TaxTMI 
TaxTMI 
2022 (11) TMI 229
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....40,014/- made by ld. AO u/s 14A taking view that the advances made to subsidiaries for non-business purchases and out of interest bearing loans without considering the fact that these advances made in earlier years for business expansion. 2. That Ld. CIT(Appeals) has erred in confirming the addition made by the Ld. AO of Rs. 3,12,118/- in respect of interest on income tax refund despite of the fact that the assessee doesn't have any intimation even no updation in 26AS statement and the more important refunds are lesser then its claim, therefore, interest to the extent of Rs. 3,12,118/- couldn't be taken as income. 3. That the Appellant craves to add, amend, alter any other grounds or grounds of Appeal at the time of hearing of appeal." 3. Brief facts of the case are that the assessee company is engaged in the business of owning, running and managing hotels since 1996. Return of income for the assessment year 2013-14 was filed by the assessee on 31.10.2013 declaring total income of Rs. 52,03,990/-. The case was selected for the scrutiny assessment under CASS and assessment was completed determining total income of Rs. 90,39,480/- after making disallow u/s 14A and disallowing to....
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....600/- and as on 31.03.2013 was to the tune of Rs.14,25,61,600/-(PB-41). The appellant company debited interest expenses amounting to Rs.3,79,32,100/-. During the course of assessment the AO was of the view that the income received by the assessee from investment made in the AOP is exempted and consequently applying sec 14A r.w Rule 8D disallowance of Rs.25,40,014/- was made by the AO. However, during the course of appellate proceeding the CIT(A) took an altogether different view and disallowance u/s 36(1)(iii) was proposed u/s 251(2). It was submitted before the CIT(A) vide submission dated 21.02.2017(PB 73-79)that the investments made by the assessee are for the business purposes and in addition to this the assessee is also having sufficient interest free funds. However, feeling dissatisfied, the CIT(A) made disallowance u/s 36(1)(iii) by holding as under (Extract Only at Pg 23): "Thus, in view of the factual matrix of the case and above referred judicial pronouncements, it is held that the appellant had made investment/advanced a sum of Rs. 15,00,83,600/- (26,63,74,600 - 8,56,12,800 - 3,06,078,200) to its subsidiaries companies/AOP out of its interest bearing borrowed funds....
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....the business of owing, running and managing hotels since 1996 and operating two hotel properties in Jaipur. For further expansion of the business, the group was in search of acquiring new hotel property in Delhi. The Group identified one hotel property in Delhi and completed its due diligence in respect of title, operating licenses, business viability and financials. Having satisfied from various point of view, the Company finalized the deal after negotiation in AY 2004-05 and the Group has acquired this new Hotel situated at prime location in Delhi by way of company transfer and acquired the shares of M/s Comfort Living Hotels Pvt. Ltd. With the acquisition of shares, the Group became owner of the hotel property. Thus, the appellant company became holding company of that Company and shown its acquisition of shares as investment in its financial statements. The investments so made as Holding Company by the appellant company for business expansion, furtherance and purely commercially expedient and such takeover and acquisitions are most popular mode in corporate world. 1.1.2 The investment so made by the assessee was a business investment as the hotel so acquired was available at ....
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.....2The ld. CIT(A) refused to accept the investment in the AOP for the business purpose on the ground that the M/s Naveen Tak AOP is having total capital balance as on 31.03.2013 of Rs.10,40,56,083/- and out of this capital Rs.9,11,75,100/- were invested in another AOP named M/s Ramesh Singh AOP. In this regards it is submitted that the AOPs are created for obtaining liquor licenses to get the liquor at cheaper prices and thereby increasing the margin. If in a particular year the AOP is not successful to get any liquor contract then instead of keeping all the funds idle the Naveen TakAOP decided to invest the capital in some other AOP. The investment in the AOPs is generally made in the month of Feb/March every year, as such, the actual outflow of funds is not for a whole year but for a small period. Further, the share of profit from the AOP represents share of profits from AOP not from partnership firm. As per Section 10(2A) only the share of profits form a firm governed by the Partnership Act is excluded from computation of total income. As such, the nature of income from the AOP does not comes under the category of "Exempt" income u/s 10 unlike share of profit from partnership f....
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.... Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 / 158 Taxman 74 the Tribunal has held that the assessee was entitled to the deduction of interest on the borrowed funds. The observations made by the Supreme Court in S. A. Builders Ltd.'s case (supra) were quoted by the Tribunal as under (page 10) : ". . . where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." 3. In these circumstances holding it to be expenditure incurred for business the same was allowed under section 36(1)(iii) of the Income-tax Act by the Tribunal. The Tribunal has also held that this expenditure would be allowed even under section 57(iii) of the Act. Though there may be some controversy as to whether the aforesaid expenditure is allowable under section 57(iii) of the Act or not, we have no doubt, in our mind, that the expenditure incurre....
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.... assessee's wholly owned subsidiaries therefore, the assessee was having deep interest therein therefore, advances were made for the purpose of business only. 3.1.2 Commercial Expediency proved: The facts are not rebutted that the assessee is having a deep interest in its subsidiaries and AOP in terms of strong business connection and ownership rights. The ld.CIT(A) completely failed to bring on the record that these funds were not utilized by the CLHPL and MBPL for the purpose of business. The ld. CIT(A) confined his understating of commercial expediency on the amount of yearly profits only. He completely overlooked the multifold capital appreciation achieved by the assessee in form of increase in value of properties and brand value of the group. 3.1.3 Supporting Case Laws: 3.1.3.1 DCIT vs Enron India Ltd (2017) 82 taxmann.com 334 (Mum Trib) wherein it was held that: (Para-3.1) "that the assessee has shown the commercial expediency and business needs to advance the loans to the subsidiary company for the reasons that the windmill installed by the subsidiary company were being used by the assessee for transmission of its electricity to the power grid of the Electricity Boar....
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....IT v/s Sridev Enterprises (1991) 192 ITR 165 (Kar) /(1991) 59 Taxmann 439 ( KAR) and CIT v/s Excel Industries (2013) 93 DTR 457/ 358 ITR 295 (SC)/ ( 2013) 38 taxmann.com 100(SC) (DPB 15-21) 5. Not whole amount represent the loans &advances: The appellant company had advanced interest free funds to the subsidiaries, as and when required by them which has been subjected by the ld. CIT(A) to disallowance u/s 36(1)(iii) by alleging that the interest bearing funds were given by way of interest free loans and advances to them. Assuming for a moment his allegation was correct yet however, alternatively, he has wrongly considered not only figures of such alleged interest free loans & advances to the subsidiaries but also the interest element, in as much as in some of the years, assessee had also debited the amount of interest to their accounts, which has increased the total amount of the loans and advances to the debit of such subsidiaries. In other words, the total subjected amount of Rs.12.92 Cr. in A.Y. 2012-13 &Rs.14.25Cr. in A.Y. 2013-14consisted of the principal amount(which was actually taken interest bearing and was actually given interest free to the subsidiaries)and the other p....
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.... total loans given to subsidiaries were Rs. 14.25 Crores only and if amount of interest charged is further reduced from this amount (as discussed in para 3.3) it comes to Rs. 7.37 Cr. (14.25 Cr. -6.88 Cr. ) only. Hence the impugned disallowance deserves a complete allowance on this ground alone. 6.1.2Depreciation is also Interest Free Fund:The availability of these interest free funds have been admitted by the ld.CIT(A) and AO both.However, the ld.CIT(A) refused to admit the amount of accumulated depreciation as a part of interest free funds or funds available with the assessee. This is misconception on the part of the ld.CIT(A) that the amount of accumulated depreciation is not a part of interest free funds. It is submitted that depreciation is nothing but an estimated charge created by the assessee on its profit and depreciation being a non-cash item does not result in (cash) outflow of the funds hence the availability of the same cannot be denied. This position has been repeatedly affirmed in various decisions. 6.3Supporting Case Laws: 6.3.1 CIT vs Reliance Industries Ltd. (2018) 161 DTR 420 (Bom.) (DPB 22- 23)affirmed by Hon'ble SC in CIT vs Reliance Industries Ltd. (2019....
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.... out of the interest bearing funds available to the assessee. No part of the borrowed funds could be said to have been diverted as non-interest bearing advances to the subsidiary companies. For this short reason alone, there is no room for any disallowance of interest paid on borrowings, on account of grant of interest free advances to the subsidiary companies, on the facts of this case. The Commissioner (Appeals) was indeed in error in holding that the assessee did not have sufficient own funds to advance the interest free advances to the sister concerns. [Para 9] " 6.3.4CIT v/s Ram Kishan Verma (2016) 132 DTR 107 (Raj.)/[2015] 64 taxmann.com 358 (RAJ HC) (DPB40-43) holding as under: "12. As far as the disallowance of interest is concerned, admittedly the assessee had an opening capital of Rs. 5,70,74,967/- of his own and the advances, if at all, being interest free, is to the extent of Rs. 98,93,950/- which is far below the capital of the assessee and, therefore, the tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge inter....
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....terest on borrowed capital - Interest free advances to sister-concern - Tribunal having found on facts that assessee had sufficient funds in the form of capital reserve and surplus other than the borrowed funds, assessee was entitled to full allowance of interest on borrowed money." 6.3.6 Godrej & Boyce Manufacturing Co. Ltd. v/s DCIT & Anr. (2017) 151 DTR 0089 (SC) /[2017] 81 taxmann.com 111 (SC) (DPB 44-46) 6.3.7 CIT v/s Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Mum)/ [2009] 178 Taxman 135 (Bombay)(DPB 34-35), "The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs.43.62 crores by way of issue of deb....
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....ound, it was held: "Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the appellant company could in any case, utilise those funds for giving advance to its Directors." 6.3.9 CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CTR 384 (Raj.) "The AO un-wantedly stressed over the alleged absence of the commercial expediency behind giving of the subjected loans & advances in as much as, such a consideration was relevant only in a case where the interest free funds were given out of the interest bearing funds only and there was admittedly no availability of the interest free funds. In our case, such facts are not available and even otherwise the utilization of the funds was for commercial expediency in as much as the major utilization of the funds was towards capital investment in building for coaching, and partly in the mutual funds but income from both were duly taxed. It was not the case of AO that assesse....
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....t his jurisdiction (board): At the outset it is submitted that the so called enhancement made by the ld. CIT (A) by making disallowance u/s 36(1)(iii) of the Act in relation to the claimed interestis completely without jurisdiction in as much as law is well settled that the CIT (A) cannot find new sources of income. The facts are evident and admitted that where the AO proceeded and applied his mind only on the disallowance made under the specific provisions of S. 14A which, operates into entirely different field and made disallowance holding that the utilization of the interest bearing borrowed funds towards the investment and the loans and advances, generating exempted income, was not allowable. The ld. CIT (A) on the other hand, completely replaced the disallowance so made by the AO u/s 14A by new disallowance u/s 36(1)(iii) of the Act, on the plea that the utilization of the interest bearing borrowed funds was not for business purpose It is not denied that the subject matter of appeal before the ld. CIT (A) was only against the disallowance made by the AO u/s 14A and the bare reading of the entire assessment order does not show a single word whispered by the AO w.r.t applicati....
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....It is not, therefore, open to the AAC to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO, with a view to finding out new sources of income and the power of enhancement under s. 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of taxability". Their Lordships considered the meaning of the word 'consideration' and held that, "'Consideration' does not mean, 'incidental' or 'collateral' examination of any matter by the ITO in the process of assessment, therefore, there must be something in the assessment order to show that ITO applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection". In the instant case, the AAC has, after issuing notice, himself considered the new material and has gone into new sources of income the consideration of which he had no jurisdiction. 8. In fact, we fail to understand as to why when the order was brought to the notice of the Commissioner himself proceeded into direction when he had ample po....
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....was also rejected relying up on the decision of the Honorable Supreme court. The issue of verification of capital gain was not the issue which was at all dealt with by the assessing officer, or even a question of verification made by ld AO. There was no inquiry made by the ld AO on the issue of capital gain shown by the assessee. The ld AO has not at all considered the issue of sales consideration received by the assessee on sale of house as an issue of dispute before him. Therefore, according to us, ld CIT (A) could not have made enhancement on the issue holding that capital gain shown by the assessee itself is not in accordance with the law and given a finding that no capital gain has accrued to the assessee." It was held as under"Appeal [CIT (A)]-Power to enhance income-Scope- CIT(A) cannot enhance income on a source not subject matter of assessment before AO-AO having demit exemption under s. 54, CIT(A) had no Jurisdiction to declare sale as bogus and make addition under s. 68." Thus, the ld. CIT (A) has clearly exceeded his jurisdiction. Thus the CIT(A) has clearly exceeded his jurisdiction. Consequently, the enhancement made by him of Rs. 1.69 Cr , deserve to be deleted."....
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....ing as under:- (xiv) It is noted that the appellant was paying interest at the average rate of 13% per annum on its secured/unsecured loans, therefore it would be appropriate to compute disallowance out of interest expenses claimed by the appellant @ 13% of Rs. 14,68,17,600/- which amount to Rs. 1,90,86,288/-. Thus a sum of Rs.1,90,86,288/- is being disallowed u/s 36(1)(iii) of the Act as theses were not incurred for the purposes of the business of the appellant company. Consequently, the income of the appellant is hereby enhanced by a sum of Rs. 1,74,18,626/-(1,90,86,288 -16,67,662)." 8. During the course of hearing, the ld. AR of the assessee has lucidly submitted the details of the investment made in AOP by the assessee company. The investments made by the assessee in subsidiaries and AOP are as under:- S.N. Particulars of investments and investors Amount 1. Equity Shares of Comfort Living Hotels (P) Ltd. 7,57,02,300 2. Equity Shares of Maharani Buildestate (P) Ltd. 99,00,000 3. Investments in AOPs (PB 41) 3,19,26,800 (initial investment in A.Y. 2012-13) It is also noted from the record that the assessee was having total interest funds to the tune of Rs.15.13 cror....