The DCITBharuch Circle, Bharuch V. M/s. Gujarat Narmada Valley Fertilizers Co.Ltd., Bharuch

ITA 2026/AHD/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2101 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 16-04-2013
• Assessment Year: 2002-2003
• Appeal Filed On: 10-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D P GUPTA
• Keywords: Business income; Depreciation; Earning of tax free income; Commercial expediency
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMEDABAD BEFORE SHRI G.C.GUPTA , VICE PRESIDENT AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ITA NOS. 2025 & 2026/AHD/2010 ASSESSMENT YEARS :2001-02 & 2002-03 DEPUTY COMMISSIONER OF INCOME TAX, BHARUCH CIRCLE, BHARUCH V/S . GUJARAT NARMADA VALLEY FERT. CO. LTD., P.O. NARMADA NAGAR, BHARUCH PAN NO. A AAC G8372Q (APPELLANT) .. (RESPONDENT) BY APPELLANT SHRI D. P. GUPTA, CIT D.R. /BY RESPONDENT SHRI SANJAY R. SHAH, A.R. /DATE OF HEARING 16.04.2013 /DATE OF PRONOUNCEMENT 10.05.2013 O R D E R PER : ANIL CHATURVEDI, ACCOUNTANT MEMBER THESE APPEALS ARE FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) - VI, BARODA, DATED 15.03.2010 FOR THE ASSESSMENT YEA RS 2001-02 & 02-03 RESPECTIVELY. 2. THE FACTS AS CULLED OUT FROM THE ORDERS ARE AS U NDER: 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF FERTILIZERS, VARIOUS CHEMICALS AND INFORMATION T ECHNOLOGY BUSINESS. THE ASSESSEE HAD FILED ITS RETURN OF INCOME FOR A.Y. 01 -02 ON 29.10.2001 DECLARING TOTAL INCOME OF RS.54,30,57,988/- AND FOR A.Y. 02-0 3 ON 30.10.2002 DECLARING TOTAL INCOME OF RS.78,83,38,249/-. ASSESSMENT WAS FRAMED U/S.143(3) VIDE ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 2 ORDER DATED 31.12.2003 DETERMINING TOTAL INCOME OF RS.66,57,27,300/- FOR A.Y. 01-02 & FOR A.Y. 02-03, VIDE ORDER DATED 28.02.200 5 TOTAL INCOME WAS DETERMINED AT RS. 89,98,24,992/-. THE ASSESSEE AND THE REVENUE HAD FILED APPEALS BEFORE HONBLE ITAT AGAINST THE ORDER OF CI T(A). HONBLE ITAT VIDE ORDER ITA NOS. 1351/AHD/2005 & 1227/AHD/2005 DATED 30.09.2008 AND 07.11.2008 HAS SET ASIDE CERTAIN ISSUES TO THE FILE OF A.O. FOR A.Y. 01-02 AND ALSO FOR A.Y. 02-03 VIDE ORDER IN ITA NO.1010/AHD/2 005. PURSUANT TO THE HONBLE ITATS DIRECTION, THE A.O. VIDE HIS ORDER D ATED 29.12.2009 PASSED U/S. 143(3) R.W.S. 250 OF THE IT ACT HAD DETERMINED THE TOTAL INCOME AT RS.63,25,16,401/- FOR A.Y. 2001-02 AND RS. 79,34,34 ,060/- FOR A.Y. 02-03. AGGRIEVED BY THE ORDER OF THE A.O., THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A). CIT(A), VIDE HIS ORDER DATED 15.03.2010, A LLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF THE CIT(A), THE REVENUE IS NOW IN APPEAL BEFORE US AND RAISED FOLLOWING EFFECT IVE GROUNDS IN BOTH ASSESSMENT YEARS: FOR A.Y. 2001-02 1(I). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING ADDITION OF RS.7,97 ,82,157/- ON ACCOUNT OF DISALLOWANCE OF INTEREST ON INTEREST FRE E LOANS / ADVANCES GIVEN BY THE ASSESSEE TO ITS SUBSIDIARIES AND ASSOC IATE CONCERNS. 1(II). THE CIT(A) FAILED TO APPRECIATE THE LEGAL PR INCIPLE, THAT ONUS U/S.36(1)(III) LIES ON THE ASSESSEE TO PROVE THAT E ACH LOAN IS USED FOR THE PURPOSES OF ITS BUSINESS, AS SETTLED IN THE CAS E OF KISHANCHAND CHELLARAM VS. CIT. 114 ITR 654 (BOM), R. DALMIYA VS CIT. 133 ITR 169 (DEL.), CIT VS. M.S. VENKATESHWARAN 222 ITR 163 (MAD), K. ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 3 SOMASUNDARAM & BROTHERS CIT 238 ITR 939 (MAD) AND C IT VS MOTOR GENERAL FINANCE LTD. 254 ITR 449 (DEL) WHICH WAS CONFIRMED IN PRINCIPLE BY THE SUPREME COURT IN THE CASE OF MO TOR GENERAL FINANCE VS CIT 267 ITR 381 (SC). HENCE, APPEAL TO I TAT IS PROPOSED ON THIS ISSUE. 2(I). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF INTEREST EXPENSES OF RS.64,00,000/- U/S.14A OF THE ACT IN RESPECT OF DIVIDEND INCOME OF RS.10,18,43,271/- WHICH IS EXEMPT FROM TAX IN THE H ANDS OF THE ASSESSEE COMPANY. 2(II). THE CIT(A) FAILED TO APPRECIATE THAT THE ASS ESSEE HAD TAKEN INTEREST BEARING LOANS AND THE ASSESSEE DID NOT DIS CHARGE ITS ONUS TO ESTABLISH THAT INTEREST BEARING FUND WAS NOT UTILIZ ED FOR THE PURPOSE OF INVESTMENT. SINCE THE ASSESSEE FAILED TO FURNIS H ANY QUANTIFICATION, IN RESPECT OF LOAN TAKEN AND INVEST MENT MADE, THE DISALLOWANCE U/S.14A WAS RIGHTLY MADE BY THE A.O. FOR A.Y. 2002-03 1(I). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF INTEREST EXPENSES OF RS.64,00,000/- U/S.14A OF THE ACT IN RESPECT OF DIVIDEND INCOME OF RS.7,13,01,338/- WHICH IS EXEMPT FROM TAX IN THE HA NDS OF THE ASSESSEE COMPANY. 1(II). THE CIT(A) FAILED TO APPRECIATE THAT THE ASS ESSEE HAD TAKEN INTEREST BEARING LOANS AND THE ASSESSEE DID NOT DIS CHARGE ITS ONUS TO ESTABLISH THAT INTEREST BEARING FUND WAS NOT UTILIZ ED FOR THE PURPOSE OF INVESTMENT. SINCE THE ASSESSEE FAILED TO FURNISH ANY QUANTIFICATION, IN RESPECT OF LOAN TAKEN AND INVEST MENT MADE, THE DISALLOWANCE U/S.14A WAS RIGHTLY MADE BY THE A.O. ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 4 4. THE FIRST GROUND FOR A.Y. 01-02 IS WITH RESPECT TO THE ADDITION OF RS.7,97,82,157/- ON ACCOUNT OF INTEREST FREE LOANS GIVEN BY THE ASSESSEE:- DURING THE COURSE OF ASSESSMENT PROCEEDING IN THE F IRST ROUND, A.O. NOTICED THAT THE ASSESSEE COMPANY HAD ADVANCED VARIOUS INTE REST FREE ADVANCES TO THE SUBSIDIARIES AND ASSOCIATE CONCERNS AND ON THE OTHER HAND, THE ASSESSEE WAS PAYING HEAVY INTEREST ON THE SECURED AND UNSECU RED LOAN. THE A.O. WAS OF THE VIEW THAT THE ASSESSEE HAS PARTED THE BORROW ED FUNDS FOR LOAN AND ADVANCES TO THE PARTIES, THE DETAILS OF WHICH ARE AS UNDER: 1 GNAL 40,82,08,176 2 NARMADA EDUCATION AND SCIENTIFIC SOCIETY 3,48,99, 629 3 GUJARAT NARMADA FINANCE & I NVESTMENT CO. LTD. 1 , 27 , 483 TOTAL 44,32,35,288 THE A.O. FURTHER OBSERVED THAT THE ASSESSEE WAS HAV ING INTEREST FREE FUNDS OF RS.1,75,469.32 LACS AND INVESTMENT OF RS.2,61,646.1 5 LACS. IF THE SECURED LOAN WERE ALSO CONSIDERED FOR PURCHASES OF ASSETS, THE TOTAL FUND WORKED TO RS.2,31,291.63 LACS. THUS, THE A.O. HELD THAT THE BORROWED FUNDS WERE UTILIZED FOR MAKING INTEREST FREE ADVANCES AND MADE ADDITION OF RS.7,97,82,157/-. HONBLE ITAT SET ASIDE THE ISSUE TO THE A.O. FOR THE REASON THAT THE ISSUE WAS NOT CONSIDERED FROM THE ANGLE OF BUSINESS EXPEDIENCY. PURSUANT TO THE DIRECTIONS OF HONBLE ITAT, A.O. A SKED THE ASSESSEE TO FURNISH THE DETAILS OF INTEREST FREE ADVANCES ALONG WITH THE REASONS AND TO PROVE THAT THE MONEY WAS ADVANCED AS A MEASURE OF C OMMERCIAL EXPEDIENCY. THE ASSESSEE, INTER ALIA, SUBMITTED THAT NO FRESH A DVANCE WAS GIVEN TO THE SUBSIDIARIES DURING THE YEAR. IT ALSO SUBMITTED TH E EXPLANATION WITH RESPECT TO THE ADVANCES GIVEN TO THREE PARTNERS. THE SUBMISSI ON MADE BY THE ASSESSEE ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 5 WAS NOT FOUND ACCEPTABLE TO THE A.O. HE DISALLOWED THE CLAIM OF THE ASSESSEE BY HOLDING AS UNDER: 5.5 I HAVE CAREFULLY CONSIDERED REPLY OF THE ASSE SSEE COMPANY. WHILE DECIDING THE CASE OF SA BUILDER, THE HON'BLE SUPREME COURT HAS HELD THAT 'WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE A LLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DE PENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INST ANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMER CIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVAN CED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OT HER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DE EP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANC ES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE S UBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. ' IT IS THEREFORE, THE ASSESSEE COMPANY HAS TO FILE T HE PURPOSE OF ADVANCES GIVEN TO ITS SUBSIDIARY COMPANIES AND ALSO TO EXPLAIN THE USE OF THE FUND BY THE SUBSIDIARY COMPANY TO EXPLAI N BUSINESS EXPEDIENCY OF THE FUND. THE ASSESSEE HAS SIMPLY SUB MITTED THAT THE ADVANCES GIVEN IN THE EARLIER YEARS IS NOT A POINT BECAUSE THE ASSESSEE HAS PAID AND CLAIMED THE INTEREST EXPENSES ON THE FUNDS BORROWED BY THE ASSESSEE AND USED BY THE SISTER CON CERNS AND THERE IS NO WHEREABOUTS MADE AVAILABLE ON RECORDS R EGARDING THE USE OF THE FUND. 5.5.1 IN RESPECT OF ADVANCE TO NE -&- SRS THE ASSES SEE COMPANY HAS SUBMITTED THAT THE COMPANY MADE ADVANCES TO THE SOCIETY OUT ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 6 OF IMMINENT BUSINESS SENSE FOR ENSURING EDUCATIONAL FACILITIES TO THE CHILDREN OF ITS EMPLOYEES, WHICH IN TURN WOULD ENAB LE IT TO ATTRACT AND RETAIN TALENTED EMPLOYEES FOR THE PURPOSES OF ITS B USINESS. THE NE &. SRS IS AN EDUCATION INSTITUTE AND THE CHILDREN O F THE EMPLOYEES AS WELL AS OUTSIDER BENEFIT FROM THE SAID INSTITUTE . MERELY SUBMISSION THAT THE CHILDREN OF THE STAFF MEMBERS/OFFICERS ARE BENEFITED FROM THE EDUCATION INSTITUTE IS NOT SUFFICIENT TO PROVE BUSI NESS EXPEDIENCY. 5.5.2 IN RESPECT OF ADVANCES TO GUJARAT NARMADA FI NANCE & INVESTMENT CO. LTD. THE ASSESSE COMPANY HAS TOTALLY FAILED TO PROVE BUSINESS EXPEDIENCY AS DIRECTED BY THE HON'BLE ITAT AND DECIDED IN THE CASE OF S.A. BUILDER. THE ASSESSEE COMPANY HAS TO ESTABLISH NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF TH E BUSINESS. 5.5.3 TO AVOID/REDUCE THE TAXABILITY, THE ASSESSEE COMPANY HAS TAKEN THE LOAN AND PAID AND CLAIM THE INTEREST IN I TS OWN CASE AND DIVERTED THE FUND INTO THE LOSS MAKING COMPANY. 5.5.4 AFTER CONSIDERING ALL THE FACTS OF THE CASE AND SUBMISSION MADE BY THE ASSESSEE COMPANY IT IS CONCLUDED THAT T HE ASSESSEE COMPANY HAS TOTALLY FAILED TO PROVE THE BUSINESS EX PEDIENCY OF THE INTEREST FREE ADVANCES TO THE SUBSIDIARY COMPANIES AND HENCE BY APPLYING THE RATE OF INTEREST OF 18% P.A. INTEREST PAYMENT OF RS,7,97,82,157/- IS HEREBY DISALLOWED AND ADDED BAC K TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. PENALTY PROCEEDING FOR FURNISHING INACCURATE PARTICULARS AND THEREBY CONCE ALMENT OF INCOME IS INITIATED. 5. AGGRIEVED BY THE ORDER OF THE A.O., THE ASSESSEE CARRIED THE MATTER BEFORE CIT(A). THE CIT(A), AFTER CONSIDERING THE S UBMISSIONS OF THE ASSESSEE HELD THAT SIMILAR ISSUE HAS ARISEN FOR A.Y. 07-08 A ND WHERE THE ASSESSEE HAD ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 7 PROVED THE COMMERCIAL EXPEDIENCY. HE WAS FURTHER O F THE VIEW THAT SINCE THE FACTS ON THE BASIS OF WHICH THE A.O. DECIDED THE IS SUE AND THE CONTENTION OF THE ASSESSEE WAS IDENTICAL IN A.Y. 07-08, HE FOLLOW ING HIS OWN DECISION IN APPEAL FOR A.Y. 07-08 ALLOWED THE CLAIM OF THE ASSE SSEE. AGGRIEVED BY THE AFORESAID ORDER OF CIT(A), THE REVENUE IS NOW IN AP PEAL BEFORE US. 6. BEFORE US, THE LD. CIT. D.R. SUBMITTED THAT THER E WAS FACTUAL DIFFERENCE AS COMPARED TO THE FACTS OF A.Y. 07-08 AS INTEREST FREE FUNDS WERE LESS AS COMPARED TO THE INVESTMENT MADE. HE FURTHER SUBMIT TED THAT THE ASSESSEE HAD ADVANCED TO THE LOSS MAKING CONCERNS AND THE CO MMERCIAL EXPEDIENCY WAS NOT PROVED BEFORE THE A.O. HE, THUS, SUPPORTED THE ORDER OF A.O. THE LD. A.R., ON THE OTHER HAND, SUBMITTED THAT THE ASSESSE E HAS NOT GRANTED ANY FRESH ADVANCE TO GUJARAT NARMADA AUTO LTD. (GNAL) A ND NARMADA EDUCATION AND SCIENTIFIC RESEARCH SOCIETY (NE&SRS) DURING A.Y . 2001-02, HOWEVER SMALL ADVANCE OF RS.0.03 LACS WAS GIVEN TO GUJARAT NARMADA FINANCE & INVESTMENT CO. LTD. THE LD. A.R. SUBMITTED THAT TH E ADVANCE TO GUJARAT NARMADA AUTO LTD. REPRESENTED PAYMENT MADE BY THE A SSESSEE TO FINANCIAL INSTITUTION TOWARDS SETTLEMENT OF THE BORROWAL ACCO UNTS. THE SETTLEMENT WAS MADE OUT OF COMMERCIAL EXPEDIENCY AND IN VIEW OF TH E FACT THAT THE ASSESSEE HAD GUARANTEED THE BORROWING FACILITIES OF GUJARAT NARMADA AUTO LTD. AND THE COMPANY WAS LEGALLY LIABLE TO PAY THOSE DEBTS. IT WAS FURTHER SUBMITTED THAT BY MAKING THE PAYMENTS TO THE FINANCIAL INSTITUTION , THE ASSESSEE BECAME THE ONLY SECURED CREDITOR OF GNAL AND THEREBY GAINED CO NTROL OVER SECURITIES. IT WAS FURTHER SUBMITTED THAT THE BUSINESS CARRIED ON THROUGH THE WHOLLY SUBSIDIARY GNAL IS ASSESSEES BUSINESS IN ACCORDANC E WITH THE MEMORANDUM ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 8 OF ASSOCIATION. WITH RESPECT TO ADVANCE OF NE&SRS , THE LD. A.R. SUBMITTED THAT THE AFORESAID TRUST WAS ESTABLISHED IN THE YEA R 1985 BY THE ASSESSEE WITH THE OBJECTING OF ESTABLISHING ENGLISH MEDIUM HIGHER EDUCATION INSTITUTIONS IN THE DISTRICT OF BHARUCH TO ENSURE EDUCATIONAL FACIL ITIES FOR THE CHILDREN OF EMPLOYEES. THE ADVANCE WAS MADE TO THE SOCIETY OUT OF IMMINENT BUSINESS SENSE FOR ENSURING EDUCATIONAL FACILITIES TO THE CH ILDREN OF ITS EMPLOYEES WHICH IN TURN WOULD ENABLE IT TO ATTRACT AND RETAIN TALEN TED EMPLOYEES FOR THE PURPOSES OF ITS BUSINESS. THUS, THE LOAN IS FOR BU SINESS PURPOSE FOR EDUCATION OF CHILDREN WAS A PART AND PARCEL OF STAFF WELFARE ACTIVITY. IT WAS FURTHER SUBMITTED THAT THE FUNDS WERE GIVEN OUT OF SURPLUS FUNDS AVAILABLE WITH THE COMPANY. IT WAS, THUS, SUBMITTED THAT THE CASE OF THE ASSESSEE WAS COVERED BY HONBLE SUPREME COURTS DECISION IN CASE OF SA BUILDERS 288 ITR 1. LD. A.R. FURTHER SUBMITTED THAT ON IDENTICAL FACTS FOR A.Y. 1992-93, 93-94 & 94-95, THE REVENUE HAD PREFERRED APPEAL BEFORE HONBLE GUJ ARAT HIGH COURT. HONBLE GUJARAT HIGH COURT DISMISSED THE APPEALS OF THE REVENUE. HE PLACED ON RECORD THE COPY OF THE JUDGMENTS IN TAX APPEAL N O. 399, 400 & 401 OF 2000 AT PAGE NOS. 119 TO 126 OF THE PAPER BOOK. HE FURTHER SUBMITTED THAT IN THIS MATTER, BEFORE HONBLE HIGH COURT, THE THREE C ONCERNS TO WHICH THE ADVANCES WERE MADE WERE SAME AS IN THE PRESENT CASE . THE ASSESSEE HAS ALSO PLACED ON RECORD A COPY OF ITS BALANCE SHEET T O POINT OUT THAT THE INTEREST FREE SHARE HOLDERS FUNDS IN THE FORM OF CAPITAL AND RESERVES AND SURPLUS WAS TO THE EXTENT OF RS.84,450.27 LACS, WHICH WAS FAR I N EXCESS AMOUNT ADVANCED TO THE CONCERNS. IT WAS, THUS, SUBMITTED THAT THE ASSESSEE WAS HAVING ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 9 SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL. HE THUS SUPPORTED THE ORDER OF CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAD GRANTED LOANS AND ADVANCES TO ITS ASSOCIATES AND THE LOANS AND ADVANC ES OUTSTANDING AS ON 31.03.2001 TO ITS SUBSIDIARIES AND ITS ASSOCIATES W AS SAME AS THAT ON 31.03.2000 EXCEPT FOR AN INCREASE OF RS.0.03 LACS, WHICH SUPPORTS THE CONTENTIONS OF THE ASSESSEE THAT NO NEW LOANS AND A DVANCES HAVE BEEN GRANTED TO THE AFORESAID CONCERN DURING THE YEAR. FURTHER, FROM THE BALANCE SHEET AS ON 31.03.2001, THE ASSESSEE HAS DEMONSTRAT ED THAT IT WAS HAVING SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL. FU RTHER, THE A.O. HAS NOT BROUGHT OUT ANY TANGIBLE EVIDENCE TO SUPPORT HIS CONTENTION THAT INTEREST BEARING LOANS TAKEN BY THE ASSESSEE FOR THE PURPOSE OF ITS OWN BU SINESS HAVE BEEN USED FOR NON BUSINESS PURPOSE AND THE NEXUS BETWEEN INTEREST BEARING LOANS AND INTEREST FREE ADVANCES HAS NOT BEEN PROVED BY THE A .O. IN THE ASSESSEES OWN CASE THE HONBLE GUJARAT HIGH COURT DISMISSED T HE APPEAL OF THE REVENUE BY HOLDING AS UNDER: 10. THUS, IT IS APPARENT THAT THE SUPREME COURT WA S DEALING WITH THE QUESTION OF ALLOWABILITY OF INTEREST ON BORROWE D FUNDS WHICH WERE GIVEN AS INTEREST FREE LOAN TO THE SISTER COMPANY. IT IS IN THE CONTEXT OF THE AFORESAID FACTS THAT THE COURT HELD THAT THE TEST IN SUCH A CASE IS WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. IN THE FACTS OF THE PRESENT CASE, THE TRIBUNAL HAS UPON GOING THROUGH THE FIGURES IN THE BALANCE SHEET OF THE ASSESSEE CO MPANY FOUND AS A MATTER OF FACT THAT THE SHARE CAPITAL AND THE RES ERVES AND SURPLUS TOGETHER WITH THE ACCUMULATED DEPRECIATION, FAR EXC EEDED THE LOANS ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 10 AND ADVANCES MADE TO THE AFORESAID THREE CONCERNS. THE PERCENTAGE OF LOANS AND ADVANCES IN RELATION TO THE OWN FUNDS OF THE ASSESSEE COMPANY WAS VERY SMALL. THE TRIBUNAL UPON APPRECIATION OF THE EVIDENCE ON RECORD FOUND THAT THERE WERE SUF FICIENT FUNDS AVAILABLE WITH THE COMPANY ON WHICH NO INTEREST WAS PAID AND OUT OF WHICH LOANS AND ADVANCES TO THE AFORESAID CONCERNS COULD BE MADE. IT WAS FURTHER FOUND THAT THERE IS NO CLEAR EVIDENC E THAT THE INTEREST BEARING LOANS TAKEN BY THE ASSESSEE COMPANY FOR THE PURPOSE OF ITS OWN BUSINESS HAVE BEEN DIVERTED FOR NON-BUSINESS PU RPOSES AND THAT NO DIRECT NEXUS HAD BEEN PROVED BY THE ASSESSI NG OFFICER BETWEEN INTEREST BEARING LOANS TAKEN AND INTEREST F REE ADVANCES GIVEN. IN THE LIGHT OF THE AFORESAID FINDINGS, THE DECISION OF THE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. V. COMMISSIONER OF INCOME-TAX (APPEALS) CHANDIGARH AND ANOTHER (SUPRA) WOULD NOT BE APPLICABLE TO THE FACTS OF THE PRESENT CASE. WHEN NO INTEREST BEARING FUNDS HAVE BEEN DIVERTED TO THE SISTER CONC ERN BY WAY OF INTEREST FREE ADVANCES. THE QUESTION OF GOING INTO THE COMMERCIAL EXPEDIENCY OF SUCH LOANS WOULD NOT ARISE. IN FACT, IN THE LIGHT OF THE FINDINGS RECORDED BY THE TRIBUNAL, THE QUESTION AS FORMULATED WHILE ADMITTING THE APPEALS WOULD NOT ARISE AS ON FACTS T HERE IS NO DIVERSION OF INTEREST BEARING FUNDS TO INTEREST FRE E ADVANCES. IN THE CIRCUMSTANCES, THE TRIBUNAL WAS JUSTIFIED IN DELETI NG DISALLOWANCE MADE UNDER SECTION 36(1)(III) OF THE ACT. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE GUJ ARAT HIGH COURT, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A ) AND THUS, WE UPHOLD THE ORDER OF CIT(A) AND THEREFORE, THIS GROUND OF REVEN UE IS DISMISSED. 8. THE SECOND GROUND FOR A.Y. 2001-02 AND FIRST GRO UND FOR A.Y. 2002-03 ARE WITH RESPECT TO THE DISALLOWANCE U/S.14A:- DURI NG THE COURSE OF ASSESSMENT PROCEEDING, THE A.O. NOTICED THAT THE AS SESSEE HAD RECEIVED ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 11 DIVIDEND INCOME OF RS.10,18,43,271/- FOR A.Y. 01-02 AND RS.7,13,01,338/- FOR A.Y. 02-03. HE FURTHER NOTICED THAT THE ASSESSEE H AS RAISED FUNDS OUT OF WHICH RS.12893.23 LACS FOR A.Y. 01-02 & RS.9,664.24 LACS FOR A.Y. 02-03 HAVE BEEN UTILIZED FOR INVESTMENT IN UTI AND DOMESTIC CO MPANIES. ACCORDING TO THE A.O., INVESTMENT WORKED OUT TO 70% OF FUNDS RAISED. HE, ACCORDINGLY, MADE AN ADDITION OF RS.64 LACS I.E. 70% OF 87.73 LACS U/ S.14A. HONBLE ITAT HAD SET ASIDE THE ISSUE BEFORE THE A.O. FOR RE-CONSIDERATIO N. IN THE SECOND ROUND, THE ASSESSEE SUBMITTED THAT THE INVESTMENT IN UTI AND S HARES OF DOMESTIC COMPANIES FROM WHICH THE ASSESSEE HAS EARNED DIVIDE ND INCOME WERE MADE IN EARLIER YEARS AND NO FRESH INVESTMENT WERE MADE DURING THE YEAR. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD INCURRED NO EXPENDITURE FOR EARNING DIVIDEND. THE ASSESSEE FURTHER RELIED UPON THE DEC ISION IN THE CASE OF CIT VS. HERO CYCLES LTD. 290 ITR 398. THE CONTENTION OF TH E ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE A.O. AS HE WAS OF THE VIEW THE YE AR OF INVESTMENT OR SOURCE OF INVESTMENT DOES NOT MATTER BUT SINCE, THE ASSESS EE HAS EARNED TAX FREE DIVIDEND INCOME DISALLOWANCE U/S.14A HAS TO BE WORK ED OUT AND HE ACCORDINGLY WORKED OUT DISALLOWANCE U/S.14A OF RS 8 7.73 LACS. 9. AGGRIEVED BY THE ORDER OF THE A.O., THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A). THE CIT(A), AFTER CONSIDERING T HE SUBMISSIONS MADE BY THE ASSESSEE, DELETED THE ADDITION IN BOTH YEARS BY HOL DING AS UNDER: 5.2 I HAVE GONE THROUGH THE SUBMISSIONS OF THE AUT HORIZED REPRESENTATIVE AND THE ASSESSMENT ORDER. I HAVE AL SO GONE THROUGH THE ITAT ORDER WHICH HAS RESTORED THIS ISSUE TO THE FILE OF THE AO WITH SPECIFIC DIRECTION. THE AO OUGHT TO HAVE LOOKED IN TO ONLY THE ASPECT WITH REFERENCE TO WHICH THE ITAT HAD SET ASIDE THE ISSUE. THE ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 12 APPELLANT HAS CLEARLY ESTABLISHED THAT DIVIDEND INC OME IS EARNED OUT OF THE INVESTMENT MADE IN EARLIER YEARS. NO DISALL OWANCE OF INTEREST WAS MADE IN PAST. SIMILARLY THE AO HAS NOT ESTABLI SHED NEXUS BETWEEN INTEREST BEARING BORROWING AND INVESTMENT F ROM WHICH EXEMPT INCOME IS EARNED. THE APPELLANT HAS HUGE SH ARE CAPITAL AND RESERVES AND SURPLUS WHICH DO NOT CARRY ANY INTERES T. THE MAKING OF INVESTMENT IS NOT A DISTINCT ACTIVITY WITH AN OBJEC TIVE OF EARNING TAX FREE INCOME. THE BORROWING MADE BY THE COMPANY IS ALWAYS FOR THE PURPOSE OF BUSINESSES AND THE INCOME FROM WHICH IS TAXABLE. CONSIDERING ALL THESE ASPECTS AND ALSO CONSIDERING THE JUDICIAL PRONOUNCEMENTS CITED BY THE LD. AR, I HOLD THAT THE AO HAS ERRED IN MAKING DISALLOWANCE OF RS.64.00 LACS U/S.14A. THIS GROUND OF APPEAL IS THEREFORE ALLOWED. 10. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE I S IN APPEAL BEFORE US. 11. BEFORE US, THE LD. CIT D.R. SUBMITTED THAT THE ONUS WAS ON ASSESSEE TO PROVE THAT NO INTEREST BEARING FUND HAS BEEN USED F OR THE PURPOSE OF MAKING INVESTMENT AND WHICH THE ASSESSEE HAD NOT DISCHARGE D. HE PLACED RELIANCE ON THE DECISION OF SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD. (2008) 119 TTJ 289 (MUM ) FOR THE PROPOSITION THAT THE ONUS IS ON THE ASSESSEE TO PROVE THAT NO E XPENDITURE WAS INCURRED FOR EARNING TAX FREE INCOME. HE ALSO PLACED RELIANCE I N THE CASE OF DHANUKA AND SONS VS. CIT (2011) 339 ITR 0319. LD. A.R., ON THE OTHER HAND, SUBMITTED THAT NO NEW INVESTMENT HAS BEEN MADE BY THE ASSESSE E IN THE CURRENT YEAR. THE INVESTMENTS WERE MADE IN THE EARLIER YEARS FROM THE FUNDS GENERATED BY THE ASSESSEE. HE FURTHER PLACED RELIANCE ON THE DE CISION IN THE CASE OF ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 13 RELIANCE UTILITIES & POWER LTD. 313 ITR 340 AND IN THE CASE OF HERO CYCLES LTD. 290 ITR 398. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT NO FRESH INV ESTMENTS HAVE BEEN MADE BY THE ASSESSEE DURING THE YEAR. IT IS ALSO A FACT TH AT AS PER THE BALANCE SHEET OF THE ASSESSEE, THE INTEREST FREE FUNDS IN FORM OF CA PITAL, RESERVES AND SURPLUS ARE TO THE EXTENT OF RS.84,45,567/- LACS WHEREAS TH E INVESTMENTS ARE TO THE EXTENT OF RS.22.707/- LACS. THUS, THE SHARE HOLDER FUNDS ARE FAR IN EXCESS OF THE INVESTMENTS. IN THE CASE OF CIT VS. RELIANCE U TILITIES & POWER LTD. 313 ITR 340, THE HONBLE BOMBAY HIGH COURT HAS HELD AS UNDER: THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN , THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENTS. IN THE CASE OF CIT VS. HERO CYCLES LTD. (2010) 189 TAXMAN 50 (P&H) . THE HONBLE HIGH COURT HELD AS UNDER: THE CONTENTION OF THE REVENUE, THAT DIRECTLY OR IN DIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED, WHICH MUST BE DISAL LOWED UNDER SECTION 14A, AND THE IMPACT OF EXPENDITURE SO INCUR RED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME W HICH MAY NULLIFY THE MANDATE OF SECTION 14A, COULD NOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE. WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A C ANNOT STAND. ITA NOS. 2025 & 2026/AHD/2010 A.Y. 01-02 & 02-03 PAGE 14 IN THE PRESENT CASE, THE A.O. HAS NOT GIVEN A SPECI FIC FINDING WITH RESPECT TO THE EXPENDITURE INCURRED BY ASSESSEE FOR EARNING TA X FREE INCOME. FURTHER, THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE ARE FAR IN EXCESS OF INVESTMENTS. THUS RELYING UPON THE AFORESAID DECIS ION OF THE HIGH COURTS, WE ARE OF THE VIEW THAT IN THE PRESENT CASE, NO ADDITI ON U/S. 14A CAN BE MADE. WE, THEREFORE, FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) AND THUS, DISMISS THIS APPEAL OF THE REVENUE. 13. IN THE RESULT, THE REVENUES APPEALS FOR BOTH YEARS ARE DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 10.05.2013 SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER TRUE COPY S.K.SINHA ! ! ! ! '! '! '! '! / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. '(' ) * / CONCERNED CIT 4. *- / CIT (A) 5. !./ ), ) , 12( / DR, ITAT, AHMEDABAD 6. /45 67 / GUARD FILE. BY ORDER/ , 8/ 1 ': ) , 12( ;