Vildirect IncomeTaxcaselaws1970VIL454ITATDEL nbsp 1970VIL454ITATDEL Income Tax Appellate Tribunal DELHI ITA No 2104Del2017 ITA No 2105Del2017 ITA No 2106Del2017 ITA No 2107Del2017 Date 01011970 VIC ENTERPRISES PVT LTD Vs DEPUTY COMMISSIONER OF INCOME TAX CIRCLE26 1  NEW DELHI JUDGMENT 13 13 PER DR B R R KUMAR ACCOUNTANT MEMBER13 13 The present appeals have been f iled by the assessee against the orders of ld CIT A33 New Delhi dated 19012017 and the orders of ld CIT A9 New Delhi dated 2002201713 13 2 In ITA No 2104Del2017 following grounds have been raised by the assessee13 13 1 The ld CIT Appeals of Income Tax erred in disallowing the interest payment of Rs 30512745 keeping in view the interest free advances given by the appellant company Full arguments will be advanced at the time of hearing13 13 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 funds13 13 3 In ITA No 2105Del2017 following grounds have been raised by the assessee13 13 1 The ld CIT Appeals of Income Tax erred in disallowing the interest payment of Rs 6973346 keeping in view the interest free advances given by the appellant company Full arguments will be advanced at the time of hearing13 13 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 funds13 13 4 In ITA No 2106Del2017 following grounds have been raised by the assessee13 13 1 The ld CIT Appeals of Income Tax erred in disallowing the interest payment of Rs 6881215 keeping in view the interest free advances given by the appellant company Full arguments will be advanced at the time of hearing13 13 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 funds13 13 5 In ITA No 2107Del2017 following grounds have been raised by the assessee13 13 1 The ld CIT Appeals of Income Tax erred in disallowing the interest payment of Rs 1631794 keeping in view the interest free advances given by the appellant company Full arguments will be advanced at the time of hearing13 13 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 funds13 13 3 The ld CIT Appeals of Income Tax erred in not accepting the disallowance amounting to Rs 410947 us 14A made by the appellant and allowed the enhancement of disallowance by Rs 4079583 made by the Assessing Officer The increase in disallowance us 14A is not at all justified and requires revision Full arguments and detailed submissions will be made at the time of hearing13 13 6 The issues involved in these appeals to be adjudicated are13 13 i Disallowance of interest payment on the interest free advances given by the assessee13 13 ii Disallowance us 14A of the Income Tax Act 1961 more than the disallowance made by the assessee suo moto13 13 7 The assessment year 201213 is taken as the lead case for the sake of convenience on the issue of interest payments13 13 8 Brief facts of the case taken from the record are that during the relevant financial year the assessee earned interest income of Rs 87313968 and also debited interest expenses of Rs 1631794 From the details of interest paid furnished during the course of assessment proceedings it is seen that a total amount of Rs 1631794 has been paid to various entities against the total unsecured loans taken amounting to Rs 120 crores during the year A perusal of the balance sheet of the assessee also shows that an amount of Rs 26874 crores has been shown as loans and advances given as at 31032013 The corresponding figure as at 31032012 was Rs 25505 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 163179413 13 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 26874 crores It was argued that there can be no notional addition of interest on interest free loan and advances has been decided by the Honble 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 proved13 13 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 under13 13 Details of Interest Free reserves available with the appellant13 13 13 13 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 Honble Punjab amp Haryana High Court in the case of Bright Enterprises Pvt Ltd Vs CIT in ITA No 2242013 dated 24072015 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 PampH wherein the Honble 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 Honble 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 fund13 13 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 361iii be deleted13 13 13 The other ground relates to disallowance us 14A rwr 8D2iii The facts mentioned by the AO are that the revenue enquired vide query letter dated 26062015 to provide the basis on which Rs 410947 has been disallowed us 14A The assessee vide letter dated 23042015 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 201213 that expenses were disallowed  05 in clause 171 of the audit report us 44AB in form 3CB3CD Hence 05 of average value of investments which comes to Rs 4490230 was disallowed as against Rs 410947 The Assessing Officer relied on the judgment of Honble 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 deduction13 13 14 The ld CIT A finds that the assessee during the AY 201314 had earned tax free dividend of Rs 333417195 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 20321156 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 2118743 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 8D2iii the disallowance of Rs 4490230 is justified13 13 15 Before us the ld AR argued that the disallowance us 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 05 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 nonassured 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 502Del2012 vide order dated 16062017 the nondividend yielding investments ought to have been excluded13 13 16 Heard the arguments of both the parties and perused the material available on record13 13 17 The closing value of opening value of investment and average investment are as under13 13 13 13 13 13 Closing value of investments 13 13 13 Rs 99126884613 13 13 13 13 Opening value of investments 13 13 13 Rs 80482326613 13 13 13 13 Average value of investments 13 13 13 Rs 89804605613 13 13 13 13 13 18 The assessee has disallowed the expenses us 14A of Rs 41094713 13 Since the assessee has not given any basis so Assessing Officer applied Rule 8D2iii and worked out disallowance of Rs 449023013 13 19 The details of the investments  dividend yielding and nonexempt income is as under13 13 VIC ENTERPRISES PRIVATE LIMITED13 13 Non Current Investment as at 31st March 201313 13 13 13 20 The Honble Delhi High Court primarily decided the issue regarding applicability of section 14A even if no dividend income was earned The Honble High court in its decision observed as under13 13 14 On the issue whether the respondentassessee 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 appellantRevenue 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 9702008 decided on 02042014 made reference to two earlier decisions of the same Court in CIT vs Hero Cycles Limited 2010323 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 TaxI 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 05052014 In the said decision it has been held13 13 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 Act13 13 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 income13 13 Hence in the absence of any tax free income the corresponding expenditure could not be worked out for disallowance13 13 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 tax13 13 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 recompute the disallowance taking into consideration the dividend yielding investments13 13 22 In the result we hereby hold that13 13 a No disallowance on the interest is required when the assessee has got sufficient own funds at their disposal to lendadvance13 13 b The disallowance under Rule 8D2iii be restricted to dividend yielding investments to determine the average value of the investments13 13 23 The appeals of the assessee are hereby allowed13 13 Order Pronounced in the Open Court on 2901202013 nbsp 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 responsibleliable for any loss or damage caused to anyone due to any mistakeerroromissions