Prabhat Dairy Pvt.Ltd, Ahmednagar V. Deputy Commissioner of Income-tax, Ahmednagar

ITA 2514/PUN/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 5869 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 10 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 25-04-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 28-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAILAJA RAI
• Keywords: Earning of tax free income; Commercial expediency; Rule 8D
• Section: 143(3); 153A; 14A; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE (THROUGH VIRTUAL COURT) BEFORE SHRI P.M. JAGTAP, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JM . / ITA NO.2514/PUN/2016 / ASSESSMENT YEAR : 2012-13 PRABHAT DAIRY PVT. LTD., RANJANKHOL, TALUKA: RAHATA, AHMEDNAGAR- 423107. PAN : AACCP8872E ....... / APPELLANT / V/S. DCIT, AHMEDNAGAR RANGE, AHMEDNAGAR. / RESPONDENT ASSESSEE BY : SHRI S. N. PURANIK REVENUE BY : SMT. SHAILAJA RAI / DATE OF HEARING : 18.09.2020 / DATE OF PRONOUNCEMENT : 24.09.2020 / ORDER PER P.M. JAGTAP, VP : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)-2, PUNE DATED 29.07.2016 FOR THE ASSESSMENT YEAR 2012-13. 2. THE ISSUE RAISED IN GROUND NO.1 RELATES TO THE DISALLOWANCE OF RS.3,36,567/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) U/S 14A OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF RE-SALE OF MILK AND MILK PRODUCTS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 29.09.2012 DECLARING TOTAL INCOME OF RS.2,10,02,830/-. AS NOTICED BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AN INVESTMENT OF RS.37,99,930/- WAS MADE BY THE 2 ITA NO.2514/PUN/2016 ASSESSEE IN THE EQUITY SHARES OF OTHER GROUP COMPANIES. SINCE THE SAID INVESTMENT WAS CAPABLE OF EARNING EXEMPT INCOME IN THE FORM OF DIVIDEND AND NO DISALLOWANCE ON ACCOUNT OF EXPENSES INCURRED IN RELATION TO THE SAID INVESTMENT WAS OFFERED BY THE ASSESSEE-COMPANY AS REQUIRED BY SECTION 14A OF THE ACT, THE ASSESSING OFFICER WORKED OUT SUCH EXPENSES OF RS.3,36,567/- BY APPLYING RULE 8D OF THE RULES AND MADE A DISALLOWANCE TO THAT EXTENT U/S 14A OF THE ACT. ON APPEAL, LD. CIT(A) CONFIRMED THE SAID DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A R.W. RULE 8D. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS AGREED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES, THIS ISSUE INVOLVED IN GROUND NO.1 IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF LAXMI STEEL AND METAL PRESSING PVT. LTD. VS. DCIT VIDE ORDER DATED 09.01.2019 PASSED IN ITA NO.2214/PUN/2016 WHEREIN IT WAS HELD BY RELYING INTER ALIA ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. CHETTINAD LOGISTICS (P) LTD., 95 TAXMANN.COM 250 THAT WHERE THERE IS NO EXEMPT INCOME IN THE RELEVANT ASSESSMENT YEAR EARNED BY THE ASSESSEE, SECTION 14A CANNOT BE INVOKED TO MAKE DISALLOWANCE OF EXPENSES. IN THE PRESENT CASE, NO EXEMPT INCOME WAS ACTUALLY EARNED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION AND THIS BEING THE UNDISPUTED POSITION, WE RESPECTFULLY FOLLOW THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF LAXMI STEEL AND METAL PRESSING PVT. LTD. (SUPRA) AND DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) U/S 14A OF THE ACT. GROUND NO.1 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 3 ITA NO.2514/PUN/2016 5. THE ISSUE RAISED IN GROUND NO.2 RELATES TO THE DISALLOWANCE OF RS.5,00,00,495/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF INTEREST EXPENSES. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER FROM THE BALANCE SHEET FILED BY THE ASSESSEE-COMPANY THAT THE INTEREST FREE ADVANCES OF RS.60.20 CRORES WERE GIVEN BY THE ASSESSEE- COMPANY TO ITS SISTER CONCERNS, NAMELY, (I) CHEESLAND AGRO INDIA PVT. LTD. AND (II) PRABHAT AGRI PROJECT DEVELOPMENT PVT. LTD.. IT WAS ALSO NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE-COMPANY HAD BORROWED LOAN OF RS.78.54 CRORES FROM CANARA BANK AND SBI ON WHICH INTEREST OF RS.8,15,32,847/- WAS PAID FOR THE YEAR UNDER CONSIDERATION. IN THIS REGARD, IT WAS EXPLAINED ON BEHALF OF THE ASSESSEE-COMPANY BEFORE THE ASSESSING OFFICER THAT IN ADDITION TO OWN FREE FUNDS OF RS.54.10 CRORES IN THE FORM OF SHARE CAPITAL AND FREE RESERVES, INTEREST FREE UNSECURED LOANS OF RS.34.95 CRORES WERE AVAILABLE AT THE RELEVANT TIME AND THE SAME BEING MORE THAN THE INTEREST FREE ADVANCES GIVEN TO THE SISTER CONCERNS, THERE WAS NO UTILIZATION OR DIVERSION OF INTEREST BEARING BORROWED FUNDS BY THE ASSESSEE-COMPANY FOR GIVING INTEREST FREE ADVANCES TO ITS SISTER CONCERNS. THIS EXPLANATION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER. ACCORDING TO HIM, THERE WAS NO DIRECT NEXUS THAT COULD BE ESTABLISHED BY THE ASSESSEE-COMPANY BETWEEN ITS OWN FUNDS, INTEREST FREE UNSECURED LOANS AND INTEREST FREE ADVANCES GIVEN TO ITS SISTER CONCERNS AND SINCE ITS OWN FUNDS HAD ALREADY BEEN CONSUMED IN FIXED ASSETS, IT WAS A CLEAR CASE OF UTILIZATION OF INTEREST BEARING BORROWED FUNDS FOR GIVING INTEREST FREE ADVANCES BY THE ASSESSEE-COMPANY TO ITS SISTER CONCERNS. HE ACCORDINGLY WORKED OUT THE INTEREST ATTRIBUTABLE TO THE ADVANCES GIVEN BY THE ASSESSEE- 4 ITA NO.2514/PUN/2016 COMPANY TO ITS SISTER CONCERNS ON PROPORTIONATE BASIS AT RS.5,00,00,495/- AND MADE DISALLOWANCE TO THAT EXTENT. 7. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST EXPENDITURE WAS CHALLENGED BY THE ASSESSEE IS AN APPEAL FILED BEFORE THE LD. CIT(A) AND THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS WERE REITERATED ON BEHALF OF THE ASSESSEE- COMPANY DURING THE APPELLATE PROCEEDINGS BEFORE THE LD. CIT(A). THE LD. CIT(A), HOWEVER, DID NOT FIND MERIT IN THE SAME AND PROCEEDED TO CONFIRM THE SAID DISALLOWANCE FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPHS NO.7.3 TO 7.3.4 OF HIS IMPUGNED ORDER :- 7.3. I HAVE EXAMINED THE FACTS OF THE MATTER. ON A PERUSAL OF THE BALANCE SHEET, AS REPRODUCED BY THE ASSESSING OFFICER IN PAGE 6 OF THE ASSESSMENT ORDER, IT IS SEEN THAT THE APPELLANT COMPANY HAS AWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES, WHICH IS RS. 54,10,84,258/- AGAINST THIS THE AMOUNT INVESTED IN FIXED ASSETS AND CAPITAL WORK-IN-PROGRESS IS RS. 93,19,70,922/-. THUS, THE APPELLANT COMPANY DID NOT HAVE SUFFICIENT OWN FUNDS EVEN FOR THE PURPOSE OF INVESTMENT IN FIXED ASSETS AND WORK-IN-PROGRESS. BESIDES SHARE CAPITALS AND RESERVES ALMOST ALL OTHER FUNDS ARE FROM LONG TERM BORROWING AND SHORT TERM BORROWINGS AND TOTAL OF SUCH BORROWINGS IS RS. 1,29,30,86,216/-. ALL THESE BORROWINGS ARE FROM VARIOUS BANKS ON WHICH INTEREST HAS BEEN PAID TO THE EXTENT OF RS. 8,15,32,847/-. THUS, THERE IS CLEAR NEXUS BETWEEN THE BORROWED FUNDS AND THE INTEREST FREE ADVANCES MADE TO THE TWO SUBSIDIARY COMPANIES. 7.3.1 IN THE CASE OF CRESCENT ORGANICS (P.) LTD. VS. DCIT, (226 TAXMAN 289), HON'BLE BOMBAY HIGH COURT HAS HELD THAT WHERE INTEREST PAID ON BORROWALS UTILIZED FOR INVESTMENTS IN A FOREIGN COMPANY WAS NOT IN COURSE OF ASSESSEE'S BUSINESS, ITS CLAIM FOR DEDUCTION UNDER SECTION 36(1)(III) WAS TO BE REJECTED. 7.3.2 HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORNERSTONE EXPORTS (P.) LTD. (67 TAXMANN.COM 345), HAS HELD THAT WHERE THE ASSESSEE ADVANCED FUNDS TO RELATED COMPANIES AT A TOWER RATE OF INTEREST AS COMPARED TO RATE OF INTEREST PAYABLE ON LOANS TAKEN THEN PROPORTIONATE DISALLOWANCE OF INTEREST IS JUSTIFIED. 7.3.3 IN THE CASE OF C. R. AULUCK AND SONS (P.) LTD. VS. CIT 49 TAXMANN.COM 21 HON'BLE PUNJAB & HARYANA HAS HELD THAT WHERE ASSESSES AFTER TAKING LOAN FROM BANK GAVE INTEREST-FREE ADVANCES TO ITS SISTER CONCERN WHICH HAD GONE INTO HUGE LOSS AND THERE WAS NO COMMERCIAL EXPEDIENCY IN ADVANCING SUCH LOAN, INTEREST ATTRIBUTABLE TO SUCH LOAN WAS TO BE DISALLOWED. 7.3.4 IN THE LIGHT OF AFORESAID DISCUSSION ON THE FACTS AS WELL AS DECISIONS CITED, I HOLD THAT THERE IS CLEAR NEXUS BETWEEN THE INTEREST BEARING FUNDS AND INTEREST FREE ADVANCES MADE TO THE SUBSIDIARY COMPANIES. ALSO NO COMMERCIAL EXPEDIENCY WAS PROVED BY THE APPELLANT IN GIVING INTEREST FREE ADVANCES TO SUBSIDIARY COMPANIES. THE ASSESSING OFFICER IS THEREFORE JUSTIFIED IN MAKING PROPORTIONATE DISALLOWANCE OF INTEREST AT RS. 5,00,00,495/-. HIS ORDER IS THEREFORE UPHELD. 5 ITA NO.2514/PUN/2016 8. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET INVITED OUR ATTENTION TO THE BALANCE SHEET OF THE ASSESSEE-COMPANY AS ON 31.03.2012 (COPY OF WHICH IS PLACED AT PAGE NO.12 OF THE PAPER BOOK) TO POINT OUT THAT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND FREE RESERVES AGGREGATING TO RS.54.10 CRORES WERE AVAILABLE WITH THE ASSESSEE-COMPANY AT THE RELEVANT TIME. HE ALSO POINTED OUT THAT INTEREST FREE UNSECURED LOAN OF RS.34.95 CRORES WAS ALSO AVAILABLE WITH THE ASSESSEE-COMPANY AND SINCE THE OWN FREE FUNDS AND INTEREST FREE UNSECURED LOANS AGGREGATING TO RS.89.05 CRORES WERE SUFFICIENT TO GIVE INTEREST FREE ADVANCES OF RS.60.20 CRORES BY THE ASSESSEE-COMPANY TO ITS SISTER CONCERNS, THERE WAS A PRESUMPTION THAT THE SAID INTEREST FREE ADVANCES TO ITS SISTER CONCERNS WERE GIVEN BY THE ASSESSEE-COMPANY OUT OF THE SAID FUNDS AND THERE WAS NO UTILIZATION OR DIVERSION OF THE INTEREST BEARING BORROWED FUNDS BY THE ASSESSEE-COMPANY FOR GIVING THE SAID ADVANCES. IN SUPPORT OF THIS CONTENTION, HE RELIED INTER ALIA ON THE FOLLOWING DECISIONS OF HONBLE BOMBAY HIGH COURT :- (I) RELIANCE UTILITIES AND POWER LTD., 313 ITR 340 (II) HDFC BANK LTD., 383 ITR 529 (III) HDFC BANK LTD., 366 ITR 505 9. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDERS OF THE AUTHORITIES BELOW IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE. SHE ALSO SUBMITTED THAT A SEARCH ACTION WAS CONDUCTED IN THE CASE OF THE ASSESSEE-COMPANY AND ITS GROUP CASES SUBSEQUENTLY ON 09.10.2015 AND THE INCRIMINATING MATERIAL FOUND IN THE SAID ACTION REVEALED THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE NOT RELIABLE. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT OWN FREE FUNDS IN THE FORM OF 6 ITA NO.2514/PUN/2016 SHARE CAPITAL AND FREE RESERVES AMOUNTING TO RS.54.10 CRORES WERE AVAILABLE WITH THE ASSESSEE-COMPANY AT THE RELEVANT TIME WHILE INTEREST FREE UNSECURED LOAN OF RS.34.95 CRORES WAS ALSO AVAILABLE WITH THE ASSESSEE-COMPANY. THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE-COMPANY BEFORE THE AUTHORITIES BELOW RIGHT FROM THE BEGINNING WAS THAT SINCE THE SAID INTEREST FREE FUNDS AGGREGATING TO RS.89.06 CRORES WERE SUFFICIENT TO GIVE INTEREST FREE ADVANCES OF RS.60.20 CRORES TO ITS SISTER CONCERNS, THERE WAS NO UTILIZATION OR DIVERSION OF INTEREST BEARING BORROWED FUNDS FOR GIVING THE SAID ADVANCES AND NO DISALLOWANCE ON ACCOUNT OF INTEREST FREE FUNDS WAS CALLED FOR. THE AUTHORITIES BELOW, HOWEVER, DID NOT ACCEPT THIS CONTENTION RAISED ON BEHALF OF THE ASSESSEE- COMPANY ON THE GROUND THAT THE ASSESSEE-COMPANY COULD NOT ESTABLISH A DIRECT NEXUS BETWEEN THE INTEREST FREE FUNDS AND INTEREST FREE ADVANCES GIVEN TO ITS SISTER CONCERNS. IN THIS REGARD, IT IS OBSERVED THAT THE ASSESSEE-COMPANY AT THE RELEVANT TIME HAD BOTH THE INTEREST FREE FUNDS AND INTEREST BEARING FUNDS AVAILABLE WITH IT AND THERE IS NO DISPUTE THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE-COMPANY AT THE RELEVANT TIME WERE MUCH MORE THAN THE INTEREST FREE ADVANCES GIVEN BY IT TO ITS SISTER CONCERNS. IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA) CITED BY THE LD. COUNSEL FOR THE ASSESSEE, IT WAS HELD BY THE HONBLE BOMBAY HIGH COURT THAT WHERE BOTH THE INTEREST FREE FUNDS AND INTEREST BEARING FUNDS ARE AVAILABLE AND THE INTEREST FREE FUNDS ARE MORE THAN THE INVESTMENTS MADE, THE PRESUMPTION IS THAT THE INVESTMENT IN TAX FREE SECURITIES WOULD HAVE BEEN MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND SINCE THE INTEREST FREE FUNDS OF ITS OWN FUNDS AVAILABLE WITH THE ASSESSEE-COMPANY IN THE FORM OF SHARE CAPITAL OR FREE RESERVES WERE SUBSTANTIALLY MORE THAN THE CORRESPONDING INVESTMENTS MADE, NO DISALLOWANCE ON ACCOUNT OF INTEREST COULD BE MADE. THIS DECISION RENDERED IN THE CASE OF 7 ITA NO.2514/PUN/2016 RELIANCE UTILITIES AND POWER LTD. (SUPRA) WAS SUBSEQUENTLY FOLLOWED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD. (SUPRA) TO HOLD THAT THE DISALLOWANCE MADE ON ACCOUNT OF INTEREST WAS NOT SUSTAINABLE. IN OUR OPINION, THE ANALOGY OF THESE DECISIONS RENDERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CONTEXT OF DISALLOWANCE OF INTEREST U/S 14A IS EQUALLY APPLICABLE IN THE PRESENT CASE INVOLVING THE DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT AND SINCE THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE- COMPANY AT THE RELEVANT TIME WERE SUBSTANTIALLY MORE THAN THE INTEREST FREE ADVANCES GIVEN BY IT TO ITS SISTER CONCERNS, WE ARE OF THE VIEW THAT THERE WAS A PRESUMPTION THAT INTEREST FREE ADVANCES TO ITS SISTER CONCERNS WERE GIVEN BY THE ASSESSEE-COMPANY OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE- COMPANY AT THE RELEVANT TIME AND THERE BEING NO UTILIZATION OR DIVERSION OF INTEREST BEARING BORROWED FUNDS FOR GIVING THE SAID ADVANCES, THE DISALLOWANCE ON ACCOUNT OF INTEREST MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) IS NOT SUSTAINABLE. WE ACCORDINGLY DELETE THE SAID DISALLOWANCE AND ALLOW GROUND NO.2 OF THE ASSESSEES APPEAL. 11. AS REGARDS THE CONTENTION RAISED BY THE LD. DR TO SUPPORT THE CASE OF THE REVENUE ON THIS ISSUE BASED ON THE INCRIMINATING MATERIAL ALLEGEDLY FOUND DURING THE COURSE OF SEARCH SUBSEQUENTLY CONDUCTED IN THE CASE OF THE ASSESSEE ON 19.02.2015, WE ARE OF THE VIEW THAT THE SAME IS NOT RELEVANT IN THE PRESENT CONTEXT INVOLVING THE ISSUE OF DISALLOWANCE OF INTEREST MADE IN THE REGULAR ASSESSMENT U/S 143(3) OF THE ACT WHICH HAD ALREADY BEEN FINALIZED BEFORE THE DATE OF SEARCH AND THE SAME WOULD BE RELEVANT FOR THE PURPOSE OF ASSESSMENT U/S 153A WHICH IS TO BE FRAMED SEPARATELY AND INDEPENDENTLY BY THE ASSESSING OFFICER IN PURSUANCE OF SEARCH CONDUCTED IN THE CASE OF THE ASSESSEE. AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD, SUCH PROCEEDINGS 8 ITA NO.2514/PUN/2016 U/S 153A WERE INDEED INITIATED SEPARATELY BY THE ASSESSING OFFICER EVEN FOR THE YEAR UNDER CONSIDERATION AND THE SAID MATTER HAS ALREADY BEEN SETTLED VIDE THE ORDER OF INCOME TAX SETTLEMENT COMMISSION DATED 18.01.2008. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 24 TH DAY OF SEPTEMBER, 2020. SD/- SD/- ( PARTHA SARATHI CHAUDHURY ) ( P.M. JAGTAP ) JUDICIAL MEMBER VICE PRESIDENT / PUNE; / DATED : 24 TH SEPTEMBER, 2020. SUJEET / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(A)-2, PUNE. 4. THE PR. CIT-1, PUNE. 5 . , , , / DR, ITAT, A BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE.