M/S TRADITIONAL GALLERY PVT. LTD., JAIPUR V. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-4, JAIPUR

ITA 108/JPR/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2399 (ITAT-JAIPUR)
• Duration Of Justice: 3 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 30-01-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Notional interest; Set aside
• Section: 143(3); 14A; 119

Judgement Text

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCH ‘B’,VC JAIPUR Jh laanhi xkslkbZ] U;kf;d lnL; ,oa Jh jkBkSM+ deys'k t;arHkkbZ] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 107 & 108/JP/2019 fu/kZkj.k o"kZ@Assessment Year : 2013-14 & 14-15. M/s. Traditional Gallery P. Ltd., 181, Radha Govind Colony, Dher Ke Balaji, Sikar road, Jaipur. cuke Vs. The ACIT, Circle-4, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. AABCT 8044 P vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@Assessee by : Shri Manish Agarwal (CA) jktLo dh vksj ls@ Revenue by : Smt. Runi Pal (Addl.CIT) lquokbZ dh rkjh[k@ Date of Hearing : 12/04/2022. ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 12/05/2022. vkns'k@ ORDER PER SANDEEP GOSAIN, J.M. These two appeals by the assessee are directed against two separate orders dated 14.12.2018 of ld. CIT (A), Ajmer for the assessment years 2013-14 & 14-15. The assessee has raised the following grounds of appeal in A.Y. 2013-14 :- “ 1. That in law and in the facts and in circumstances of the case, the ld. Lower authorities grossly erred in making an addition of Rs. 54,68,858/- on account of interest @ 12% per annum on advance given to its subsidiary company i.e. traditional Heritage Hotels Pvt. Ltd. during the year consideration. 2. That on the facts and in the circumstances of the case, the ld. Lower authorities grossly erred in disallowing Rs. 2,62,306/- out of total interest expenses incurred by the assessee appellant. 2 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. 3. That on the facts and in circumstances of the case, the ld. Lower authorities grossly erred in disallowing Rs. 33,83,847/- u/s 14A of the Income Tax Act by holding that the investment made by the assessee appellant was after taking loans from the financial institutions. 4. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing. 2. Briefly stated the facts of the case are that the assessee is a private limited company carrying on business of export of readymade garments, madeups, handicraft items and other sundry items for past several years. Return of income for the year under consideration was filed declaring total income at Rs. 1,00,51,070/-. The AO completed the assessment under section 143(3) of the IT Act, 1961 after making the addition of Rs. 54,68,858/- on notational basis towards interest, disallowance of Rs. 2,62,306/- under section 36(1)(iii) and disallowance of Rs. 33,83,847/- on account of disallowance u/s 14A of the IT Act. Aggrieved by the order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld. CIT (A) confirming the order of the AO, sustained the addition of Rs. 91,15,011/-. Now the assessee is in appeal before us. Ground No. 1 & 2 relates to confirming addition of Rs. 57,31,164/- on account of interest @ 12% p.a. on advance given to subsidiary company and disallowance of Rs. 2,62,306/- on account interest expenses. 3. Before us, the ld. A/R for the assessee submitted that assessee had incurred financial charges of Rs. 1,52,40,204/- for the year under consideration. The ld. A/R contended that as per the AO, assessee had borrowed funds more than required for business and held that advances made by it were out of borrowed funds and made 3 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. the addition of accrued interest on such advances. At the appellate hearing, it was explained before the ld. CIT (A) that borrowed funds were utilized for the purposes of business only and assessee was having sufficient interest free funds which were utilized for making advances, but this explanation did not find favour with the ld. CIT (A). While making assessment, the AO reproduced Assets and Liabilities in his assessment order and arrived at a conclusion that assessee was having shortage of funds to the tune of Rs. 2,21,73,371.56, whereas assessee had borrowed more funds than such shortage of funds. The AO, thus presumed that advances made to M/s. Traditional Heritage Hotels Pvt. Ltd. of Rs. 11,04,52,000/- and two other concerns namely M/s. Nav Sarjan Projects Pvt. Ltd. of Rs. 5,00,000/- and S.D. Education Trust of Rs. 12,21,000/- were out of borrowed funds and accrued interest on the funds outstanding was added as income. In this regard, ld. A/R drawn our attention to para 3.6 of the assessment order which reads as under :- “ Since the assessee is maintaining its books on mercantile basis, therefore, the accrued interest on loan advances to M/s. Traditional Heritage Hotels Pvt. Ltd. being 12% as paid by the assessee to the financial institutions and one percent extra as mentioned by the assessee, amounting to Rs. 50,01,100/- plus Rs. 4,67,758/- (1% additional as per agreement) is added to the total income of the assessee on account of interest accrued from M/s. Traditional Heritage Hotels Pvt. Ltd. The interest is calculated @ 12% p.a. on day to day balance. Thus accrued interest of Rs. 54,68,858/- is added to the total income of assessee on account accrued interest.” The ld. A/R, thus submitted that it is evident that AO has added interest of Rs. 54,68,858/- to the income of the assessee on Notional basis. It is trite law that only real income is taxable and since assessee has neither accrued nor received any interest from amount advanced to these parties, therefore, no addition on notional basis on account of accrued interest in the hands of the assessee could be made 4 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. without any express provision under Income Tax Act. To support his contention reliance is placed on the following judgments :- Shoorj Vallabh Das & Co. 46 ITR 144 (SC) Godhra Electricity Co. Ltd. vs. CIT 225 ITR 746 (SC) CIT vs. VTC Leasing & Finance Ltd. 39 TW 211 (Raj. HC) Brahmaputra Capital & Financial Services Ltd. vs. ITO 119 ITD 266 (Delhi) The ld. A/R further submitted that while making addition of Rs. 54,68,858/- on account of notional interest and disallowance of interest expenses of Rs. 2,62,306/- on account of loan advanced to Nav Sarjan Projects Pvt. Ltd. and S.D. Education Trust, the AO has completely ignored the vital fact that entire advances made were considered as interest bearing whereas assessee was holding interest free loan also from one Director Shri Dinesh Goyal. He has drawn our attention to the Ledger cum Notional Interest working account of Shri Dinesh Goyal which clearly shows that assessee was in possession of interest free funds in the range of Rs. 42.23 lacs to Rs. 1.28 crores throughout the year (upto 24.03.2013), which was paid on 25 th March thereby reducing the balance at the end of the year of interest free loan account to Rs. 7,33,739.17. Similarly, assessee had received interest free funds from Kids Fashion India Pvt. Ltd. to the tune of Rs. 30 lacs approx.. Besides this, assessee was having huge interest free funds in the shape of Share Capital and Reserves & Surplus aggregating to Rs. 6,94,91,574.45 which were available for making advances. The ld. A/R submitted that as the assessee was having interest free funds available for making advances, no disallowance can be made. The AO instead 5 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. of making disallowance out of interest expenses, had made addition towards the notional interest which is not permissible under the provisions of IT Act. The ld. A/R placed reliance on the following judgments : CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC) Munjal Sales Corporation vs. CIT & Others 298 ITR 298 (SC) The ld. A/R further submitted that assessee was holding funds from various sources. At this juncture, our attention was invited to Note 2.3 of Balance Sheet, i.e. Long Term borrowings, and Note 2.5 i.e. Short term borrowings, from perusal of which it is evident that assessee has certain loans which are specific purposes, i.e. Loan from SIDBI (against Plant & Machinery), Car Loans from various banks, Working capital loans, EPC limits etc. Against the said loans, the banks by regular monitoring ensure that funds are utilized for the purpose for which the same were sanctioned, and if any default is noticed, penal actions are taken by the financial institutions. In the case of assessee, no such action is taken by the financial institutions. The ld. A/R, thus submitted that loans taken for specific purposes i.e. car loans, working capital loans and EPC limits etc. deserve to be reduced from total borrowed funds as such funds could not be diverted for making interest free advances. The ld. A/R submitted that assessee maintains regular books of accounts which are subject to audit by qualified chartered accountant, who has not given any adverse comments. The AO has accepted the books of accounts and no discrepancy has been pointed out. The ld. A/R, therefore, prayed that addition on notional basis on account of accrued interest of Rs. 54,68,858/- and disallowance of Rs. 2,62,306/- out of interest payment deserve to be deleted. 6 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. 4. On the other hand, the ld. D/R supported the orders of the lower authorities and further argued that the assessee has diverted interest bearing funds for making interest free advances to its related parties. Therefore, he requested to uphold the order of the ld. CIT (A). 5. We have heard the rival submissions and perused the material available on record. The A.O. made the addition on account of accrued interest calculated @ 12% on the advances given to M/s. Traditional Heritage Hotels Pvt. Ltd. We are in agreement with the ld. A/R that no addition could be made on notional basis as has been held by Hon’ble Supreme Court in the case of Shoorji Vallabh Das & Co. 46 ITR 144 (SC) by observing as under :- “ Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialize.” In the instant case, no income has arisen to the assessee and the AO on hypothetical basis calculated the accrued interest. Therefore, by respectfully following the above judgment of Hon’ble Supreme Court and other judgments of various High Courts including the jurisdictional High Court, we are of the considered view that no addition could be made on notional basis. Accordingly the addition of Rs. 54,68,858/- made on account of accrued interest is hereby deleted. With regard to disallowance of Rs. 2,62,306/-, it is seen that assessee was having sufficient interest free funds throughout the year which includes share capital and reserves and surpluses out of which the advance was made to the sister concern. The 7 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. Hon’ble Supreme Court recently in the case of CIT vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) has held that where there is a finding of fact that interest free funds available to the assessee were sufficient to meet its investment, it will be presumed that investments were made from such interest free funds. In view of the above judgment (supra) and looking to the facts of the case, since sufficient funds are available to the assessee for making interest free advances, disallowance of Rs. 2,62,306/- made by the A.O. under section 36(1)(iii) is unwarranted and the same is deleted. Ground No. 3 is regarding disallowance made under section 14A of the IT Act. 6. The AO noted that the assessee has subscribed shares of Rs. 2.40 crores out of interest bearing funds, therefore, he invoked the provisions of section 14A and disallowed Rs. 33,83,847/- being interest on such investment @ 12% on day to day balance. The ld. CIT (A) uphold the disallowance so made by the AO. Aggrieved by the addition, the assessee preferred appeal before us. 7. Before us, the ld. A/R of the assessee has submitted that when the assessee has not earned or received any exempt income from the said investment during the year under consideration, then no disallowance is called for under section 14A of the IT Act. He has further contended that even the assessee has not incurred any expenditure for the said investment and, therefore, no disallowance can be made. To support his contention, the ld. A/R placed reliance on the judgment of Hon’ble Supreme Court in case of Maxopp Investment Ltd vs. CIT reported in 402 ITR 640 (SC) and also on the judgment of Hon’ble Delhi High Court in case of Cheminvest Ltd. vs. CIT, 378 ITR 33 (Delhi) and also relied on the decision of Jaipur Bench of 8 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. the Tribunal in case of Deepak Vegpro (P) Ltd vs. ACIT in ITA No. 110/JP/2014 and in the case of M/s. Mahalaxmi Saws Pvt. Ltd. in ITA No. 280/JP/2019 and prayed for deletion of disallowance made by the AO under section 14A of the IT Act. 8. On the other hand, the ld. D/R has submitted that the purpose of investment is not relevant as settled by the Hon’ble Supreme Court in case of Maxopp Investment Ltd. vs. CIT, 91 taxmann.com 154. He has relied upon the Circular No. 5 of 2014 issued by the CBDT and submitted that the CBDT has further clarified that the word “Income” as used in the section 14A not necessarily be the exempt income of a particular year but the income under the Act and, therefore, provisions of section 14A would be attracted even if the assessee has not earned such exempt income during the financial year. 9. We have considered the rival submissions as well as the relevant material on record. As far as Circular No. 5 of 2014 relied upon by the ld. D/R, it is settled position of law that the Circular issued by the CBDT are binding on the Taxing Authorities but the same is not binding on the Court. Further, if a particular provision of the Act is already explained/interpreted by the Court then the explanation of the CBDT which is contrary to the decision of the Court, would not be binding even on the Taxing Authorities. Therefore, the circular which explains the provision of the Act is binding on the Taxing authorities only to the extent of the said provision is not given a different meaning or explanation by the Court. The decision of the court is binding on both the parties i.e. assessee as well as the revenue. Therefore, once the Hon’ble High Court as well as Hon’ble Supreme Court has explained the provision, no disallowance of expenditure can be made under section 14A if there is no exempt income earned or received during the year under 9 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. consideration. The provisions of section 14A is attracted if the assessee has certain income which is not includible in its total income under any provisions of the Act and assessee has incurred any expenditure in relation to earning such income which is exempted under the Act. Our attention was drawn to the fact that during the year under consideration there is no investment which had earned or for that matter even would have earned exempt income and thereby there is no occasion to invoke the provisions of section 14A and therefore, the disallowance made is totally unwarranted. This also finds support from the catena of the judicial decisions as relied upon by the ld. A/R hereinabove. 9.1. Since there is no dividend income earned by the assessee during the year under consideration, therefore, there is no question of making any disallowance for earning the exempt income. Hence the disallowance made by the AO under section 14A is deleted. 10. Now we take up the appeal of the asseseee in ITA No. 108/JP/2019 for the assessment year 2014-15. The grounds raised in the appeal are reproduced hereunder :- 1. That in law and in the facts and in circumstances of the case, the ld. Lower authorities grossly erred in making an addition of Rs. 91,31,974/- on account of interest not charged on advance given to its subsidiary company i.e. traditional Heritage Hotels Pvt. Ltd. during the year consideration. 2. That on the facts and in the circumstances of the case, the ld. Lower authorities grossly erred in disallowing Rs. 4,90,000/- u/s 14A of Income Tax Act. 3. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing. 10 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. 11. We have already adjudicated similar grounds as raised by the assessee in assessee’s own case for the assessment year 2013-14 in ITA No. 107/JP/2019 by deleting the additions. While dealing with these grounds, we have discussed the issue hereinabove in para 5 and para 9 & 9.1 respectively and considering that there is no change in facts and circumstances of the case for the year under consideration, and following the judgments of Hon’ble Supreme Court and Hon’ble High Courts, we set aside the orders of the authorities below and delete the additions. 12. In the result, appeals of the assessee are allowed. Order pronounced in the open court on 12/05/2022. Sd/- Sd/- ¼ jkBkSM+ deys'k t;arHkkbZ] ½ ¼lanhi xkslkbZ½ (RATHOD KAMLESH JAYANTBHAI) (SANDEEP GOSAIN) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@ Dated:- 12/05/2022. das/ vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. vihykFkhZ@The Appellant-M/s. Traditional Gallery Pvt. Ltd., Jaipur. 2. izR;FkhZ@ The Respondent-The ACIT, Circle-4, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur 6. xkMZ QkbZy@ Guard File {ITA No. 107 & 108/JP/2019} vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar 11 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.