Income Tax Act, 1961 – Sections 14A, 36(1)(iii) and 145(3) – Addition of surrendered amount – Deletion of addition – Respondent/assessee filed its return of income for AY 2012-13 – AO completed assessment by determining total income of assessee by making certain additions to returned income – CIT(A) deleted additions made by AO – Whether CIT(A) has erred in deleting addition made by AO on account of disclosure made by assessee during course of survey proceedings – HELD – There is no material on record to suggest that any discrepancy was found during course of survey in form of any incriminating document – In absence of any incriminating evidence collected at time of survey, disclosure made by assessee in form of a plain statement has no legs to stand – Disclosure made by assessee was not based on any incriminating material found during survey, but was only on estimation of profits he had expected to earn during the year which had drastically fallen on account of unprecedented circumstances which was evidenced by audited financial statements of assessee – Since there was no basis with AO except disclosure made by assessee which was duly explained, addition made on account of disclosure so made was not sustainable – There is no infirmity in order of CIT(A) deleting addition made on account of disclosure made by assessee during survey – Appeal dismissed.

 

Issue 2: Estimation of net profits – Whether CIT(A) has erred in deleting addition made on account of estimation of net profits – HELD – AO rejected books of accounts of assessee under Section 145(3) of the Act and estimated profits at average of last three years – For rejecting books of accounts, there has to be a specific finding by AO that books are not reliable for arriving at a true and correct profits earned by assessee – Merely making a general statement that some vouchers were unsupported or there were expenses incurred in cash by assessee, cannot justify such adverse action of AO in rejecting audited books of accounts of assessee – Assessee had explained reasons for fall in net profit by pointing out that while its gross profits had increased during impugned year, net profit had fallen on account of increase in financial cost and huge foreign exchange losses incurred by it which were pointed out even by auditors of assessee company – No anomaly in accounts or claims of assessee has been found by AO – Rejection of books of accounts of assessee was totally unjustified – Addition made by estimation of net profits has been rightly deleted by CIT(A).

 

Issue 3: Deletion of disallowance of expenses – Whether CIT(A) has erred in deleting disallowance of expenses incurred in relation to earning of exempt income in terms of provisions of Section 14A of the Act – HELD – CIT(A) deleted disallowance by noting that assessee had sufficient owned funds for making investment for earning exempt income – Revenue was unable to controvert factual findings of CIT(A) with respect to sufficiency of own funds available with assessee for purposes of making investment for earning exempt income – Where sufficient own funds are available, no disallowance of interest was warranted – Order passed by CIT(A) on this issue affirmed.

 

Issue 4: Disallowance of interest expenditure – Deletion of disallowance – Whether CIT(A) has erred in deleting addition made by AO on account of disallowance of interest expenditure under Section 36(1)(iii) of the Act – HELD – Assessee had sufficient interest free funds to cover interest free advances given to assessee's sister concern for business purpose – Since interest free funds available at disposal of assessee are sufficient to meet interest free advances, presumption would arise that interest free advances were lent from interest free funds and not borrowed funds – There is no reason to interfere in order of CIT(A) deleting disallowance of interest expenses under Section 36(1)(iii) of the Act .

 

2023-VIL-1724-ITAT-AHM

 

IN THE INCOME TAX APPELLATE TRIBUNAL

“A” BENCH, AHMEDABAD

 

ITA No. 415/Ahd/2022

Assessment Year: 2012-13

 

Date of Hearing: 28.08.2023

Date of Pronouncement: 21.11.2023

 

ASST. COMMISSIONER OF INCOME-TAX

 

Vs

 

M/s JEWEL CONSUMER CARE PRIVATE LIMITED

 

Revenue by: Shri Akhilendra Pratap Yadav, CIT-DR

Assessee by: Shri Milin Mehta, AR

 

BENCH

MRS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER

MRS. MADHUMITA ROY, JUDICIAL MEMBER

 

ORDER

 

PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER

 

The present appeal has been preferred by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-12, Ahmedabad (hereinafter referred to as “CIT(A)”) dated 18.08.2022 passed u/s 250(6) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year (AY) 2012-13.

 

2. The brief facts relating to the case are that a survey operation under Section 133A of the Act was carried out on the assessee on 17.08.2011. During the course of survey, the assessee made a disclosure of Rs.3 crores for the preceding assessment year and Rs.7 crores for the impugned assessment year i.e. AY 2012-13. However, in the return of income filed, no disclosure of the income surrendered was found to have been made by the Assessing Officer. Accordingly, the assessee was questioned with regard to the same, to which the assessee submitted that no adverse material was found during survey; that the surrender made pertained to the profits which the assessee estimated to earned during the whole year, but due to exceptional adverse circumstances, the assessee was unable to earn the same; that during survey the difference in stock, which was found of Rs.1.52 crores, was incorrect and the stock actually tallied with the books of the assessee; that therefore no separate surrender of Rs.7 crores was made by the assessee. The Assessing Officer, however, was not convinced with the explanation of the assessee and held that the assessee has suo moto surrendered the impugned amount and the retraction was not based on any evidence or material; therefore, he added the same to the income of the assessee.

 

3. Further, he noted that the net profit shown by the assessee showed a major decline as compared to the preceding years. Noting certain anomalies in the books of accounts maintained by the assessee, he rejected the books of accounts of the assessee under Section 145(3) of the Act and estimated the profits at the average of the last three years which came to 3.87% resulting in the net profit being estimated at Rs.3,50,65,880/-. Since the assessee had disclosed net profit of only Rs.46,32,432/-, the difference amounting to Rs.3,04,33,448/- was added to the income of the assessee; but no separate addition on account of the same was made as it was treated as covered in the addition made on account of disclosure of Rs.7 crores which was added to the income of the assessee.

 

4. The Assessing Officer also made disallowance of expenses incurred in relation to earning of exempt income in terms of provisions of Section 14A of the Act amounting to Rs.1,21,905/- and also disallowance of interest expenses allegedly not incurred for the purpose of business of the assessee under Section 36(1)(iii) of the Act amounting to Rs.6,26,176/-.

 

5. All these additions made by the Assessing Officer were challenged by the assessee before the ld. CIT(A) who deleted all the additions so made. Aggrieved by which, the Revenue has come up in appeal before us.

 

6. Ground Nos. [i] to [iv] of the Revenue’s appeal read as under:-

 

“[i] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.7,00,00,000/- on account of disclosure made during the course of survey proceedings whereas the same has been categorically accepted by the assessee in statement recorded on oath u/s. 131 of the I.T. Act.

 

[ii] In addition to the Ground No. 1. on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.7,00,00,000/- by observing that the addition is not based on any cogent/credible/incriminating material found during the course of survey, even though it was clearly mentioned during the course of survey, difference in book value of stock-in-trade and on physical verification was worked at Rs. 1.52 Cr, and to cover up the issues, the director of the company has made disclosure during the survey.

 

[iii] In addition to the Ground No. 1 & 2, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.7,00,00,000/- by misinterpreting the Circular F. No. 286/2/2003-IT (Inv.) dated 10/03/2003, and ignoring the judicial pronouncement of the Hon'ble Apex Court in the case of Bannalal Jat Construction (P) Ltd. Vs. ACIT decided in SLP(Civil), Diary No.7469 dated 08.04.2019 wherein the Hon'ble Supreme Court in its decision held that mere retraction of statement at later point of time is unacceptable as the burden lies upon assessee to show that admission made by the director in his statement was wrong and such retraction had to be supported by a strong evidence showing that earlier statement was recorded under duress and coercion, which is binding and the assessee failed to substantiate its retraction through evidences.

 

[iv] In addition to Ground No. 1, 2 & 3, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the assessee company has paid total advance tax of Rs.1,77,00,000/- during the F.Y. 2011-12 relevant to AY 2012-13 which is much comparable to the disclosure amount during survey action. Later on, the assessee has reduced the net profit based on the afterthought and claimed refund thereon.”

 

7. Ground Nos. [i] to [iv] of the Revenue’s appeal relate to the issue of the addition made of Rs.7 crores by the Assessing Officer on account of disclosure made by the assessee during survey which was in turn deleted by the ld. CIT(A). The relevant findings of the ld. CIT (A) are at paragraph Nos. 4.2 to 4.8 of the order as under:-

 

“4.2. I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record on this issue. Facts of the case are that a survey u/s 133A of the Act was carried out on 17.08.2011 at the business premises of the appellant. As per the assessment order books of accounts for F.Y.2011-12 were verified and also physical inventory of raw material, semi-finished stock and finished goods were taken. The AO has mentioned that difference in book value of stock-in-trade and on physical verification was worked out at Rs.1.52 crores on the date of survey. On the basis of books of accounts and difference in stock, the taxable income A.Y.2012-13 was estimated at Rs.7 crores. The AO has further noted that during the course of survey proceedings, in the statement of Shri Amit Goradia, Chairman of the assessee company, recorded u/s 131(1) of the Act vide Answer to Q.No.39, Shri Goradia has categorically admitted the disclosure of Rs.3 crores for the F.Y 2010-11 and Rs.7 crores for F.Y.2011-12. Further, the assessee company vide its letter dated 17.8.2011 again reconfirmed this disclosure for the AYs 2011-12 and 2012-13. In the said letter the appellant had promised to pay an amount of Rs.1 crore by way of self- assessment tax for A.Y.2011-12 and also agreed to pay advance-tax on 15th September, December, 2011 and March, 2012 on the income disclosed for F.Y 2011-12. From the above, the AO concluded that it was very clear that the disclosure made by the assessee company during the course of survey was based on facts and material evidence gathered on the date of survey. However, the AO found that the appellant had not made any disclosure while filing the return of income for AY 2012-13. During the course of assessment proceedings, the appellant took a plea that no excess stock of Rs.1.52 crores was detected during the course of survey. It further submitted in the letter dated 20.2.2015 that the company regularly followed a practice of having stock in process included in the books of accounts maintained in its regular course of business based on periodic computation of work-in-progress. In the submission it was further stated that there has been no admission or conclusion that the said work in progress represents stock which was not recorded in the books of accounts. The AO held that the statements averred by the appellant in its submission thus, is just an afterthought and made-up story to eye wash the revenue from paying the tax liability on the admitted disclosure of Rs. 7 crores made during the course of survey. The AO also noted that on the basis of disclosure made during the course of survey, the appellant had also started to make the advance-tax payments which were due in the month of 15th September, 2011 and 15th December, 2011 proving that the company was running its business without any hurdle and the payment was made on the basis of income and disclosure made during the course of survey. The appellant before the AO had taken a plea that subsequent to the survey, the company passed through very difficult business conditions in second half year of the financial year but AO rejected the same as it had failed to bring on record any iota of evidence to prove that after survey operation, the company has faced any difficulty which causes he production/marketing of its products. The AO then went on to make an addition of Rs.7 crore to the income of the appellant based on the disclosure made by Shri Amit Goradia during the course of survey holding that the subsequent retraction was an afterthought and the disclosure admitted during the course of survey is based on facts and material evidence found and impounded during the course of survey. Aggrieved the appellant is in appeal.

 

4.3 During the appellate proceedings the appellant reiterated its stand that it passed through very difficult business conditions especially in euro-zone, and consequently did not achieve its targeted sales. It pleaded that increased input costs, finance costs and foreign exchange fluctuation losses adversely affected the company's bottom line. It pointed that this was not known at the time of survey as the same was conducted on 16.08.2011, in the first half of the relevant financial year only. It stated that later adverse conditions including forex fluctuation losses have contributed in eroding the Appellant's profitability. It invited attention to Note 27 of Financial Statements wherein the net foreign exchange fluctuation loss was shown at Rs. 2.78 crores and pointed out that during the preceding FY it had earned due to huge foreign exchange fluctuation. It submitted that if the effect of foreign exchange fluctuations is considered the income of the Appellant would match the estimate made at the time of survey. The computation is as under:

 

Particulars	Amount
Income as per computation of total income	60,09,132
Add: Loss of the current year on account of foreign exchange fluctuations	2,78,51,99
Add: Income on account of foreign exchange gain for AY 2011-12 (page 49)	4,49,91,39
Total impact	7,88,52,52

 

It further submitted that the statement recorded u/s 133A of the Act during the course of survey has no evidentiary value and cited the case of Hon'ble Supreme Court in the case of CIT vs. S. Khader Khan Son [2013] 352 ITR 480.

 

4.4 From the plain reading of the assessment order along with the copy of the statement of Shri Goradia, it was not discernable that what exactly was the finding of the survey based on which the appellant had made a disclosure while recording statement u/s 131(1A) of the Act as under

 

"To cover up the issues which come up during the course of survey operations at the office and factory premises of M/S Jewel Consumer Care Pvt. Ltd., we making disclosure of estimated income as under:-

 

F. Yr. 2010-11	Rs. 3,00,00,000/
F.Yr. 2011-12	Rs. 7,00.00.000/-
	Rs 10,00,00,000/-

 

We have not paid any advance tax, either for F. Ys. 2010-11 or 2011- 12. We promise to pay an amount of 1 Crore by way of SA. tax for A. Ys. 2011-12 within next 15 days and we shall pay advance tax on 15th September, December 2011 and March, 2012 on the income disclosed for FY. 2011-12. We also promise to furnish the details and documents as asked for, within the shortest possible time." (emphasis supplied)

 

4.4.1 Accordingly, a letter was issued to the AO dated 22.03.2022 specifically asking him to furnish a report based on the analysis of material available on record, to enumerate how the figure of Rs. 7 crore that was disclosed by the Chairman of the company at the time of survey arrived at. The said letter is reproduced as under :-

 

“….2. During the course of appellate proceedings, it is found that the DCIT Circle-111(2), Baroda vide his order dated 27.03.2015 us 143/3) of the Act had made an addition of Rs. 7,00,00,000/- on account of disclosure made on account of difference in stock found during the course of survey u/s 133A on 17.08.2011.

 

3. From the art order it is found that appellant at the time of survey proceedings u/s. 133A of the Act, by his state recorded us 131(1) had made a disclosure of estimated income for AY 2012-13 of Rs.7,00,00,000 However, while filing the Return of Income, assessee had shown a total income of Rs. 57,08,680/- only. The AO rejected the contentions made by the appellant during the course of assessment proceedings and made the aforesaid addition stating that:

 

“…Since the course of survey is based on facts and material evidence found und impounded during the course of survey and subsequent retraction thereof is only an afterthought is just to avoid payment of tax, In view of the above facts and circumstances of the case, the disclosure made of Rs 7 crores on the date of survey is based on material evidence only and accordingly the sum of Rs 7 crores is hereby added to your income.....”

 

3.1 Thus the sole basis of making the said addition is the disclosure made by the appellant at the time of survey and later. However, there is no reference to what incriminating material was found or impounded during the course of survey and no working was done on how the calculation of Rs 7 crore which the appellant had disclosed at the time of survey was arrived at in the assessment order. You are therefore, requested to furnish a report based on the analysis of material available on record to enumerate that how the figure of Rs 7 crore was arrived at.

 

3.2 You are also requested to furnish the duly verified copies of such material as well as a clear legible copy of the statement of Shri Amit Goradia, Chairman of the appellant Company, recorded during the course of survey and later and any written submission made by the appellate before you.

 

4. Your report directed to be furnished as above should reach the undersigned on or before 10th April, 2022"

 

4.4.2 The AO furnished a reply on 15.07.2022 which is reproduced as under:-

 

"Vide above referred letter, your office has asked to furnish a report based on the analysis of material available on record to enumerate that how the figure of Rs.7 crore was arrived. During the course of survey proceedings, a statement on oath w/s 131(1A) of the I.T. Act 1961 recorded on 17.08.2011 of Shri Amit Goradia in the case of Jewel Consumer Care Pvt. Ltd. In his statement the assesse has made a disclosure of Rs. 3 crores for the FY 2010-11 and Rs.7 crores for FY 2011-12. The assessee has also made disclosure during the course of survey w's 133A at Jewel Consumer Care Pvt. Ltd vide its letter dated 17.08.2011. Therefore, statement on oath u/s 131(1A) of the IT. Act 1961 recorded on 17.08.2011 of Shri Goradia in the case of Jewel Consumer Care Pvt. Ltd. and letter dated 17.08.2011 are submit herewith for your kind perusal and necessary action."

 

4.4.3 There was no whisper of any specific material on record in the form of any impounded documents or details of inventory of stock at the time of survey as compared to the entry in the books of accounts in the said reply. The assessment order is also silent about this aspect except the fact that it mentions finding of excess stock on the date of survey of Rs.1.52 crore based on which the appellant had made a disclosure of Rs.7 crore for the entire year. Other than the mention, the AO has not given any detail of what was the stock and nature thereof which varied from the corresponding entry in the Books of a/c. It is found that during the course of assessment proceedings also, the appellant had categorically denied any evidence regarding finding of such excess stock as mentioned by the AO, and instead pleaded that the stock found during survey was in conformity with the records and have been included in the books of accounts maintained in the regular course of business. It had although accepted that Quantification of stock on the date of the survey was done at Rs. 1.52 Crore but submitted that there was no difference in the physical stock and the book stock and the book stock and it was already considered while considering the monthly inventory and therefore the same had no impact on the profits of the Appellant. It added that there has been no admission or conclusion that the said work in progress represents stock which was not recorded in the books of accounts. Further, the AO has not brought forth any material or evidence to substantiate his claim of difference in stock. Furthermore, the appellant had submitted that the AO has not controverted the facts presented by it vide letter dated 16-09- 2011. In view of the same it had also argued that there was no basis for AO to make addition to its total income. It added that assessments for AY 2011-12 and also AY 2013-14 were completed. The book results are accepted and therefore there was no ground for the AO to make addition on this issue.

 

4.5 During the course of appellate proceedings, the appellant furnished copy of return of income along with computation of income and the audited financial statements for AY 2011-12 that were perused. It is found that the appellant had reflected a total income of Rs. 3,19,41,200/- in the Return of Income filed. The appellant has submitted that the amount of disclosure was made on the basis of rough computation of total income which was already prepared at the time of survey, as the FY 2010-11 had already concluded on the date of survey and income for the said year could be reasonably estimated. From the financial statements filed for AY 2011-12, no specific addition of Rs.3,00,00,000/- on account of any disclosure made by the appellant is discernible. The case was assessed u/s 143(3) of the Act vide order dated 04/03/2014. No specific addition with respect to the Rs 3,00,00,000/- disclosure made during the course of survey was made. Clearly the AO in the previous AY has accepted the income as per the books and consequentially returned, barring some small additions returned by the appellant.

 

4.6 For this AY, the appellant has also pleaded that the survey was conducted on 17/08/2011 much before the end of the FY. At that time an estimate for the Income of the year was made. It emphasized that no incriminating material was found during the course of survey for the period 01.04.2011 to 17.08.2011, hence the disclosure of Rs. 7 crore was purely an estimate.

 

However, due to increased costs, finance costs and foreign exchange fluctuation losses coupled with failure to achieve targeted sales adversely affected the companies bottom line. It gave calculation chart showing that a foreign exchange fluctuation loss in this assessment year vis-à-vis foreign exchange gain in AY 2011-12 is taken into consideration then its income exceeded Rs.7 crore. The AO has not rebutted these submissions in the assessment order. The appellant has presented audited accounts. At no point of time the AO has objected to the completeness or correctness of the Books of accounts. The expenditure in the form of input costs, finance costs and foreign exchange fluctuation losses have not been questioned and thereby accepted. No evidence is available on record to suggest that there was suppression of income by the appellant amounting to Rs. 7 crore for this assessment year other than the admission made in the statement u/s 131(1A) of the Act.

 

4.7 It is brought to notice that the CBDT has at various times issued instructions to the field authorities regarding any disclosures/surrender of income during the conduct of search/survey proceedings. Vide its circular F.No. 286/2/2003-IT (Inv.) dated 10th March 2003 it had issued an advisory to field officers regarding confession of additional income during the course of search and survey operations. Relevant portion of the above said circular is reproduced hereunder:-

 

"Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search and seizure and survey operations, Such confessions is not based on credible evidence are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income-tax Department. Similarly, while recording statement during the Course of search and seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. An action on the contrary shall be viewed adversely. Further, in respect of pending assessment proceedings also, the Assessing Officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders.

 

4.8 In view of the above discussion and facts on record it is found that the entire addition of Rs.7crore to the income of the appellant is not based on any cogent/credible/incriminating material found during the course of survey but on the basis of statement of the Chairman of the company recorded u/s.131(1A) of the Act. During the course of appellate proceedings the AO was given an opportunity to adduce any material on record that reflected suppression of income by the appellant which could not do. It can be safely contended that there is no material on record to suggest that any discrepancy was found during the course of survey in the form of any incriminating document or discrepancy in the inventory of the stock taken vis-à-vis that recorded in the regular books of accounts. Although there is mention of quantification of stock on the date of survey of Rs.1.52 crore but there is no evidence to suggest that the same was not disclosed/recorded in the books of account. No query related to any discrepancy found during the course of survey is found to have been made while recording the statement of Shri Amir Goradia. Further, there is no calculation/computation by the AO that how the purported disclosed figure of Rs.7 crore for the AY 2013-14 made by the Chairman of the company in response to the last query 'do you have anything else to say of the statement u/s 131(1A) recorded on the date of survey was arrived at. The AO has not brought any material on record to justify that why the audited financials of the appellant and the expenditures especially Finance cost. Forex fluctuation losses, etc were incorrect. In the absence of any cogent/credible/incriminating evidence collected at the time of survey the entire disclosure made by the appellant in the form of a plain statement and letter of the same date has no legs to stand n and cannot be made a basis of addition to the returned income. Further, the Chairman had so made disclosure of Rs. 3 crore for the previous assessment year and despite the fact no clear eflection of the said amount while computing the income of that year, the AO had not taken any adverse view while completing the assessment for that assessment year. In view of the same, the AO is directed to delete the addition of Rs 7,00,00,000/- made by him. Ground of appeal 1 is therefore allowed.”

 

8. As is evident from a bare perusal of the order of the ld. CIT(A), which we find is a detailed and speaking order, he deleted the addition made on account of disclosure made by the assessee during survey, noting that: -

 

(a) No adverse material was found during survey. That even on specifically asking the Assessing Officer as to what adverse material was found, the Assessing Officer could not submit a shred of evidence in this regard;

 

(b) He noted that the assessee had duly explained the difference in stock of Rs.1.52 crores found during survey pointing out that there was actually no difference in stock on that date and it represented work-inprogress which was duly accounted for in the books of accounts of the assessee;

 

(c) He noted that the statement of the Director of the assessee-company making disclosure was to the effect that the assessee could earn income of Rs.7 crores during the year and Rs.3 crores during the preceding year. He noted that the assessee had earned Rs.3 crores during the preceding year which was returned to tax also and accepted by the Assessing Officer in assessment proceedings. He further noted that during the impugned year, there were exceptional circumstances resulting in heavy financial cost incurred by the assessee in terms of interest charges paid and also on account of foreign exchange fluctuation losses incurred which in the preceding year had resulted in profits to the assessee.

 

9. That for the afore-stated reasons, the estimated profits could not be earned by the assessee. He found the explanation of the assessee evidenced by the audited balance sheet of the assessee reflecting the aforesaid facts. Therefore, he was convinced that the disclosure made by the assessee during survey of Rs.7 crores was not based on any incriminating material found during survey but was only on estimation of profits he had expected to earn during the year, which had drastically fallen on account of unprecedented circumstances which was evidenced by the audited financial statements of the assessee. Accordingly, he held that since there was no basis with the Assessing Officer except the disclosure made by the assessee during survey which was duly explained, the addition on account of the disclosure so made was not sustainable and he deleted the same.

 

10. The only pleading made by the ld. DR before us was that since the assessee had suo moto made disclosure of Rs.7 crores during survey, he could have retracted it only on the basis of some evidences; and in the absence of the same, the addition in the hands of the assessee of the disclosure so made was justified in view of the decision of the Hon’ble Apex Court in the case of Bannalal Jat Construction (Pvt.) Ltd Vs. ACIT, in SLP (Civil), Diary No.7469 dated 08.04.2019. The ld. Counsel for the assessee, on the other hand, heavily relied on the findings of the ld. CIT(A).

 

11. We have heard both the parties and have gone through the orders of the authorities below. The issue before us is whether the surrender made by the assessee of Rs.7 crores was liable to be taxed in its hands.

 

12. It is not denied and in fact it is admitted by the Assessing Officer also that Rs.7 crores disclosure made during survey was dehors any incriminating material found during survey. The said fact finds mention in the order of the ld. CIT(A) where he specifically asked the Assessing Officer to submit the evidence found during survey leading to the disclosure of Rs.7 crores, to which the Assessing Offifer had only referred to the statement of the Director of the assessee-company Shri Amit Goradia recorded during survey under Section 131(1A) of the Act, making the disclosure. As for the excess stock found during survey of Rs.1.52 crores, the ld. CIT(A) has noted that the Assessing Officer has not given any details of what was the stock and the nature thereof which varied from the corresponding entry in the books of accounts of the assessee. The assessee, he has noted, denied any discrepancy in the stock and pleaded that stock found during survey was in conformity with the record. The ld. CIT(A) has noted that though the assessee has accepted that the quantification of stock on the date of survey was done at Rs.1.52 crores, but there was no difference in the physical and book stock. The Ld.DR did not controvert any of the above facts noted by the Ld.CIT(A)

 

13. The assessee, we have noted, had explained that Rs.7 crores disclosure made by the Director of the assessee-company was with respect to the estimation of its profits for the entire year, survey having been conducted at the beginning of the year in the month of August, and that due to adverse circumstances, it had incurred huge foreign exchange loss to the tune of Rs.2.68 crores and heavy financial cost by way of interest expenses resulting in lower net profits as opposed to that estimated. In this regard, the assessee had also furnished the reconciliation of its estimated profits and its actual profits on account of these adverse circumstances. The ld. CIT(A) has noted that the books of accounts of the assessee, taking note of these adverse circumstances faced by the assessee by way of incurring huge foreign exchange losses and interest expenditure, has not been found to be incorrect by the Assessing Officer. No discrepancies vis-à-vis these accounts have been noted by the Assessing Officer despite the entire books being produced before him.

 

14. The Ld. DR was unable to controvert the above.

 

15. Therefore, the assessee’s explanation for not returning the disclosure of Rs.7 crores is a reasonable and plausible explanation which, we hold, has been rightly accepted by the ld. CIT(A).

 

16. We have also noted that the ld. CIT(A) found that identical disclosure made in the preceding year of Rs.3 crores was returned by the assessee as profits of the said year which was accepted by the Assessing Officer in the assessment proceedings. The ld. CIT(A), therefore, has, we hold, rightly held that having accepted the disclosure of the assessee as representing profits of the year in the preceding year, the Assessing Officer could not have taken a different stand in the impugned year for treating the disclosure as an independent disclosure of income and not relating to the profits of the assessee for the year.

 

17. In the absence of any incriminating material found during survey to form the basis for the surrender made by the assessee and the assessee duly explaining the basis of its surrender and the reason for not disclosing the same in the return filed, duly backed with evidence, We do not find any infirmity in the order of the ld. CIT(A) deleting the addition made on account of the disclosure made by the assessee during survey of Rs.7 crores.

 

18. The contention of the ld. DR that the assessee had retracted its disclosure which was possible only if the retraction was supported with evidence and explanation, we find that, in the present case, there was in fact no retraction made by the assessee. As noted above, what the assessee had disclosed was the profits that it estimated to earn during the year and what it had returned was its actual profits and the reasons for the fall in profits had been duly explained by the assessee, in which explanation there was no infirmity pointed out by the Assessing Officer. Therefore, it is not a case of retraction of disclosure or surrender made by the assessee and even if found so the assessee has given basis for retracting the surrender. It is relevant to note that the disclosure was not based on any incriminating material found during survey which the Assessing Officer had admitted. It is only when the disclosure is based on some incriminating material found with the assessee that it is required to substantiate its retraction with evidences. It is only when the Revenue has found the assessee to have not disclosed particular income supported with evidence and which the assessee surrenders, the retraction of such surrender then has to be duly supported with evidence and cannot be based on a blanket retraction without any evidence. The case law relied upon by the ld. DR has not pointed out how the decision relied upon by it , is applicable to the facts of the present case.

 

Ground of appeal Nos. [i] to [iv] raised by the Revenue, therefore, are dismissed.

 

19. Ground No.[v] relates to the addition made on account of estimation of net profits which was deleted by the ld. CIT(A). The said ground reads as under:-

 

“[v] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3,04,33,448/- made as alternative addition on account of enhancement of net profit as the assessee has shown drastically low net profit as compared to preceding previous years without furnishing any cogent reason.”

 

20. The ld. CIT(A) has dealt with this issue at paragraph Nos. 5.2 to 5.4 of his order as under:-

 

“5.2 I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record on this issue. The AO found that the appellant has shown steady decline in net profit rate of 0.51% for AY 2012-13, 4.87% for AY 2011-12 and 6.24% for AY 2010-11. Before him the main argument of the appellant to explain this decline was the increase of finance cost as compared to in the immediately preceding assessment year and also on account of heavy volatility in the foreign currency rates of the dollar, the company has incurred a foreign exchange loss of Rs.278 lacs. The AO stated that there is substantial increase in repairs and maintenance of machinery, factory expenses, legal and professional expenses, etc. Books were produced for verification. He stated that of the bills and vouchers of the expense viz. communication, travelling and conveyance, printing and stationery, postage and courier, office expenses, vehicle running and hiring expenses, legal and professional, freight and forwarding, sales discount, business promotion, and other selling expenses are not properly vouched and not fully verifiable. Expenses have also been incurred on cash basis which are also not verifiable. Cash vouchers were also made which do not have any signature or thump impression of the recipients. Noting these issues, he rejected the explanation of the appellant and also the books of accounts and estimated the net profit for the year at the average rate of 3.87% and computed the same as Rs 3,50,65,880/-.

 

5.3 The AO has failed to substantiate the addition with any cogent corroborative material. The appellant has argued that its GP rate for the current year exceeded that of the previous assessment year. It said that however, the net profit rate went down drastically as it had huge foreign exchange losses and also that the finance cost also went up. He added that he has failed to find any defect with the books of accounts that are duly audited. He has also not brought any material on record to show that any bogus expenditure or non-verifiable expenses have been debited to profit and loss account. He therefore, questioned the AO rejecting the books of accounts and re-estimating his net profit.

 

5.4 I find that the AO has without any analysis summarily rejected the basic argument of the appellant. It is seen From Note 21 of the audited financial statement that the appellant had a foreign exchange gain of Rs 4,49,91,391/- (Other Income) where as in the current year as per Note 27 it had a foreign exchange loss of Rs 2,78,51,999/-. Along with the same, the Finance cost as per Note 26 for this year is Rs 6,56,46,623/- higher than previous FY expense under this head of Rs 5,19,61,838/-. With such heavy difference in major expenses, the net profit figure is bound to go down drastically. It is added that the AO has not questioned the correctness of these expenses or loss. Further on the issue of rejection of books, the AO has made some general comments without bringing on record any specific instance of why the books of accounts are incorrect and incomplete. These are audited books of accounts. No case can be built up merely on the fact that appellant has claimed cash expenditure. I believe that the AO has not brought any material on record to justify the books of accounts. Further he summarily rejected the appellant's explanation of fall in Net profit, without analyzing the same. The appellant case had a justifiable reason for such change. I do not find any merit in such estimation of net profit and direct the AY to delete the addition of Rs.3,04,33,448/- made in this regard. Ground of appeal 2 is allowed.”

 

21. We have noted from the above that ld. CIT(A) has found the Assessing Officer’s act of rejecting the books of accounts of the assessee and estimating its net profits to have been made without any basis at all. With respect of the issue of rejection of the books of accounts of the assessee, ld. CIT(A) has noted that the Assessing Officer has made some general comments without bringing on record any specific instance of what books of accounts are incorrect and incomplete. He noted that these are audited books of accounts and merely on account of claiming certain expenditures in cash, the same cannot be rejected. He observed that the Assessing Officer has brought no material to justify the rejection of books of accounts. With respect to the fall in net profits which the Assessing Officer had noted from the preceding year, the ld. CIT(A) noted that the assessee had justified the fall with a reasonable expenditure evidenced by its audited books of accounts of the assessee. He noted that the gross profit of the assessee in fact had increased in the impugned year as compared to the preceding year but there was a fall in net profit on account of unprecedented circumstances resulting in huge interest expenditure and foreign exchange loss incurred by the assessee.

 

22. The ld. DR was unable to controvert the above findings of the ld. CIT(A). A perusal of the assessment order also reveals that the ld. CIT(A) has rightly noted the Assessing Officer to have rejected the books of accounts of the assessee in a very casual manner, without pointing out any specific major discrepancy in its books to lead to such a conclusion. We have noted from paragraph No.5.1 of the assessment order that he has made a general statement of various expenses viz. communication, travelling and conveyance, printing and stationery, postage and courier, office expenses, vehicle running and hiring expenses, legal and professional, freight and forwarding, and so on and so forth, having not been properly vouched and not fully verifiable, and expenses having been incurred in cash. He has also noted the fall in net profit of the assessee from 6.24% in the AY 2010-11, 4.87% in AY 2011-12, 0.51% in the impugned year. We concur with the ld. CIT(A) that for rejecting the books of accounts, there has to be a specific finding by the Assessing Officer that the books are not reliable for arriving at a true and correct profits earned by the assessee. Merely making a general statement that some vouchers were unsupported or there were expenses incurred in cash by the assessee, cannot justify such adverse action of the Assessing Officer in rejecting the otherwise audited books of accounts of the assessee. Also we find that the assessee had explained reasons for fall in net profit, pointing out that while its gross profits had increased during the year, the net profit had fallen on account of increase in financial cost and huge foreign exchange losses incurred by it which were pointed out even by the auditors of the assessee-company. No anomaly in these accounts or claims of the assessee has been found by the Assessing Officer. Therefore, we completely agree with the ld. CIT(A) that the rejection of books of accounts of the assessee was totally unjustified. The addition, therefore, made by estimation of the net profits, we hold, has been rightly deleted by the ld. CIT(A). Ground of appeal No. [v] is, therefore, dismissed.

 

Ground No. [v] of Revenue’s appeal is accordingly dismissed.

 

23. Ground of appeal No.[vi] relates to the issue of disallowance of expenses incurred for the purpose of earning exempt income under Section 14A of the Act. The said ground reads as under:-

 

“[vi] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition of Rs.1,21,905/- to Rs.4,204/- made on account of disallowance under Rule 8D r.w.s. 14A by ignoring the fact that the assessee has failed to provide one to one nexus between the interest free fund vis-à-vis its investment from which income earned is exempted.”

 

24. The findings of the ld. CIT(A) deleting the addition are at paragraph Nos. 6.2 to 6.4 of the order as under:-

 

“62 I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record regarding this issue. The Appellant has not earned any exempt income during the year under consideration the AO has made disallowances as per sec 14A r/w rule 8D(ii) of Rs 1,17,701/- + Rule 8D(iii) of Rs 11,499/- The appellant has suo motu disallowed a sum of Rs 7,295/-. The appellant has submitted with respect to the disallowance U/R 8D(ii) that it had sufficient interest free funds in the form of Share Capital and Reserve and Surplus amounting to Rs. 19.93,01,480 and Rs. 5,92,15,053 respectively. This is clearly verifiable from the copy of balance sheet filed. Further, Investment in Equity that gives tax free dividend, the amount reduced from Rs 45,09,500/- to Rs 90,000/- only. The issue that if the appellant does not have any exempt income during the FY, then no disallowance under Rule 8D(ii) is tenable, as enumerated in the order cited above by my predecessor, has been upset by the recent amendment in the Act. However, I find that the submission that the appellant has sufficient interest free funds in it's balance, various courts have decided the issue in favour of appellant. These are discussed as under:-

 

6.2.1 In the case South Indian Bank Limited Vs CIT (Supreme Court of India), Civil Appeal No. 9606 of 2011 vide order dated 09.09.2021, the Hon'ble Supreme Court had held that the law does not require separate accounts to be maintained for the earning of exempt and non-exempt income and thus the argument of the department on these lines are brushed aside. The Apex court held that

 

2. The question of law to be cowered in the present batch of appeals is on interpretation of Section 14A of the Income Tax Act (for short "the Act") and the same reads as follows:

 

"Whether proportionate disallowance of interest paid by the banks is called for under Section 14A of Income Tax Act for investments made in tax free bonds securities which yield tax free dividend and interest to assessee Banks when assessee had sufficient interest free own funds which were more than the investments made"

 

……...

 

13. The question therefore so he answered is whether Section 144, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income.

 

…….

 

27…. the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.

28. The above conclusion is reached because next has not been established between expenditure disallowed and earning of exempt income, The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (Supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance.

 

29. In the above context, the following saying of Adam Smith in his seminal work - The Wealth of Nations may aptly be quoted:

 

"The tax which each individual is hound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.

 

Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these unnecessary litigations can be avoided without compromising on generation of revenue.

 

30. In view of the forgoing discussion, the issue framed in these appeals is answered against the Revenue and in favour of the assessee. The appeals by the Assessees are accordingly allowed with no order on costs.”

 

6.2.2 Earlier the Supreme Court in the case of CIT VS M/s Reliance Industries Ltd (Supreme Court), Civil Appeal No.10 of 2019 vide order dated 02/01/2019 for Assessment Year: 2003-04 to 2006-07 had held that:

 

“These appeals have arisen from the judgment of the Bombay High Court dated 22 & 23 August 2017 for Assessment Years 2003-04, 2004-05, 2005-06 and 2006-07

 

The High Court has passed a common order for all the Assessment Years. Learned counsel for the assessee states that all the questions which have been framed do not necessarily arise for each Assessment Year. A chart has been tendered, explaining the position. The chart is taken on the record.

 

The appeals by the Revenue raise the following questions:

 

1. Whether the High Court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction under Section 36(1)(ii) of the Income Tax Act, 1961 (for short the Act) when the interest would not have been payable to banks, if funds were not provided to subsidiaries;

 

2. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that prior to insertion of Explanation-5 to Section 32 of the Act, the claim of depreciation was optional and could not be thrust on the assessee, if it had not claimed it;

 

3. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that pre-operative expenses incurred in connection with creation of plant & machinery in units which have not commenced production, are revenue in nature;

 

4. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that expenditure on estimated basis cannot be reduced from dividends for deduction under Section 80M of the Act; and

 

5. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view in sustaining the deletion of the Transfer Pricing adjustment made to consultancy charges, especially when the TPO had adopted the same mark up in relation to its European associate, what the assessee itself had adopted in relation to its USA associate.

 

Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest fre funds available with the assessee. The Tribunal has also followed its own order for Assessment 2002-03.

 

In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question." (emphasis supplied)

 

6.2.3 The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held vide order dated 19-07-2018 had held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd.. ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest-bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure w's. 14A can be made.

 

6.24 The Hon'ble Gujarat High Court in the case of CTT Vs Suzlon Energy Lad (2013) 354 TTR 630 (Guj) had held that:

 

2. Question (2) pertain to the disallowances made by the Assessing Officer under section 14A of the Act in respect of rest expenses incurred for investments made in subsidiaries and administrative expenses. The Commissioner of Income-tax (Appeals) deleted such disallowances, upon which the Revenue approached the Tribunal. The Tribunal rejected Revenues appeal, making the following observations (page 403 of 20 ITR (Trib):

 

3.5 We have catered the rival submissions, perused the material on record and have gone through the orders of the authorities below. Regarding the grounds raised by the Revenue in respect of disallowance of interest expenditure made by the Assessing Officer wider section 144 and deletion mode by learned Commissioner of Income-tax Appeals), we find that no interference is called for in the order of the learned Commissioner of Income-tax (Appeals). We hold so because we find that with regard to the investment of Rs 5907.18 lakks in foreign subsidiaries, no disallowance can be made under section 144 because dividend income from foreign subsidiaries is taxable in India Regarding the balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest-free own funds of the assessee is many time more than this investment because interest-free funds available with the assessee an on March 31, 2005, as per the balance-sheet as on that date is of Rs 929.57 crores. There is no fading given by the Assessing Officer regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance under section 144 can be made out of interest expenditure in the facts of the present case. Accordingly, ground Non 2 and 3 of the Revenues appeal are rejected.

 

2.1 From the above portion, we noticed that the Tribunal has bifurcated the expenditure into two parts, the first related to investment of Rs. 5907.18 lakhs in foreign subsidiaries, it was held that the dividend income from such subsidiaries is taxable in India and that, therefore, section 14A would have no applicability. The remaining amount pertain to investment of Rs. 38 crores (rounded off) made in Indian subsidiaries. Is this respect, the Tribunal noted that the assessee had to its disposal, own interest-free funds many times over the investment in question. As per the balance-sheet as on March 31, 2005, the assessee had interests-free fund of Rs. 929.57 crores

 

Such being the facts, the Tribunal, in our opinion, committed no error. No question of law, therefore, arises.”

 

625 The Hon'ble Gujarat High Court in the case of PCTT Vs. Sintex India Ltd [2017] 82 taxmann.com 171 (Gujarat) held that:

 

7. We have heard learned advocate Shri Nitin K Mehta learned counsel appearing on behalf of the Revenue and Shari JP Shah learned Senior Advocate appearing on behalf of the respondent-assessee.

 

8. At the outset, it is required to be noted that the Assessing Officer made disallowance in respect of interest and administrative expenses of Rs. 54,39,916 under Section 14A of the Act read with Rule 8D of the IT Rules. However, it is required to be noted and it does not seem to be in dispute that on the A.Y 2010-2011, the assessee was having reserve fund of Rs. 2319.17 Crores and mode investment of Rs.111.09 Crores Thus, the assessee was already having surplus interest free reserve fund of Rs. 2319.17 crores against which investment was made of Rs. 111.09 Crores only. It is also required to be noted that in the AY 2010- 2011, a sum of Rs.8.23 crores was offered for taxation as short/long term capital gain. Thus, the investment made by the assessee was not out of interest bearing fund. As observed hereinabove, the assessee was already having its own surplus fund, out of which investment was made. Considering the aforesaid facts and circumstances, the Assessing Officer was not justified in making the disallowance under Section 144 of the Act and thereafter to determine the expenses in respect of interest and administrative expenses of Rs 54,39,916/- under Section 144 of the Act read with Rule 8D. The relevant observations made by the learned Tribunal, while deleting the disallowance of expenditure in respect of interest and administrative expenses in respect of interest and administrative expenses, read as under:-

 

36. We have duly considered rival contentions. As far as the proposition of the learned CIT-DR that even in the absence of any mechanism for disallowance, the expenditure, which is attributable to earning of exempt income can be worked out on estimate basis or reasonableness basis after looking into the facts and circumstances of a particular case is concerned, we do not have any dispute. The amounts can be disallowed on estimate basis. In the present appeals, the assessee itself has made disallowance of Rs. 5.10 lakhs in the Asst. Year 2009- 2010, and Rs. 52.000 in the A.Y 2010-11. In the A.Y 2009-2010, the exempt income is of Rs 202 Crores whereas in the AY 2010-2011, it is Rs. 22.50 lakhs. Before embarking upon the facts of the present case, we deem it pertinent to take note of the observations of the Delhi High Court recorded in para 29 of the judgment in the case of Maxopp Investment Limited [Supra). It reads as under:

 

Scope of sub-sections (2) and (3) of Section 144.

 

29. Sub-section (2) of Section 144 of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specified a positive amount of expenditure in relation to income which does not form part of the total income under the said Act in other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark on a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.

 

37. According to the Hon'ble Delhi High Court, when an assessee demonstrate actual incurrence of the expenditure, then Rule 8D would not be automatically applied without looking into the explanations. In other words, when an assessee has worked out the expenditure relatable to earning of exempt income on actual basis and demonstrated to the AO the incurrence of such expenditure, then AO record a finding that he was hot satisfied with the correctness of the expenditure shown by the assessee. In other words, he has to verify the account of the assessee, and if he was not satisfied with the correctness of the claim made by the assessee, then, after assigning reasons, he would proceed to compute the expenses on the basis of the method brought in the Rule 8D. In light of the above proposition, let us examine the facts in both the years and finding recorded by the A.O. The main contention of the assessee in both the years is that it has made investment in the mutual fund with "growth option". In the case of growth option, no dividends are declared by the mutual fund, and only income declared by an investor is in the form of capital gains. The capital gains derived by the assessee on mutual fund are taxable and not an exempt income derived by the assessee on mutual fund are taxable and not an exempt income derived from such investment. In the Asstt. Year 2009-2010, the assessee has offered a sum of Rs. 19.22 Crores on sale of such investment for taxation as short/long term capital gain. Similarly, in the Asstt. Year 2010-2011, a sum of Rs. 8.23 Crores has been offered. The investment made by the assessee was not out of interest bearing fund It has its own surplus fund out of which investment has been made. The assessee has demonstrated that it had own funds of Rs. 1981.55 Crores in the A.Y 2009-10 and investment in the mutual fund was only 144.51 Crores. The assessee had also submitted that its investment in earning exempt income has reduced during the year from 78.45 crores to Rs. 18.09. The assessee has submitted these details in its submissions reproduced by the AO. Similarly, in the A.Y 2010-11, it has reserve fund of Rs, 2319.17 Crores and made investment of Rs. 111.09 crores. The learned AO has not given any heed to these submission or figures submitted by the assessee. The assessee has further made disallowance of Rs. 5.12 lacs in the A.Y 2009-10. This was mainly for management of investment. He simply discussed the background for bringing section 144 as well as Rule 8D on the statute book. He has specifically not worked out the amounts even on the basis of Rule 8D. He called for a working from the assessee and made a lumpsum addition in both the years. The learned AO has not recorded any-finding that amounts added back by the assessee are not commensurate with the administrative expenses which might be attributable to earning exempt income. Because, on interest expenses account, there cannot be any disallowance as the assessee has far more interest free fund than investment. We are of the view that the learned CIT [A] has looked into all these aspects in the A.Y 2009-2010 before deleting the disallowance. We do not find any error in the order of the learned CIT [A] on this issue in A.Y 2009-10. Consequently we allow the ground of appeal raised by the assessee in the A.Y 2010-2011 and delete the disallowance made by the A.O."

 

Considering the aforesaid facts and circumstances, more particularly the fact that the assessee was already having its own surplus fund and that too to the extent of Rs. 2319.17 Crores against which investment was made of Rs. 111.09 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses of Rs. 54,39,916/- under rule 8D of he Rules. Under the circumstances and in the facts of the case, narrated hereinabove, it cannot be said that the learned Tribunal has committed any error in deleting the disallowance of expenditure of Rs. 54.39.916- incurred in respect of interest and administrative expenses under Section 14A of the Act. We are in complete agreement with the view taken by the learned: Tribunal. At this stage, decision of Division Bench of this Court in the case of Pr. CIT v. India Gelatine & Chemicals Ltd. [2015] 376 ITR 553/120161 66 taxmann.com 356 needs a reference. In the said decision, it is observed and held by the Division Bench of this Court that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 144 is not justified."

 

6.2.6 Respectfully bowing to the ratio of the orders of the Apex Court and various High Courts, Since the appellant had sufficient interest free funds at its command as against the investments that resulted in earning of exempt income, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A r/w Rule 8D(ii) towards any interest expenditure can be made. Accordingly, the AO is directed to delete the disallowance u/s 14A r/w Rule 8D(ii) amounting to Rs 1,21,701/

 

6.3 Further with respect to the issue of disallowance of Rs 11.499/-on account of administrative expenses under Rule 8D(iii). I find that my predecessor on similar facts had dismissed the appeal of the appellant as under:-

 

“….of exempt Income should not be disallowed as per provisions of section 144 of the Act. In response, it was submitted by appellant that investment in equity shares requires very miniscule administrative cost as the management of equity shares does not require any significant paper work. It was submitted by the appellant that it had on a suo motu basis disallowed Rs. 3,700/- which is the cost of proportionate time spent by the Chairman of the company (approximately 1 hr) DGM (Finance) (Approximately 1 hr) and the clerical staff (approximately 4 hrs) for review and any other paper work related to the investment. It was submitted by the appellant before the 40 that thus, a cost of Rs.3,700/- towards administrative expenditure has already been disallowed by it u's 14A. The AO was not satisfied with the submission of the appellant as disallowance of Rs.3,700/-was merely a token disallowance. As per the AO the fact cannot be denied that the management and the office manpower as well as office facilities were not used for such activities. As per the AO therefore, to say that there was only Rs.3,700/- involved in earning dividend income from equity shares would be to negate the matter of interest and other expenses. In my opinion the AO has recorded his dissatisfaction in the assessment order for applying rule 8D for making disallowance of other expenses. Thus, it can be said that the AO was not satisfied with the correctness of claim of expenditure made by the appellant. In my opinion, for making investment in shares and mutual funds decision is required to be taken by the Director of the company after considering market condition and other financial aspects. Again, for making investments in share and mutual funds and for studying and monitoring the growth of such investments, time of the Directors and concerned staff members of the assessee's are also spent and therefore it cannot be said that no any part of administrative expenses and consultancy fees etc. is incurred. In view of these facts, I hold that the AO has correctly applied sec. 14A read with Rule 8D for making disallowance of administrative expenses, consultancy fees and management expenses etc. and therefore, such action of the AO is hereby confirmed. In view of this the disallowance of other expenditure (ie. the expenditure other than interest expenditure) as made by the AO in the case of appellant by applying the formula of rule 8D IT rule is hereby confirmed. Thus, the ground of appeal no.3 of the appellant is partly allowed."

 

6.3.1 The appellant did not agitate this issue before the ITAT in its appeal for AY 2011-12. Respectfully following the order of CIT(A)-1, Ahmedabad, I also confirm the entire disallowance made by the AO u/R 8D(iii) of Rs 11,499/-. However, the appellant has on its own made a suo motu disallowance u/s 14A of Rs 7,295/- and therefore the disallowance shall be reduced by the said amount. Addition of Rs 4,204/- is confirmed and Rs 7,295 is directed to be deleted.

 

6.4 In view of above, Ground of appeal 3 is therefore partly allowed.”

 

25. We have noted from the above that the ld. CIT(A) deleted the disallowance noting that the assessee had sufficient owned funds for making investment for earning exempt income; and therefore following the decision of the Hon’ble Apex Court in the case of South Indian Bank Limited Vs. CIT, Civil Appeal No. 9606 of 2011 vide order dated 09.09.2021, and another decision of Hon’ble Apex Court in the case of CIT Vs M/s. Reliance Industries Ltd., Civil Appeal No. 10 of 2019, dated 02.01.2019, as also other decision of the Hon’ble jurisdictional High Court in the case of PCIT Vs. Sintex India Ltd [2017] 82 taxmann.com 171 (Guj.), he deleted the disallowance of interest expenses amounting to Rs.1,21,701/-.

 

26. The ld. DR was unable to controvert the factual findings of the ld. CIT(A) with respect to the sufficiency of own funds available with the assessee for the purposes of making investment for earning exempt income, nor was he able to distinguish the decision of the Hon’ble Apex Court relied upon by the ld. CIT(A) in the case of South Indian Bank Limtied (supra) for applying the proposition that where sufficient own funds are available, no disallowance of interest was warranted. In view of the same, we do not find any merit in the ground raised by the Revenue in this behalf and the same is thus dismissed.

 

Ground No. [vi] of Revenue’s appeal is accordingly dismissed.

 

27. Ground No.[vii] relates to the issue of disallowance of interest expenditure under Section 36(I)(iii) of the Act. The said ground reads as under:-

 

“[vii] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.6,26,176/- made by the Assessing Officer on account of disallowance of interest expenditure u/s. 36(1)(iii) of the I.T. Act without appreciating the fact that the assessee company has charged interest from M/s. Amigo Dispensing Solutions Pvt. Ltd. for initial years, however, the same was converted as interest free loan on subsequent years, and despite failure of the assessee to provide one to one nexus between the interest free fund vis-a-vis its interest free advances.”

 

28. The ld. CIT(A) has dealt with this issue at paragraph Nos. 7.2 to 7.6 of his order. We have noted that the ld. CIT(A) had deleted this disallowance noting that sufficient owned interest free funds are available with the assessee and the fact that similar disallowance made in AY 2014-15 was deleted by the ITAT in its order passed in ITA No.2070/Ahd/2018 dated 24.06.2020. The relevant findings of the ld. CIT(A) at paragraph Nos. 7.2 to 7.6 of his order as under:-

 

“7.2 I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record on this issue. During the course of assessment proceedings, the AO found from the balance sheet, that the appellant had given a short-term loan to its associate concern Amigo Dispensing Solutions Pvt. Ltd., for Rs.44,82,560/- without charging any interest therein. The opening balance of the said loan was Rs 56,82,560/- while closing balance was Rs.44,82,560/-. The AO claimed that such money was advanced out of the borrowed funds from bank on which it had suffered interest cost. He therefore made an addition of Rs.6,26,176/-on account of interest free loans/ advances given to its associate concern by applying provisions of section 36(1)(iii) of the Act. Aggrieved the appellant is in appeal.

 

7.3 The appellant in its submission has not disputed the fact that it had given an interest-free advance to its sister concern M/s Amigo Dispensing Solutions Pvt. Ltd. It added that the said concern was engaged in packing of toothbrushes for the Appellant Company on a job work basis. The ancillary industry to the Company's manufacturing activity being in need of financial support was provided funds from time to time. Further as a measure of further financial support. the Company decided not to recover any interest from M/s Amigo Dispensing Solutions Pvt. Ltd., in order to enable the said Company, improve its financials. The appellant has argued that not charging of any interest from such ancillary was a decision of commercial expediency squarely recognized by the Hon'ble Supreme Court in the case SA Builders Ltd. vs. CIT 288 ITR 0001 (SC). Further, as additional argument the appellant has also stated that it had sufficient interest free funds to make such interest free advance. It has added that there is no clear evidence that the interest-bearing loans taken by the company for the purpose of its own business have been diverted for non-business purposes. Additionally, the appellant has said that the AO for AY 2007-08 has not made any addition in this regard. Fairly it has brought on record that for AY 2011-12 the CIT(Appeal) has confirmed such addition.

 

7.4 I am aware of the ratio of the judgment of the Hon'ble Supreme Court in the case S.A Builders Ltd. In this case there is no dispute that the concern to which the loan advance was extended is an ancillary unit to the appellant. There is clearly a nexus between the expenditure made and the business of the appellant. Such business decisions cannot be interfered with. Further, I find that there is sufficient interest free funds available with the concern in the form of Share Capital, Reserves & Surplus of Rs. 2,585 lacs whereas the aggregate of interest free advance was only Rs. 44 lacs.

 

7.5 It is seen that similar disallowance was made by the AO for AY 2014-15 and a disallowance of Rs.372000/- was made on interest free advance to the same concern. The then CIT(A)-1, Baroda following the order of his predecessor for AY 2011-12 confirmed the said addition against which the appellant went before the ITAT Ahmedabad which in its order dated 24/06/2020 vide ITA No.2070/Ahd/2018 deleted the addition and held as under-

 

"2. The substantive ground of appeal raised by assessee read hereunder:

 

"1. Disallowance u's 36(1)(iii) The Id. CIT(A)-1, Baroda has erred in law and facts in confirming the disallowance of Interest Expenses of Rs. 3,72,000/- u/s 36(1)(ii). The Id CIT(A)-I has followed the order of his predecessor for AY 2011-12 and confirmed the addition. The Id. CIT(A) has failed to appreciate that the Appellant had sufficient interest free funds to cover the interest free advances to the Appellant's sister concern in relation to the above disallowance. The ld. CIT(A)-I has also failed to appreciate that the said interest free advances were provided by the Appellant to its sister concern for business purpose and with a clear commercial purpose and thus the conclusion that the said funds were applied for a non-business purpose was erroneous. The ld. CIT(A)-1 has also failed to appreciate that the issue on identical facts stands covered by the Hon. ITAT in favour of the Appellant for AY 2007-08 and AY 2008-09 vide ITA no. 2618/Ahd/2010 & 757/Ahd/2012 respectively."

 

3. We have heard the rival submissions on the issue. The disallowance of interest expenses of Rs.3,72,000/- under s.36(1)(ii) of the Act is in controversy.

 

4. It is the case of the assesse that interest expenditure has been incurred on certain interest free advances to sister concern M/s. Amigo Dispensing Solutions Pvt. Ltd. The AO has alleged that the said advances have been made for non-business purposes and consequently, interest incurred thereon cannot be claimed as deduction in view of the provision of Section 36(1)(ii) of the Act. The CIT(A), in first appeal, has confirmed the aforesaid action of disallowance by AO placing reliance on the order of the CIT(A) on similar facts concerning AY 2011-12. It is submitted on behalf of the assessee that the disallowance made by the Revenue authorities on similar facts has been reversed by the ITAT in ITA Nos. 3436 & 3437/Ald/2014 order dated 09.07.2018 concerning AYs 2010-11 & 2011-12 for the same assessee. Similar reversal of disallowance was stated to have been done by the co-ordinate bench in ITA No. 1008/Ahd/2017 order dated 03.05.2019 concerning AY 2013-14. On facts, it was pointed out on behalf of the assessee that interest free funds in the form of capital/reserves etc. is substantially in excess of the interest free advances given by the assessee. The interest free capital and reserves are stated to be in the vicinity of Rs.26 Crores as against the interest free advance of Rs.31 Lakhs in question. It was thus claimed that in the instant case, interest free funds available at the disposal of assessee are sufficient to meet the interest free advances and thus a presumption would arise that interest free advances were lent from interest free funds and not borrowed funds.

 

5. In view of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Lid. [2009] 313 ITR 340 (Bom) and similar approach adopted by the co-ordinate bench in earlier years, we find sufficient reasons to admit the claim of the assessee for reversal of disallowance favourably,"

 

7.6 In view of the above-mentioned order and following the same, I also direct the AO to delete the addition of Rs.6.26,176/- made on account of disallowance of interest expenses u/s 36(1)(iii) of the Act. The ground of appeal 4 is allowed.”

 

29. Since the issue is covered by the decision of the ITAT in the case of the assessee for A.Y 2014-15, with no distinguishing facts being pointed out by the Ld.DR, we see no reason to interfere in the order of the Ld.CIT(A) deleting the disallowance made of interest expenses u/s 36(1)(iii) of the Act . In this view of the same, the ground No. [vii] raised by the Revenue is found to be without any basis and, therefore, dismissed.

 

Ground No.[vii] of the appeal of the Revenue is thus dismissed.

 

30. In effect, the appeal of the Revenue is dismissed.

 

Order pronounced in the open Court on 21/11/2023 at Ahmedabad.

 

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