TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 1286
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....ishing the fact whether own funds were actually used for making investments while ignoring the fact that the assessee had huge borrowings on which interest expenses were claimed and also ignoring the CBDT circular No. 5 of 2014? II. Whether on the facts and circumstances of the case and in law, the CIT(A) was right in deleting the disallowance of Rs. 8,98,66,194/- made on account of excessive commission expenses while ignoring the fact that a clear relation existed between the assessee company and the firm, as a director of the assessee company was also a partner in the firm concerned? III. Whether on the facts and circumstances of the case and in law, the CIT(A) was right in deleting the disallowance u/s 36(1)(iii) of the Act on account of advances made to /debit balances of M/s Hero Exports and M/s Hero Motors Ltd. on the ground of sufficient own funds while ignoring that the assessee has huge borrowings on which interest expenses were claimed? 4. Vide ground no. 1 the grievance of the Department relates to the deletion of disallowance of Rs. 14,15,10,213/- made by the A.O. by invoking the provisions of Section 14A of the Income Tax Act, 1961. (hereinafter re....
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..../CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A. Y. 2011-12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the orders of the Honourable IT AT, Chandigarh in IT A No. 192/Chd/2013 for the A.Y. 2008-09 dated 29.10.2015, IT A No. 314/Chd/2013 for the A.Y. 2009-10 dated 16.02.2016 and ITA Nos. 720 & 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 for the A. Y. 2011-12 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Ys. 2008-09, 2009-10 & 2010- 11 was deleted by the Honorable jurisdictional IT AT. Not only this, I have also deleted identical addition made by the Assessing Officer in A. Y. 2011-12 vide my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under....
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....ee's favour in the earlier AYs 2008-09 to 2011-12. We deem it appropriate to reproduce the findings of the ITAT in ITA No. 192/Chd/2013 for the A.Y. 2008-09 wherein vide order dt.29/10/2015 given at para 8 to 10 which read as under: 8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. From the perusal of the balance sheet and other documents filed in the Paper Book, we see that the total investment in shares and mutual funds as on 31.3.2007 was of Rs. 3,83,82,47,226/- while the investment as on 31.3.2008 is of Rs. 4,64,37,73,922. Therefore, there was an increase of around Rs. 80 crores in the investment during the year. While reserves and own funds of the assessee company as on 31.3.2008 are amounting to Rs. 6,24,18,74,854/-. From these figures, it is quite clear that own funds and reserves of the assessee are more than sufficient to cover the investment made during the year. In such a scenario, it can be very conveniently presumed that all the investment have been made out of own funds. For this purpose, reliance is placed on the judgment of Hon'ble Jurisdic....
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.... the A.Y. 2010-11. Accordingly, Revenue appeal on ground No. 1 is dismissed. 11. Vide ground no. 2 the grievance of the Department relates to the deletion of disallowance of Rs. 8,98,66,194/- made by the A.O. on account of excessive commission. 12. The facts related to this issue in brief are that the A.O. during the course of assessment proceedings noticed that the assessee paid the commission of Rs. 110234965/- to sole selling agents. The A.O. asked the assessee to reply on the following issues: (i) Terms and conditions of payment (ii) Details of services rendered (iii) Rate at which commission is paid (iv) The partners of Munjal Sales Corporation are related to the Directors of M/s Hero Cycles Ltd. Why this expense should not be considered as excessive? (v) What is the rationale of commission expenses when other selling expenses are incurred. 12.1 In response the assessee submitted its reply vide letter dated 06.02.2015. The assessee again submitted a second reply vide letter dated 10.02.2015 in response to show cause which is reproduced in para 5.2 of the assessment order dated 03.03.2015. To avoid repetition the aforesaid s....
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.....08.2017 in the case of the assessee company itself for the A.Y. 2011-12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A. Y. 2010-11 as well as by the order of the Honourable ITA T, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. I have also deleted identical addition made by the Assessing Officer in A.Y. 2011-12 vide my order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the Assessment Years 2010-11 and 2011-12 and....
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.... 34. We have heard both the parties. We have gone through the findings of the Ld. CIT (Appeals) and we find no infirmity in the same. The Ld. CIT (Appeals) has dealt with the issue in detail outlining the facts that the said agent had been acting as the sole selling of the assessee since 1962 and relevant application had been field to the Ministry of Corporate Affairs on its reappointment as sole selling agent on 29.3.2007 which the Ministry had approved on old commission rate of 1% of turnover. The Ld. CIT (Appeals) has also given a finding that the Board of Directors had also approved the said rate. The Ld. CIT (Appeals) has further pointed out that this rate of commission has always been accepted by the Department in the past. The Ld. CIT (Appeals) has also pointed out the fact that both the assessee and Munjal Sales Corporation had been paying taxes at the same rate and that Munjal Sales Corporation was not a person covered u/s 40(A) of the Act. All these facts have not been controverted by the Ld. DR before us. In view of the above facts, we find no infirmity in the order of the Ld. CIT (Appeals) holding that the payment of commission was not excessive since it was app....
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....how causes issued to the assessee on the issue, the replies of the assessee to the same and the findings and conclusions about both the debit accounts have been given in para 6.2 to 6.14. The AO has reproduced assessee's reply dated 27.2.2015 in para 6.3 & 6.8 which for the sake of brevity and repetition are not being reproduced here. 20. Being aggrieved the assessee carried the matter to the Ld. CIT (A) and furnished the written submissions which had been incorporated in paras 7.1 of the impugned order. 20.1 The Ld. CIT(A) after considering the submission of the assessee, deleted the disallowances made by the A.O. under section 36(1)(iii) of the Act by following the earlier order of the ITAT in ITA Nos. 758/Chd/2014 forthe A.Y. 2010-11 dt. 03/04/2017. The relevant findings given by the Ld. CIT (A) in para 7.2 of the impugned order read as under: 7.2 I have considered the observations of the Assessing Officer as made by him in para 6 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further con....
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....orrowed funds for non-business purposes is directed to be deleted on the basis of same reasoning and logic as adopted by the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A. Y. 2010-11 and by me in A.Y. 2011-12 while deleting the identical addition in Assessment Years 2010-11 and 2011-12. In the result, the ground No. 4 of appeal taken by the assessee company is allowed. 21. Now the Department is in appeal. 22. The Ld. CIT DR strongly supported the order of the A.O. and reiterated the observations made in the assessment order dt. 03.03.2015. 23. In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that the issue under consideration had already been decided by this Bench of the ITAT in assessee's own case in the assessment year 2010-11 in ITA Nos. 720 & 758/Chd/2014 wherein on a similar issue, the appeal of the Department was dismissed vide order dt. 03/04/2017, the relevant findings are given in the aforesaid order vide paras 18, 19, 24, 42 and 43 which read as under: 18. We have heard the learned representativ....
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.... Ltd. (2002) 254 ITR 377 (Del) that the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. It was further held that no businessman can be compelled to maximise its profits. And that the Income Tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would work. The authorities must look at the matter from their own view point but that of a prudent businessman. Even the Hon'ble Supreme Court in assessee's own case as referred hereinabove had held that applying the said ratio to the facts of the case that no such notional addition on account of lesser rate of interest charged can be made by the assessee. In view of this, the Assessing Officer is directed to delete the addition made by him. The ground No.8 is allowed." 19. The facts in the present case, we find, are identical to that in assessment year 2009-10. In the impugned year the loan given is Rs. 50 crores,Rs.10 Crore being advanced in the preceding year, while the profit of the asse....
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.... the Assessing Officer in respect of the borrowals made by the assessee for the purposes of investment in capital work-in-progress. The Assessing Officer noted that the assessee had shown capital work-in- progress in its Balance Sheet and consequently computed disallowance in view of the provisions of proviso to section 36(1)(iii) of the Act. The CIT(Appeals) has given the finding that no loan had been raised by the assessee company for the purchase of furnace or for the construction of building. The said finding of the CIT(Appeals) has not been controverted by the learned D.R. for the Revenue. Further, the CIT(Appeals) has also noted that the total investment made by the assessee during the year on capital work-in-progress was Rs. 42.46 lacs spent on furnace and Rs. 33.23 lacs on the building as against the net profit of the assessee for the year at Rs. 1.97 crores. In view of the above said facts and circumstances, we find no merit in the disallowance made by the Assessing Officer. Upholding the order of the CIT(Appeals), we dismiss Ground No. 1 raised by the Revenue. 23. Since no distinguishing facts were brought to our notice during the course of hearing, respectfully ....
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....regard reference may be made to the case of M/s Power Drugs Ltd. Vs. Additional CIT, Range-III, Chandigarh in ITA No.313/Chd/2011. In this order, the Hon'ble I.T.A.T., Chandigarh observed as under :- On hearing the rival contentions of the parties, we find that it is an admitted position that the amount was advanced for acquisition of new asset which was claimed to be for the furtherance of the business activity of the assessee before us. Admittedly, the amount was not advanced as a loan and we find no merit in the orders of authorities below in applying the ratio laid down by the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries (Supra). " This observation of the Hon'ble IT AT was also noted by the Hon'ble Punjab and Haryana High Court in the case of Power Drugs Ltd. Vs. CIT (2011) 62 DTR(P&H) 276. Keeping in view the aforesaid decisions of the Hon'ble ITAT and Hon'ble Jurisdictional High Court, it is held that the case of M/s Abhishek Industries Ltd. is not applicable where any amount was not advanced as loan. In the instant case, the undisputed fact is that no amount of debit balance is on account of any loa....
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.... applies to the present case also following which we confirm the order of the Ld. CIT (Appeals) in deleting disallowance made u/s 36(1)(iii) of the Act of Rs. 2,09,66,994/-. 23.1 It is noticed that the ITAT in AY 2011-12 in ITA No. 1493/Chd/2017 vide order dated 15.6.2021 in assessee's own case on similar facts followed the aforesaid order for AY 2010-11. So respectfully following the aforesaid referred order in assessee's own case for the preceding assessment year i.e; 2010-11 in ITA No. 720 &758/Chd/2014 dt. 03/04/2017, we do not see any valid ground to interfere with the decision given by the Ld. CIT (A). Accordingly, Revenue's appeal on this ground is dismissed. 24. Now we will deal with the Appeal filed by the assessee in ITA No.473/Chd/2018. 25. The grounds raised in this appeal of assessee read as under: 1. That the learned CIT(A)-2 while deleting the disallowance made u/s 14A/Rule 8D by the AO has erred in not deleting the disallowance suo-moto wrongly made by the appellant amounting to Rs. 3,97,31,691/- ignoring the followings:- i) That the investments were made out of own funds. ii) That there was decrease in the investments as ....
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....ed any funds for brought forward as well as fresh investments made during the year. Similarly the assessee company has also considered disallowance for indirect expenditure Rs. 29448717/-ie, at the rate of half percent as per rule 8D. However it is contended that in view of findings in earlier years disallowance of indirect expenditure at one-half percent of average investments is not justified. In the light of facts of this case department has made disallowance of Rs. 50000/- up to AY2006-07 which was also confirmed in appeals. In AY 2007-08 disallowance of Rs. 200000/- was confirmed. In this regard, detailed submissions regarding applicability of Section 14A read with Rule 8D to the facts of this case with the relevant details/evidence source of funds available and utilised with the company on the dates of transactions, has already been filed separately at pages 439 to 966." The AO considered the assessee's reply vide para 4.2 to 4.6.1 at pages 16 to 21 and ignoring the assessee's submissions rather made a further disallowance of Rs. 14,15,10,213/- on his own assumptions and presumptions u/s14A without considering the provisions in right perspective vide para 4.7 of th....
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....ce made by the assessee. Though the investments made by the appellant have not been taken correctly by the A.O which appear on page 22 of the order in as much as he has considered all the investments irrespective of the fact whether they yielded any exempt income or not. The correct investments for making disallowance under rule 8D(2)(ii) and rule 8D(2)(iii) are those investments which have yielded exempt income. The Ld. Counsel for the Assessee has filed details of the investments which yielded exempt income and are outstanding in the Balance Sheet as on 31.03.2011 and 31.03.2012 Total investments as per Balance Sheet: - As on 31.03.2012 - Rs. 7,69,98,92,132 As on 31.03.2011- Rs. 8,70,73,62,564 Investment yielded exempt income and outstanding: -As on 31.03.2012 Rs. 1,32,09,28,068 -As on 31.03.2011 Rs. 2,34,36,86,413 Average of investments yielded exempt income =(1, 32,09,28,068+2,34,36,86,413)/2 Rs. 1,83,23,07,240 Disallowance @ 0.5% Rs. 91,61,536/- as against Rs. 2,94,48,717/- suo- moto disallowed made by assessee. The appellant is entitled to the following relief:- i) Suo-moto disallowance ....
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....llowance made u/s 14A rw Rule 8D2(iii), the assessee has stated that in view of the various judicial rulings relied upon before hon'ble bench, the same is to be restricted to 0.5% of average of the investments which have yielded exempt income. In this regards, the relevant rule 8D(2)(iii) is reproduced hereunder, "An amount equal to one half percent of the average of the value of the investments, income from which shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and last day of the previous year." 10. As per this rule, the average of the value of the investments, which will not form part of the total income is to be taken and not the investments which have actually yielded exempt income as the assessee has done in its submissions filed before the I TAT and during the course of set aside proceedings. The AO, in his order u/s 143(3) as well as in order u/s 154 has correctly computed the disallowance u/s 14 r w Rule 8D(2)(iii) of the Act at Rs. 2,45,56,827/- which is the same as computed by the assessee in its return of income by taking 0.5% of the average of the value of the investments, which will not f....
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....023 placed before us that the AO has already accepted the ratio laid down by the ITAT in the above referred orders in the set aside proceedings for the AY 2011-12 and deleted suo-moto disallowance mistakenly made in return under Rule 8D(2)(ii). 31. The Hon'ble High Court of Delhi in the case of Cargo Motors P. Ltd. vs. Deputy Commissioner of Income Tax 145 Taxmann.com 641 (Delhi) relied by the appellant has held as under: "While section 14A is charging section, rule 8D is method/mechanism to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the assessee. By virtue of the charging section, namely, section 14A, the Assessing Officer has the power only to determine the amount of expenditure incurred in relation to such income which does not form part of the total income. [Para 13] Rule 8D(2)(iii) clearly postulates that in calculation of the disallowance amount, 'an amount equal to one half per cent of the value of the investment, income from which does not or shall not form part of the total income' should be taken into consideration. Thus, it is not all investment but only that which i....
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....o not agree with the same. It is well settled, having been decided on a number of occasions by the Hon'ble Supreme Court and many other Courts of our country, that the object of the income tax proceeding is to determine the taxable income of the assessee and tax payable thereon fairly and as per law only. Article 265 of the Constitution of India also provides in express terms that no tax can be collected without the authority of law. Moreover, even the Central Board of Revenue now called as the Central Board of Direct Taxes had issued a circular in 1955, guiding Assessing Officer's that they should assess the taxable income and compute tax liability of the taxpayers in accordance with law only and should not take undue advantage of the ignorance of the assessees. Therefore any claim of the assessee should be decided on the touchstone of law and not on the basis of claim made by the assessee. The Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT, 82 ITR 363 (SC) has observed that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not the view which the assessee may t....
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....) rightly deleted the disallowance of Rs. 14,15,10,213/- made by the A.O. by following the earlier orders of the ITAT in assessee's own case. But the Ld. CIT(A) has not given any directions to delete the suo-moto disallowance of Rs. 1,02,82,974/- made under rule 8D(2)(ii) as per submissions made by appellant before him. 35.1 Since we have upheld the findings of Ld. CIT(A) in the appeal filed by the revenue, by following the same reasoning therefore we hold that in such circumstances suo-moto disallowance of Rs. 1,02,82,974/- made u/s 14A read with rule 8D(2)(ii) in the return filed is also to be deleted. Moreover, the AO has also deleted identical disallowance made suo-moto in return vide order passed in the proceedings restored by the ITAT in AY 2011-12 after due consideration of order passed by the ITAT for the AYs 2008-09 to 2011-12. 36. As regards suo-moto disallowance of Rs. 2,94,48,717/- made under rule 8D(2)(iii) we have considered the contention of Ld. AR and objection of LD. DR. By following judgement of Hon'ble Delhi High Court in the case of PCIT(central) v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) we upheld that amendment made by ....
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....ing to Rs. 8,39,55,267/- disallowed by the AO and confirmed by the Ld.CIT (A)-2 and whereas in ground no. 3 the grievance of the appellant is that Ld.CIT(A) -2 has not deleted the disallowance of interest expenditure of Rs. 22,86,36,462/- suo-moto made in the return filed on account of advances made to the above referred sister concerns. 40. The facts related to this issue in brief are that the A.O. made disallowance of interest under section 36(1) (iii) of the Act by observing in para 7 of the assessment order which read as under: 7. Disallowance of Interest u/s 36(1)(iii) on account of interest free advances 7.1 During the course of assessment proceedings the details of Loans and Advances given by the assessee was called for. It was seen that the assessee has given Loans and Advances to M/s Hero Exports and M/s Munjal Hospitality P. Ltd. The ledger accounts were also submitted. It was seen that the balance as on 31.03.2012 in the case of Munjal Hospitality Ltd was Rs. 4,35,50,00,000/- and in the case of M/s Hero Exports was Rs. 54,61,00,000/-The perusal of the ledger accounts placed on record shows that in the case of M/s Hero Exports, the opening balance its....
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....amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits." However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at ....
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....h cases of mixed funds that the advances were made out of its own funds of share capital or out of mixed funds. Mere claim of having made the advances out of its own funds is not sufficient to discharge the onus and interest relatable to such sums advanced interest free are to be disallowed. The onus is not upon the revenue to show nexus between the borrowers and the advances made by the assessee. 7.6 It has repeatedly been held by various Courts that whenever there is a diversion of funds for non-business purposes and at the same time there are interest bearing borrowing, the interest paid on borrowed funds should not be allowed as an item of expenditure to the extent of the funds diverted. It was held in the case of CIT Vs. Orissa Cement Ltd. 258 ITR 365 (Del) that the court cannot shut its eyes to reality. Had the advances not been made, borrowings would have been less. Similar was the view held in the case of CIT Vs. HP Sugar Factory Put. Ltd. (All)187 ITR 363. 7.7 The assessee has relied on the decision of the Apex Court in the case of SA Builders. The facts in the two cases are completely different. The subsidiary company of the assessee, M/s Munjal Hospital....
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....owance of interest under section 14A and Section 36(1) (iii). In para 4 the AO made disallowance of interest u/s 14A at Rs. 141510213/-, in para 6 made disallowance of interest u/s 36(1)(iii) at Rs. 40,22,065/- on account of outstanding debit balances from M/s Hero Exports Pvt. Ltd. and M/s Hero Motors Ltd. and further in para 7 made disallowance of Rs. 8,39,55,267/- on account of advances made to sister concerns. The total disallowance as per para 4, 6 & 7 therefore calculated by AO at Rs. 22,94,87,545/- whereas in the ITR filed the appellant has claimed total interest expenditure only Rs. 15,02,49,895/-. Therefore, the AO in para 8 of the assessment order restricted the total disallowance at Rs. 15,02,49,895/- as claimed by the assessee in the ITR filed. Para 8 of the assessment order reads as under: 8. The total disallowance of interest calculated as per Para 4, 6 and 7 is Rs. 22,94,87,545/- (Rs. 14,15,10,213 + Rs. 40,22,065 + Rs. 8,39,55,267). However the assessee has claimed interest of only Rs. 15,02,49,895/- as calculated below:- Interest expense as per P&L A/c Rs.38,91,69,331/- Less: Interest added back u/s 36(1)(iii) in the computation Rs.22,8....
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....unts are enclosed. 2. These advances have been given by the main unit of the company only Photocopies of relevant pages of the bank accounts of main unit from where the payments to M/s Munjal Hospitality Pvt. Ltd. were made, was filed with the AO. Photocopy of same is enclosed. The borrowings made by independent unit of company called as CR Division were exclusively for its business purposes and no portion of same utilised to give above advances. 3. As stated above M/s. Munjal Hospitality Pvt. Ltd (MHPL) is a fully owned subsidiary company of the assessee company and M/s Hero Exports Pvt. Limited is a group company. These advances were made as a commercial expediency for business purposes, as the subsidiary company has purchased the hotel project which was in progress. Different activities were undertaken to carry on this project during the year e.g. appointment of consultants for the hotel project, renewal of license for hotel, visits of interior designers, consultations for selecting the JV partners etc. The assessee company is holding the entire share capital of MHPL. Since the assessee company has given advance to its wholly owned subsidiary company as a comme....
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.... AO. Photocopies of same are enclosed at Pages 7 to 22 It is clearly evident from these balance sheets that both Main units as well as CR Division of company have raised loans independently to meet their long term und working capital requirements & accordingly the respective units in their books of accounts enteral! the financial charges separately. No borrowing made by CR Division has been utilised or diverted for advances given to above concerns 10. The AO objected to interest free amounts advanced to wholly owned subsidiary company / sister concern by holding that since assessee itself is charging interest on advances given to other parties there is no rationale for interest free advances to sister concerns. There is no business prudence in an interest free advance to sister concern. In assessment order AO discussed the issue at pages 36 to 40. He placed reliance on P&H High court Judgment in the case of CIT v. Abhishek Industries Limited. He failed to consider this judgment in right perspective wherein jurisdictional high court itself held that only in cases where advances to sister concerns have been given without any business purposes interest is to be disal....
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....es, which includes interest paid to banks Rs. 145388538/- and interest on excise duty Rs. 4831601/ This interest is directly attributable to the business activity of that independent unit as per separate accounts maintained by it. This issue has attained already finality in AY 2004-05 where CIT (A) under similar circumstances and facts held that interest paid by the independent unit of company called CR division is not to be included for disallowance u/s 14A. The revenue has not challenged these findings of CIT (A) before Hon'ble ITAT and High Court while contesting disallowance u/s 14A. The same decision also holds good for the purposes of section 36(1)(iii). 12. As confirmed by the Hon'ble Supreme Court in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288 ITR 1 where it has been held as under- "In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g. a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial e....
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.... to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." Photocopy of judgment is enclosed. 14. In view of the above submissions and judgments of Apex Court, it is therefore prayed that no portion of interest paid relating to advances made to subsidiary company /sister concern, is disallowable. The assessee company had filed the letter for "correction of amount" disallowed in the Computation of taxable income. Reference may be made to following case law i) CIT Vs. Bharat Aluminium Co Limited 303 ITR 256 (Del) ii) Orissa Rural Housing Development Corporation Ltd. v. ACTT 343 ITR 316 (ORR) iii) M/s Andhra Pradesh Industrial Development Corporation Limited Vs Deputy Commissioner of Income Tax, Circle-1 (1). Hyderabad ITA 548/HYD/2017 dated 7.9.2017 Pages 431 to 438 The AO is bound to compute the correct income for assessment, irrespective of incorrect disallowances made by the assessee in computation. Refer CBDT Circular No....
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....sallowing the interest in the computation, the assessee company has itself admitted that the amounts to M/s Munjal Hospitality (P) Limited and M/s Hero Exports (P) Limited have been given out of borrowed funds. The details filed by the assessee company also prove beyond doubt that the loans/advances under reference have been given out of borrowed funds and have direct nexus between the borrowed funds and amount advanced. Moreover, the funds advanced to M/s Munjal Hospitality (P) Limited and M/s Hero Exports (P) Limited has been stated to be utilized for the expansion of business which is still in progress. It means, the new business of the assessee company has not yet been come into existence and as such the interest expenses incurred by the assessee company on the funds advanced for expansion of business cannot be allowed as revenue expenses even otherwise. It is not the case of the assessee company that the funds have been given out of own interest free funds. It has also not been established on record that the borrowed funds of other unit have not been utilized for giving advances under reference. The assessee company has also not filed any documentary evidence to prove its vers....
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.... out of proceeds received on liquidation of investments and partly out of term loans raised by the main unit of the company. Though the advance was given to the subsidiary company on account of commercial expediency for business purposes and no disallowance was called for but by mistake the appellant disallowed an interest of Rs. 22,86,36,462/-on the said loan. The A.O on page 39 of the order calculated the disallowance of interest at Rs. 25,11,55,479/- ignoring the submissions that no disallowance is called for if the interest free advance is given to a 100% subsidiary for business purposes and that there are host of judgments on this issue. Reliance is placed on the case law already filed before your Honour and further case law which is being filed now. The landmark judgments on this issue are Hero Cycles ltd. v/s CIT (2015) 379 ITR 347 (SC), S A Builders ltd. v/s CIT (2007) 288 ITR 1 (SC) and Munjal Sales Corp Vs. CIT(2008) 298 ITR 298 (SC). All this case law is directly on the issue of allowability of interest on loans given to a subsidiary company for business purposes. 2. There is a further disallowance of interest of Rs. 6,14,36,250/- on advance ofRs. 54.61 cr. to H....
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.... hearing the Ld. AR vide letter dated 21-06-2025 also filed a chart of judgements along with copies thereof relied upon as under: Sr. No. Judgment name Brief Pages 1. Copy of Ld. AO's order u/s 143(3) r.w.s. 254 pursuant to Hon'ble ITAT order restoring the issue to the file of AO for reworking disallowance u/s 14A in assessee's own case for A.Y. 2011-12 dated 21.03.2023 The Ld. AO on page 7 of the order allowed the relief by deleting complete suo-moto disallowance under Rule 8D(2)(ii) and reduced the suo-moto disallowance under Rule 8D(2)(iii) by considering only the investments which have yielded tax free income for purpose of computing disallowance @ 0.5% of average investments. 1 - 11 2. Pr. CIT vs. E City Investments and Holdings Company (P) Ltd (2020) 272 Taxman 90 (SC) Interest on borrowed capital (Loan given to sister concern) - Assessment year 2008-09 - During relevant year assessee claimed deduction of interest paid on borrowed funds -Assessing Officer noticed that assessee had also funded its sister concerns without charging interest -He therefore disallowed interest expenditure - Tribunal, however, allowed assessee's claim....
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...., no disallowance of interest was warranted, therefore, disallowance made under section 36(1)(iii) was to be deleted - Held, yes [Para 14.4][ln favour of assessee] 46 - 59 47. In his arguments the Ld. Counsel for the Assessee vehemently reiterated the submissions made before the authorities below and further submitted that the issue under consideration is squarely covered by number of judgement in favour of the appellant company. 48. We have duly considered the rival contentions and gone through the submissions and record carefully. Since the issue raised in ground no.2 & 3 relates to the advances given to M/s Munjal Hospitality Pvt Ltd. a subsidiary of the Assessee Company and M/s Hero Exports Pvt. Ltd. another sister concern of the assessee company, hence these grounds are heard together. We have also deliberated upon the decisions relied upon by the parties. 49. The facts in brief regarding the advance of Rs. 435.50 crore made to wholly owned subsidiary company and another advance of Rs. 54.61 crore given to M/s Hero Exports Pvt. Ltd. sister concern as per submissions of Ld. AR may be recapitulated because such facts are relevant to decide the issue raised by the app....
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....f Rs. 8,39,55,267/-made in the assessment order is contrary to the facts and is not justified. The appellant has filed a chart in paper book giving the details of interest paid and the disallowance made in the ITR filed. v) The Ld. AR argued during the course of hearing that no disallowance of interest expenditure for advances given to wholly owned subsidiary company as a commercial expediency for the business purposes is called for in view of the Hon'ble Supreme Court decision in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288 ITR I where it has been held as under- "In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it....
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....advanced to MHPL was given only from the main unit of the appellant company. The interest expenditure incurred by the separate independent division of the company called CR Division which has no correlation with the amounts advanced to MHPL. Appellant also filed relevant pages of bank statements of main units from where payments were made. vii) Regarding suo-moto disallowance the appellant submitted that while filing return of income the appellant under wrong notion of law made disallowance of Rs. 22,86,36,462/-. In written submissions Ld. AR submitted that no disallowance of the interest can be made if the advance is given to a subsidiary company on account of commercial expediency. He filed host of judgments in support of assessee's claim and prayed that this amount of disallowance made by mistake may be deleted. 50. The Hon'ble Supreme Court in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288 ITR 1 relied by the appellant has held as under: "In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deducti....
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....17 taxmann.com 124 (SC)/[2020] 272 Taxman 90 (SC)[27-01-2020] dismissed the departments SLP filed against the judgement of Hon'ble Bombay High Court Pr. Commissioner of Income-tax v. E - City Investments & Holdings Co. (P.) Ltd. [2020] 117taxmann.com 123 (Bom.). The Hon'ble Bombay High Court has confirmed the order of the ITAT wherein it was held that the assessee's decision to fund its subsidiaries is driven by business exigency. The extract from the HC order are reproduced as under: 2. We notice that a similar issue had come up for our consideration before this Court in the case of the very same assessee in Income- tax Appeal No. 213 of 2017 and the appeal was dismissed making following observations: "2. Respondent-assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee's return for the assessment year 2008-09. Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue ....
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.... (supra) has held that once it is established that there is nexus between expenditure and purpose of business, Revenue cannot justifiably claim to put itself in the arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The various other decisions relied on by the Id. Counsel for the assessee in the case law compilation also supports the case of the assessee to the proposition that where interest free advances made to a wholly owned subsidiary company, no disallowance of interest paid on borrowed fund could be made. Since, in the instant case, admittedly, the assessee has extended funds to its wholly owned subsidiary company for the purpose of business, therefore, in view of the decisions cited supra, I hold that no interest paid on borrowed funds could have been disallowed u/s 36(1)(iii) of the IT Act, 1961. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 10,88,438/-. The grounds raised by the assessee are accordingly allowed. 15. In the result, the appeal filed by the assessee is allowed." c) The Hon'....
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....nal profit was only during the year and that it would not per-se end the reguirement of 'commercial expediency'. This is best left to the assessee to judge its reguirement of commercial expediency unless the Assessing Officer makes it out a case that commercial expediency is no longer reguired. The commercial expediency does not mean the support by a holding company to its associate concern only when the associate concern is in a loss. Moreover, the Ld. CIT(A) observed that the loan from the holding company to its subsidiary FFC during the year had increased from Rs. 2.60 Crores to 4.18 Crores which prima facie shows that the subsidiary was in need of more funds during the year. Moreover, that in pursuance of the management agreement entered by the assessee with the associate concern, the assessee had earned consultancy and service fee of Rs. 77,88,894/-. Therefore, we do not agree with the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance of interest made by the Assessing Officer in respect of the loan given by the assessee company to M/s FFC. Accordingly, ground no. 1 and 1.1 of the assessee are allowed." e) The Hon'ble ....