The Asstt. Commissioner of Income Tax, Jalandhar V. M/s Kapsons Industries Ltd., Jalandhar

ITA 410/ASR/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9598 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 31-07-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A N MISRA
• Assessee Lawyers: S K VATTA
• Keywords: Business income; Depreciation; Business expenditure; Rule of consistency; Earning of tax free income; Proportionate interest; Notional interest; Commercial expediency
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR (CAMP AT JALANDHAR) BEFORE SH. A.D.JAIN, JUDICIAL MEMBER AND SH. T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A NO.410(ASR)/2015 ASSESSMENT YEAR: 2012-13 ASST. CIT, RANGE-1, JALANDHAR. PAN:AACFG0536D VS. M/S. KAPSONS INDUSTRIES LTD., G.T. ROAD, SURANUSSI, JALANDHAR. PAN:AAACK9887G (APPELLANT) (RESPONDENT) APPELLANT BY: SH. A. N. MISRA (DR) RESPONDENT BY: SH. S.K. VATTA (CA) DATE OF HEARING: 24.06.2016 DATE OF PRONO UNCEMENT: 12.08.2016 ORDER PER T. S. KAPOOR (AM): THIS IS AN APPEAL FILED BY REVENUE AGAINST THE ORDE R OF LEARNED CIT(A), JALANDHAR DATED 25.05.2015 FOR ASST. YEAR:2 012-13. 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF A PPEAL. (I) THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.73, 47,652/- WHICH WAS MADE BY THE A.O. OUT OF INTEREST AND OTHER EXPENSES UNDER SECTION 14A OF THE INCOME TAX ACT,1961. (II) THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.4,2 0,000/- WHICH WAS MADE BY THE A.O. BY DISALLOWING PROPORTIONATE INTEREST O N INTEREST FREE ADVANCES U/S 36(1) (III) OF THE INCOME TAX ACT,1961. (III) IT IS PRAYED THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 2 3. THE LEARNED DR, AT THE OUTSET RELIED UPON THE OR DER OF ASSESSING OFFICER WHEREAS THE LEARNED AR RELIED UPON THE ORDE R OF LEARNED CIT(A). THE LEARNED AR FURTHER RELIED UPON THE ORDER OF HON BLE TRINUBAL DECISION IN ITA NO.719(ASR)/2014 FOR ASST. YEAR:2011-12, WHE RE THE APPEAL OF REVENUE IN THE CASE OF ASSESSEE ITSELF UNDER SIMILA R FACTS AND CIRCUMSTANCES WAS DISMISSED BY THE HONBLE TRIBUNAL . 4. WE FIND THAT ASSESSING OFFICER DURING ASSESSMENT PROCEEDINGS HAD MADE THE DISALLOWANCE U/S 14A OF THE INCOME TAX ACT , TO THE EXTENT OF RS.73,47,652/- AND ALSO MADE DISALLOWANCE U/S 36(1) (III) OF THE ACT TO THE EXTENT OF RS.4,20,000/-. THE ASSESSING OFFICER ALSO MADE FURTHER ADDITIONS WHICH ARE NOT IN APPEAL BEFORE US. THE LE ARNED CIT(A), HOWEVER, DELETED THE ADDITIONS BY HOLDING AS UNDER: 5.2 I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSE SSING OFFICER AS MADE BY HIM IN THE ASSESSMENT ORDER AS WELL AS THE WRITT EN SUBMISSIONS FILED BY THE ASSESSEE COMPANY VIDE LETTER DATED 22.05.201 5 IN CONNECTION WITH THE ISSUE UNDER REFERENCE. I HAVE ALSO CONSIDERED V ARIOUS JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE AS WELL AS BY THE ASSESSING OFFICER ON THE ISSUE UNDER REFERENCE. ON CAREFUL CO NSIDERATION OF THE RIVAL CONTENTIONS, IT HAS BEEN NOTICED THAT THE ASSESSING OFFICER HAS MADE THE IMPUGNED ADDITION BY INVOKING THE PROVISIONS OF SEC TION 14A OF THE ACT AS THE ASSESSEE COMPANY HAS MADE INVESTMENT/CAPITAL CO NTRIBUTION IN THE SISTER CONCERNS WHICH WILL FETCH EXEMPT INCOME. ON THE OTHER HAND, THE CONTENTIONS AND SUBMISSIONS OF THE ASSESSEE COMPANY BASICALLY EMPHASIZE THAT THE ASSESSEE COMPANY HAD SUBSTANTIAL OWN CAPITAL BASE BY WAY OF SHARE CAPITAL AND BY WAY OF FREE RES ERVES IN THE A.YS. 2011-12 AND 2012-13 OF RS.77.20 CRORES AND RS . 117.39 CRORES RESPECTIVELY ON WHICH NO INTEREST IS BEING P AID BY THE ASSESSEE COMPANY. IT WAS ALSO CONTENDED THAT THE AS SESSEE COMPANY ALSO HAVE NET PROFIT BEFORE DEPRECIATION TO THE EXTENT OF RS.17.73 CRORES AND RS. 14.32 CRORES IN THE A.YS. 2 011-12 & 2012- 13 RESPECTIVELY WHICH ARE INTERNAL ACCRUALS AND THE REFORE THE COMPANY HAD SUBSTANTIAL RESOURCES OF ITS OWN TO MAK E THE INVESTMENTS IN SHARE CAPITAL OR SHARE APPLICATION O R PARTNER CAPITAL OF ITS SISTER/SUBSIDIARY COMPANIES/CONCERNS AND NO FUNDS WERE ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 3 BORROWED TO MAKE THE SAID INVESTMENTS/CONTRIBUTION. THE LD. AR OF THE ASSESSEE COMPANY ALSO STRONGLY CONTENDED WIT H THE FACTS AND FIGURES OF THE WORKING CAPITAL LOANS RAISED FRO M BANKS AND THE COMPANIES AND WITH REGARD TO EMPLOYMENT OF THE TOTA L FUNDS IN THE REQUISITE WORKING CAPITAL SUCH AS STOCKS/STORES, SU NDRY DEBTORS AND OTHER CURRENT ASSETS. IN THE OPINION OF THE LD. AR OF THE ASSESSEE COMPANY INVESTMENT IN THE WORKING CAPITAL FAR EXCEEDED THE WORKING CAPITAL LOANS TAKEN FROM THE BANKS AND THE SAID WORKING CAPITAL LOANS WERE KEPT DEPLOYED FOR THE PU RPOSES IT WAS SANCTIONED AND RELEASED WHICH WERE ALSO BEING REGUL ARLY MONITORED BY THE BANKERS. IT WAS, THEREFORE, CONTENDED THAT N O AMOUNT OF WORKING CAPITAL FUNDS COULD BE ASSUMED OR PRESUMED OR SAID TO HAVE BEEN DEPLOYED/OR UTILIZED FOR MAKING THE INVES TMENTS IN THE SISTER/SUBSIDIARY CONCERNS OR UTILIZED FOR CONTRIBU TION AS PARTNERS CAPITAL. IT WAS ALSO CONTENDED THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT HAVE EVER BEEN MADE IN THE CASE OF T HE ASSESSEE COMPANY IN ANY OF PREVIOUS ASSESSMENT YEARS EXCEPT A.Y. 2010-11 AND 2011-12 ALTHOUGH THE ASSESSMENTS IN THOSE YEARS HAVE ALSO BEEN FRAMED UNDER SCRUTINY UNDER SECTION 143(3) OF THE ACT UNDER SIMILAR SITUATIONS AND NOTHING NEW HAS TRANSPIRED I N THE ASSESSMENT YEARS IN QUESTION WHICH WOULD NECESSITAT E TO HAVE A DIFFERENT AND CONTRARY VIEW. IT WAS FURTHER CONTEND ED THAT THE DISALLOWANCES MADE BY THE ASSESSING OFFICER UNDER T HE PROVISIONS OF SECTION 14A OF THE ACT IS CONTRARY TO THE PRINCI PLES AND RULES OF CONSISTENCY AND OF NATURAL LAW AND JUSTICE. IT HAS AGAIN BEEN CONTENDED THAT SIMILAR DISALLOWANCE MADE BY THE ASS ESSING OFFICER IN A.YS. 2010- 11 AND 2011-12 HAS BEEN DELETED BY M E IN THE CASE OF THE ASSESSEE ITSELF. 5.3. IN SUPPORT OF THE ABOVE SUBMISSIONS/CONTEN TIONS, THE LD. AR OF THE ASSESSEE COMPANY HAD ALSO RELIED UPON THE JUDGMENTS OF THE HONORABLE APEX COURT IN THE CASE OF CIT VS SHIV SAGAR ESTATE REPORTED AT (2002) 177 CTR 107 / 257 ITR 59 (SC), H ONORABLE DELHI HIGH COURT IN THE CASE OF CIT VS ARJ SECURITY PROMOTERS REPORTED AT (2003) 264 ITR 276 (DELHI), HONORABLE P UNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. MARUDHAR CHEMICALS & PHARMACEUTICALS (P) LIMITED REPORTED AT 319 ITR 75, CIT VS MODEL EXIMS (2014) 267 CTR 177, HONORABLE PUNJAB & HARYAN A HIGH COURT IN THE CASE OF HERO CYCLES LIMITED REPORTED A T 323 ITR 518, CIT CHANDIGARH-II VS M/S WINSOME TEXTILE INDUSTRIES LIMITED P & H) [ITA NO. 504 OF 2008], CIT VS GLENMARK PHARMACEU TICALS LIMITED REPORTED AT (2013) 85 DTR 169 (MOMBAY), CIT VS RELIABLE UTILITIES & POWER LIMITED REPORTED AT (2009) 313 IT R 340 (BOMBAY) AND PLETHORA OF OTHER SUCH JUDGMENTS ON THE ISSUE U NDER REFERENCE (DETAILS IN WRITTEN SUBMISSIONS AS REPRODUCED ABOVE ). THE GIST OF- THE ARGUMENTS OF THE LD. AR OF THE ASSESSEE WITH FA CTS HAVE ALSO BEEN GIVEN IN PARA 5.2 ABOVE. ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 4 5.4. I HAVE CAREFULLY CONSIDERED THE ARGUMENT OF THE LD. AR OF THE ASSESSEE COMPANY, FACTS BROUGHT ON RECORD AND VARIO US JUDICIAL PRONOUNCEMENTS RELIED UPON BY HIM IN SUPPORT OF HIS ARGUMENTS. 5.5.1 FIRSTLY THE FINANCIAL STATEMENTS FOR THE FINA NCIAL YEARS 2008- 09, 2009-10, 2010-11 AND 2011-12 WHICH HAVE BEEN BR OUGHT ON RECORD BY THE LD. AR OF THE ASSESSEE COMPANY IN EAR LIER YEARS AND ALSO IN CURRENT YEAR, SUPPORT THE CONTENTIONS, FACT S AND ARGUMENTS OF THE ASSESSEE COMPANY AS THE ASSESSEE COMPANY HAD SUBSTANTIAL OWN CAPITAL BASE AND FREE RESERVES BESIDES SUBSTANTIAL CURRENT YEAR PROFITS BEFORE DEPRECIATION (SINCE DEPRECIATION IS NOT A CA SH OUT FLOW) TO THE EXTENT OF RS. 14.32 CRORE WHICH FOR EXCEEDS THE EXT ENT OF INVESTMENTS IN THE SHARE CAPITAL OF SUBSIDIARY SISTER COMPANY OR O THER ALLIED COMPANY AND A CAPITAL CONTRIBUTION IN A SISTER PARTNERSHIP CONCERN ON RECORD. THE INVESTMENT IN SUCH SHARES IS MERELY RS.2.75 CRORES IN THE FINANCIAL YEAR 2008-09 AS AGAINST FREE FUNDS OF RS. 12.38 CRORES A ND ONLY RS. 44.45 LACS AS AGAINST PROFIT OF RS. 14.63 CRORES IN THE FINANC IAL YEAR 2009-10 AND RS.50.00 LACS IN FINANCIAL YEAR 2011-12 AS AGAINST PROFITS OF RS. 14.32 CRORES IN A.Y. 2012-13. APART FROM THIS, THE CONTRI BUTION AS A PARTNER IN A SISTER CONCERN DURING CURRENT YEAR IS AT RS.6,74, 33,974/- AS AGAINST PROFITS OF RS.14.32 CRORES IN THE FINANCIAL YEAR 20 11-12. MORE SO, THE WORKING CAPITAL LIMIT AS RAISED FROM BANKS AND OTHE RS ALSO REMAINED DEPLOYED IN WORKING CAPITAL REQUIREMENTS OF THE STO CKS/STORES, SUNDRY DEBTORS AND OTHER CURRENT ASSETS, INVESTMENT IN WHI CH APPARENTLY FAR EXCEEDED SUCH WORKING CAPITAL LIMIT AVAILMENT AND T HE ASSESSING OFFICER HAS ONLY AVERRED ON PRESUMED MIXED USE OF FUNDS. 5.5.2 SECONDLY IT IS ALSO BORNE OUT FROM THE RECORD S THAT NO SUCH DISALLOWANCES/ADDITIONS HAVE BEEN MADE UNDER SECTIO N 14A OF THE ACT IN ANY OF THE PAST ASSESSMENT YEARS UNDER SIMILAR CIRC UMSTANCES EXCEPT IN A.YS. 2010-11 AND 2011-12 WHICH ALSO STAND DELETED? THE PLEA OF THE ASSESSING OFFICER THAT EVERY YEAR IS AN INDEPENDENT YEAR AND THUS DISALLOWANCE/ADDITIONS CAN BE MADE/SUSTAINED IS ALS O NOT WELL FOUNDED ON THE FACTS OF THE CASE AND IN VIEW OF THE RULES A ND PRINCIPLES OF CONSISTENCY AS UPHELD BY THE VARIOUS DECISIONS OF T HE HONORABLE SUPREME COURT AND OTHER HONORABLE COURTS. THE RULE OF CONSISTENCY IS A FACET OF RULE OF RES JUDICATA BUT BROADER IN CONCEP T THAN RES JUDICATA RULE. THE WELL-SETTLED .-PRINCIPLE OF CONSISTENCY HAS BEE N UNIFORMLY FOLLOWED BY COURTS IN THE COUNTRY TO HOLD THAT THE VIEW ADOPTED BY THE ASSESSING OFFICER ON A LEGAL ISSUE IN A CASE OR CASES FOR A Y EAR OR YEARS SHOULD NOT BE DEVIATED FROM THE SAME CASE OR IN OTHER CASE S IN SUBSEQUENT PROCEEDINGS UNLESS THERE IS A CHANGE IN THE LEGAL O R FACTUAL SCENARIO, JUSTIFYING DEPARTURE THERE FROM. THE DELH I HIGH COURT IN THE CASE OT CIT VS. A.R.J SECURITY PRINTERS (2003) 183 CTR (DEL) 323/( 2003) 264 ITR 276 ( DEL) HAS FOLLOWED THIS PR INCIPLE . WHEN THE DEPARTMENT WANTED TO NEGATE THE CLAIM OF THE AS SESSEE, WHICH WAS ACCEPTED IN THE PAST, THE HONORABLE HIGH COURT HAD HELD AS UNDER:- ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 5 HAVING ACCEPTED IN THREE ASSESSMENT YEARS THAT THE ASSESSEE'S BUSINESS ACTIVITY OF PRINTING LOTTERY TICKETS FALLS WITHIN THE AMBIT OF SECTION 80-1, THE REVENUE CANNOT BE ALLOWED TO TURNAROUND AND CONTEND THAT TH E DEDUCTION UNDER THE SAID SECTION IS NOT ALLOWABLE IN RESPECT OF THE ASSESSME NT YEARS IN QUESTION. THE SPECIAL LEAVE PETITION FLED BY THE REVENUE AGAI NST THIS JUDGEMENT STANDS DISMISSED IN (2004) 266 ITR (ST.) 4'. THE HONORABLE SUPREME COURT HAS ALSO AFFIRMED THIS VIEW IN SEVERAL CASES. IN CIT VS. SHIVSAGAR ESTATE (2002) 1 77 CTR (SC) 107: (2002) 257 ITR 59 (SC), IT HAS BEEN HELD THAT THE LEASE RENT FROM CERTAIN PROPERTY WAS SEPARATELY ASSESSABLE IN THE HANDS OF INDIVIDUAL CO-OWNERS AND WAS NOT ASSESSABLE IN THE HANDS OF ASSOCIATION OF PERSONS .THE COURT DECIDED THAT HAVI NG REGARD TO THE FACT THAT NO APPEAL HAD BEEN CARRIED AGAINST THE OR DERS OF IDENTICAL ASSESSMENT FOR THE PREVIOUS YEAR, THE CIVIL APPEALS AND SPECIAL LEAVE PETITIONS WERE TO BE DISMISSED . 5.5.3 THIRDLY, EVEN ON THE PRINCIPLE OF COMMERCIAL EXPEDIENCY, THE DECISION IN THE CASE OF SA BUILDERS CASE 288 ITR 1 (SC) WHEREIN THE HONORABLE SUPREME COURT HAS HELD THAT THE ISSUE OF LENDING OF FUNDS TO THE SISTER CONCERN SHOULD HAVE BEEN EXAMIN ED FROM THE POINT OF VIEW AS TO WHETHER THIS HAS BEEN DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY IS QUITE RELEVANT. IN THE SAI D JUDGMENT IT WAS NOTED THAT THE EXPRESSION FOR THE PURPOSE OF B USINESS INCLUDED EXPENDITURE VOLUNTARILY INCURRED FOR COMME RCIAL EXPEDIENCY AND IT WAS IMMATERIAL IF A THIRD PARTY A LSO BENEFITTED THEREBY. IT WAS HELD THAT THE HIGH COURT AS WELL AS THE TRIBUNAL AND OTHER INCOME TAX AUTHORITIES SHOULD HAVE APPROA CHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWE D FUNDS FROM THIS ANGLE AND THEY SHOULD HAVE INQUIRED AS TO WHETHER T HE INTEREST FREE LOAN WAS GIVEN TO THE SISTER COMPANY AS A MEASURE O F COMMERCIAL EXPEDIENCY AND IF IT WAS, IT SHOULD HAVE BEEN ALLOW ED. THEY FURTHER HELD THAT THE EXPRESSION COMMERCIAL EXPEDIENCY WA S AN EXPRESSION OF WIDE IMPORT AND INCLUDED SUCH EXPENDI TURE AS A PRUDENT BUSINESSMAN INCURRED FOR THE PURPOSE OF BUS INESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, BUT IT WAS ALLOWABLE IF IT WAS INCURRED ON GROUND OF COMMERCIAL EXPEDIENCY. THE HONORABLE JURISDICTIONAL HIGH COURT HAVE ALSO, IN THEIR DECISION IN THE CASE OF CIT VS MARUDHAR CHEMICALS & PHARMACEUTICALS (P) LTD 319 1TR 75, HEL D THAT DISALLOWANCE OF INTEREST IN RESPECT OF INTEREST FRE E ADVANCE TO SISTER CONCERN WAS NOT WARRANTED WHERE THE ADVANCE WAS GIV EN AS A MEASURE OF COMMERCIAL EXPEDIENCY. THEY HAVE HELD THAT IT WAS NOT RELEVANT AS TO WHETHER THE ASSESSEE HAD UTILIZE D THE BORROWED AMOUNT IN ITS OWN BUSINESS OR HAD ADVANCED THE SAME AS INTEREST FREE LOAN TO ITS SISTER CONCERN, BUT HELD THAT THER E SHOULD BE SOME NEXUS BETWEEN THE FUNDS AND PURPOSE OF BUSINESS. TH E HONORABLE HIGH COURT FOLLOWED THE DECISION OF THE HONORABLE A PEX COURT IN THE CASE OF S.A. BUILDERS (SUPRA) WHILE REFERRING T O THE EARLIER DECISION OF THE HONORABLE JURISDICTIONAL HIGH COURT IN THE CASE OF ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 6 ABHISHEK INDS LTD. 286 ITR 1 (P&L1). IN MY OPINION, THE ASSESSEE HAS RIGHTLY CONTENTED THAT THE INVESTMENTS IN EQUIT Y SHARES OF KAPSONS INSULATIONS PVT. LTD., WHICH IS A SUBSIDIAR Y COMPANY AND COMPANY HOLDS MORE THAN 71.35% OF EQUITY IN THE SAI D COMPANY, WHICH IS FOR PURPOSES OF EXPANSION OF BUSINESS BASE OF COMPANY AS BOTH THE END PRODUCTS PRODUCED/MANUFACTURED BY THE COMPANY AND THE SAID SUBSIDIARY COMPANY ARE FOR MANUFACTURE OF ELECTRIC MOTORS/TRANSFORMERS AND PRODUCTS MANUFACTURED BY ELECTROMAGNETIC UNITS. THEREFORE, THE END USE PRODU CT OF ELECTRICAL STAMPINGS AND SE COPPER WIRE ARE WITHOUT WHICH THE SAID ELECTRICAL MOTORS, TRANSFORMER OR ELECTROMAGNETIC FINISHED PRO DUCTS CANNOT BE MANUFACTURED AND FUNCTIONAL AT ALL. SIMILARLY, T HE CONTRIBUTION AS A PARTNER CAN BE ASSUMED OUT OF OWN FUNDS AS THE ASSESSEE COMPANY HAS HUGE CAPITAL BASE. 5.6 ON THE DISALLOWANCE OF INTEREST AND OTHER EXPAN SES IN RESPECT OF SUCH INVESTMENTS IN SHARES OF ALLIED OR OTHER CONCERNS, THE DECISION OF THE JURISDICTIONAL HONORABLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLE LIMITED (2012) 323 ITR 518 ON THE SUBJECT MATTER OF APPARENT LARGE INTEREST FREE OWN SHARE CAPITAL BASE, FREE RESERVE & SURPLUS IS QUITE RELEVANT AND SQUARELY APPLIES IN THE CASE OF THE ASSESSEE COMPANY. THE HONORABLE JURISDICTIONAL HIGH COURT IN THE SAID CASE HAS HELD AS UNDER :- THE CONTENTION OF THE REVENUE THAT DIRECTLY OR IND IRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECT ION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CAN NOT BE ALLOWED TO BE SE T OFF AGAINST THE BUSINESS INCOME WHICH MAY MOLLIFY THE MANDATE OF SECTION 14A , CAN 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 TINDER SECTION 14A CAN NOT S TAND. THE HON 'ABLE HIGH COURT HAVE FURTHER HELD: * WE HAVE TAKEN THIS VIEW EARLIER ALSO IN ITA NO. 504 OF2008 (COMMISSIONER OF INCOME TAX CHANDIGARH II VS M/S WINSOME TEXTILE IND USTRIES LIMITED, CHANDIGARH) DECIDED ON 25.08.2009, WHEREIN IT WAS OBSERVED AS U NDER: 6. CONTENTION RAISED ON BEHALF OF THE REVENUE IS TH AT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF ITS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LIMITED (2006) 286 ITR 1 AND THEREFORE, DISALLOWANCE UNDER SECTION 14A WAS JUSTIFIED. 7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION, JUDGME NT OF THIS COURT IN ABHISHEK INDUSTRIES (SUPRA) WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD T HAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PURPOS E AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH TH E BUSINESS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN TH E PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN S UCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 7 5.7 SIMILARLY, THE OTHER HONORABLE HIGH COURTS HAVE WHILE DECIDING ABOUT THE APPLICABILITY OF SECTION 14A OF THE ACT A ND DISALLOWANCE OF INTEREST AND EXPENDITURE VIS A VIS AVAILABILITY OF OWN CAPITAL FUNDS, FREE RESERVES AND SUFFICIENCY OF INTERNAL AC CRUAL GENERATIONS HAVE ALSO HELD IN FAVOUR OF THE ASSESSEE. IN CIT VS RELIABLE UTILITIES & POWER LIMITED (2009) 313 1TR 340 (BOMBAY), THE HO NORABLE COURT HAVE HELD AS UNDER:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL YEAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INT EREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE M ADE OUT OF INTEREST BEARING FUNDS. 5.7.1 THE HONORABLE BOMBAY HIGH COURT IN THE CASE O F CIT VS GLENMARK PHARMACEUTICAL LTD AS REPORTED IN (2013) 85 DTR 169 DECIDED ON 08.01.2013 HAS HELD AS UNDER:- BUSINESS EXPENDITURE - DISALLOWANCE UNDER S. 14A - NO EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME - WHETHER OR NOT ASSESSEES EXPENSES WERE INCURRED FO R EARNING EXEMPT INCOME IS PURE QUESTION OF FACT - TRIBUNAL HAS ARRIVED AT A FINDING OF FACT THAT NO EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME AS THE INVESTMENTS WERE MADE FROM ITS OWN FU NDS AND NOT BORROWED FUNDS REVENUE HAS NOT BEEN ABLE TO SHOW HOW THE FINDING O F FACT ARRIVED AT BY THE TRIBUNAL IS EITHER ARBITRARY OR PERVERSE - IN VIEW OF THE FINDING OF FACT THE QUESTION WHETHER THE DELETION OF DISALLOWANCE UNDER S. 14A W AS JUSTIFIED DOES NOT INVOLVE ANY QUESTION O LAW. 5.7.2. IN CIT VS AMARJOTHI GRANITES INDIA (P) LTD ( 2013) 263 CTR (RAJ) 621, THE HONORABLE COURT HAS HELD AS UNDER:- BUSINESS EXPENDITURE - INTEREST ON BORROWED CAPITAL - INTEREST FREE ADVANC ES TO ANOTHER COMPANY - FINDING OF THE TRIBUNAL THAT THE ASSESSEE MADE INTEREST FREE ADVANCES TO ANOTHER COMPANY OUT OF ITS OWN FUNDS AN D THUS THE DISALLOWANCE ON ACCOUNT OF NOTIONAL INTEREST CANNOT BE SUSTAINED BE ING ESSENTIALLY FINDING OF FACT, NO INTERFERENCE IS WARRANTED - NO SUBSTANTIAL QUEST ION OF LAW ARISES FOR CONSIDERATION. A) IN CIT VS GUJARAT STATE FERTILIZER & CHEMICALS LTD (2014) 101 DTR (GUJ) 175, THE HONORABLE COURT HAS HELD AS UNDE R:- IN THE CASE OF AN INCOME, LIKE DIVIDEND INCOME, WH ICH DOES NOT FORM PART OF THE TOTAL INCOME, ANY EXPENDITURE INCURRED BY THE ASSES SEE IN RELATION TO SUCH NON- TAXABLE INCOME, THE CLAIM OF DEDUCTION OF SUCH EXPE NSES INCURRED CAN NOT BE ALLOWED. THE MOOT QUESTION HERE IS AS TO WHETHER TH E CIT(A) AND THE TRIBUNAL WERE RIGHT IN SETTING ASIDE THE ORDER OF AO. WHEREB Y IT DISALLOWED THE SUM OFRS. 91.80 LAKHS, APPLYING THE PROVISIONS OF S. 14A ON T HE GROUND THAT THE ASSESSEE HAD USED INTEREST BEARING BORROWED FUNDS FOR EARNIN G DIVIDEND DURING THE ASSESSMENT YEAR UNDER QUESTION. THE DIVIDEND INCOME EARNED WAS OFRS.9.80 CRORE AND THE ESTIMATE OF EXPENDITURE WAS ASSESSED @10 PERCENT OF THE TOTAL ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 8 INCOME. HAD THE REVENUE BEEN SUCCESSFUL IN ESTABLIS HING THAT THE ASSESSEE HAD INCURRED THE EXPENSES TO EARN THE DIVIDEND INCOME F ROM THE BORROWED FUNDS, THE ENTIRE DISCUSSION OF APPLICATION OF S. 14A COULD BE UNDERSTOOD. HOWEVER, WHEN BOTH THE CIT(A) AND THE TRIBUNAL HAVE NOTED THAT TH E ASSESSEE HAD SUFFICIENT FUNDS AVAILABLE WITH IT, WHICH WERE MORE THAN THE A MOUNT IT INVESTED FOR EARNING BY THE DIVIDEND INCOME, BOTH THESE AUTHORITIES HAVE CORRECTLY APPROACHED THE ISSUE BY SETTING ASIDE THE ORDER OF IS ALLOWANCE UN DER S. 14A IN RESPECT OF INTEREST EXPENDITURE. WHEN THE VERY BASIS FOR EMPLOYING S. 1 4A ON FACTUAL METRIC IS LACKING, THE DISALLOWANCE TO THE EXTENT OF 10 PERCE NT OF DIVIDEND INCOME WAS NOT PERMISSIBLE. WHEN IT TRANSPIRES FROM RECORD THAT TH E ASSESSEES OWN FUNDS WERE HIGHER THAN THE INVESTMENT MADE BY IT AND WITH NOTH ING TO INDICATE THAT THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF INV ESTMENT IN SHARES AND FOR EARNING DIVIDENDS, THE TRIBUNAL COMMITTED NO ERROR IN DISALLOWING THE SUM OF RS. 91.80 LAKHS. 5.7.4 THE HONORABLE MADRAS HIGH COURT IN CIT VS RP G TRANSMISSIONS LTD. (2014 100 DTR (MAD) 338 HAVE HEL D AS UNDER:- BUSINESS EXPENDITURE INTEREST ON BORROWED CAPITAL CAPITAL BORROWED FOR INVESTMENT IN SHARES OF GROUP COMPANY - THERE BEING PROXIMATE NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE COMPANY AND THAT OF TH E COMPANY IN WHICH INVESTMENTS WERE MADE IN THE FORM OF SHARES, INTERE ST ON CAPITAL BORROWED FOR SAID INVESTMENT IS ALLOWABLE BUSINESS EXPENDITURE - SECTION 36(L)(III) DOES NOT REQUIRE THAT THE AMOUNTS SO INVESTED SHOULD BE 'WHO LLY AND EXCLUSIVELY FOR MAKING OR EARNING SUCH INCOME ' NOR DOES IT PLACE A NY EMBARGO FOR INVESTMENTS TO BE MADE IN GROUP CONCERNS AND SUBSIDIARY CONCERN . ALSO HELD: THE TRIBUNAL HAS FOUND THAT THERE IS PROXIMATE NEXU S BETWEEN THE BUSINESS OF THE ASSESSEE COMPANY AND THAT OF THE COMPANY IN WHICH I NVESTMENTS WERE MADE IN THE FORM OF SHARES. IT MAY BE TRUE THAT THE RETURNS ARE NOT COMMENSURATE WITH THE EXPECTED RETURNS IN THE FORM OF INTEREST, BUT IF AN D WHEN, THE SHARES ARE LIQUIDATED, THERE IS EXPECTANCY OF SUBSTANTIAL GAIN S WHICH FACT HAS BEEN GLOSSED OVER BY THE AO WHILE CONFINING HIS FINDINGS THAT TH E RETURNS ARE FAR BELOW THE QUANTUM OF INTEREST PAID ON THE BORROWED FUNDS AND, THEREFORE, THE BASIS OF ANALYZING THAT THE PAYMENT OF INTEREST ON BORROWED FUNDS HAS TO BE TESTED ON THE GROUND OF QUANTUM OF RETURN IS UNTENABLE. FURTHER M ORE, S. 36(1) (HI) DOES NOT CONTEMPLATE ANY TEST THAT THE AMOUNTS SO INVESTED S HOULD BE 'WHOLLY AND EXCLUSIVELY FOR MAKING OR EARNING SUCH INCOME FURT HERMORE, THE SECTION ALSO DOES NOT PLACE ANY EMBARGO FOR INVESTMENTS TO BE MA DE IN GROUP CONCERNS AND SUBSIDIARY CONCERNS. THE APPELLATE AUTHORITY AND T HE TRIBUNAL FOUND THAT THE INVESTMENT MADE IN SHARES BY THE ASSESSEE BY UTILIZ ING BORROWED CAPITAL WAS FOR STRATEGIC BUSINESS PURPOSES BECAUSE THE COMPANIES W ERE PROMOTED AS SPECIAL PURPOSE COMPANIES TO STRENGTHEN AND PROMOTE ITS EXI STING BUSINESS BY COMBINING DIFFERENT BUSINESS SEGMENTS AND, THEREFORE, THE CLA IM WAS FULLY ALLOWABLE UNDER S. 36(1) (HI). THE REVENUE DID NOT ADDUCE ANY MATERIAL TO SHOW THAT THE BORROWED CAPITAL WAS UTILIZED BY THE ASSESSEE FOR NON-BUSINE SS PURPOSES. THE APPELLATE AUTHORITY WAS CORRECT IN ALLOWING THE CLAIM OF THE ASSESSEE AND DELETING THE DISALLOWANCE MADE BY THE ASSESSING AUTHORITY - CIT VS SPENCERS & CO. LTD (2014) 100 DTR (MAD) 314 FOLLOWED. ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 9 5.8 IN VIEW OF THE ABOVE STATED FACTS AND IN THE CI RCUMSTANCES OF THE CASE AND AFTER DUE EXAMINATION OF THE FACTS AS BROUGHT OUT ABOVE, THE CONTENTIONS AND ARGUMENTS OF THE LD. AR OF THE ASSESSEE COMPANY, THE LAW LAID DOWN ON THE ISSUE OF DISALLOWANCE OF INTEREST AND EXPENDITURE BY THE HONORABLE COURTS AND MORE PARTICULARLY MY OWN DECISIONS IN THE CASE OF THE AS SESSEE COMPANY ITSELF FOR THE AY. 2010-11 & 2011-12 ON THE IDENTIC AL ISSUE, THE ADDITIONS/DISALLOWANCE OF RS.73,47,652/- MADE BY TH E ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A O F THE ACT IS, THEREFORE, DIRECTED TO BE DELETED. IN THE RESULT, G ROUNDS NO. L(I) TO L(VII), 2 AND 3 OF APPEAL TAKEN BY THE ASSESSEE COM PANY ARE ALLOWED. 6. VIDE GROUNDS NO. 4(I), 4(II) AND 4(III) OF APPEA L, THE ASSESSEE COMPANY HAS CHALLENGED THE ACTION OF THE ASSESSING OFFICER MAKING ADDITION OF RS.4,20,000/- (INADVERTENTLY MENTIONED IN THE GROUNDS OF APPEAL AT RS.7,20,000/-) ON ACCOUNT OF DISALLOWA NCE OF INTEREST ON INTEREST FREE ADVANCES UNDER THE PROVISIONS OF S ECTION 36(L)(III) OF THE ACT. WHILE MAKING THE IMPUGNED ADDITION, THE ASSESSING OFFICER HAS OBSERVED IN THE RELEVANT PARAS OF THE A SSESSMENT ORDER AS UNDER:- 4) FORWARDING OF ADVANCES FOR NON BUSINESS PURPOSES 4.1) UPON PERUSAL OF THE DETAILS FDED BY THE ASSESS EE WITH RESPECT TO ADVANCE FORWARDED , THE FOLLOWING ENTRY REQUIRES TO BE MENTIONED: FORWARDING OF RS. 35.00.000/- TO M/S ORIEL VENTURES IT WAS SUBMITTED BY THE ASSESSEE THAT THE SAME ISSU E WAS ALSO INVOLVED IN THE ASSESSMENT OF PREVIOUS YEARS ALSO RELEVANT TO ASSES SMENT YEARS 2010-11 AND 2011-12. WHICH APPEALS HAVE BEEN DISPOSED OFF IN FA VOUR OF THE ASSESSEE BY THE TWO CONCURRENT DECISIONS BY THE WORTHY CIT (APPEALS ) AND THE EXPLANATION IN THIS REGARD MAY BE CONSIDERED AS FDED IN PREVIOUS YEARS. THUS THIS ADVANCE WAS FORWARDED FOR THE PURPOSE OF TO ARRANGE FINANCE FOR EXPANSION PLANS AND WORKING CAPITAL REQUIREMENTS BY ISSUING CONVERTIBLE DEBENTU RES ON PRIVATE PLACEMENT BASIS AND PAID AS ADVANCE FOR CONSULTING AND ARRANG ING PRIVATE EQUITY PARTICIPATION. HOWEVER IT WAS SEEN SUBSEQUENTLY THA T THE PARTY WAS NOT PERFORMING AS PER THEIR EXPECTATION AND SO THE CONT RACT WAS CANCELLED. THIS AMOUNT HAS TILL DATE NOT BEEN RECEIVED BACK AND LIT IGATION IS GOING ON FOR ITS RECOVERY. UPON APPRECIATION OF THE FACTS OF THE CASE AS SUBMI TTED BY THE ASSESSEE, FOLLOWING POINTS EMERGE: UPON APPRECIATION OF THE FACTS OF THE CASE AS SUBMI TTED BY THE ASSESSEE, FOLLOWING POINTS EMERGE: THE ADVANCE TO M/S ORIEL VENTURES IS ON ACCOUNT OF EXPENSES LIABLE TO BE INCURRED FOR THE PURPOSE OF INCREASING THE LONG TER M DEBT (BY ISSUING CONVERTIBLE ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 10 DEBENTURE ON PRIVATE PLACEMENT BASIS). SUCH EXPENSE S ARE CLEARLY CAPITAL IN NATURE AND NOT ALLOWABLE AS A DEDUCTION. IN VIEW OF THE FINDINGS ABOVE, IT IS CLEAR THAT THE EXPENSES INCURRED ON ACCOUNT OF THE ABOVE MENTIONED ADVANCES ARE NOT ALLOWABLE AS A DEDUCTION. IN VIEW OF THE FACT THAT THE ASSESSEE HAS A MIXED KITTY OF FUND, W HEREIN BOTH THE BORROWED FUNDS AND THE FUNDS OUT OF ITS INTERNAL ACCRUAL ARE DEPOS ITED AND HAVE THE SAME CHARACTER, THE POSSIBILITY OF HAVING ADVANCED INTER EST BEARING FUNDS TO THE ABOVE MENTIONED PERSON IS NOT RULED OUT. IN VIEW OF THE A BOVE, VIDE NOTE SHEET NOTING DATED 26.12.2014, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY PROPORTIONATE INTEREST, OUT OF THE TOTAL INTEREST PAYMENT, ATTRIB UTABLE TO THESE ADVANCES SHOULD NOT BE ADDED BACK U/S 36(L)(III) OF THE INCOME-TAX ACT. 4.2. IN REPLY, THE COUNSEL OF THE ASSESSEE RETREATED THA T THE SAME ISSUE WAS ALSO INVOLVED IN THE ASSESSMENT OF PREVIOUS YEARS ALSO RELEVANT T O ASSESSMENT YEARS 2010-11 AND 2011-12, WHICH APPEALS HAVE BEEN DISPOSED OFF IN FA VOUR OF THE ASSESSEE BY THE AT 'O CONCURRENT DECISIONS BY THE WORTHY CIT (APPEALS) AND THE EXPLANATION IN THIS REGARD MAY BE CONSIDERED AS FILED IN PREVIOUS YEARS , THUS MADE THE FOLLOWING DEFENSE: A. THE LOAN TAKEN IS EITHER FOR THE PURPOSE OF WORKIN G CAPITAL REQUIREMENT OR FOR THE PURPOSE OF ACQUISITION OF SPECIFIC ASSET. MOREO VER THE INVESTMENT IN STOCK & DEBTORS ARE MUCH IN EXCESS OF THE WORKING CAPITAL L IMIT RAISED BY THE COMPANY & HENCE NO INTEREST PAYMENT IS ATTRIBUTABLE TO THIS A DVANCE. B. NO SPECIFIC LOAN HAS BEEN TAKEN TO FORWARD THESE A DVANCES AND HENCE NO INTEREST PAID IS ATTRIBUTABLE TO THESE ADVANCES. C. THE ADVANCES MADE ARE FROM OWN RESERVES AND SURPLUS AND NOT BORROWED FUNDS. 4.3. THE CONTENTION OF THE ASSESSEE HAS BEEN DULY CONSI DERED BUT THE SAME IS NOT ACCEPTABLE AND IS DISPOSED OFF AS UNDER: A) THE INTEREST PAYMENT ON WORKING CAPITAL LOAN IS DIR ECTLY PROPORTIONAL TO THE AMOUNT OF DEBIT BALANCE OUTSTANDING. THIS ISSUE HAS ALREADY BEEN DISCUSSED IN DETAIL IN PARA 3.4 ABOVE AND HENCE IS NOT BEING PRO DUCED AGAIN TO AVOID DUPLICATION. NEEDLESS TO SAY THAT THE INTEREST PAYMENT WOULD HAVE BEEN REDUCED AT LEAST TO THAT EXTENT TO WHICH THE ADVANCES HAVE BEEN FORWARDED. B) THIS CONTENTION IS ALSO NOT ACCEPTABLE AS THE INCO ME TAX ACT ACCEPTS THE PRINCIPLE OF DIRECT AND INDIRECT EXPENSES FOR ALL T RANSACTIONS. THE CONTENTION GIVEN BY THE ASSESSEE IS ACCEPTABLE TO THE EXTENT O F ACCEPTING THAT NO DIRECT EXPENSES ARE ATTRIBUTABLE TO THESE ADVANCES. HOWEVE R THE CONCEPT OF INDIRECT OR ATTRIBUTABLE EXPENSES IS VERY MUCH VALID FOR THIS T RANSACTION. C) THIS ISSUE HAS ALREADY BEEN DISCUSSED IN DETAIL IN PARA 3.4 OF THIS ORDER AND HENCE IS NOT BEING REPRODUCED TO AVOID DUPLICATION. D) THIS EXPLANATION OF THE ASSESSEE DOES NOT FALL WITH IN THE AMBIT OF COMMERCIAL EXPEDIENCY. ( SA BUILDERS LTD. VS. CIT(2007) 158ITR 82(SC) }. 3.1. THE DECISION OF HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDS. LTD. IS VERY CLEAR IN THIS REGARDING . THE HON BLE HIGH COURT HAS HELD IN THE ABOVE MENTIONED CASE THAT 'ONCE IT IS BORN O UT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABIL ITY TO PAY TAX IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADV ANCED TO SISTER CONCERNS OR ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 11 OTHERS WITHOUT CARRYING ANY INTEREST AND WITHOUT AN Y BUSINESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYI NG ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(L)(III) OF THE ACT. ' THE CONDITIONS TO BE SATISFIED FOR DISALLOWANCE OF INTEREST PROPORTIONATE TO INTEREST FREE ADVANCES ARE AS FOLLOWS:- 1. THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCES. 2. THERE IS NO COMMERCIAL EXPEDIENCY INVOLVED IN GIVIN G THE ADVANCES 3. THE ASSESSEE HAS PAID INTEREST ON BORROWED FUNDS. THE CASE IS BEING EXAMINED IN THE LIGHT OF THESE TH REE CONDITIONS AS FOLLOWS:- (I) WHILE THE ASSESSEE HAS BORROWED THE FUNDS ON WHICH LIABILITY TO PAY INTEREST HAS BEEN INCURRED, HE HAS ADVANCED AMOUNTS TO M/S ORIEL VENTURES CHARGING NO INTEREST. (II) THE ASSESSEE HAS DEBITED BANK CHARGES AND INTEREST EXPENDITURE. (III) THEASSESSEE FAILS TO PROVE ANY COMMERCIAL EXPEDIENC Y INVOLVED IN GIVING THE ADVANCES. IN VIEW OF THE ABOVE, THE CONTENTION OJ THE ASSESSE E THAT NO INTEREST EXPENSE IS ATTRIBUTABLE TO THESE ADVANCES IS REJECTED AND THE FOLLOWING INT EREST, COMPUTED AS UNDER, TAKING THE AVERAGE RATE OF BORROWING @ 12% PER ANNUM, IS DISAL LOWED U/S 36(L)(III) OF THE INCOME TAX ACT. INTEREST ATTRIBUTABLE TO ADVANCE GIVEN TO M/S ORIEL RS.4,20,000/- THUS AN AMOUNT OF RS.4,20,()()()/- IS DISALLOWED OU T OF THE INTEREST PAYMENT DEBITED IN THE PROFIT & LOSS ACCOUNT AND ADDED BACK TO THE TOTAL I NCOME. PENALTY U/S 271(L)(C) IS INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME AFTER TAKING INTO ACCOUNT THE FACT THAT THESE EXPENSES WERE NEVER ALLOWABLE AS A REVEN UE EXPENDITURE. (ADDITION : RS. 4,20,000/-) 6.1 IN SUPPORT OF GROUNDS NO. 4(I), 4(II) AND 4(III ) OF APPEAL, THE ASSESSEE COMPANY HAS FILED WRITTEN SUBMISSIONS VIDE LETTER D ATED 22.05.2015, THE RELEVANT PARAS OF WHICH READ AS UNDER:- (XVII) THAT THE PROPORTIONATE DISALLOWANCE OF INTE REST OF RS.4,20,000/- ON THE GROUNDS OF PAYMENT OF INTERET ADVANCES TO THE FOLLO WING PERSONS/PARTIES FOR PURPORTEDLY ALLEGE NON BUSINESS PURPOSES, IS ABSOLU TELY WRONG, UNJUSTIFIED UNFOUNDED AND CONTRARY TO THE FACTS AND THE LEGAL P ROVISIONS U/S 36(1)(III) OF THE INCOME TAX ACT. I) THAT PROVISIONS OF THE SECTION 36(1)(III) HAVE B EEN WRONGLY INVOKED AS THERE WAS NO CAPITAL BORROWED FOR THE SAID ADVANCES APPARENTLY M ADE FOR BUSINESS PURPOSES AND IN ' PURSUIT OF THE BUSINESS ACTIVITIE S AND IN ABSENCE OF DIVERSIONS OF THE SAID FUNDS FOR USE BY ANY SISTER/ASSOCIATE CONC ERNS AND THERE COULD NOT BE ANY ASSUMPTION OF THE PRESUMED BORROWING MERELY ON THE GROUNDS THAT THE ASSESSEE ALSO HAS WORKING CAPITAL LIMITS AND FUNDS MIGHT HAVE BEEN USED FOR THE SAID PURSUIT OF THE BUSINESS ACTIVITIES ESPECIALLY CONTR ARY TO THE FACTS ON RECORD IN VIEW OF THE AVAILABILITY OF LARGE CASH ACCRUAL (INTERNAL GENERATIONS OF NET PROFITS DEPRECIATION) AND OWN LARGE CAPITAL BASE FREE RESER VES WITH THE ASSESSEE ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 12 COMPANY DURING THE YEAR AND. IN THE PREVIOUS YEAR A ND IN ABSENCE OF SUCH NEXUS OR RAISING OF THE BORROWED CAPITAL, NO SUCH DISALLO WANCES/ADDITIONS COULD BE ENVISAGED; II)THAT IN RESPECT OF ADDITION OF RS.4,20.000/- ON ADVANCE TO M/S ORIEL VENTURES, THE SAID WAS NOT FOR RAISING EQUITY CAPITAL BUT FOR WORKING CAPITAL LIMITS AS EVIDENCED BY THE AGREEMENT IN THAT RESPECT ON RECOR D AND AS SUCH THE VERY PRESUMPTION IS ARBITRARY AND SO WAS THE SAID DISALL OWANCE. II) THAT THE GROUND OF APPEAL IN RESPECT OF THE DIS ALLOWANCE OF RS. 3.00.000/- IN CASE OF H.L. KATYAL IS WITHDRAWN AS HAS BEEN INADVERTENTLY TAKEN IN GROUNDS OF APPEAL. III) BESIDES THE AFORESAID THERE WAS LARGE SUNDRY C REDITORS FOR SUPPLY OF MATERIAL AND PAYMENT OF INTEREST ADVANCES TO THE FOLLOWING PERSO NS/PARTIES FOR PURPORTEDLY ALLEGED NON BUSINESS PURPOSES, IS ABSOLUTELY WRONG, UNJUSTIFIED UNFOUNDED AND CONTRARY TO THE FACTS AND THE LEGAL PROVISIONS U/S 36(L)(III) OF THE INCOME TAX ACT; IV) THAT PROVISIONS OF THE SECTION 36(I)(III) HAVE BEEN WRONGLY INVOKED AS THERE WAS NO BORROWINGS MERELY ON THE GROUNDS THAT THE AS SESSEE ALSO HAS WORKING CAPITAL LIMITS AND EXPENSES TO THE EXTENT OF RS.60.56 CRORE ON WHICH N O INTEREST WAS PAID BY THE COMPANY ALSO AND AS SUCH THE ADVANC ES PAID FOR TRADE AND BUSINESS PURPOSES HAVE TO BE TREATED AT ALSO AND AS SUCK THE ADVANCES PAID FOR TRADE AND BUSINESS PURPOSES HAVE TO BE. TREATED AT PAR WITH NO CHANGEABILITY OF INTEREST FROM THEM OR PURPORTED DISALLOWANCE OF INT EREST, IF ANY IN THE ABSENCE OF ANY PRIVITIES OF THE AGREEMENT. V) THE AFORESAID DISALLOWANCE/ADDITIONS IN RESPECT OF THE SAID PARTIES WAS DELETED AND DUE RELIEF WAS ALLOWED IN APPEAL ORDERS FOR THE ASSTT. YEAR 2010-11 AND ALSO 2011-12 BY YOUR GOODSELF IN RESPECTIVE APPEAL ORDER S FOR THE RELEVANT YEARS. VI) THE ASSESSEE ALSO RELIES ON THE DECISION OF HON ABLE COURTS AS RELIED ON SUPRA WHEREIN THE HON 'ABLE COURTS HAVE HELD THAT IN VIEW OF APPARENT OWN FUNDS AND SUBSTANTIAL INTERNAL ACCRUAL GENERATION AND ALSO LA RGE SUNDRY CREDITORS OUTSTANDING ON WHICH NO INTEREST IS APPARENTLY PAID BY THE ASSESSEE, THERE IS NO JUSTIFICATION OF DISALLOWANCE OF INTEREST U/S 36(L) (III) OF THE ACT ON PURPORTEDLY ALLEGED MIXED FUND USE AS PRESUMED BY THE TAX AUTHO RITIES. THE RELIANCE IS ALSO PLACED BY THE ASSESSEE COMPANY ON THE FOLLOWING DECISIONS: B) CIT VS RPG TRANSMISSIONS LTD (2014) 100 DTR338 (MAD RAS) C) CIT VS AMARJOTHI GRANITES INDIA (P) LTD (2013) 263 CTR (RAJ) 621 HI) SA BUILDERS LTD 288ITR 1 (SUPEME COURT) IV) CIT VS MURUDHAR CHEMICALS AND PHARMACEUTICALS(P) LTD 319 I TR 75 (PUNJAB & HARYANA HIGH COURT) FROM THE FOREGOING, YOUR HONOUR. WOULD KINDLY CONSI DER THAT THE SAID DISALLOWANCE/ADDITIONS ARE CONTRARY TO FACTS AND MI SAPPLICATION OF THE PROVISIONS OF LAW. 6.2 I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSES SING OFFICER AS MADE BY HIM IN THE ASSESSMENT ORDER AS WELL AS THE WRITTEN ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 13 SUBMISSIONS FILED BY THE ASSESSEE COMPANY VIDE LETT ER DATED 22.05.2015 ON THE ISSUE UNDER REFERENCE. I HAVE ALS O CONSIDERED VARIOUS JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE AS WELL AS BY THE ASSESSING OFFICER ON THE ISSUE UNDER REFERENCE. ON CAREFUL CONSIDERATION OF THE RIVAL CONTENTIONS AND AFTER CAREFUL EXAMINATION OF THE AFORESAID SUBMISSIONS AND DOCUME NTS PLACED ON RECORD, IT TRANSPIRES TO ME THAT ALL THE INTERES T FREE ADVANCES AS MADE BY THE ASSESSEE COMPANY ARE CLEARLY FOR BUSINE SS PURPOSES AND FOR THE REQUIREMENTS TO CARRY ON THE BUSINESS O F THE ASSESSEE COMPANY AND ARE ALSO DIRECTLY RELATABLE TO ITS BUSI NESS TRANSACTIONS IN COURSE OF NORMAL BUSINESS OPERATION S AND ACTIVITIES. THE ASSESSEE COMPANY ALSO HELD SUBSTANT IAL OWN FUNDS AND RESERVES BESIDES IT HAD CURRENT NET CASH ACCRUA L INTERNAL GENERATIONS, PROFITS BEFORE DEPRECIATION, TO THE EX TENT OF RS. 14.32 CRORES ON WHICH NO INTEREST IS PAYABLE BY THE COMPA NY AND ARE IN THE NATURE OF NON INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE. THE ASSESSEE COMPANY HAS ALSO NOT BORROWE D ANY FUNDS FOR MAKING SUCH ADVANCES TO PERSONS/PARTIES. THE WO RKING CAPITAL FUNDS AS PER BANKS LIMITS ALSO REMAINED DEPLOYED IN WORKING CAPITAL FUND REQUIREMENTS IN STOCKS AND STORES, SUN DIY DEBTORS AND OTHER CURRENT ASSETS AS PER FINANCIAL FIGURES BROUG HT ON RECORD. THE ARGUMENTS OF THE ASSESSING OFFICER THAT ASSESSE E HAS MIXED KITTY OF FUNDS WHEREIN BOTH THE BORROWED FUNDS AND FUNDS OUT OF ITS OWN INTERNAL ACCRUALS AND THE POSSIBILITY OF HA VING ADVANCED INTEREST BEARING FUNDS TO THE SAID PERSONS/PARTIESJ ARIIOT MLED OUT APPEARS TO BE MORE PRESUMPTIONS AND SURMISES IN VIE W OF APPARENT AVAILABILITY OF INTEREST FREE FUNDS OF OWN CAPITAL, FREE RESERVE AND CURRENT YEAR INTERNAL ACCRUALS GENERATIONS. 6.3 THE ADVANCE TO M/S ORIEL VENTURES AMOUNTING TO RS.35 LACS, PURSUING TO THE COPY OF THE AGREEMENT WITH THE SAID PARTY OF THE ASSESSEE COMPANY WHICH WAS ALSO FILED AT THE ASSESS MENT STAGE ALSO REFLECTS THAT THE ARRANGEMENT WAS FOR ARRANGIN G WORKING CAPITAL REQUIREMENTS BY ISSUING OF CONVERTIBLE DEBE NTURES ON PRIVATE PLACEMENT BASIS OF RS.70 CRORE AND NOT FOR RAISING AND ARRANGING ANY EQUITY CAPITAL OF THE COMPANY, WHICH COULD BE SAID TO BE OF CAPITAL NATURE. MOREOVER ON THE NON PERFOR MANCE OF THE SAID PARTY, THE ADVANCE WAS CALLED FOR, REPAYMENT A LSO RECEIVED BY CHEQUE WHICH WAS SUBSEQUENTLY DISHONORED AND AMOUNT WAS THUS REFLECTED AS OUTSTANDING, AS THE AMOUNT WAS ADVANCE D FOR THE PURPOSES OF WORKING CAPITAL WHICH IS OF REVENUE NAT URE AND VERY MUCH FOR THE NORMAL BUSINESS OPERATIONS AND PUIPOSE S AND THEREFORE, ON THIS GROUND ALSO AND IN VIEW OF SUBST ANTIAL INTERNAL ACCRUAL GENERATION OF THE COMPANY ON THE RELEVANT Y EAR, THE BASIS OF DISALLOWANCE IS NOT TENABLE. 6.4 IN VIEW OF THE ABOVE STATED FACTS AND IN THE CI RCUMSTANCES OF THE CASE AND MORE PARTICULARLY MY OWN ORDERS IN THE CAS E OF ASSESSEE ITSELF FOR THE A.YS.2010-11 AND 2011-12, THE ADDITIONAL O F RS.4,20,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF INTEREST IS, THEREFORE, NOT JUSTIFIED AND IS DIRECTED TO BE DELE TED. IN THE RESULT, ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 14 GROUNDS NO.4(I) 4(II) OF APPEAL TAKEN BY THE ASSESS EE COMPANY ARE ALLOWED AND GROUND NO.4(III) OF APPEAL TAKEN BY THE ASSESSE E IS DISMISSED AS THE SAME HAS BEEN WITHDRAWN. 5. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE TH ROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THE LEARNED CIT(A) HAS DELETED THE ADDITION MADE BY ASSESSING OFFICER U/S 14A BY H OLDING THAT ASSESSEE HAD SUFFICIENT FUNDS OF ITS OWN AND LEARNED CIT(A) HAS ALSO FOLLOWED THE ORDERS IN THE CASE OF ASSESSEE ITSELF FOR ASST. YEA R 2010-11& 2011-12, WHEREIN UNDER SIMILAR FACTS AND CIRCUMSTANCES THE A DDITION U/S 14A WAS DELETED. THE LEARNED CIT(A) HAS RELIED UPON A NUMBE R OF JUDGMENTS FOR MAKING THE DELETIONS. WE FIND THAT ASSESSEE COMPANY HAD SUBSTANTIAL OWN CAPITAL BASE BY WAY OF SHARE CAPITAL AND BY WAY OF FREE RESERVES IN THE ASST. YEARS: 2011-12 & 2012-13 OF RS.77.20 CORE S AND 117.39 CORES ON WHICH NO INTEREST WAS BEING PAID BY THE ASSESSEE COMPANY. THE LEARNED CIT(A) HAS MADE A CATEGORICAL FINDING IN TH IS RESPECT. THE LEARNED CIT(A) HAS ALSO MADE A FINDING OF FACT THAT ASSESSE E COMPANY HAD EARNED NET PROFIT BEFORE DEPRECIATION TO THE EXTENT OF RS. 17.73 CORES AND RS.14.32 CRORES IN ASST. YEARS: 2011-12 & 2012-13 R ESPECTIVELY. WE ARE IN AGREEMENT WITH THE FINDINGS OF LEARNED CIT(A) AN D LEARNED DR WAS NOT ABLE TO CONTROVERT ANY OF THE FINDINGS, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LEARNED CIT(A) AS REGARDS GROUND NO.1 AND THEREFORE, THE SAME IS DISMISSED. ITA NO.410 (ASR)/2015 ASST. YEA R: 2012-13 15 7. NOW COMING TO GROUND NO.2, WE FIND THAT LEARNED CIT(A) HAS MADE A FINDING OF FACT THAT ALL INTEREST FREE ADVANCE MA DE BY COMPANY WERE CLEARLY FOR BUSINESS PURPOSES AND FOR THE REQUIREME NTS TO CARRY ON BUSINESS FOR ASSESSEE COMPANY AND WERE RELATABLE TO ITS BUSINESS TRANSACTIONS IN THE COURSE OF NORMAL BUSINESS ACTI VITIES. THE LEARNED CIT(A) HAD ALSO MADE A FINDING OF FACT THAT ASSESS EE WAS HAVING HUGE CASH ACCRUALS. THE LEARNED CIT(A) HAS PASSED AN EXH AUSTIVE AND SPEAKING ORDER AND WE ARE IN AGREEMENT WITH HIS FIN DINGS AS LEANED DR WAS NOT ABOVE TO CONTROVERT ANY OF THE FINDINGS AND THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER THE SAME. IN VIEW O F THE ABOVE, THE GROUND NO.2 OF APPEAL IS ALSO DISMISSED. 8. IN NUTSHELL, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 .08.2016. SD/- SD/- (A.D. JAIN) (T. S. KAPOOR) JUDICIAL MEMBER ACCO UNTANT MEMBER DATED: 12.08.2016. /PK/ PS. COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: (2) THE (3) THE CIT(A), (4) THE CIT, (5) THE SR DR, I.T.A.T., TRUE COPY BY ORDER