IN THE INCOME TAX APPELLATE TRIBUNAL,
\nCHANDIGARH BENCH \u2018A\u2019, CHANDIGARH<\/p>\n
BEFORE: SHRI SANJAY GARG, JM & SMT. ANNAPURNA GUPTA, AM
\n________\t__.\/ ITA No. 470\/Chd\/2018
\n___________\/ Assessment Year : 2014-15
\nThe A.C.I.T.,
\nPanchkula Circle,
\nPanchkula.
\n____
\nM\/s Janak Global
\nResources Pvt. Ltd.,
\nPlot No.315, Indl-
\nArea, PH-1,
\nPanchkula.
\n______\t_____.\/PAN NO: AACCJ4466C
\n___\t___\/Appellant _____\/Respondent
\n________________\/Assessee by : Shri Manoj Kumar
\n,Ms.Chanderkanta Sr.DR
\n_____________\/ Revenue by : Shri Parikshit Aggarwal, CA
\n! __ _______”_\/Date of Hearing : 06.07.2018\/16.10.18
\n#$%&__________”_\/Date of Pronouncement : 16 .10.2018
\n__&(\/Order<\/p>\n
PER ANNAPURNA GUPTA, AM:<\/p>\n
This appeal has been preferred by the Revenue against
\nthe order of learned Commissioner of Income Tax (Appeals) ,
\nPanchkula (hereinaf ter referred to as CIT(Appeals) dated
\n21.2.2018 relat ing to assessment year 2014-15.
\n2. Ground No.1 raised by the Revenue reads as under:
\n\u201c1. Whether on the facts and circumstances of the case
\nthe Ld. CIT(A) has erred in allowing the appeal of the
\nassessee and deleting the disallowance of
\nRs.18,44,482\/-u\/s 36(l)(iii) which is not correct because
\nthe assessee has given interest free advances of
\nRs.3,55,00,000\/- to Shivaks Impex Limited, sister
\nconcern which is for non business purposes.\u201d
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n2
\n3. Brief facts relevant to the issue are that during
\nassessment proceedings, the Assessing Of f icer noted that the
\nassessee had given interest free advance of Rs.3,55,00,000\/-
\nto Shivaks Impex Ltd. , a sister concern. On the other hand,
\nthe assessee had paid interest of Rs.33,40,780\/- on loan
\nraised from banks but had not charged any interest on the
\nloans advanced to M\/s Shivaks Impex Ltd. The Assessing
\nOf f icer asked the assessee as to why interest expenses
\nshould not be disal lowed u\/s 36( l ) ( i i i ) of the Income Tax Act ,
\n1961 ( in short \u2018 the Act \u2019 ) and added to the taxable income.
\nThe assessee f i led i ts reply, which is reproduced in para 2 of
\nthe assessment order. Brief ly put the assessee contended
\nthat the impugned advances were business advances and
\ntherefore no disal lowance, of interest paid on funds ut i l ized
\ni f any for making the advances, was warranted. The assessee
\nalso contended al ternately that i t had ut i l ized i ts own
\ninterest free funds for making the advances and therefore
\nalso no disal lowance of interest u\/s.36(1) ( i i i ) was warranted.
\nAf ter considering the reply f i led by the assessee, the AO
\nrejected the same and on the basis of reasons recorded in
\npara 2.1 of the assessment order interest amount ing to
\nRs.18,44,482\/- was disal lowed and added to the income of
\nthe assessee. The AO held that the assessee had fai led to
\nprove business exigency for making the advances, and
\ntherefore, as per the decision of the Jurisdictional High
\nCourt in the case of Abhishek Industries Ltd. , reported in
\n286 ITR 1 and of the Apex court in the case of S.A. Bui lders,
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n3
\nreported in 288 ITR 1, the disal lowance of interest was
\nwarranted .
\n4. During appel late proceedings the assessee contended
\nthat i t had suf f icient own funds for making the investment
\nand, therefore, no disal lowance u\/s.36(1) ( i i i ) of the Act
\nwarranted. Rel iance was placed on a number of decisions of
\nthe Hon’ble Jurisdict ional High Court in this regard and also
\non decisions of the ITAT Chandigarh Bench. The
\nLd.CIT(Appeals) on appreciat ing the content ion of the
\nassessee deleted the disal lowance made fol lowing the
\ndecision of the Hon’ble Jurisdict ional in the case of CIT Vs.
\nMax India Ltd. in ITA No.210\/Chd\/2013 and CIT vs. Stock
\nKapsons Associates, 381 ITR 204 (P&H) . The relevant
\nf indings of the CIT(A) at para 5.2 of the order is as under:
\n\u201c5.2 I have gone through the facts of the case and
\nwr i tten submission f iled by the appel lant. It is noted f rom
\nthe balance sheet f rom A.Y.2013-14 & A.Y.2014-15
\nrespectively that appel lant’s share capi tal, f ree reserves
\nand interest f ree current l iabil i ties far exceeded the
\nadvance of Rs.3.55 Crores given to the sister concern
\nShivaks Impex Ltd. during Assessment Year 2013-14. The
\naverage f ree funds available in the A.Y.2013-14 are
\nRs.1560 lacs and in A.Y.2014-15 are Rs.1491 lacs. Thus
\nthe appel lant has demonstrated the availabil i ty of enough
\nsurplus funds for making interest f ree advance to the
\nsister concern. The Hon’ble jurisdictional High Court has
\nheld in the case of CIT vs Max India Ltd. ITA
\nNo.210\/Chd\/2013 dated 08.03.2017 that if an assessee
\nestablishes that its interest free funds were equal to or more than
\nthe interest bearing funds it would be open to it to contend that
\npresumption arises that investments have been made out of the
\nsame. Similarly reliance placed by the appellant on CIT vs. Kapsons
\nAssociates, 381 ITR 204(P&H) is also found to be supporting the
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n4
\nfacts of its case. Therefore, no portion of the interest paid on
\nborrowed funds is required to be disallowed in the case of the
\nappellant and addition made on this account for both the years
\nunder appeal are ordered to be deleted. This ground of appeal is
\nallowed.\u201d
\n5. Aggrieved by the same the Revenue has come up in
\nappeal before us.
\n6. During the course of hearing before us, the Ld. DR
\ncontended that the proposi t ion laid down by the Hon’ble
\nJurisdict ional High Court in the decision rel ied upon by he
\nCIT(Appeals) whi le delet ing the disal lowance was no longer
\ngood law. I t was pointed out that the Hon’ble Jurisdict ional
\nHigh Court in various decisions had laid down that where
\nthe assessee could demonstrate suf f iciency of own funds, the
\npresumpt ion that would arise was that i t had used i ts own
\nfunds for the purpose of making interest free non business
\nadvances, cal l ing for no disal lowance of interest u\/s.
\n36(1) ( i i i ) of the Act . The Ld. DR pointed out that this
\npresumpt ion theory had now been overruled by the Hon’ble
\nApex Court in i ts decision in group of cases wi th the lead
\ncase being Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR
\n640 (SC) , wherein in the context of sect ion 14A the decision
\nof the Hon’ble Jurisdict ional High Court in the case of Avon
\nCycles Ltd. Vs. CIT in ITA No.277 of 2013 was also under
\nconsiderat ion. The Ld. DR pointed out from the order of the
\nHon’ble Apex Court that in the said case the Hon’ble
\nJurisdict ional High Court had upheld the disal lowance of
\ninterest u\/s 14A where mixed funds were deployed by the
\nassessee, and this proposi t ion was af f irmed by the Hon’ble
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n5
\nApex Court also in the aforementioned appeal before i t . Our
\nat tent ion was drawn to para 42 of the order of the Hon’ble
\nApex Court in this regard as under:
\n40. Civil Appeal No. 1423 of 2015 is filed by M\/s. Avon Cycles Limited,
\nLudhiana, wherein the AO had invoked section 14A of the Act read
\nwith Rule 8D of the Rules and apportioned the expenditure. The CIT(A)
\nhad set aside the disallowance, which view was upturned by the ITAT
\nin the following words:
\n“…Admittedly the assessee had paid total interest of Rs.2.92
\ncrores out of which interest paid on term loan raised for specific
\npurpose totals to Rs.1.70 crores and balance interest paid by the
\nassessee is Rs.1.21 crores. The funds utilized by the assessee
\nbeing mixed funds and in view of the provisions of Rule 8D(2)(ii) of
\nthe Income Tax Rules the disallowance is confirmed at
\nRs.10,49,851\/-, we find no merit in the ad hoc disallowance
\nmade by the CIT (Appeals) Rs.5,00,000\/-. Consequently, ground
\nof appeal raised by the Revenue is partly allowed and ground
\nraised by the assessee in cross-objection is allowed…” –
\nTaking note of the aforesaid finding of fact, the High Court has
\ndismissed the appeal of the assessee observing as under:
\n“In the present case, after examining the balance-sheet of the
\nassessee, a finding of fact has been recorded that the funds
\nutilized by the assessee being mixed funds, therefore, the interest
\npaid by the assessee is also an interest on the investments made.
\nSuch being a finding of fact, we do not find that any substantial
\nquestion of law arises for consideration of this Court.
\nAfter going through the records and applying the principle of
\napportionment, which is held to be applicable in such cases, we do not
\nfind any merit in Civil Appeal No. 1423 of 2015, which is accordingly
\ndismissed.\u201d
\nThe Ld. DR stated that i t was clearly evident from the
\nabove order of the Hon’ble Apex Court that the presumpt ion
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n6
\ntheory laid down by the Hon’ble Jurisdict ional High Court in
\nvarious decisions, now stood overruled and where mixed
\nfunds were deployed by the assessee, disal lowance of
\ninterest on proport ionate basis was to be made to the extent
\nof interest free non business advances made by the assessee.
\nIn sum and substance, the Ld. DR contended that the mixed
\nfunds theory had been conf irmed to be the Law of the Land
\nas opposed to the presumpt ion theory laid down by the
\nHon’ble Jurisdict ional High Court .
\n7. The Ld. counsel for assessee, on the other hand,
\nvehement ly opposed this content ion of the Ld. DR. The Ld.
\ncounsel for assessee pointed out that the decision rendered
\nin the case of Avon Cycles Ltd. (supra) was on a di f ferent set
\nof facts and the proposi t ion laid down therein was to be read
\nin the context of the facts relat ing to i t . I t was contended
\nthat before the Hon’ble Supreme Court the only fact before
\nthe Hon\u2019ble Court was that there were mixed funds avai lable
\nwi th the assessee and in the l ight of this l imi ted fact , the
\nHon’ble Supreme Court upheld the disal lowance of interest
\nu\/s 14A of the Act af ter holding in the lead case i .e. Maxopp
\nInvestment Ltd. (supra) that the apport ionment rule was to
\nbe appl ied for the purpose of making disal lowance of
\nexpenses incurred in relat ion to earning exempt income,as
\nper sect ion 14A of the Act . The content ion of the Ld. counsel
\nfor assessee was that i t was nei ther submi t ted to the court
\nthat suf f icient own interest free funds were avai lable, nor
\nwere any arguments made raising the presumpt ion that
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n7
\nwould arise in such case. I t was pointed out that even the
\nquest ion before the Hon\u2019ble Court was not relating to the
\ncorrectness of the presumpt ion theory and therefore, also
\nthe disal lowance u\/s 14A was not deal t wi th by the Hon’ble
\nSupreme Court in this context . I t was contended therefore,
\nthat the decision rendered in the case of Avon Cycles Ltd.
\n(supra) had to be read in the restricted sense, of meaning
\nthat where the fact si tuat ion revealed the l imi ted fact of
\nmixed funds avai lable wi th the assessee, disal lowance u\/s
\n14A was warranted. The Ld. counsel for assessee thereaf ter
\ncontended that in fact the Hon’ble Apex Court , in the case of
\nHero Cycles Pvt . Ltd. Vs. CIT, 379 ITR 347(SC) , had upheld
\nthe presumpt ion theory of ut i l izat ion of own interest free
\nfunds for making non business advances where suf f iciency of
\nsuch funds is adequately demonstrated. I t was pointed out
\nthat the Hon\u2019ble Supreme Court in the said case ,on the
\nissue of disal lowance of interest u\/s 36(1) ( i i i ) on advances
\nmade to directors had held that where the assessee had
\nsuf f icient surpluses i t could have ut i l ized those funds for
\ngiving advances to i ts directors.
\n8. The Ld. counsel for assessee stated that i t is clearly
\nevident from the above that the Hon’ble Apex Court had
\nupheld the proposi t ion that where suf f icient own interest
\nfree funds are avai lable no disal lowance of interest u\/s
\n36(1) ( i i i ) of the Act was warranted. Our at tent ion was also
\ndrawn to various decisions of the Hon’ble Jurisdict ional High
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n8
\nCourt which had also upheld the presumpt ion theory as
\nunder:
\n\u201c1. Br ight Enterpr ises P. Ltd. vs. CIT, (2016) 381 ITR 107
\n(P&H)
\n2. CIT vs. Kapsons Associates, (2015) 381 ITR 204 (P&H)
\n3. Gurdas Garg vs. CIT, ITA No.413\/2014 dated
\n16.7.2015 (P&H) ,
\n4. Pr.CIT vs. M\/s. Malhotra Book Depot, ITA No.31 of
\n2017 dated 23.02.2017 (P&H)
\n5. Pr.CIT vs. M\/s. Holy Fai th Internat ional Pvt . Ltd. ,
\nITA No.87 of 2017 dated 24.07.2017 (P&H)
\n6. Trident Infotech Corporat ion Ltd. vs. CIT & Anr,
\n(2016) 385 ITR 335 (P&H)
\n7. CIT vs. Max India Ltd. , (2017) 398 ITR 209 (P&H) \u201d
\n9. We have careful ly considered the content ions of both
\nthe part ies and have also gone through various case laws
\nreferred to before us. The issue to be adjudicated,as
\nnarrowed down from the arguments made before us by both
\nthe part ies, is whether in relat ion to disal lowance of
\ninterest made u\/s.36(1) ( i i i ) of the Act , the proposi t ion laid
\ndown by the Hon’ble Jurisdict ional High Court in a number
\nof decisions, that where the assessee had suf f icient own
\ninterest free funds along wi th interest bearing funds and had
\nmade or advanced sums for non business purposes wi thout
\ncharging any interest , the presumpt ion that would arise is
\nthat the investment had been made out of interest free funds
\ngenerated or avai lable wi th the assessee, is st i l l a good law
\nin the l ight of the decision of the Hon’ble Apex Court in the
\ncase of Hero Cycles Ltd. (supra) .
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n9
\n10. We are in agreement wi th the content ion of the Ld.
\ncounsel for assessee. Undoubtedly, proposi t ion of law laid
\ndown by courts have to be read in the context of the facts
\nbefore them and the issue deal t wi th by them. Rel iance
\nshould not be placed on a decision wi thout discussing how
\nthe factual si tuat ion f i ts in wi th the factual si tuat ion of the
\ndecision on which rel iance is placed. The Hon\u2019ble High Court
\nof Bombay in the case of CIT vs Sudhir, 214 ITR 154 (Bom)
\nhas observed that a case is an authori ty for what i t actual ly
\ndecides and not what may come to fol low from some
\nobservat ion which may f ind place therein. The Hon\u2019ble High
\ncourt observed as under:
\n\u201cIt is well-settled that the ratio of a decision alone is binding, because a
\ncase is only an authority for what it actually decides and not what may
\ncome to follow from some observations which find place therein. The ratio of
\nthe decision has to be distinguished from propositions assumed by the Court
\nto be correct for the purpose of disposing of the particular case, because it
\nis the ratio and not the propositions which are relevant and binding. It is,
\ntherefore, not proper to regard every word, clause or sentence occurring in
\na judgment of the Court as containing a full exposition of the law.
\nJudgments of the Courts should not be construed as statutes. They must be
\nread as a whole and observations made therein should be considered in the
\nlight of the facts and circumstances of that case and the questions before
\nthe Court. A decision of the Court takes its colour from the questions
\ninvolved in the case in which it is rendered.\u201d
\nIn the case of CIT vs Sun Engineering Works Pvt . Ltd.
\n198 ITR 297(SC) , the Hon\u2019ble Supreme Court observed that
\nJudgements must be read as a whole and observat ions in
\njudgements should be considered in the context in which
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n10
\nthey are made and in the l ight of the quest ion that were
\nbefore the court :
\n\u201c I t is nei ther desirable nor permissible to pick out a word
\nor a sentence f rom the judgement of the Supreme Cour t
\ndivorced f rom the context of the quest ion under
\nconsiderat ion and treat i t to be the complete law declared
\nby the cour t. The judgement must be read as a whole and
\nthe observat ion f rom the judgement have to be considered
\nin the l ight of the quest ions which were before the
\ncour t.A decision of the Supreme Cour t takes i ts colour
\nf rom the quest ion involved in the case in which i t is
\nrendered and whi le applying the decision to a later
\ncase,cour ts must careful ly try to ascer tain the true
\npr inciple laid down by the decision.\u201d
\n11. The Hon\u2019ble apex court in the case of Goodyear India
\nLtd & Ors vs State of Haryana & Another and State of
\nMaharashtra & Another reported in 188 ITR 402(1991) have
\nheld that a decision on a quest ion that has not been argued
\ncannot be treated as a precedent . The Hon\u2019ble Kerala High
\nCourt in the case of CIT vs K. Ramakrishnan (1993) 202 ITR
\n997 held that a precedent is an authori ty only for what i t
\nactual ly decides and not for what may remotely or even
\nlogical ly fol low from i t .
\nHaving said so we f ind that in the case of Avon Cycles
\nLtd. (supra) the issue was relat ing to disal lowance of
\nexpendi ture u\/s 14A of the Act . The Hon’ble Apex Court
\ndeal ing wi th the bunch of cases relat ing to said issue, took
\nup the case of Maxopp Investment Ltd. (supra) as the lead
\ncase and proceeded to answer the quest ion which arose
\nunder various circumstances before them that whether the
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n11
\ninvestment made in shares and stocks for the purpose of
\nretaining the control over the company or as stock-in-trade
\nand from which exempt income by way of dividend was
\ngenerated would at tract the provisions of sect ion 14A of the
\nAct , cal l ing for disal lowance of expendi ture incurred in
\nrelat ion to earning the said dividend income and the
\nquest ion arose for the reason that i t was the content ion of
\nthe assessee, which had been upheld by various High
\nCourts, that the dominant purpose for making the
\ninvestment in the shares not being earning of dividend
\nincome, i t cal led for no disal lowance of expendi ture u\/s 14A
\nof the Act . Answering this quest ion the Hon’ble Supreme
\nCourt held that the dominant purpose test was irrelevant
\nand the fact remaining that the exempt income had been
\nearned which was at tributable to the dividend income had to
\nbe disal lowed and could not be treated as business
\nexpendi ture. The Hon’ble Apex Court reaf f irmed the theory of
\napport ionment of expendi ture between taxable and non
\ntaxable income laid down by i t in the case of CIT Vs. Wal fort
\nShare & Stock Brokers Pvt . Ltd. , 326 ITR 1. Af ter holding so,
\nthe Hon’ble Apex Court deal t wi th the appeal f i led in the
\ncase of Avon Cycles Ltd. (supra) and taking note that the
\nfact in that case was that the funds ut i l ized by the assessee
\nwere mixed funds, the Hon’ble Apex Court held that the
\nprinciple of apport ionment was to be appl ied and, therefore,
\ndismissed the appeal of the assessee. The same is evident
\nfrom a bare reading in the case of Maxopp Investment Ltd.
\n(supra) and more speci f ical ly para 42 of the said order
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n12
\nwherein the case of Avon Cycles Ltd. (supra) has been deal t
\nwi th and which is reproduced again hereunder:
\n41. Civil Appeal No. 1423 of 2015 is filed by M\/s. Avon Cycles Limited,
\nLudhiana, wherein the AO had invoked section 14A of the Act read with
\nRule 8D of the Rules and apportioned the expenditure. The CIT(A) had
\nset aside the disallowance, which view was upturned by the ITAT in
\nthe following words:
\n“…Admittedly the assessee had paid total interest of Rs.2.92 crores out
\nof which interest paid on term loan raised for specific purpose totals to
\nRs.1.70 crores and balance interest paid by the assessee is Rs.1.21
\ncrores. The funds utilized by the assessee being mixed funds and in
\nview of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the
\ndisallowance is confirmed at Rs.10,49,851\/-, we find no merit in the ad
\nhoc disallowance made by the CIT (Appeals) Rs.5,00,000\/-.
\nConsequently, ground of appeal raised by the Revenue is partly
\nallowed and ground raised by the assessee in cross-objection is
\nallowed…”
\nTaking note of the aforesaid finding of fact, the High Court has
\ndismissed the appeal of the assessee observing as under:
\n“In the present case, after examining the balance-sheet of the assessee,
\na finding of fact has been recorded that the funds utilized by the
\nassessee being mixed funds, therefore, the interest paid by the
\nassessee is also an interest on the investments made. Such being a
\nfinding of fact, we do not find that any substantial question of law
\narises for consideration of this Court.
\nAfter going through the records and applying the principle of
\napportionment, which is held to be applicable in such cases, we do not
\nfind any merit in Civil Appeal No. 1423 of 2015, which is accordingly
\ndismissed.\u201d
\n12. I t is evident from the above that the issue before the
\nHon’ble Apex Court was not whether the presumpt ion theory
\nwould apply or not where there are mixed funds and the
\nassessee had demonstrated avai labi l i ty of suf f icient own
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n13
\nfunds for making the investments . No discussion on this
\naspect has also been done by the Hon’ble Apex Court and
\nmerely not ing that the assessee had ut i l ized mixed funds,
\nthe Hon’ble Apex Court held that the principle of
\napport ionment would apply. Wi thout any discussion or
\ndel iberat ion on the presumpt ion theory, the proposi t ion laid
\ndown in the case of Avon Cycles Ltd. (supra) by the Hon’ble
\nApex Court has to be restricted to the extent of the issue
\nbefore the Hon’ble Apex Court and facts before i t and not
\nbeyond that . And on that basis the decision of the Hon’ble
\nSupreme Court in the case of Avon Cycles Ltd. (supra) can
\nbe read only to the extent of upholding the principle of
\napport ionment of expenses incurred in the context of the
\nl imi ted fact of mixed funds avai lable wi th assessee and no
\nfurther. The proposi t ion laid down cannot be stretched even
\nlogical ly to address the fact si tuat ion where suf f icient own
\ninterest free funds are avai lable wi th assessee, which fact
\nwas not there before the Hon\u2019ble Apex court in the case of
\nAvon Cycles (supra) , and to negate the presumpt ion that the
\nown funds were used for making the investment , which was
\nnei ther the quest ion raised before the apex court and
\ntherefore not addressed by i t also.
\n13. Going further from here we f ind that the presumpt ion
\ntheoory was upheld by the Hon’ble Supreme Court in the
\ncase of Hero Cycles Pvt . Ltd. (supra) wherein on the issue of
\ndisal lowance of expendi ture u\/s.36(1) ( i i i ) of the Act on
\ninterest free advance made to Directors, the Hon’ble Apex
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n14
\nCourt held that in view of the f indings of fact that the
\nassessee had suf f icient credi t balance in i ts bank account
\nfor making the impugned advances and had suf f icient own
\ninterest free funds, the assessee company could in any case
\nut i l ize those funds for giving advances to i ts Directors. The
\nf indings of the Hon’ble Apex Court at para 16 of this order to
\nthis ef fect are as under:
\n\u201c16. Insofar as the loans to directors are
\nconcerned, i t could not be disputed by the Revenue
\nthat the assessee had a credi t balance in the bank
\naccount when the said advance of Rs.34 lakhs was
\ngiven. Remarkably, as observed by the CIT(A) in his
\norder, the company had reserve\/surplus to the tune
\nof almost Rs.15 crores and, therefore, the assessee
\ncompany could in any case, ut i l ise those funds for
\ngiving advance to i ts directors.\u201d
\n14. I t is evident from the above that the Hon’ble Apex Court
\nhad in very clear terms held that where suf f icient own
\ninterest free funds are avai lable wi th the assessee, the
\npresumpt ion arises that the assessee had ut i l ised those
\nfunds for the purpose of making interest free non business
\nadvances. Thus in very clear terms the Hon’ble Apex Court
\nin the case of Hero Cycles Pvt . Ltd. (supra) have upheld he
\npresumpt ion theory.
\n15. Considering both the judgments of the Hon’ble Apex
\nCourt and reading and interpret ing them in the l ight of facts
\nand the issue before the Hon’ble Apex Court we f ind that the
\njudgments compl iment each other. In the case of Avon
\nCycles Ltd. (supra) the Hon’ble Apex Court held that in the
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n15
\nfact si tuat ion where mixed funds are ut i l ized by the
\nassessee, the disal lowance of interest to the extent the funds
\nare ut i l ized for the purpose of non business advance is
\nwarranted. Going forward from there, the presumpt ion
\ntheory would come into operat ion i f in the case of mixed
\nfunds, the assessee is able to demonstrate\/ establ ish
\navai labi l i ty of interest free funds equal to or more than
\ninterest free non business advances\/investments thus
\nraising the presumpt ion that the same have been made out
\nof the interest free funds of the assessee.
\n16. In view of the above, we hold that the decision of the
\nHon’ble Apex Court in the case of Avon Cycles Ltd. (supra)
\ndoes not displace the presumpt ion theory which has been
\nupheld by the Hon’ble Apex Court in the case of Hero Cycles
\nPvt . Ltd. (supra) and the same st i l l holds. In view of the
\nabove, since the Ld.CIT(Appeals) , we f ind, has al lowed the
\nassessee\u2019s appeal delet ing the disal lowance of interest made
\non f inding that it had suf f icient own interest free funds for
\nmaking the investment , which fact has not been controverted
\nby the Revenue, we see no reason to interfere in the order of
\nthe Ld.CIT(Appeals) and the ground raised by the Revenue,
\ntherefore, is dismissed.
\n17. The Ld. counsel for assessee had also raised the
\ncontent ion before us that the advance made was for business
\npurpose. In this regard, the Ld. counsel for assessee
\ncontended that the advance was made to Shivaks Impex Ltd.
\nwhich was a step down subsidiary of the assessee company.
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n16
\nThe Ld. counsel for assessee stated that the assessee had
\ninvested in a whol ly owned subsidiary which in turn was the
\nholding company of Shivaks Impex Ltd. and which made
\nShivaks Impex Ltd. a step down subsidiary of the assessee
\ncompany, meaning thereby that the assessee had a indirect
\ninterest and control over the Shivaks Impex Ltd. . The Ld.
\ncounsel for assessee further stated that the advances made
\nto Shivaks Impex Ltd. , who was in the same l ine of business
\nas was the assessee, was ut i l ized for the purpose purchasing
\nraw material . In this regard our at tent ion was drawn to the
\ncopy of bank account of Shivaks Impex Ltd. ref lect ing the
\ndeposi t of advance made by the assessee of Rs.3.55 crores in
\nthe same and the ut i l izat ion of the same for the purpose of
\nreleasing a let ter of credi t issued in the regular course of i ts
\nbusiness. The Ld. counsel for assessee, therefore, stated
\nthat the advance had been made for the purpose business of
\nShivaks Impex Ltd. which being a step down subsidiary of
\nthe assessee, i t was contended that the assessee company
\nwould have been severely impacted i f the said advance would
\nnot have been made. Our at tent ion was drawn to the
\nfol lowing documents placed in the paper book f i led on 06-07-
\n18, to substant iate i ts aforesaid content ion:
\n( i ) copy of ledger account of Shivaks Impex Ltd. in
\nthe books of appel lant for Assessment Year 2013-
\n14.
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n17
\n( i i ) Copy of Ledger account of Shivaks Impex Ltd.
\nin the books of appel lant for Assessment Year 2014-
\n15.
\n( i i i ) Copy of relevant Bank statements of Shivaks
\nImpex Ltd.
\n( iv) Shareholder l ist of various Group Companies.\u201d
\n18. The Ld. DR, on the other hand, rel ied upon the order of
\nthe Assessing Of f icer reject ing this content ion of the
\nassessee and stated that no business exigency for making
\nthe advance had been establ ished by the assessee.
\n19. Af ter considering the rival submissions we hold that
\ncommercial expediency of the said advance had been
\nadequately establ ished by the assessee. The facts relat ing to
\nthe impugned transact ion have not been controverted by the
\nRevenue. That Shivaks Impex Ltd. was a step down
\nsubsidiary of the assessee company, has not been disputed
\nby the Revenue. The fact that the assessee, i ts subsidiary
\nand Shivaks Impex Ltd. were al l in the same l ine of business
\nhas also not been disputed by the Revenue. I t is also not
\ndisputed that the advance made has been ut i l ized for the
\npurpose of making purchases. I t is evident that had the said
\nadvance not been made i t would have seriously af fected the
\nbusiness of Shivaks Impex Ltd. , which in turn would have
\naf fected the assessee also since the value of i ts investment
\nin i ts subsidiary would have been af fected on account of the
\npoor resul ts shown by Shivaks Impex Ltd. . Therefore, the
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n18
\ncommercial expediency of the advance has been establ ished
\nand for this reason also, no disal lowance u\/s 36(1) ( i i i ) of the
\nAct could have been made.
\n20. In view of the above we hold that on account of the
\navai labi l i ty of suf f icient own funds and on account of the
\nadvances having been made for business purpose ,no
\ndisal lowance of interest pertaining to funds ut i l ized for
\nmaking the same was warranted. We therefore uphold the
\norder of the CIT(A) delet ing the disal lowance of interest u\/s
\n36(1) ( i i i ) of the Act , amount ing to Rs.18,44,482\/-.
\n21. Ground of appeal No.1 raised by the Revenue is
\ntherefore dismissed.
\n22. Ground No.2 raised by the Revenue reads as under:
\n\u201c1. Whether on the facts and circumstances of the case the Ld. CIT(A) has
\nerred in allowing the appeal of the assessee and deleting the disallowance of
\nRs. 25,43,299\/- u\/s 14A which is not correct because the assessee had made
\ninvestments, to the tune of Rs. 5,23,00,000\/- and on the other side, assessee
\nhas shown outstanding secured loan from Banks on which the assessee has
\nclaimed interest expenses of Rs. 1,13,06,258\/-.\u201d
\n23. The above ground relates to disallowance made of expenses
\nrelating to exempt income earned by the assessee as per the
\nprovisions of Section 14A of the Act read with Rule 8D of the
\nIncome Tax Rules, 1962.
\n24. Briefly stated the impugned disallowance was made by the
\nAssessing Officer in relation to the investments made by the
\nassessee in the shares of sister concern M\/s. KVS International
\nPvt. Ltd. of Rs.5,23,00,000\/-. The Assessing Officer relying upon
\nvarious judgments made a disallowance of Rs.25,43,299\/- u\/s.14A
\nof the Act.
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n19
\n25. Ld. CIT(A) deleted the disallowance made on finding that no
\nexempt income had been earned by the assessee from the
\nimpugned investments made. Relevant findings of the Ld. CIT(A) at
\nparagraph 6.2 of our order deleting the said disallowance is as
\nunder:
\n\u201c6.2 I have gone through the facts of the case and written
\nsubmission filed by the appellant. As no exempt income has been
\nearned during the year on the impugned investments made in shares of
\nsister concern in the earlier year and there is no claim of any other
\nexempt income in the computation of income, therefore placing reliance
\non the ratio of CIT vs. M\/s Lakhani Marketing Inc. [2014] 272 CTR 265
\n(P&H) and jurisdictional ITAT Chandigarh decision in the case of
\nSwami Automobiles (P) Ltd. ITA No.74\/Chd\/2015 dated 10.02.2016,
\nit is held that no disallowance u\/s 40A read with rule 8D of the Income
\ntax Rules was warranted in this case . Therefore addition of
\nRs.25,43,299\/- made by the AO on this account for A.Y.2014-15 is
\nordered to be deleted. This ground of appeal is allowed.\u201d
\n26. During the course of hearing before us, Ld. DR, though relied
\nupon the order of the Assessing Officer, was unable to controvert
\nthe factual and the legal findings of the Ld. CIT(A), we therefore see
\nno reason to differ with the Ld. CIT(A) deleing the disallowance
\nmade u\/s.14A in the light of the admitted fact that no exempt
\nincome was earned by the assessee during the impugned year from
\nthe impugned investments made.
\nOur decision is forfeited by the order of the Hon\u2019ble Apex
\nCourt in the case of Commissioner of Income Tax,(Central ),1
\nvs Chettinad Logistics (P) Ltd dated 2nd July
\n2018,.reported in 257 Taxman 2, in which the Hon\u2019ble
\napex court has, we find, dismissed on merits the SLP f i led
\nby the Revenue against order of the Hon\u2019ble Madras High
\nCourt holding that where no exempt income was earned
\nno disallowance u\/s 14A was warranted. The Hon\u2019ble High
\nCourt had in its order, reported in 248 Taxman 55, held
\nas under:
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n20
\n\u201c6.The record shows that during the course of arguments before the
\nTribunal, the Assessee advanced a submission, to the effect, that in
\ncases, where, investments are made in sister concern(s), out of interest
\nfree funds, for strategic purposes, the provisions of Section 14 A of the
\nAct, could not be invoked. In support of this submission, the Assessee
\nrelied upon the judgment of the Tribunal in the case of: Rane Holdings
\nLtd., Vs. ACIT, passed in ITA No.115\/Mds\/2015, dated 06.01.2016.
\n7. It is, in this background, that the Tribunal remanded the matter to the
\nAssessing Officer, so as to reach a conclusion as to whether investments
\nhad been actually made, in sister concerns of the Assessee, out of interest
\nfree funds, albeit, for strategic purposes.
\n8. According to us, this exercise, in the given facts which emerge from the
\nrecord, was clearly unnecessary, as the CIT(A) had returned the finding of
\nfact that no dividend had been earned in the relevant assessment year,
\nwith which, we are concerned, in the present appeal.
\n9. In our opinion Section 14 A of the Act, can only be triggered, if, the
\nAssessee seeks to square off expenditure against income which does not
\nform part of the total income under the Act.
\n9.1. The legislature, in order to do away with the pernicious practice
\nadopted by the Assessees’, to claim expenditure, against income exempt
\nfrom tax, introduced the said provision.
\n10. In the instant case, there is no dispute that no income i.e., dividend,
\nwhich did not form part of total income of the Assessee was earned in the
\nrelevant assessment year.
\n10.1. Therefore, to our minds, the addition made by the Assessing Officer
\nby relying upon Section 14 A of the Act, was completely contrary to the
\nprovisions of the said Section.
\n10.2. Mr.Senthil Kumar, who appears for the Revenue, submitted that the
\nRevenue could disallow the expenditure even in such a circumstance by
\ntaking recourse to Rule 8D.
\n10.3. According to us, Rule 8D, only provides for a method to determine
\nthe amount of expenditure incurred in relation to income, which does not
\nform part of the total income of the Assessee.
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n21
\n10.4. Rule 8 D, in our view, cannot go beyond what is provided in Section
\n14 A of the Act.
\n11. Furthermore, we may note that a similar argument was sought to be
\nadvanced by the Revenue in the matter concerning, M\/s.Redington (India)
\nLimited Vs. The Additional Commissioner of Income Tax, which was,
\nsubject matter of T.C.A.No.520 of 2016.
\n11.1. A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016,
\nrejected the plea of the Revenue advanced in that behalf.
\n11.2. As a matter of fact, a perusal of the judgment would show that the
\nRevenue had sought to argue that because exempt income could be
\nearned in future years, therefore, recourse could be taken to the
\nprovisions of Section 14A of the Act, to disallow expenditure. In other
\nwords the stand taken by the Revenue was irrespective of the fact
\nwhether or not income was earned in the concerned assessment year
\nexpenditure under Section 14A could be disallowed against anticipated
\nincome.
\n11.3. Pertinently, the Division Bench in M\/s.Redington (India) Limited
\ncase has repelled this precise argument.
\n12. The Division Bench, in our view, quiet correctly held that, the
\ncomputation of total income, in terms of Section 5 of the Act, is made qua
\nreal income and not, vis-a-vis, notional income.
\n12.1. The Division Bench went on to hold that Section 4 of the Act brings
\nto tax, that income, which is relatable to the assessment year in issue.
\nThe Division Bench, thus, held that where no exempt income is earned in
\nthe previous year, relevant to the assessment year in issue, provisions of
\nSection 14 A of the Act, read with Rule 8 D could not be invoked.
\n12.2. While coming to this conclusion, the Division Bench also took note of
\nthe aforementioned Circular, issued by the Board.
\n12.3. The reasoning of the Division Bench is contained in the following
\npart of the judgment:
\n\u201c4. The admitted position is that no exempt income has been earned by
\nthe assessee in the financial year relevant to the assessment year in
\nissue. The order of assessment records a finding of fact to that effect. The
\nissue to be decided thus lies within the short compass of whether a
\ndisallowance in terms of s.14A of the Act read with Rule 8D of the Rules
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n22
\ncan be contemplated even in a situation where no exempt income has
\nadmittedly been earned by the assessee in the relevant financial year.
\n7. Per contra, Sri T. Ravi kumar appearing on behalf of the revenue drew
\nour attention to the marginal notes of s.14 A pointing out that the
\nprovision would apply not only where exempted income is ‘included’ in the
\ntotal income, but also where exempt income is ‘includable’ in total income.
\n8. He relied upon a Circular issued by the Central Board of Direct taxes in
\nCircular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was
\nintended to cover even those situations whether there is a possibility of
\nexempt income being earned in future. The Circular, at paragraph 4,
\nstates that it is not necessary for exempt income to have been included in
\nthe income of a particular year for the disallowance to be triggered.
\nAccording to the Learned Standing Counsel, the provisions of s.14A are
\nmade applicable, in terms of sub section (1) thereof to income ‘under the
\nact’ and not ‘of the year’ and a disallowance under s.14A r.w. Rule 8D
\ncan thus be effected even in a situation where a tax payer has not earned
\nany taxable income in a particular year.
\n9. We are unable to subscribe to the aforesaid view. The provisions of
\nsection 14A were inserted as a response to the judgments of the Supreme
\nCourt in Commissioner of Income Tax Vs. Maharashtra Sugar Mills
\nLimited (1971) (82 ITR 452) and Rajasthan State Ware Housing
\nCorporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in
\nterms of which, expenditure incurred by an assessee carrying on a
\ncomposite business giving rise to both taxable as well as non-taxable
\nincome, was allowable in entirety without apportionment. It was thus that
\ns.14A was inserted providing that no deduction shall be allowable in
\nrespect of expenditure incurred in relation to the earning of income exempt
\nfrom taxation. As observed by the Supreme Court in the judgment in the
\ncase of Commissioner of Income Tax vs. Walfort Share and Stock Brokers
\n(P) Ltd (2010) 326 ITR 1
\n‘…. The mandate of s.14A is clear. It desires to curb the practice to claim
\ndeduction of expenses incurred in relation to exempt income against
\ntaxable income and at the same time avail of the tax incentive by way of
\nan exemption of exempt income without making any apportionment of
\nexpenses incurred in relation to exempt income.’
\n10. The provision this is clearly relatable to the earning of actual income
\nand not notional or anticipated income. The submission of the Department
\nto the effect that s.14A would be attracted even to exempt income
\n‘includable’ in total income would entail the assessment of notional
\nincome, assumed to be exempt in the future, in the present assessment
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n23
\nyear. The computation of total income in terms of s.5 of the Act is on real
\nincome and there is no sanction in law for the assessment of admittedly
\nnotional income, particularly in the context of effecting a disallowance in
\nconnection therewith.
\n11.The computation of disallowance in terms of Rule 8D is by way of a
\ndetermination involving direct as well as indirect attribution. Thus,
\naccepting the submission of the Revenue would result in the imposition of
\nan artificial method of computation on notional and assumed income. We
\nbelieve this would be carrying the artifice too far.
\n(emphasis is ours)\u201d
\n13. Mr. Senthil Kumar, seeks to distinguish the judgment in M\/s.
\nRedington (India) Limited case based on the fact that Rule 8D had not
\nkicked-in by AY 2007-08, which was the AY being considered in the said
\ncase.
\n14. According to us, this was not the argument, put forth, before the
\nDivision Bench. As a matter of fact, the Revenue relied heavily on Rule
\n8D.
\n14.1. Mr. Ravi kumar, who appeared for the Revenue, in that matter and
\nwho is present in this Court, informs us that he had in fact argued that
\nthe Rule was clarificatory in nature and would apply retrospectively, and
\nthat, the Division Bench, therefore, discussed the impact of Rule 8D of the
\nRules.
\n15. However, it is, our view, as indicated above, independent of the
\nreasoning given in M\/s. Redington (India) Limited case that Rule 8D
\ncannot be read in a manner, which takes it beyond the scope and content
\nof the main provision, which is, Section 14 A of the Act.
\n15.1. Therefore, as adverted to above, Rule 8D, cannot come to the rescue
\nof the Revenue.\u201d
\nSLP fi led against the said judgment was dismissed
\nby the apex court both on merits as wel l as on the ground
\nof delay.
\n27. In view of the above, we uphold the order of the CIT(A)
\ndeleting the disallowance made u\/s. 14A of the Act.
\nITA No.470\/Chd\/2018
\nA.Y. 2014-15
\n24
\n28. Ground no.2 raised by the Revenue is dismissed.
\n29. In the resul t , the appeal of the Revenue is
\ndismissed.
\nOrder pronounced in the Open Court .
\n_________ __”__$ __ _#% !_
\n(SANJAY GARG ) (ANNAPURNA GUPTA)_
\n___________\/ Judicial Member \t&’______\/ Accountant Member<\/p>\n","protected":false},"excerpt":{"rendered":"
It is evident from the above that the issue before the Hon’ble Apex Court was not whether the presumpt ion theory would apply or not where there are mixed funds and the assessee had demonstrated avai lability of sufficient own funds for making the investments . No discussion on this aspect has also been done by the Hon’ble Apex Court and merely not ing that the assessee had ut i l ized mixed funds, the Hon’ble Apex Court held that the principle of apport ionment would apply. Wi thout any discussion or del iberat ion on the presumpt ion theory, the proposi t ion laid down in the case of Avon Cycles Ltd. (supra) by the Hon’ble Apex Court has to be restricted to the extent of the issue before the Hon’ble Apex Court and facts before i t and not beyond that . And on that basis the decision of the Hon’ble Supreme Court in the case of Avon Cycles Ltd. (supra) can be read only to the extent of upholding the principle of apport ionment of expenses incurred in the context of the l imi ted fact of mixed funds avai lable wi th assessee and no further. The proposi t ion laid down cannot be stretched even logical ly to address the fact si tuat ion where suf f icient own interest free funds are avai lable wi th assessee, which fact was not there before the Hon\u2019ble Apex court in the case of Avon Cycles (supra) , and to negate the presumpt ion that the own funds were used for making the investment , which was nei ther the quest ion raised before the apex court and therefore not addressed by i t also.<\/p>\n