1970-VIL-454-ITAT-DEL

Income Tax Appellate Tribunal DELHI

ITA No. 2104/Del/2017, ITA No. 2105/Del/2017, ITA No. 2106/Del/2017, ITA No. 2107/Del/2017

Date: 01.01.1970

VIC ENTERPRISES PVT. LTD.

Vs

DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-26 (1) , NEW DELHI

JUDGMENT

PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER:

The present appeals have been f iled by the assessee against the orders of ld. CIT (A)-33, New Delhi dated 19.01.2017 and the orders of ld. CIT (A)-9, New Delhi dated 20.02.2017.

2. In ITA No. 2104/Del/2017, following grounds have been raised by the assessee:

“1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs. 3,05,12,745/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.

2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.”

3. In ITA No. 2105/Del/2017, following grounds have been raised by the assessee:

“1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs. 69,73,346/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.

2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.”

4. In ITA No. 2106/Del/2017, following grounds have been raised by the assessee:

“1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs. 68,81,215/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.

2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.”

5. In ITA No. 2107/Del/2017, following grounds have been raised by the assessee:

“1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs. 16,31,794/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.

2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.

3. The ld. CIT (Appeals) of Income Tax erred in not accepting the disallowance amounting to Rs. 4,10,947/- u/s 14A made by the appellant and allowed the enhancement of disallowance by Rs. 40,79,583/- made by the Assessing Officer. The increase in disallowance u/s 14A is not at all justified and requires revision. Full arguments and detailed submissions will be made at the time of hearing.”

6. The issues involved in these appeals to be adjudicated are,

i. Disallowance of interest payment on the interest free advances given by the assessee.

ii. Disallowance u/s 14A of the Income Tax Act, 1961 more than the disallowance made by the assessee suo moto.

7. The assessment year 2012-13 is taken as the lead case for the sake of convenience on the issue of interest payments.

8. Brief facts of the case taken from the record are that, during the relevant financial year, the assessee earned interest income of Rs. 8,73,13,968/- and also debited interest expenses of Rs. 16,31,794/-. From the details of interest paid furnished during the course of assessment proceedings, it is seen that a total amount of Rs. 16,31,794/- has been paid to various entities against the total unsecured loans taken amounting to Rs. 1.20 crores during the year. A perusal of the balance sheet of the assessee also shows that an amount of Rs. 268.74 crores has been shown as loans and advances given as at 31.03.2013. The corresponding figure as at 31.03.2012 was Rs. 255.05 crores. During the course of assessment proceedings, the details of interest paid were called for to justify that the loans and advances have been made for the purpose of business activities only. The Assessing Officer examined whether any interest has been charged on the advance. The Assessing Officer held that the assessee is using interest bearing funds by giving advances to various other group concerns and individuals without charging any interest from them. Therefore, a proportionate disallowance out of the interest expenses claimed by the assessee was made by the Assessing Officer of Rs. 16,31,794/-.

9. It was argued before the revenue authorities that the Assessing Officer has made a notional computation of interest @ 15% on loans and advances of Rs. 268.74 crores. It was argued that there can be no notional addition of interest on interest free loan and advances has been decided by the Hon'ble Delhi High Court in the case of Shivnandan Buildcon Pvt. Ltd. v CIT 2015 (5) TMI 192. The ld. CIT (A) confirmed the addition holding that the burden lies on the assessee that interest free loans and advances were given from own funds and no nexus has been proved.

10. Before us during the argument, the ld. AR submitted that the details of the own funds available with the assessee. The ld. DR supported the order of the ld. CIT (A). The details of own funds and loans given are as under:

Details of Interest Free reserves available with the appellant

11. We find that the loans and advances including interest free advances are far less than the own funds. And hence, the presumption that the own funds have been utilized for extending the loans and advances sets in. When the assessee has got own funds available at their disposal, no disallowance is called for as enunciated in various judgments. The decision of Hon’ble Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT in ITA No. 224/2013, dated 24.07.2015, it was held that if there are interest free funds available then it will be presumed that these have been made out of interest free funds. Similar view was held in the case of CIT Vs. Kapsons Associates Investment Pvt. Ltd. (2015) 381 ITR 204 (P&H) wherein, the Hon'ble Court has held that interest on investment in other properties not for business purpose cannot be disallowed if the assessee is having sufficient interest free funds at its disposal. Similar view was taken by the Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. 63 Taxman 308 held that no disallowance is called for if the assessee has got own surplus fund.

12. Keeping in view the facts and circumstances of the case and the judicial pronouncements and keeping in view the fact that the assessee has got sufficient own funds to extend the loans interest free, we hereby direct that the disallowance made under section 36(1)(iii) be deleted.

13. The other ground relates to disallowance u/s 14A r.w.r 8D(2)(iii). The facts mentioned by the AO are that the revenue enquired vide query letter dated 26.06.2015 to provide the basis on which Rs. 4,10,947/- has been disallowed u/s 14A. The assessee vide letter dated 23.04.2015 stated that while calculating the disallowance, the assessee company has not considered income of those investment, which are not changed last year. Since, no activity has been done on these investments, the allocation of expenses or disallowance of expenses on these investments is not at all justified. The Assessing Officer observed that the auditor has given the note in the year under consideration and in the Assessment Year 2012-13, that expenses were disallowed @ 0.5% in clause 17(1) of the audit report u/s 44AB in form 3CB/3CD. Hence, 0.5% of average value of investments which comes to Rs. 44,90,230/- was disallowed as against Rs. 4,10,947/-. The Assessing Officer relied on the judgment of Hon’ble Supreme Court in the case of CIT vs. United Trust Ltd 200 ITR 488 on preposition that proportionate management expenses should be deducted from gross dividend for the purpose of the deduction.

14. The ld. CIT (A) finds that the assessee during the AY 2013-14 had earned tax free dividend of Rs. 33,34,17,195/- on the various investments made by it in the equity shares and units. During the year, the assessee had net loss on account of sale of long term equity shares on which no STT is paid of Rs. 2,03,21,156/-. This loss is allowed to be carried forward as long term capital gains on which no STT is paid is taxable. Whereas, there was gain on sale of long term shares of Rs. 21,18,743/-, on which loss is not allowed to be carried forward. Besides, the assessee had taken a position that any investment in equity shares over a period of less than one year shall be taken as income from business and hence will be taxed at full rate of 30%. The ld. CIT (A) after due deliberation held that as per Rule 8D(2)(iii), the disallowance of Rs. 44,90,230/- is justified.

15. Before us, the ld. AR argued that the disallowance u/s 14A should only with respect to actual expenditure and such expenses should be directly corelated with the exempt income. The only dispute of this ground is 0.5% has applied on the average investments. The ld. AR argued that earning dividends is not an assured activity, no business man will ever incur a recurring in anticipation of non-assured returns especially dividends. He further argued that the dividend earning was never the objective of the Company and thus finding has not been given by the Assessing Officer as to what was motive of the company of the invests Rs. 111 crores. The ld. AR argued that keeping in view the judgment of the Special Bench of ITAT in the case of Vireet Investment Pvt. Ltd. in ITA No. 502/Del/2012 vide order dated 16.06.2017, the non-dividend yielding investments ought to have been excluded.

16. Heard the arguments of both the parties and perused the material available on record.

17. The closing value of opening value of investment and average investment are as under:-

Closing value of investments	Rs. 99,12,68,846
Opening value of investments	Rs. 80,48,23,266
Average value of investments	Rs. 89,80,46,056

18. The assessee has disallowed the expenses u/s 14A of Rs. 4,10,947/-.

Since, the assessee has not given any basis so Assessing Officer applied Rule 8D(2)(iii) and worked out disallowance of Rs. 44,90,230/-.

19. The details of the investments – dividend yielding and non-exempt income is as under:

VIC ENTERPRISES PRIVATE LIMITED

Non Current Investment as at 31st March 2013

20. The Hon’ble Delhi High Court primarily decided the issue regarding applicability of section 14A even if no dividend income was earned. The Hon’ble High court in its decision observed as under:

“14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad vs. MIs. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT vs. Hero Cycles Limited, [2010]323 ITR 518 and CIT vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is Of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, vs. MIs. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:-

"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act.

Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income.

Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance…………..”

The Courts further held that the income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether Income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term. capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not all improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”

21. Hence, keeping in view the legal and factual position of the case, we hereby hold that the disallowance needs to be restricted to the dividend yielding investment only for the years involved. The Assessing Officer is hereby directed to re-compute the disallowance taking into consideration, the dividend yielding investments.

22. In the result, we hereby hold that

(a) No disallowance on the interest is required when the assessee has got sufficient own funds at their disposal to lend/advance.

(b) The disallowance under Rule 8D(2)(iii) be restricted to dividend yielding investments to determine the average value of the investments.

23. The appeals of the assessee are hereby allowed.

Order Pronounced in the Open Court on 29/01/2020.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.