Admissibility of deduction towards Interest on capital borrowed if Interest free loans are given to related party & Assessee have interest free funds available with it

short overview : It is well settled law that when interest free funds were available to the assessee which were sufficient to make its investments, it would be presumed that the investments were made from the interest free funds available with the assessee and also the loans and advances were given looking to commercial expediency, hence no addition was justified.

AO noted that assessee-company had given interest free loans and advances to related party. The disallowance of interest expenses against these loans have been discussed in the assessment order passed for preceding assessment year 2011-12. In the same manner, interest on loans/advances given to M/s. P Resorts and Builders (P) Ltd. had been disallowed. The AO, therefore, disallowed Rs. 1,51,65,269 under section 36(1)(iii). CIT(A) allowed the appeal of assessee.

It is held that : AO on this issue made the addition by following his Order for the assessment year 2011-2012 without giving any independent findings. In assessment year 2011-2012 the CIT(A) had allowed the claim of assessee and deleted the addition. Though the Department had filed an appeal before the Tribunal, but, no ground have been raised on this issue. These facts itself were sufficient to delete the addition. Tribunal may further note that assessee had own sufficient funds to give advance to M/s. P Resorts & Builders Pvt. Ltd., out of own funds. There was also an opening balance as contended by the assessee in preceding year, on which, addition had already been deleted. The assessee had also placed on record the correspondence between the parties to show that advance have been given for commercial expediency. It is well settled Law that when interest free funds were available to the assessee which were sufficient to made its investments, it would be presumed that the investments were made from the interest free funds available with the assessee. Considering the totality of the facts and circumstances of the case, there was no justification to sustain the addition. Accordingly, the Orders of the authorities below was set and the addition was deleted.

Decision: In assessee’s favour.

Relied: Reliance Utility & Power Ltd. (2009) 313 ITR 340 (Bom.) : 2009 TaxPub(DT) 1275 (Bom-HC), Munjal Sales Corporation (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC).

IN THE ITAT, DELHI BENCH

BHAVNESH SAINI, J.M. & N.K. BILLAIYA, A.M.

ATS Infrastructure Ltd. v. ACIT

ITA.No.3080/Del./2017 & 5408 & 5601/Del./2018

15 January, 2020

Assessee by: Ved Jain, Advocate & Surbhi Goyal, C.A.

Revenue by: Ved Prakash Mishra, Sr. D.R.

Bhavnesh Saini, J.M.

All the appeals by the assessee are directed against the different Orders of the learned Commissioner (Appeals)-4, Kanpur, dated 31-3-2017, for the assessment year 2012-2013 and 25-7-2018 for the assessment years 2013-2014 and 2014-2015.

2. We have heard the learned Representatives of both the parties and perused the material on record. Since issues are common , therefore, all the appeals were heard together and we dispose of the same by this consolidated order. The appeals are decided year-wise as under :

Assessment Year 2012-2013 :

3. On Ground Nos. 1 and 2, assessee challenged the disallowance of Rs. 1,51,65,269 made on account of interest under section 36(1)(iii) of the Income Tax Act, 1961. The assessing officer noted that assessee-company has given interest free loans and advances to related party. The disallowance of interest expenses against these loans have been discussed in the assessment order passed for preceding assessment year 2011- 2012. In the same manner, interest on loans/advances given to M/s. Prateek Resorts & Builders Pvt. Ltd., has been disallowed. The assessing officer, therefore, disallowed Rs. 1,51,65,269 under section 36(1)(iii) of the Income Tax Act, 1961. The assessee made detailed written submissions before the learned Commissioner (Appeals).

However, the learned Commissioner (Appeals) dismissed the appeal of assessee.

3.1. Learned Counsel for the assessee submitted that addition has been made by the assessing officer simply by relying on the Order passed in preceding assessment year 2011-2012 in the case of the assessee. However, the said addition has been deleted by the learned Commissioner (Appeals) and Department did not move any appeal against the said decision. Copy of the grounds of appeal for the assessment year 2011-2012 is filed on record in support of this contention. The Order of the learned Commissioner (Appeals) for the assessment year 2011-2012 is filed at Pages 186 and 187 of the paper book. In addition to the above submissions, the learned Counsel for the assessee further submitted that detailed break-up of advances given to M/s. Prateek Resorts & Builders Pvt. Ltd., relating to assessment year under appeal as on 31-3-2012 was Rs. 12,13,22,153. The opening balance as on 1-4-2011 was Rs. 5,70,72,153 relevant to assessment year 2011- 2012 which have been decided in favour of the assessee.

Learned Counsel for the assessee further submitted that advances were given for business purposes. The evidence for the same are filed at Pages 94, 95 and 98 of PB which is correspondence between the parties. He has, therefore, submitted that since the amount in question have been given for commercial expediency, therefore, no addition could be made. He has relied upon Judgment of Hon’ble Supreme Court in the case of S.A. Builders (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 0833 (SC).

Learned Counsel for the assessee further submitted that during the year under consideration, the assessee-company has sufficient own funds as well as interest free borrowing funds which have been used to make these advances and these advances have been shown in the balance-sheet, copy of which is filed at page-10 of the PB to show that assessee has total own surplus funds of Rs. 35,57,47,999. It was, therefore, submitted that no disallowance of interest should be made out of the same. He has relied upon Judgment of Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) : 2019 TaxPub(DT) 0659 (SC) in which the Hon’ble Supreme Court has noted findings of Tribunal that “the findings of the Tribunal that interest free funds available to the assessee were sufficient to him for its investment. Hence, it can be presumed that investments were made from the interest free funds available with the assessee”.

4. On the other hand, learned D.R. relied upon the Orders of the authorities below.

5. We have considered the rival submissions and perused the material on record. The assessing officer on this issue made the addition by following his Order for the assessment year 2011-2012 without giving any independent findings. In assessment year 2011-2012 the learned Commissioner (Appeals) has allowed the claim of assessee and deleted the addition, copy of the Order is placed in the paper book. Though the Department has filed an appeal before the Tribunal, but, no ground have been raised on this issue.

Copy of the grounds of appeal is also filed on record. These facts itself are sufficient to delete the addition. We may further note that assessee has own sufficient funds to give advance to M/s. Prateek Resorts & Builders Pvt. Ltd., out of own funds. There was also an opening balance as contended by the learned Counsel for the assessee in preceding year, on which, addition has already been deleted. The assessee has also placed on record the correspondence between the parties to show that advance have been given for commercial expediency. It is well settled Law that when interest free funds are available to the assessee which were sufficient to made its investments, it would be presumed that the investments were made from the interest free funds available with the assessee. We rely upon the Judgment of the Hon’ble Bombay High Court in the case of Reliance Utility & Power Ltd. (2009) 313 ITR 340 (Bom.) : 2009 TaxPub(DT) 1275 (Bom-HC) and Judgment of Hon’ble Supreme Court in the case of Reliance Industries Ltd. 410 ITR 466 (SC) and Judgment of Hon’ble Supreme Court in the case of Munjal Sales Corporation (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC). Considering the totality of the facts and circumstances of the case, we do not find any justification to sustain the addition. We, accordingly, set aside the Orders of the authorities below and delete the addition of Rs. 1,51,65,269. Ground Nos. 1 and 2 of the appeal of assessee are allowed.

6. On Ground Nos.3 and 4, assessee challenged the disallowance of Rs. 1,52,47,867 under section 14A of the Income Tax Act read with rule 8D of the Income Tax Rules, 1962.

6.1. The assessing officer noted that assessee has received dividend income of Rs. 64,59,304 and has claimed the same to be exempted. Since the assessee has not made disallowance of expenditure against the exempted income, therefore, the assessing officer disallowed Rs. 1,52,47,867 under section 14A read with rule 8D of the Income Tax Rules. The learned Commissioner (Appeals) confirmed the addition.

6.2. Learned Counsel for the assessee submitted that the dividend earned by the assessee-company during the assessment year under appeal can be bifurcated that investment in M/s. ATS Town Ship Pvt. Ltd., yielded dividend of Rs. 56,25,000 and from the Reliance Mutual Funds dividend was earned of Rs. 8,34,304. He has further submitted that value of investments from where dividend has been earned in the case of  ATS Town Ship Pvt. Ltd., as on 31-3-2012 was Rs. 9,000, which is supported by PB-17 which is the details of Note-12 Non-current investments and PB-60 which is balance-sheet of M/s. ATS Town Ship Pvt. Ltd. In the case of Reliance Mutual Fund, the investment was NIL in assessment year under appeal since purchase and sales were within the year. He has submitted that the average value of investments comes to Rs. 9,500 only. He has submitted that provisions of section 14A read with rule 8D provide for disallowance of expenses which are incurred only in relation to the exempt income earned. It is well settled Law that while computing the disallowance under rule 8D (iii), rate of 0.5% has to be applied to only those investments which actually have resulted in exempted dividend income rather than 0.5% of the average of total investments. Thus, in assessee’s case also for the purpose of making disallowance under the above provision, only average value of investment as calculated at Rs. 9,500 shall be considered which would make disallowance of Rs. 47.50 only. He has submitted that the issue is covered by the Judgment of Hon’ble Delhi High Court in the case of ACB India Ltd. v. ACIT [ITA. No.615/2014, dt. 24-3-2015] : 2015 TaxPub(DT) 1966 (Del-HC) in which it was held that “the assessing officer instead of adopting the average value of investment of which income is not part of total income i.e., the value of tax exempt investment, chose to factor in the total investment itself. Even though the learned Commissioner (Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error to chose to apply his own equity. Given the record that it be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and thereafter, arrive at the exact details of .05%. In view of the above reasoning, the findings of the ITAT and lower authorities are hereby set aside. The appeal is allowed and the matter is remitted to work-out the tax effect to the assessing officer who shall do so after giving due notice to the party.” learned Counsel for the assessee on the same proposition also relied upon other decision of the Hon’ble Delhi High Court.

Learned Counsel for the assessee further submitted that the assessing officer has merely made the impugned addition by stating that since the assessee has earned exempt income, therefore, provisions of section 14A are applicable. It is evident that in the assessment order there is no satisfaction recorded by the assessing officer before making any disallowance, therefore, no addition could be made. He has relied upon Judgment of Hon’ble Delhi High Court in the case of Max Opp Investment Ltd. v. CIT (2011) 347 ITR 272 (Del.) : 2011 TaxPub(DT) 2171 (Del-HC), which is confirmed by the Hon’ble Supreme Court. He has also relied upon Judgments of Hon’ble Delhi High Court on the same proposition in the case of CIT v. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.) : 2015 TaxPub(DT) 0391 (Del-HC).

7. On the other hand, learned D.R. relied upon the Orders of the authorities below.

8. We have considered the rival submissions and perused the material on record. The investments made by assessee as on 31-3-2012 as argued by the learned Counsel for the assessee is not in dispute that in case of ATS Township Pvt. Ltd., assessee made investment of Rs. 9000 only and in the case of Reliance Mutual Fund it was NIL because sales and purchases were within the year.

Thus while computing the disallowance under the above provision, the rate of 0.5% has to be applied to only those investments which actually have resulted in exempt dividend income rather than .05% of the average of the total investments. The assessing officer shall have to take average value of such investment. Further assessing officer did not record any satisfaction before making the disallowance and merely made the addition because assessee has earned dividend income. Thus, these are not sufficient to make any addition against the assessee. The Hon’ble Delhi High Court in the case of I.P. Support Services India Ltd. (2015) 378 ITR 240 (Del.) : 2015 TaxPub(DT) 4548 (Del-HC) held that “no disallowance be made in the absence of satisfaction as to why voluntary disclosure made by assessee was unreasonable and unsatisfactory.” Similar view have been taken by the Hon’ble Delhi High Court in the case of CIT v. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.) : 2015 TaxPub(DT) 0391 (Del-HC). The Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (2015) 380 ITR 652 (P&H) : 2015 TaxPub(DT) 2164 (P&H-HC) held that “onus is on assessing officer to record satisfaction that interest bearing funds used for investment to earn tax free income.” Considering the facts and circumstances of the case in the light of submissions of the learned Counsel for the assessee and in the absence of any satisfaction recorded by the assessing officer for making disallowance under section 14A read with rule 8D of the Income Tax Act, no disallowance could be made in the case of the assessee. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. In the result, Ground Nos.3 and 4 of the appeal of the assessee are allowed.

9. In the result, ITA.No.3080/Del./2017 for the assessment year 2012-2013 of the assessee is allowed.

Assessment Year 2013-2014 :

10. On Ground Nos.1 to 4, the assessee challenged the disallowance of Rs. 2,04,97,971 under section 14A read with rule 8D of the Income Tax Rules, 1962.

11. The assessing officer noted that in the balance-sheet filed along with the return of income, an investment of Rs. 414.96 crores have been shown as non-current investment. In view of this, disallowance is to be made as per section 14A read with rule 8D. The assessee was asked to submit as to why disallowance under section 14A should not be made. The assessee submitted that during the year under consideration the assessee has not earned any income by way of dividend and that no expenditure is incurred in relation to any exempted income. The assessing officer however, did not accept the contention of assessee and made the disallowance of Rs. 2,04,97,971 under section 14A read with rule 8D of Income Tax Rules, 1962. On appeal, the learned Commissioner (Appeals) dismissed the appeal of assessee.

12. Learned Counsel for the assessee submitted that in assessment year under appeal assessee has not earned any exempt income. He has referred to PB-29 which is balance-sheet of the assessee to show that as on 31-3-2013 assessee has not earned any dividend income.

He has submitted that the Hon’ble Supreme Court in the case of CIT v. Chettinad Logistics (P.) Ltd. (2018) 95 taxmann.com 250 (SC) : 2018 TaxPub(DT) 4126 (SC) dismissed the SLP of the revenue by confirming the Order of the Hon’ble Madras High Court holding that “Section 14A of the Act cannot be invoked where no exempt income is earned by the assessee”. He has relied upon Judgment of Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT (2015) 378 ITR 33 (Del.) : 2015 TaxPub(DT) 3520 (Del-HC) in which the Hon’ble High Court similarly held that “if assessee has not earned exempt income, no disallowance could be made.” He has, therefore, submitted that no disallowance could be made by the authorities below.

13. The learned D.R. relied upon the Orders of the authorities below.

14. We have considered the rival submissions. It is well settled Law that in the absence of any exempt income no addition can be made by the assessing officer The above decisions squarely apply to the facts of the case. It is not in dispute that during the assessment year under appeal assessee has not earned any exempt income, therefore, no disallowance under section 14A read with rule 8D could be made.

Further no satisfaction as required under section 14A have been recorded by the assessing officer in the assessment order.

Therefore, the issue would also be squarely covered by reasoning given in assessment year 2012-2013 (supra). In view of the above, we set aside the Orders of the authorities below and delete the addition. Ground Nos. 1 to 4 of the appeal of the assessee are allowed.

15. On Ground Nos.5 and 6, assessee challenged disallowance of Rs. 39,89,019 made by assessing officer on account of interest under section 36(1)(iii) of the Income Tax Act, 1961.

16. The assessing officer noted that in assessment year 2011-2012 he has made disallowance of interest on loan and advances given to M/s. Prateek Resorts & Builders Pvt. Ltd., The assessing officer, therefore, disallowed the impugned amount.

17. After considering the rival submissions, we are of the view that the issue is same as have been considered in assessment year 2012-2013 (supra). Both the parties have submitted that the Order in assessment year 2012-2013 may be followed in this year. In this view of the matter, we set aside the Orders of the authorities below and delete the addition. In the result, Ground Nos.5 and 6 of the appeal of the assessee are allowed.

18. In the result, ITA.No.5408/Del./2018 for the assessment year 2013-2014 of the assessee is allowed.

Assessment Year 2014-2015 :

19. On Ground Nos. 1 to 6, the assessee challenged the disallowance of Rs. 2,39,66,670 made by assessing officer invoking the provisions of section 14A read with rule 8D of the Income Tax Rules, 1962.

20. The assessing officer noted that in assessment year under appeal assessee has shown investment of Rs. 543.71 crores as non-current investment. The assessing officer noted that disallowance have to be made under section 14A of the Income Tax Act. The assessee submitted that in assessment year under appeal, assessee has earned dividend of Rs. 1,97,449 only for which no expenditure was incurred in relation to exempt income. The assessing officer however under the above provisions disallowed the impugned amount. The learned Commissioner (Appeals) confirmed the addition.

21. Learned Counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that the assessee has received this dividend out of investment made in Reliance Mutual Funds whose opening and closing balance during the year were NIL (PB- 26). Thus, the average value of investment will be calculated as NIL as is evident from audited financial year statement of the assessee. Complete copies are placed at pages 7 to 43 of the PB. He has submitted that provisions of section 14A read with rule 8D provide for disallowance of expenses which are incurred only in relation to exempt income earned. He has relied upon the Judgment of Hon’ble Delhi High Court in the case of ACB India Ltd. (supra) and other decisions and submitted that the issue is same as has been considered in assessment year 2012-2013. He has further submitted that no satisfaction have been recorded by assessing officer in the assessment order before making any disallowance as required under section 14A of the Income Tax Act. In the alternate contention, he has submitted that since assessee earned only Rs. 1,97,449 as dividend income, therefore, impugned addition is unjustified and disallowance should restricted to the dividend income of Rs. 1,97,499 and relied upon Judgment of Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd. (2015) 372 ITR 694 (Del.) : 2015 TaxPub(DT) 1375 (Del-HC).

22. On the other hand, learned D.R. relied upon the Orders of the authorities below.

23. Considering the rival submissions, we are of the view that the issue is same as have been considered in assessment year 2012-2013. Following the reasons for decision for the same and in the absence of any satisfaction recorded by the assessing officer in the assessment order, we are of the view that no addition could be made in the matter. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. In the result, Ground Nos.1 to 6 of the appeal of the assessee are allowed.

24. In the result, ITA.No.5601/Del./2018 for the assessment year 2014-2015 of the assessee is allowed.

25. To sum-up, all the appeals of the assessee are allowed.