DCIT, Ludhiana V. M/s Vardhman Polytex Limited, Ludhiana

ITA 396/CHANDI/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0035 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 09-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 15-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Capital asset; Earning of tax free income
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.372/CHD/2015 (ASSESSMENT YEAR : 2008-09) THE A.C.I.T., VS. M/S VARDHMAN POLYTEX LTD., CIRCLE-I, 341/K-1, MUNDIAN KHURD, LUDHIANA. P.O. SAHABANA, CHANDIGARH ROAD, LUDHIANA. PAN: AAACV5821H ITA NO.396/CHD/2015 (ASSESSMENT YEAR : 2009-10) THE D.C.I.T., VS. M/S VARDHMAN POLYTEX LTD., CIRCLE-I, 341/K-1, MUNDIAN KHURD, LUDHIANA. P.O. SAHABANA, CHANDIGARH ROAD, LUDHIANA. PAN: AAACV5821H AND ITA NO.397/CHD/2015 (ASSESSMENT YEAR : 2010-11) THE D.C.I.T., VS. M/S VARDHMAN POLYTEX LTD., CIRCLE-I, 341/K-1, MUNDIAN KHURD, LUDHIANA. P.O. SAHABANA, CHANDIGARH ROAD, LUDHIANA. PAN: AAACV5821H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.K. MITTAL, DR RESPONDENT BY : SHRI SUBHASH AGGARWAL DATE OF HEARING : 12.04.2016 DATE OF PRONOUNCEMENT : 19.04.2016 2 O R D E R PER RANO JAIN, A.M . : THESE THREE APPEALS FILED BY THE REVENUE ARE DI RECTED AGAINST THE SEPARATE ORDERS OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-1, LUDHIANA DATED 11.1.2015, 22.1.2015, 22.1.2015 FOR ASSESSMENT YEARS 2008-09, 2009-10 AND 2010-11 RESPECTIVELY. 2. SINCE THE FACTS AND CIRCUMSTANCES ARE IDENTICAL IN ALL THE APPEALS, THE SAME WERE HEARD TOGETHER AND A RE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAK E OF CONVENIENCE. WE WILL FIRST TAKE THE APPEAL OF THE R EVENUE IN ITA NO.372/CHD/2015. ITA NO.372/CHD/2015 : 3. THE GROUND NOS.1 AND 2 RAISED BY THE REVENUE RE AD AS FOLLOW: 1. THAT THE LD CIT(A) ERRED IN DELETING THE DISALLO WANCE OF RS.1,87,19,975/- U/S 14A R.W. RULE 8D RELYING ON THE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT I N THE CASE CIT VS. WINSOME TEXTILE INDUSTRIES LTD IN I.T.A. NO. 504 OF 2008 DATED 25.08.2009 BY IGNORING [SEC. 14A(3) OF I.T. ACT, 1961] AND THAT SEC. 14A R.W. RULE 8D IS AP PLICABLE FOR ASSESSMENT YEAR UNDER CONSIDERATION. 2. THAT THE LD CIT(A) ERRED IN DELETING THE DISALLOW ANCE OF RS.1,87,19,975/- U/S 14A R.W. RULE 8D RELYING ON THE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT I N THE CASE CIT VS. WINSOME TEXTILE INDUSTRIES LTD IN I.T.A. NO. 3 504 OF ,2008 DATED 25-08-2009 BY IGNORING FACT THAT THE ASSESSEE HAS NOT GIVEN PROOF THAT ENTIRE INVESTMENT HAS BEEN MADE OUT OF ITS OPERATING PROFITS AND THUS, IGNON NG THE DECISION OF APEX COURT IN THE CASE OF GODREJ AND BO YCE MANUFACTURING COMPANY LTD., 328 ITR 81WALFORT SHARE A ND STOCK BROKERS PVT. LTD 326 ITR 1 WHEREIN IT HAS BEEN HELD THAT IT IS FOR ASSESSING OFFICER TO DETERMINE AS TO W HETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE IN RELATION TO THE EARNING OF INCOME AND THE AO WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FURNISHING AN OPPORTUNITY TO TH E ASSESSEE TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUP PORT OF THE CIRCUMSTANCE. 4. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASS ESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD MADE INVESTMENTS AMOUNTING TO RS.5433.96 LACS IN THE CURRENT YEAR AS AGAINST RS.3 577.66 LACS IN LAST YEAR. THE DIVIDEND CLAIMED AS EXEMPT DURING THE YEAR WAS RS.79,735/-. ON RAISING OF ISSUE OF DISAL LOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (IN S HORT THE ACT), THE ASSESSEE CONTENDED THAT THE ENTIRE INVES TMENT HAD BEEN MADE OUT OF OPERATING CASH FLOWS AND NO EXPEND ITURE HAD BEEN INCURRED ON THE SAME. THE ASSESSING OFFICER R EJECTING THE CONTENTION OF THE ASSESSEE AND RELYING ON THE J UDGMENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., 286 ITR 1 CONCLUDED THAT IT COULD NOT BE ESTABLISHED WHETHER THE INVESTMENTS HAVE BEE N MADE FROM BORROWED FUNDS OR OPERATING INCOME OR CAPITAL. INVOKING THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.1,87,19,9 75/-. 4 5. BEFORE THE LEARNED CIT (APPEALS), FIRST CONTENT ION OF THE ASSESSEE WAS THAT NON-TRADE INVESTMENTS HAVE BE EN SEPARATELY TAXED AS SHORT TERM CAPITAL GAIN AND SIN CE NO EXEMPT INCOME HAS BEEN EARNED ON THESE, THERE IS NO LOGIC TO CONSIDER THE INVESTMENT OF RS.200.83 LACS FOR WORKI NG OF DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE SEC OND CONTENTION WAS THAT THE INVESTMENTS WERE MADE BY TH E ASSESSEE FROM ITS OWN FUNDS GENERATED FROM OPERATIO N AND NO BORROWED FUNDS HAVE NEVER BEEN USED SINCE INCEPTION . COPIES OF CASH FLOW STATEMENTS HIGHLIGHTING THE AVAILABILI TY OF SURPLUS FUNDS FOR FINANCIAL YEARS 2005-06 AND 2006- 07 WERE FILED BEFORE THE LEARNED CIT (APPEALS). RELIANCE W AS PLACED ON A NUMBER OF JUDGMENTS OF VARIOUS HIGH COURTS. AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LE ARNED CIT (APPEALS) ON PERUSAL OF CASH FLOW STATEMENTS FILED BY THE ASSESSEE, HELD THAT THE ASSESSEE HAD CASH OR CASH E QUIVALENT AS ON 31.3.2008 TO THE TUNE OF RS.1971.12 LACS. TH E LEARNED CIT (APPEALS) FURTHER DEALT WITH THE JUDGMENT OF TH E HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHE K INDUSTRIES LTD. (SUPRA) RELIED ON BY THE ASSESSING OFFICER. IN VIEW OF ANOTHER JUDGMENT OF PUNJAB & HARYANA HIGH C OURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD . (2009) 319 ITR 204 (P&H), THE LEARNED CIT (APPEALS) HELD T HAT RULE 8D CANNOT BE APPLIED AUTOMATICALLY AND NO DISALLOWA NCE COULD BE MADE WITHOUT POINTING OUT A DIRECT CONNECTION BE TWEEN THE EXPENDITURE INCURRED AND THE TAX FREE INCOME. IN THIS WAY, THE LEARNED CIT (APPEALS) ALLOWED THE GROUND RAISED BY THE ASSESSEE. 5 6. AGGRIEVED BY THIS, THE DEPARTMENT HAS COME UP I N APPEAL BEFORE US. THE LEARNED D.R. WHILE ARGUING B EFORE US, STATED THAT AS PER SECTION 14A(3) OF THE ACT,, THE PROVISIONS OF SECTION 14A APPLIES ALSO IN RELATION TO A CASE WHER E AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED BY HIM IN RELATION TO EXEMPT INCOME. AS PER RULE 8D(2), T HE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT, IS TO BE DISALLOWED AS PER THE FORMULA PRE SCRIBED IN RULE 8D(2)(II). AS PER RULE 8D, THE ASSESSING OFFI CER IS TO COMPUTE THE DISALLOWANCE EVEN WHERE THE ASSESSEE CL AIMS THAT NO EXPENDITURE HAS BEEN INCURRED OR THE ASSESSING O FFICER IS NOT SATISFIED WITH THE CORRECTNESS OF CLAIM OF EXPE NDITURE MADE BY THE ASSESSEE. A HEAVY RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF C IT VS. WALFORT SHARE & STOCK PVT. LTD. (2010) 326 ITR 1 (S C), WHEREBY IT WAS HELD THAT THE EXPENSES ALLOWED CAN O NLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A OF THE ACT. IT WAS ARGUED THAT IN VIEW OF THIS JUDGMENT, IT IS VERY CLEAR THAT THE EXPENSES INCURR ED TO EARN EXEMPT INCOME ARE NOT ALLOWABLE AT ALL EVEN WHETHER THERE IS ANY EXEMPT INCOME OR NOT. RELIANCE WAS PLACED ON T HE ORDER OF THE DELHI SPECIAL BENCH OF I.T.A.T. IN THE CASE OF CHEMINVEST LTD. VS. ITO, 121 ITD 318 FOR THE PROPOS ITION THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MA DE IN A YEAR ALSO IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. FOR THIS, RELIANCE WAS A LSO PLACED ON CIRCULAR NO.5 OF 2014 DATED 11.2.2014 OF CBDT FO R THE PROPOSITION THAT IF THE ASSESSEE DOES NOT SHOW THAT INTEREST 6 HAS BEEN INCURRED SPECIFICALLY FOR A PARTICULAR ITE M OF INCOME, THEN THE INTEREST HAS TO BE APPORTIONED AS PER RULE 8D. RELIANCE WAS PLACED ON THE ORDERS OF I.T.A.T., CHAN DIGARH BENCH IN THE CASES OF CHADHA SUPER CARS PVT. LTD. VS. ACIT IN ITA NO.1241/CHD/2011, DCIT VS. SUNDER FORGING IN ITA NO.803/CHD/2011 AND ANIL KUMAR SINGHANIA VS. ACIT ( 2014) 51 TAXMANN.COM 98 (I.T.A.T.,CHANDIGARH). A COPY OF ANOTHER ORDER OF I.T.A.T., CHANDIGARH BENCH IN THE CASE OF MUNJAL SALES CORPORATION VS. ACIT IN ITA NO.274/CHD/2015 D ATED 7.7.2015 WAS PLACED ON RECORD. 7. THE LEARNED COUNSEL FOR THE ASSESSEE STATED BEF ORE US THAT THE ASSESSEE HAD OWNED FUNDS TO THE TUNE OF RS.167,15,49,000/- WHILE THE INVESTMENTS WERE ONLY OF RS.54,33,96,000/-. THE COPY OF BALANCE SHEET TO SH OW THESE FIGURES WAS ALSO PLACED ON RECORD. IT WAS PLEADED BEFORE US THAT IN VIEW OF THE FACT THAT THE ASSESSEE IS HAVIN G OWNED FUNDS MORE THAN THE INVESTMENTS, THE PRESUMPTION HA S TO BE TAKEN THAT THE INVESTMENTS HAVE BEEN MADE OUT OF OW NED FUNDS AND NO BORROWED FUNDS HAVE BEEN UTILIZED FOR THAT PURPOSE. FOR THIS, RELIANCE WAS PLACED ON THE JUDG MENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. KAPSONS ASSOCIATES INVESTMENT P. LTD. IN ITA NO.354 OF 2013 (O&M) (P&H). FOR THE EXPENDITURE PART RELIANCE WAS PLACE D ON THE JUDGMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. DEEPAK MITTAL (2013) 361 ITR 131(P&H). 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BO TH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND 7 CONSIDERED THE MATERIAL AVAILABLE ON RECORD. AS PO INTED OUT BY Y THE LEARNED COUNSEL FOR THE ASSESSEE, FROM THE PERUSAL OF RECORD, WE OBSERVE THAT THE ASSESSEE HAS MORE THAN SUFFICIENT OWNED FUNDS TO MAKE INVESTMENTS. SINCE IT IS HAVIN G HUGE OWNED FUNDS AND IN COMPARISON TO THAT INVESTMENTS A RE OF A VERY LESSER AMOUNT, IN VIEW OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF KAPSONS A SSOCIATES INVESTMENT P. LTD. (SUPRA), WE CAN SAFELY INFER THA T THE INVESTMENTS HAVE BEEN MADE OUT OF OWNED FUNDS AND N OT FROM BORROWED FUNDS. THIS PROPOSITION HAS ALSO BEEN LAI D DOWN BY THE JURISDICTION HIGH COURT IN ANOTHER CASE OF BRIG HT ENTERPRISES P. LTD. VS. CIT IN ITA NO.224 OF 2013 ( O&M) DATED 24.7.2015 IN THE FOLLOWING TERMS : 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APP ELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF R S.10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AGREEMENT WITH THE JUDG MENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UT ILITIES & POWER LTD., (2009) 313 ITR 340, PARA-10, THAT IF THERE ARE INTEREST FREE F UNDS AVAILABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SU FFICIENT TO MEET THE INVESTMENT. 9. IN VIEW OF THE ABOVE, NO DISALLOWANCE UNDER SEC TION 14A OF THE ACT WITH RESPECT TO INTEREST EXPENDITURE CAN BE MADE. AS REGARDS THE ADMINISTRATIVE EXPENDITURE, W E ARE IN AGREEMENT WITH THE SUBMISSIONS OF THE LEARNED COUNS EL FOR THE ASSESSEE THAT IN THE CASE OF CIT VS. DEEPAK MITTAL (SUPRA), THE JURISDICTIONAL PUNJAB & HARYANA HIGH COURT HAS HELD THAT IN THE ABSENCE OF ANY SATISFACTION RECORDED BY THE ASS ESSING OFFICER AS TO THE CLAIM OF THE ASSESSEE, THE DISALL OWANCE MADE 8 BY HIM ON ACCOUNT OF ADMINISTRATIVE EXPENSES UNDER RULE 8D OF THE INCOME TAX RULES IS NOT AS PER LAW. IN VIEW OF THE ABOVE, THE ACTION OF THE LEARNED CIT (APPEALS) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SE CTION 14A OF THE ACT IS CONFIRMED. THE GROUNDS OF APPEAL RAI SED BY THE REVENUE ARE DISMISSED. 10. BEFORE PARTING, WE WOULD LIKE TO DEAL WITH THE CASE LAWS SUBMITTED BY THE LEARNED D.R. FIRST CASE IS T HAT OF HON'BLE SUPREME COURT IN WALFORT SHARE & STOCK PVT. LTD. (SUPRA). THE DECISION WAS RENDERED ON THE ISSUE OF DIVIDEND STRIPPING AND WHILE ANALYZING THE ISSUE THE INTERPR ETATION OF SECTION 14A OF THE ACT CAME BEFORE THE APEX COURT. THE FINDING GIVEN BY THE HON'BLE SUPREME COURT IS THAT THE EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. WE DO NOT HAVE ANY QUARREL WITH THE SAID P ROPOSITION AND BOW BEFORE THE HON'BLE SUPREME COURT. HOWEVER, THIS IS WHAT THE PURPORT OF SECTION 14A IS, WHILE THE ISSUE OR DISPUTE ARISES AS TO THE COMPUTATION OF AMOUNT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME ONLY. SECOND CASE RELIED ON BY THE LEARNED D.R. IS THAT OF SPECIAL BENCH OF I.T.A.T. D ELHI IN CHEMINVEST LTD. (SUPRA). WE WOULD LIKE TO STATE HE RE THAT THE SAID ORDER OF THE SPECIAL BENCH OF I.T.A.T. DELHI H AS BEEN REVERSED BY THE HON'BLE DELHI HIGH COURT IN ITA NO. 749 OF 2014 DATED 2.9.2015, WHEREBY IT HAS BEEN HELD VERY CATEG ORICALLY THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT BE MADE IN THE YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR R ECEIVED BY THE ASSESSEE. IN ALL THE ORDERS OF THE I.T.A.T., CHANDIGARH BENCH 9 RELIED ON BY THE LEARNED D.R., WE FIND THAT THE BEN EFIT OF THE JUDGMENTS OF JURISDICTIONAL PUNJAB & HARYANA HIGH C OURT IN THE CASE OF KAPSONS ASSOCIATES INVESTMENTS P. LTD. (SUPRA) AND BRIGHT ENTERPRISES P. LTD. (SUPRA) TO THE EFFEC T THAT IN THE PRESENCE OF SUFFICIENT OWNED FUNDS, PRESUMPTION CAN BE RAISED THAT THE INVESTMENTS WERE MADE OUT OF OWNED FUNDS, WAS NOT AVAILABLE TO THE COORDINATE BENCHES OF THE I.T.A.T. 11. THE GROUND NO.3 RAISED BY THE REVENUE READS AS UNDER : 3. THAT THE ORDER OF THE LD CIT(A) ERRED IN DELETI NG ADDITION OF RS.4,47,46,076/- ON ACCOUNT OF DISALLOWANCE OF INTER EST U/S 36(L)(III) ON INVESTMENT IN SHARES IGNORING THE FACT THAT THE SHARES WERE ACTUALLY ALLOCATED MUCH LATER AND THE MO NEY WAS NOT ACTUALLY USED BY ASSESSEE FOR BUSINESS PURPOSE. 12. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HA D MADE INVESTMENTS IN THE SHARE CAPITAL OF THE FOLLOWING C ASES FOR THE RELEVANT ASSESSMENT YEAR : I) OSWAL RETAIL PVT. LTD. RS.37,54,63,686/- II) OSWAL FM HAMMERLE TEXTILES LTD. RS.12,17,14,93 6/- 13. THE ASSESSING OFFICER AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE THAT THE INVESTMENTS HA D BEEN FOR THE PURPOSE OF BUSINESS, REJECTED THE SAME ON THE G ROUND THAT MAKING THE INVESTMENT IN SUBSIDIARY COMPANIES WAS N OT THE BUSINESS OF THE ASSESSEE. THE ASSESSING OFFICER PL ACED RELIANCE ON THE JUDGMENTS OF CIT VS. AMRITABEN R. S HAH, 278 ITR 777 (BOM) AND SARABHAI SONS (P) LTD. VS. CIT, 2 01 ITR 10 465 (GUJ). THEREAFTER, RELIANCE ON THE JUDGMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., 286 ITR 1 WAS PLACED. HE HELD THA T THE INVESTMENTS IN SHARE CAPITAL OF TWO SUBSIDIARY COMP ANIES COULD BE TREATED AS FROM BORROWED FUNDS AND IN THIS WAY, MADE ADDITION OF RS.4,47,46,076/- INVOKING THE PROV ISIONS OF SECTION 36(1)(III) OF THE ACT. 14. BEFORE THE LEARNED CIT (APPEALS), IT WAS SUBMI TTED THAT THESE AMOUNTS WERE INVESTED IN SHARE CAPITAL O F THE SUBSIDIARY COMPANIES SINCE THE PARENT COMPANY VARDH MAN POLYTEX LIMITED I.E. THE ASSESSEE IS MANUFACTURER O F COTTON AND DYED YARN THE FUTURE BUSINESS OPERANDI WAS TO MANUFACTURE HIGH QUALITY SHIRTING FABRIC USING THE EXISTING YARN PRODUCT BY OPENING A NEW FACILITY AT KOLHAPUR AND THAT IS WHY A SUBSIDIARY WAS FLOATED TO SERVE THE FUTURE BU SINESS OBJECTIVE OF THE COMPANY. SINCE THE ASSESSEE COMPA NY IS HOLDING MAJORITY STOCK HOLDING IN SUBSIDIARY COMPAN Y, IT CANNOT BE SAID THAT THE FUNDS WERE NOT USED FOR THE PURPOSE OF BUSINESS. ELABORATE SUBMISSIONS WERE MADE TO BRING OUT THE MEANING OF THE TERM FOR THE PURPOSE OF BUSINESS O N RECORD. RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE SUPR EME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT (2 007)158 TAXMANN.COM 74. ANOTHER ARGUMENT RAISED BEFORE THE LEARNED CIT (APPEALS) WAS THAT THE ASSESSEE COMPANY HAD INT EREST FREE FUNDS TO THE TUNE OF RS.1065.75 LACS IN THE SHARE C APITAL, RS.14769.10 LACS IN THE RESERVES AND SURPLUS AND RS .2525.30 LACS AS CASH PROFIT. THE LONG TERM BORROWINGS OR T HE WORKING 11 CAPITAL FACILITIES HAD BEEN INVESTED IN THE PURCHAS E OF FIXED ASSETS, STOCK AND BOOK DEBTS, AS IS EVIDENT FROM TH E CASH FLOW STATEMENT. IN VIEW OF THIS, IT WAS PRAYED THAT THE RE IS NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFF ICER ON ACCOUNT OF INTEREST EXPENDITURE CONSIDERING THE FAC T THAT THE BORROWED FUNDS HAVE NOT BEEN DIVERTED FOR NON-BUSIN ESS CONSIDERATION. 15. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSES SEE, THE CIT (APPEALS) HELD THAT THE INVESTMENTS WERE MA DE INTO THE SHARE CAPITAL OF SUBSIDIARY COMPANIES OUT OF NO N-BORROWED FUNDS FOR WHICH THE CASH FLOW STATEMENT HAS BEEN FI LED BY THE ASSESSEE. THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY EVIDENCE TO SHOW THAT THE BORROWED FUNDS HAVE B EEN SPECIFICALLY USED FOR MAKING THE IMPUGNED INVESTMEN TS. IT IS ONLY BY INDIRECT INFERENCE RELYING ON THE JUDGMENT OF ABHISHEK INDUSTRIES LTD. (SUPRA) THAT POSSIBILITY OF ASSESSE E USING BORROWED FUNDS FOR MAKING INVESTMENTS COULD BE ENTE RTAINED. THE LEARNED CIT (APPEALS) WAS OF THE VIEW THAT THE SAID JUDGMENT WOULD NOT BE APPLICABLE ONCE THE INVESTMEN T IS HELD TO BE FOR THE PURPOSE OF BUSINESS, AS OBSERVED BY T HE APEX COURT IN THE CASE OF S.A. BUILDERS (SUPRA). SINCE THE INVESTMENTS ARE CLEARLY INTENDED TO EXPAND THE BUSI NESS OF THE ASSESSEE IN THE LINE OF GARMENTS PRODUCTION AND RETAIL THEREOF, CANNOT BE TREATED AS NON-BUSINESS PURPOSE. THE MERE FACT THAT THERE HAS BEEN SOME DELAY IN ALLOTMENT OF SHARES, DOES NOT MEAN THAT FUNDS LYING IN THE SUBSIDIARY CO MPANY CAN BE TREATED AS NOT COMMERCIALLY EXPEDIENT. IN THIS WAY, THE 12 LEARNED CIT (APPEALS) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 16. AGGRIEVED BY THIS, THE DEPARTMENT HAS COME UP IN APPEAL BEFORE US. THE LEARNED D.R. RELIED ON THE O RDER OF THE ASSESSING OFFICER AND FURTHER SUBMITTED THAT THE FU NDS WERE GIVEN TO THE SUBSIDIARY COMPANIES ON WHICH INTEREST EXPENDITURE HAS BEEN INCURRED. THE SUBSIDIARY COMP ANIES MIGHT HAVE USED THE SAME FOR ITS OWN BUSINESS PURPO SES, WHICH CANNOT BE SAID TO BE THE BUSINESS EXPEDIENCY. THEREFORE, THE DISALLOWANCE UNDER SECTION 36(1)(III ) OF THE ACT IS AS PER LAW. 17. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT T O OUR NOTICE THAT OWNED FUNDS OF THE COMPANY ARE TO THE T UNE OF RS.167,15,49,000/- WHILE THE INVESTMENTS IN THE SHA RE APPLICATION MONEY OF SUBSIDIARY COMPANIES IS AMOUNT ING TO RS.37,54,63,646/- IN OSWAL RETAIL PVT. LTD. AND RS.12,17,14,976/- IN OSWAL FM HAMMERLE TEXTILES LTD . TOTALING RS.49,71,78,622/- ONLY. IT WAS STATED THA T IN THE JUDGMENTS OF JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES (SUPRA) AND KAPSONS ASSOCIATES INVESTME NTS P. LTD. (SUPRA), IT HAS BEEN CATEGORICALLY HELD IN THE CONTEXT OF SECTION 36(1)(III) THAT IN THE PRESENCE OF SUFFICIE NT OWNED FUNDS WITH THE ASSESSEE, IT CAN BE PRESUMED THAT TH E INVESTMENTS HAVE BEEN MADE OUT OF OWNED FUNDS AND N O BORROWED FUNDS HAVE BEEN USED IN THE SAME. IN VIEW OF THIS, IT WAS PRAYED THAT THE ACTION OF THE LEARNED CIT (A PPEALS) IN 13 DELETING THE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT MAY BE CONFIRMED. 18. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF RECORD AND SUBMISSIONS GIVEN BY THE LEARNED COUN SEL FOR THE ASSESSEE, THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE IS HAVING MORE THAN SUFFICIENT OWNED FUNDS MUCH LAR GER THAN THE TOTAL INVESTMENTS MADE IN THE SHARE CAPITAL OF THE SUBSIDIARY COMPANIES. THEREFORE, WE ARE IN AGREEME NT WITH THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESS EE IN VIEW OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES (SUPRA) AND KAPSONS ASSOCIATES INVESTMENTS P. LTD. (SUPRA), WE CAN VERY EASILY PRE SUMED THAT THE INVESTMENTS HAVE BEEN MADE OUT OF THE NON INTER EST BEARING FUNDS. THEREFORE, NO DISALLOWANCE UNDER SE CTION 36(1)(III) OF THE ACT CAN BE MADE. SINCE IT IS HEL D THAT THE INVESTMENTS WERE MADE OUT OF NON INTEREST BEARING F UNDS, IT IS AUTOMATICALLY PRESUMED THAT WITH REGARD TO THESE IN VESTMENTS THE ASSESSEE HAD NOT MADE ANY CLAIM OF INTEREST UND ER SECTION 36(1)(II) OF THE ACT. THEREFORE, THERE IS NO NEED FOR THE ASSESSEE TO PROVE THAT THE FUNDS WERE LENT FOR BUSI NESS PURPOSES OR NOT. IN VIEW OF THIS, WE DO NOT FIND A NY NEED TO INTERFERE IN THE ORDER OF THE LEARNED CIT (APPEALS) IN THIS RESPECT. THE GROUND OF APPEAL NO.3 RAISED BY THE R EVENUE IS DISMISSED. 19. THE GROUND N.4 AND 5 RAISED BY THE REVENUE REA D AS UNDER : 14 4. THAT THE ORDER OF THE LD CIT(A) ERRED IN DELETING ADDITION OF RS. 53,403/- ON ACCOUNT OF CAPITALIZATION OF CAPITAL ADVANCE TO M/S FONGS NATIONAL ENGG. CO. LTD. BY HOLDING THAT TH ESE WERE FOR 'PURCHASE OF SPARES' WHEREAS BEFORE AO THE ASSE SSEE CLAIMED THESE TO BE FOR 'MACHINERY' AND HENCE FILED DIFFERENT FACTS BEFORE LD. CIT(A). 5. THAT THE ORDER OF THE LD CIT(A) ERRED IN DELETING ADDITION OF RS. 3,386/- ON ACCOUNT OF CAPITALIZATION OF CAPITAL ADVANCE TO SURJIT SINGH & SONS BY HOLDING THAT THESE WERE FROM INTERNAL RESOURCES OF THE COMPANY WHEREAS NO SUCH C LAIM WAS MADE BEFORE A.O. 20. THE FACTS OF THE CASE ARE THAT THE ASSESSEE MA DE FOLLOWING CAPITAL ADVANCES, INTEREST PERTAINING TO THE SAME WHICH ARE NOT CAPITALIZED : I) RANA OIL MILL YEOTMAL RS.50,00,000/- II) FONGS NATIONAL ENGG. CO.LTD. RS. 7,88,074/- III) SURJIT SINGH & SONS RS. 50,000/- RS.58,33,074/- 21. THE ASSESSING OFFICER DISALLOWED THE INTEREST ON CAPITAL ADVANCE, APPLYING RATE OF 9% FOR DISALLOWIN G THE SAME. 22. BEFORE THE LEARNED CIT (APPEALS), IT WAS STATE D THAT RS.50 LACS TO RANA OIL MILLS WERE GIVEN IN AN EARLIER ASSESSMENT YEAR I.E. 2005-06 FOR PURCHASE OF DG SET S. DUE TO SOME TECHNICAL FAULT, GENERATOR WAS NOT ACCE PTED BY THE ASSESSEE COMPANY AND ADVANCE WENT IN DISPUTE AND STILL NOT WRITTEN OFF IN THE BOOKS OF ACCOUNT. THI S ADVANCE WAS MADE OUT OF CASH GENERATED FROM OPERATIONS IN ASSESSMENT YEAR 2005-06 AND NO INTEREST EXPENDITURE WAS CAPITALIZED THEREON IN THE ASSESSMENT YEAR UNDER 15 CONSIDERATION. THE SECOND ADVANCE TO FONGS NATIONA L ENGG. CO. LTD. WAS FOR PURCHASE OF SPARES ON 31.1.2008 AN D WAS MADE OUT OF OWNED FUNDS AS SURPLUS FUNDS TO THE TUN E OF RS.1971.12 LACS ARE STILL AVAILABLE WITH THE ASSESS EE COMPANY. THE ADVANCE TO SURJIT SINGH & SONS WAS GIVEN ON 7.2 .2008 FOR INSTALLATION OF WATER TANK AT THE PLANT LOCATION VI NAYAK TEXTILE MILLS AND THE SAME WAS MADE OUT OF THE SURPLUS FUND S AND NO INTEREST WAS CAPITALIZED. AFTER CONSIDERING THE SU BMISSIONS OF THE ASSESSEE, THE LEARNED CIT (APPEALS) ALLOWED THI S GROUND IN FAVOUR OF THE ASSESSEE STATING THAT THE COMPANY HAV ING SUFFICIENT INTERNAL RESOURCES FREE OF INTEREST PERM ITS TO MAKE SUCH INVESTMENTS. THEREFORE, THERE IS NO NEED TO D ISALLOW THE INTEREST EXPENDITURE. WITH REGARDS TO LAST ADVANCE GIVEN TO RANA OIL MILLS, SINCE IT WAS FOR ACQUISITION OF CAP ITAL ASSET WAS HOWEVER, CONFIRMED BY THE LEARNED CIT (APPEALS) . 23. AGGRIEVED BY THIS, THE DEPARTMENT HAS COME UP IN APPEAL. THE LEARNED D.R. RELIED ON THE ORDER OF TH E CIT (APPEALS). 24. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE F INDING OF THE CIT (APPEALS) ON THE SAID ISSUE IS RECORDED AT PAGE 36, PARA 13, WHICH READS AS UNDER : 13. I HAVE CONSIDERED THE BASIS OF THE DISALLOWANC E MADE BY THE AO IN THE ARGUMENTS OF THE AR ON THE ISSUE. IT IS APPARENT FROM THE PERUSAL OF THE ASSESSMENT ORDER THAT THE A SSESSING OFFICER AFTER CALLING FOR THE DETAILS OF INTEREST CAPITALIZED PROCEEDED TO MAKE THE DISALLOWANCE AS THE ASSESSEE COMPANY DID NOT FURNISH ANY REPLY ON THE QUERY OF THE AO ON T HE ISSUE. IT 16 IS SEEN THAT THE AMOUNT OF RS. 50 LACS GIVEN AS ADVA NCE IS MEANT FOR PURCHASE OF GENERATOR WHICH IS A CAPITAL ASSET TO BE ACQUIRED AND THEREFORE THE INTEREST PORTION- NEEDS TO BE CAP ITALIZED AS THE ASSET HAS NOT BEEN ACQUIRED AND OBVIOUSLY NOT PUT TO USE. AS SUCH THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS CONFIRMED. THE ADVANCE GIVEN TO M/S FONGS NATIONAL ENGINEERING COM PANY WAS MEANT FOR PURCHASE OF SPARE AND THEREFORE NO CAPITAL ASSE T IS EXPECTED TO COME INTO EXISTENCE WARRANTING ANY DISALLOWANCE OF I NTEREST EVEN IF IT IS PRESUMED THAT THE FUNDS FOR THE SAME WERE FRO M BORROWED SOURCES. FURTHER THE ADVANCE OF RS. 50,000/- FOR SE TTING UP OF WATER TANK, EVEN THOUGH IN THE NATURE OF CAPITAL AS SET DOES NOT CALL FOR ANY DISALLOWANCE AS COMPANY HAS SUFFICIENT INTERN AL RESOURCES FREE OF INTEREST TO PERMIT IT TO MAKE SUCH AN INVES TMENT. AS SUCH THE DISALLOWANCE MADE BY THE AO WITH REFERENCE TO A BOVE MENTIONED TWO ADVANCES IS DIRECTED TO BE DELETED. 25. ON PERUSAL OF THE SAME, WE DO NOT FIND ANY INF IRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS) SINCE HE HAS BEEN FAIR ENOUGH TO CONFIRM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST OF ADVANC E MEANT FOR PURCHASE OF GENERATOR, WHICH IS A CAPITAL ASSET TO BE ACQUIRED. HOWEVER, WITH REGARD TO TWO OTHER ADVANC ES, NO CAPITAL ASSET IS EXPECTED TO COME INTO EXISTENCE. THEREFORE, THE INTEREST ON THESE ADVANCES CAN NOT BE DISALLOWE D BY THE ASSESSING OFFICER. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISSED. 26. THE GROUND NO.6 RAISED BY THE DEPARTMENT READS AS UNDER : 6. THAT THE ORDER OF THE LD CIT(A) ERRED IN DIRECTING A.O. TO PASS A SPEAKING ORDER ON THE ISSUE OF ADJUDICATION ON REDUCTION OF PROVISION OF WEALTH TAX FROM THE STATE MENT OF TAXABLE INCOME PREPARED U/S 115JB WHEN THE LD. CIT(A) HAS NO POWERS U/S 251(1)(A) TO REMAND BACK THE ISSUE TO AO. 17 27. THE FACTS OF THE CASE ARE THAT BEFORE THE LEAR NED CIT (APPEALS) THE ASSESSEE CONTENDED THAT THE ASSESSING OFFICER DID NOT ADJUDICATED ON ITS REQUEST FOR REDUCTION OF PROVISION OF WEALTH TAX FROM THE STATEMENT OF TAXABLE INCOME PRE PARED UNDER SECTION 115JB OF THE ACT. THE LEARNED CIT (A PPEALS) AFTER REFERRING TO THE DEFINITION OF BOOK PROFITS U NDER SECTION 115JB OF THE ACT DIRECTED THE ASSESSING OFFICER TO PASS A SPEAKING ORDER ON THE CLAIM OF THE ASSESSEE. 28. AGGRIEVED BY THIS, THE DEPARTMENT HAS RAISED T HIS GROUND BEFORE US. 29. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE LEARNED CIT (APPEALS), WHILE THE LEARN ED D.R. RELIED ON THE ORDER OF THE ASSESSING OFFICER AND FU RTHER STATED THAT THE CIT (APPEALS) DOES NOT POSSESS THE POWER T O SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER. 30. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE I SSUE RAISED BY THE DEPARTMENT IN THIS GROUND OF APPEAL IS THAT SINCE THE LEARNED CIT (APPEALS) HAS NO POWER UNDER SECTION 25 1(1)(A) OF THE ACT TO REMAND BACK THE ISSUE TO THE ASSESSING O FFICER. THE DIRECTION GIVEN BY THE LEARNED CIT (APPEALS) TO THE ASSESSING OFFICER IS BAD IN LAW. ON PERUSAL OF TH E PROVISIONS OF SECTION 115JB OF THE ACT AND THE EXPLANATION APP ENDED THERETO, WE ARE IN AGREEMENT WITH THE ARGUMENT OF T HE ASSESSEE THAT THE ONLY AMOUNT TO BE ADDED BACK FOR CALCULATING THE BOOK PROFIT UNDER SECTION 115JB IS THAT OF INCOME TAX. SINCE THE ASSESSEE HAD OMITTED TO EXCL UDE WEALTH 18 TAX OUT OF COMPUTATION OF BOOK PROFIT, THE ASSESSIN G OFFICER ALSO DID NOT DO THE SAME AND HAD DISCUSSED THE WEAL TH TAX PROVISION, WE ARE ALSO IN AGREEMENT WITH THE CONTEN TION OF THE DEPARTMENT THAT THE CIT (APPEALS) HAVING NO POWERS TO SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICE R. HOWEVER, IN THE INTEREST OF JUSTICE, WE WOULD LIKE TO SEND T HIS ISSUE BACK TO THE ASSESSING OFFICER AND DIRECT HIM TO REC OMPUTE THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT AFTER EX CLUDING WEALTH TAX PROVISION ON THE SAME. THE GROUND RAISED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 31. THE APPEAL OF THE REVENUE IS DISMISSED. ITA NO.396/CHD/2015 : 32. THE GROUND NO.1 RAISED BY THE REVENUE READS A S UNDER : I) 'WHETHER IN THE LAW AND CIRCUMSTANCES OF THE CA SE, WAS LD. CIT(A) JUSTIFIED IN DELETING THE ADDITION AMOUNTING TO RS. 30,14,856 MADE U/S 14A OF INCOME TAX ACT, 1961 READ WITH RULE 8D?' 33. IT IS RELEVANT TO OBSERVE HERE THAT THE ISSUE IN GROUND NO.1 IS SIMILAR TO THE ISSUE IN GROUND NOS. 1 AND 2 RAISED BY THE REVENUE IN ITA NO.372/CHD/2015 AND TH E FINDINGS GIVEN IN ITA NO.372/CHD/2015 SHALL APPLY T O THIS CASE ALSO WITH EQUAL FORCE. 34. THE GROUND NO.2 RAISED BY THE REVENUE READS AS UNDER : 19 II) 'WHETHER IN THE LAW AND CIRCUMSTANCES OF THE C ASE, WAS LD. CIT(A) JUSTIFIED IN DELETING THE ADDITION MADE ON ACC OUNT OF DISALLOWANCE OF INTEREST AMOUNTING RS. 5,37,01,562/- MAD E U/S 36(L)(III) OF INCOME TAX ACT, 1961?' 35. THE FACTS IN GROUND NO.2 ARE SIMILAR TO THE FA CTS IN GROUND NO. 3 RAISED BY THE REVENUE IN ITA NO.372/CH D/2015 AND THE FINDINGS GIVEN IN ITA NO.372/CHD/2015 SHALL APPLY TO THIS CASE MUTATIS MUTANDIS. 36. THE GROUND NOS. 3 AND 4 ARE GENERAL IN NATURE, HENCE NEED NO ADJUDICATION. 37. THE APPEAL OF THE REVENUE IS DISMISSED. ITA NO.397/CHD/2015 : 38. THE GROUND NO.1 RAISED BY THE REVENUE READS AS UNDER : I) 'WHETHER IN THE LAW AND CIRCUMSTANCES OF THE C ASE, WAS LD. CIT(A) JUSTIFIED IN DELETING THE ADDITION AMOUNTI NG TO RS.31,95,803/- MADE U/S 14A OF INCOME TAX ACT, 1961 RE AD WITH RULE 8D?' 39. IT IS RELEVANT TO OBSERVE HERE THAT THE ISSUE IN GROUND NO.1 IS SIMILAR TO THE ISSUE IN GROUND NOS. 1 AND 2 RAISED BY THE REVENUE IN ITA NO.372/CHD/2015 AND TH E FINDINGS GIVEN IN ITA NO.372/CHD/2015 SHALL APPLY T O THIS CASE ALSO WITH EQUAL FORCE. 40. THE GROUND NOS. 2 AND 3 RAISED BY THE REVENUE ARE AS UNDER : 20 II) 'WHETHER IN THE LAW AND CIRCUMSTANCES OF THE C ASE, WAS LD. C1T(A) JUSTIFIED IN DELETING THE ADDITION MADE ON ACC OUNT OF DISALLOWANCE OF INTEREST ON INVESTMENTS FOR NON-BUSI NESS PURPOSE AMOUNTING TO RS. 5,24,99,850/- MADE U/S 36(L)(III) OF INCOME TAX ACT,1961?' III) 'WHETHER IN THE LAW AND CIRCUMSTANCES OF THE CASE, WAS LD. CIT(A) JUSTIFIED IN DELETING THE ADDITION MADE ON ACCO UNT OF DISALLOWANCE OF INTEREST ON LOANS AND ADVANCES GIVE N FOR NON- BUSINESS PURPOSE AMOUNTING TO RS. 16,56,774/- MADE U/ S 36(L)(III) OF LNCOME TAX ACT, 1961?' 41. THE FACTS IN GROUND NOS.2 AND 3 ARE SIMILAR TO THE FACTS IN GROUND NO. 3 RAISED BY THE REVENUE IN ITA NO.372/CHD/2015 AND THE FINDINGS GIVEN IN ITA NO.372/CHD/2015 SHALL APPLY TO THIS CASE MUTATIS MU TANDIS. 41. THE GROUND NOS. 4 AND 5 ARE GENERAL IN NATURE, HENCE NEEDS NO ADJUDICATION. 42. IN THE RESULT, ALL THE THREE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF APRIL, 2016. SD/- SD/- (SANJAY GARG) (RANO JAIN) JUDICIAL MEMBER ACOUNTANT MEMBER DATED : 19 TH APRIL, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH