DCIT, Chandigarh V. M/s Vardhman Chemtech Pvt. Ltd., Chandigarh

ITA 488/CHANDI/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0094 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 02-11-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 06-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: TEJ MOHAN
• Keywords: Business income; Business expenditure; Earning of tax free income; Proportionate interest; Wholly owned subsidiary; Commercial expediency; Condonation of delay
• Section: 143(3); 14A; 37; 28

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO.545/CHD/2015 ASSESSMENT YEAR: 2011-12 M/S VARDHMAN CHEMTECH PRIVATE LTD. VS. THE ADDL. CI T 525, INDUSTRIAL AREA II RANGE 1 CHANDIGARH CHANDIGARH PAN NO. AABCV3290P & ITA NO.488/CHD/2015 ASSESSMENT YEAR: 2011-12 THE DCIT, VS. M/S VARDHMAN CHEMTECH PRIVATE LT D. CIRCLE 1(1) PLOT NO. 525 CHANDIGARH INDUSTRIAL AREA II, CHANDIGARH (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. TEJ MOHAN DEPARTMENT BY : SH. S.K. MITTAL DATE OF HEARING : 19/04/2016 DATE OF PRONOUNCEMENT : 22/04/2016 ORDER PER ANNAPURNA MEHROTRA A.M. BOTH THE APPEALS HAVE BEEN FILED AGAINST THE ORDER OF LD. CIT(A)-1, CHANDIGARH DT. 27/02/2015. 2. BRIEFLY STATED DURING THE IMPUGNED ASSESSMENT YE AR THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 3,41 ,50,800/-. THEREAFTER ASSESSMENT UNDER SECTION 143(3) WAS FRAMED ON THE A SSESSEE AT INCOME OF RS. 4,86,08,810/- AFTER MAKING THE FOLLOWING ADDITION / DISALLOWANCE. 1. DISALLOWANCE U/S 14A RS. 40,28,526/- 2. DISALLOWANCE OF L/C CHARGES U/S 40(A)(IA) ON ACCOUNT OF NON DEDUCTION OF TDS RS. 64,37,342 /- 3. DISALLOWANCE OF INTEREST U/S 36(I) (III) OF THE ACT RS. 39,92,141/- 2 3. AGGRIEVED BY THE SAME THE MATTER WAS CARRIED IN APPEAL BEFORE THE LD. CIT(A) WHO VIDE HIS ORDER DT. 27/02/2015, UPHELD TH E DISALLOWANCE OF RS. 39,92,141/- UNDER SECTION 36(I)(III) OF THE ACT AND DELETED THE DISALLOWANCE UNDER SECTION 40(A)(IA) OF RS. 64,37,342/- AND FURTHER DI RECTED THE AO TO VERIFY WHETHER ANY EXEMPT INCOME HAD BEEN EARNED BY THE ASSESSEE O R NOT DURING THE IMPUGNED YEAR AND IF NO EXEMPT INCOME WAS EARNED TH E DISALLOWANCE MADE UNDER SECTION 14A WAS ALSO DIRECTED TO BE DELETED. 4. AGGRIEVED BY THE SAME BOTH THE ASSESSEE AND THE REVENUE FILED THE PRESENT APPEAL BEFORE US. 5. WE SHALL FIRST TAKE UP THE APPEAL FILED BY THE A SSESSEE IN ITA NO. 545/CHD/2015. 6. AT THE OUTSET IT MAY BE STATED THAT THE APPEAL W AS TIME BARRED BY 10 DAYS. THE LD. AR FILED AN APPLICATION DT. 19/04/201 6, REQUESTING CONDONATION OF DELAY ON BEHALF OF THE ASSESSEE STATING THAT SINCE THE MOTHER OF THE MANAGER FINANCE OF THE COMPANY HAD A SUDDEN ATTACK OF PARAL YSIS, THEREFORE FILING OF THE APPEAL WAS DELAYED BY 10 DAYS. LD. AR REQUESTED THA T THE DELAY BE CONDONED IN VIEW OF THE ABOVE APPLICATION OF THE ASSESSEE. L D. DR STATED THAT HE HAD NO OBJECTION TO THE SAME. IN VIEW OF THE SAME WE CONDO NE THE DELAY AND PROCEED TO ADJUDICATE THE APPEAL FILED. 7. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL: 1. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEAL S) HAS ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDING THE DISALLOWANCE OF PROPORTIO NATE INTEREST OF RS. 33,92,141/- ON ALLEGED INTEREST FREE ADVANCE TO ITS 100% FULLY OWNED SUBSIDIARY M/S VARDHMAN LIFE SCIENCES PRIVATE LIMITED WHICH IS ARB ITRARY AND UNJUSTIFIED. 8. THE ONLY ISSUE IN THE PRESENT APPEAL IS REGARDIN G THE UPHOLDING OF DISALLOWANCE OF PROPORTIONATE INTEREST OF RS. 33,92 ,141/- UNDER SECTION 36(1)(III) OF THE ACT. 3 9. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE A SSESSE COMPANY HAD GIVEN INTEREST FREE ADVANCE OF RS. 7,35,45,100/- TO ITS A SSOCIATE CONCERN M/S VARDHMAN LIFE SCIENCES PRIVATE LIMITED WHICH WAS A FULLY OWN ED SUBSIDIARY OF THE ASSESSEE COMPANY. DURING ASSESSMENT PROCEEDINGS THE AO QUEST IONED THE ASSESSEE REGARDING DISALLOWANCE OF INTEREST RELATING TO THE AFOREMENTIONED ADVANCE UNDER SECTION 36(1)(III)OF THE INCOME TAX ACT, TO W HICH THE ASSESSEE STATED THAT THE SAME HAD BEEN ADVANCED FOR BUSINESS PURPOSES. T HE AO NOT BEING SATISFIED WITH THE EXPLANATION OF THE ASSESSEE DISALLOWED INT EREST @ 12% ON THIS ADVANCE, WORKING OUT THE SAME AT RS. 33,92,141/-. 10. BEFORE THE LD. CIT(A) THE ASSESSEE PLEADED THAT THE DISALLOWANCE MADE WAS NOT JUSTIFIED SINCE THERE WAS NO NEXUS OF BORRO WED FUNDS AND THE AMOUNT ADVANCED. THE ASSESSEE FURTHER PLEADED THAT THE ADV ANCE HAD BEEN MADE FOR BUSINESS PURPOSE SINCE M/S VARDHMAN LIFE SCIENCES P RIVATE LTD., TO WHOM THE ADVANCE WAS GIVEN, WAS TO MANUFACTURE RAW MATERIAL WHICH WAS USED BY THE ASSESSEE COMPANY IN ITS MANUFACTURING, ACTIVITY AND WHICH IT WAS CURRENTLY IMPORTING FROM CHINA AND THUS INCURRING HUGE COST A ND IRREGULARITY IN SUPPLY OF THE SAME. LD. CIT(A) REJECTED THE CONTENTION OF THE ASSESEE BY STATING THAT SINCE THE SUBSIDIARY COMPANY I.E; VARDHMAN LIFE SCIENCES PRIVATE LTD. HAD NOT STARTED FUNCTIONING OR MANUFACTURING, THE IMPUGNED ADVANCE COULD NOT BE SAID TO BE FOR PROCURING RAW MATERIAL, BUT WAS INFACT FOR STAR TING THE BUSINESS OF THE SUBSIDIARY AND THUS CANNOT BE SAID TO HAVE BEEN GIV EN FOR BUSINESS PURPOSES. LD. CIT(A) FURTHER RELIED UPON THE JUDGMENT OF ABHI SHEK INDUSTRIES AND UPHELD THE DISALLOWANCE MADE BY THE AO. LD. CIT(A) HELD AT PARA 3.1 TO 3.3.2 OF ITS ORDER AS FOLLOWS: 3.1 BRIEF FACTS OF THE ISSUE ARE THAT THE APPELLANT COMPANY HAD GIVEN INEREST FREE ADVANCE OF RS. 7,35,45,100/- TO ITS ASSOCIATE CONCE RN M/S VARDHAN LIFE SCIENCES (P) LTD.. THE ASSESSING OFFICER QUESTIONED THE APPE LLANT REGARDING DISALLOWANCE U/S 36(1)(III) OF THE INCOME TAX ACT, 1961(HEREINAF TER REFERRED TO AS ACT) AND THE APPELLANT HAD SUBMITTED AS UNDER: THE INITIAL OBJECTIVE OF THE ASSESSEE COMPANY WAS TO ACQUIRE HUNDRED PERCENT EQUITY STAKE IN M/S VARDHMAN LIFE S CIENCES PVT. 4 LTD. THEREBY MAKING IT A HUNDRED PERCENT FULLY OWNE D SUBSIDIARY. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CO MPANY ADVANCED RS. 735.45 LACS FOR THE BUSINESS PURPOSE O F THE SUBSIDIARY. HOWEVER DUE TO THE LIMITATION OF THE CO MPANIES ACT, 1956, SECTION 301 ANY ADVANCE GIVEN IRRESPECTIVE OF FACT WHETHER IT IS GIVEN A SUBSIDIARY OR NON SUBSIDIARY OR NON S UBSDIARY THE AMOUNT HAD TO BE MENTIONED IT IS REITERATED THAT IT HAD TO BE MENTIONED IN PARA (VI)(III)(A) & (B) OF THE AUDIT R EPORT. THE ADVANCE FOR GIVEN I.E. RS. 735.45 LAC IS TO BE A SU BSIDIARY AND THE ADVANCE CAN NEVER BE PREJUDICIAL TO THE INTEREST OF THE COMPANY.(SIC) 3.1.1 THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION OF THE APPELLANT AND DISALLOWED INTEREST @ 12% ON THIS ADVANCE. THE DISALLOWANCE WORKED OUT TO RS. 33,92,141/-. 3.2 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE LD. COUNSEL FOR THE APPELLANT HAS FILED A WRITTEN SUBMISSION, WHICH IS SUMMARIZED BELOW: (I) THERE WAS NO NEXUS OF FUNDS BORROWED AND AMOUNT S ADVANCED. (II) THE PURPOSE OF ACQUIRING 100% STAKE IN M/S VAR DHMAN LIFE SCIENCES (P) LTD. WAS FOR PROCUREMENT OF MAIN RAW MATERIALS. (III) CURRENTLY THE APPELLANT IS IMPORTING RAW MATE RIAL FROM CHINA, THEREBY INCURRING HUGE IMPORT COST AND IRREGULAR SUPPLY OF THE RAW MA TERIAL. (IV) THE ADVANCE WAS MADE FOR BUSINESS PURPOSE. (V) JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES LTD. (286 ITR 1) IS NOT APPLICA BLE, SINCE ADVANCE WAS MADE TO 100% SUBSIDIARY, WHO WAS TO MANUFACTURE THE PRODUCT S, WHICH WERE RAW MATERIALS FOR THE APPELLANT. 3.3 I HAVE CONSIDERED THE SUBMISSION OF THE LD. COU NSEL. THE INTEREST FREE ADVANCE WAS GIVEN BY THE APPELLANT TO ITS ASSOCIATE CONCERN M/S VARDHMAN LIFE SCIENCES (P) LTD. WHICH WAS 100% FULLY OWNED S UBSIDIARY OF THE APPELLANT. THE PURPOSE OF ACQUIRING 100% STAKE IN THIS COMPANY HAS BEEN EXPLAINED TO BE THE PROCUREMENT OF RAW MATERIALS, BUT THIS SUBSIDIARY C OMPANY ACTUALLY HAD NOT STARTED FUNCTIONING / MANUFACTURING. THUS, THE IMPU GNED ADVANCE GIVEN TO THE SUBSIDIARY WAS NOT FOR PROCURING THE RAW MATERIALS, BUT FOR STARTING THE BUSINESS OF THE SUBSIDIARY. HENCE, THE ADVANCE CANNOT BE TREATE D TO HAVE BEEN GIVEN FOR BUSINESS PURPOSES AND THE RATIO OF THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE M/S ABHISHEK INDUSTRIES LTD. (SURPA) WILL BE APPLICABLE. 3.3.1 THE CONTENTIONS OF THE LD. COUNSEL THAT THE A PPELLANT HAD SUFFICIENT RESERVES IN THE BEGINNING OF THE YEAR IS ALSO NOT RELEVANT I N VIEW OF THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES LTD. (SUPRA), IN WHICH IT WAS HELD: THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. THE MONEYS RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS ETC., DO NOT HAVE ANY COLOUR. WHATEVER ARE THE RECE IPTS IN BUSINESS, THEY HAVE THE COLOUR OF BUSINESS RECEIPTS AND HAVE NO SEPARAT E IDENTIFICATION. SOURCES HAVE NO CONCERN WHATSOEVER. 3.3.2 IN VIEW OF THE ABOVE. IT IS HELD THAT PROPORT IONATE INTEREST U/S 36(1)(III) IS TO BE DISALLOWED ON THE ADVANCE GIVEN TO M/S VARDHMAN LIFE SCIENCES PRIVATE LTD. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS A CCORDINGLY CONFIRMED. GROUND OF APPEAL NO. 2 IS DISMISSED. 11. BEFORE US THE LD. AR REITERATED THE CONTENTION MADE BEFORE THE LD. CIT(A) AND STATED THAT THE ADVANCE HAD BEEN MADE FOR BUSIN ESS PURPOSES AND THEREFORE THERE WAS NO QUESTION OF DISALLOWING ANY INTEREST UNDER SECTION 5 36(1)(III) OF THE ACT. LD. AR DREW OUR ATTENTION TO THE FINDINGS OF THE LD. CIT(A) AT PARA 3.3 OF HIS ORDER IN THIS REGARD AND STATED THA T THE FACT THAT THE ADVANCE HAD BEEN MADE TO ITS 100% SUBSIDIARY WHICH WAS TO M ANUFACTURE THE MAIN RAW MATERIAL BEING USED BY THE ASSESSEE COMPANY HAS NOT BEEN CONTROVERTED BY THE LOWER AUTHORITIES. LD. AR STATED THAT THE LD. C IT(A) HAS HELD THE ADVANCE TO BE FOR NON BUSINESS PURPOSES MERELY FOR THE REASON THAT THE SUBSIDIARY COMPANY HAD NOT STARTED FUNCTIONING OR MANUFACTURING DURIN G THE YEAR. THE LD. AR STATED THAT THE FACT THAT THE SUBSIDIARY COMPANY WAS TO MA NUFACTURE THE MAIN RAW MATERIAL TO BE USED BY THE ASSESSEE COMPANY HAS NOT BEEN DISPUTED BY THE LD. CIT(A), IT THEREFORE CANNOT BE STATED THAT THE ADVA NCE HAD NOT MADE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. LD. AR REL IED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES (P ) LTD. VS. CIT(LUDHIANA) IN CIVIL APPEAL NO. 514 OF 2008 DT. 05/11/2015 AND THE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES(P) LTD VS. CIT, JALA NDHAR IN ITA NO. 224 OF 2013 DT. 24/07/2015 IN THIS REGARD. 12. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LD. CIT(A) AND STATED THAT THE SUBSIDIARY COMPANY HAD NOT STARTED FUNCTIONING / MANUFACTURING IN THE IMPUGNED YEAR AND THEREFORE THE ADVANCE COUL D NOT BE SAID TO HAVE BEEN GIVEN FOR PROCURING RAW MATERIAL AND IN FACT T HE ADVANCE HAD BEEN GIVEN FOR STARTING THE BUSINESS OF THE SUBSIDIARY AND HEN CE LD. DR STATED THAT ADVANCE COULD NOT BE SAID TO HAVE BEEN GIVEN FOR THE BUSINE SS PURPOSE OF THE ASSESSEE. LD. DR RELIED UPON THE FOLLOWING CASE LAWS IN SUPPO RT OF ITS CONTENTION: ORBIT RESORTS (P) LTD. (2011)14 TAXMAN 174, ITAT, C HD. C.R. AULUCK & SONS (P) LTD. VS. CIT(2014) 49 TAXMAN .COM 21 P&H 13. WE HAVE HEARD THE CONTENTION OF BOTH THE PARTIE S AND PERUSED THE DOCUMENTS PLACED BEFORE US AS ALSO THE ORDERS OF TH E AUTHORITIES BELOW. 6 WE FIND MERIT IN THE CONTENTION OF THE LD. AR THAT THE IMPUGNED ADVANCE HAD BEEN MADE FOR THE BUSINESS PURPOSE OF THE ASSESSEE. THE FACT THAT THE M/S VARDHMAN LIFE SCIENCES PRIVATE LTD. IS AN 100% SUB SIDIARY OF THE ASSESSEE COMPANY IS NOT IN DISPUTE. THE FACT THAT M/S VARDHM AN LIFE SCIENCES PRIVATE LTD. WAS TO MANUFACTURE RAW MATERIAL WHICH WAS REQUIRED BY THE ASSESSEE COMPANY IN ITS MANUFACTURING PROCESS AND WHICH IT WAS CURRE NTLY IMPORTING FROM CHINA INCURRING HUGE COST AND IRREGULARITY IN SUPPLY, HAS ALSO NOT BEEN CONTROVERTED BY THE REVENUE. IN THE LIGHT OF THE SUCH FACTUAL POSIT ION UNDENIABLY THE ADVANCE HAD BEEN GIVEN FOR THE BUSINESS PURPOSE OF THE ASSE SSEE TO ENABLE IT TO PROCURE RAW MATERIAL FROM ITS ASSOCIATE CONCERN AT CHEAPER PRICE AND ALSO ENSURE REGULAR SUPPLY OF THE SAME. THE CASE OF THE REVENUE WE FIND RESTS ON THE SOLE GROUND THAT THE ASSOCIATE CONCERN I.E; M/S VARDHMAN LIFE SCIENCES PRIVATE LTD. HAD NOT ACTUALLY STARTED FUNCTIONING OR MANUFACTURI NG DURING THE IMPUGNED AY AND THEREFORE THE ADVANCE COULD NOT SAID TO BE FOR PROCURING RAW MATERIAL. WE FIND NO MERIT IN THIS CONTENTION OF THE REVENUE. TO ESTABLISH COMMERCIAL EXPEDIENCY OF AN ADVANCE IT IS NOT NECESSARY TO EST ABLISH DIRECT NEXUS BETWEEN THE ADVANCE GIVEN AND THE BENEFIT DERIVED BY THE AS SESSEE. IN THE PRESENT CASE THE ADVANCE HAVING BEEN GIVEN TO A FULLY OWNED SUBS IDIARY OF THE ASSESSEE WHICH WAS TO MANUFACTURE A PRODUCT WHICH WAS UNDENI ABLY THE RAW MATERIAL FOR THE ASSESSEE COMPANY, THE ADVANCE WAS CLEARLY G IVEN TO FACILITATE THE ADVANCEMENT OF THE BUSINESS PURPOSES OF THE ASSESSE E COMPANY ONLY. GIVING OF THE ADVANCE FOR THE BUSINESS OF THE SUBSIDIARY CAN BE SAID TO BE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE COMPANY ONLY SINCE UNDENIABLY THE ASSESSEE COMPANY WAS TO DERIVE BENEFIT FROM THE SETTING UP O F THE SUBSIDIARY COMPANY AS IT WOULD ENABLE IT TO PROCURE RAW MATERIAL AT CH EAPER COST AND ALSO ENSURE REGULAR SUPPLY OF THE SAME. THE HONBLE APEX COURT HAS ELABORATELY DEALT WITH THE MEANING OF THE EXPRESSION COMMERCIAL EXPEDIENC Y IN THE CONTEXT OF 7 SECTION 36(1)(III) IN THE CASE OF S.A. BUILDER 288 ITR 1 WHEREIN IT HAS HELD AT PARA 19, 20, 21, 23, 24, 26, 30, 35, & 36 AS FOLLOWS: 19. WE HAVE CONSIDERED THE SUBMISSIONS OF THE RESP ECTIVE PARTIES. THE QUESTION INVOLVED IN THIS CASE IS ONLY ABOUT THE ALLOWABILITY OF THE INTEREST ON BORR OWED FUNDS AND HENCE WE ARE DEALING ONLY WITH THAT QUESTION. IN OUR OPINION, THE APPROACH OF THE HIGH COURT AS WELL AS THE AUTHORITIES BELOW ON THE AFORESAID QUESTION WAS NOT CORRECT. 20. IN THIS CONNECTION WE MAY REFER TO S. 36(1)(III ) OF THE IT ACT, 1961 (HEREINAFTER REFERRED TO AS T HE 'ACT) WHICH STATES THAT 'THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION' HAS TO BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME-TAX UNDER S. 28 OF THE ACT. 21. IN MADHAV PRASAD JATIA VS. CIT (1979) 10 CTR (S C) 375 : AIR 1979 SC 1291, THIS COURT HELD THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROF ITS OR GAINS', AND THIS HAS BEEN THE CONSISTENT VIE W OF THIS COURT. 23. IN OUR OPINION, THE DECISIONS RELATING TO S. 37 OF THE ACT WILL ALSO BE APPLICABLE TO S. 36(1)(III ) BECAUSE IN S. 37 ALSO THE EXPRESSION USED IS 'FOR T HE PURPOSE OF BUSINESS'. IT HAS BEEN CONSISTENTLY H ELD IN DECISIONS RELATING TO S. 37 THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. 24. THUS IN ATHERTON VS. BRITISH INSULATED & HELSBY CABLES LTD. (1925) 10 TAX CASES 155 (HL), IT WAS H ELD BY THE HOUSE OF LORDS THAT IN ORDER TO CLAIM A DEDU CTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS EXPENDED, NOT OF NECESSITY AND WITH A VIEW TO DIREC T AND IMMEDIATE BENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDER TO IN DIRECTLY FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST IN ATHERTONS CASE (SUPRA) HAS BEEN APPROVED BY THIS COURT IN SEVERAL DECISIONS E.G. EASTERN INVESTMENTS LTD. VS. CIT (1951) 20 ITR 1 (S C), CIT VS. CHANDULAL KESHAVLAL & CO. (1960) 38 ITR 601 (SC), ETC. 26. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EX PRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WID ER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNI NG PROFITS' VIDE CIT VS. MALAYALAM PLANTATIONS LTD. (1964) 53 ITR 140 (SC), CIT VS. BIRLA COTTON SPINNI NG & WEAVING MILLS LTD. (1971) 82 ITR 166 (SC), ETC . 35. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 174 CTR (DEL) 188 : (2002) 254 ITR 377 (DEL) THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSI NESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNO T JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR O F THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRE CTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIE S MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AU THORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER-CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT W AS ADVANCED FOR EARNING PROFITS. 36. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPI NION THAT IN EVERY CASE INTEREST ON BORROWED LOAN H AS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SIST ER-CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER-CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PER SONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER-CONCERN FOR COMMERCIAL E XPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDIN G COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUS INESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. THIS VIEW HAS BEEN REITERATED BY THE APEX COURT IN HERO CYCLES (SUPRA) AND BY THE JURISDICTIONAL HIGH COURT IN BRIGHT ENTERPRISES (SUPRA). THE HONBLE APEX COURT IN S.A. BUILDERS HAS HELD TH AT IF MONEY IS ADVANCED ON THE GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDER T O INDIRECTLY FACILITATE 8 CARRYING ON THE BUSINESS, THE TEST OF HAVING MADE T HE ADVANCE FOR THE PURPOSE OF BUSINESS; WHICH IS SINE QUA NON FOR SECTION 36( 1)(III), IS SATISFIED. IN THE PRESENT CASE WE FIND THAT THE ASSESSEE FULFILS THE ABOVE PA RAMETER SINCE AS POINTED OUT ABOVE, UNDISPUTEDLY THE INTEREST FREE ADVANCE WAS G IVEN TO A 100% SUBSIDIARY OF THE ASSESSEE COMPANY WHICH WAS TO MANUFACTURE RAW M ATERIAL USED BY THE ASSESSEE COMPANY. UNDOUBTEDLY THE EXISTENCE OF THE SUBSIDIARY WAS TO BENEFIT THE ASSESSEE COMPANY AND THEREFORE EVEN AS HELD BY THE LD. CIT(A) THAT THE ADVANCE WAS ONLY FOR SETTING UP THE SUBSIDIARY COMP ANY, IT CANNOT BE DENIED THAT THE PURPOSE WAS ONLY TO BENEFIT THE ASSESSEE C OMPANY EVEN IF INDIRECTLY. EVEN ON THE TOUCH STONE OF THE PARAMETER THAT THE E XPENDITURE SHOULD BE SUCH AS A PRUDENT MAN WOULD INCUR FOR THE PURPOSE OF BUS INESS, THE ASSESSEE SATISFIES THE SAME, SINCE IT CANNOT BE DENIED THAT THE ADVANC E MADE FOR SETTING UP THE BUSINESS OF THE SUBSIDIARY WHICH WOULD EVENTUALLY B ENEFIT THE ASSESSEE, WOULD HAVE BEEN MADE BY ANY PRUDENT BUSINESS MAN. THE HONBLE APEX COURT HAS CATEGORICALLY STATED THA T THE TRANSFER OF BORROWED FUNDS HAS TO SEEN FROM THE POINT OF VIEW OF COMMERC IAL EXPEDIENCY AND NOT FOR THE POINT OF VIEW OF WHETHER THE ADVANCE WAS FOR EA RNING PROFITS. THUS EVEN IF THE ADVANCE WAS MADE FOR SETTING UP THE BUSINESS OF THE SUBSIDIARY AND NOT PROCURING RAW MATERIAL IT CANNOT IN THE FACTS OF TH E PRESENT CASE, BE SAID THAT IT WAS NOT MADE FOR THE PURPOSE OF BUSINESS OF THE ASS ESSEE. MOREOVER THE APEX COURT HAS ALSO CATEGORICALLY STAT ED THAT WHERE THE HOLDING COMPANY HAS DEEP INTEREST IN ITS SUBSIDIARY, WHICH USES THE MONEY ADVANCED FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD BE ENTIT LED TO CLAIM DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. UNDENIABLY IN THE PRESENT CASE THE ASSESSEE IS THE HOLDING COMPANY OF VARDHMAN LIFE SCIENCES (P) LTD. HOLDING 100% INTERE ST IN IT AND FURTHER IT IS AN ADMITTED FACT THAT THE ADVANCE HAS BEEN USED BY THE ASSESSEE FOR SETTING UP ITS 9 BUSINESS, CLEARLY THEREFORE, THE ADVANCE GIVEN BY T HE ASSESSEE SATISFIED THE TEST OF COMMERCIAL EXPEDIENCY. IN VIEW OF THE ABOVE, WE UNHESITATINGLY HOLD THAT T HE AMOUNT ADVANCED BY THE ASSESSEE TO ITS SUBSIDIARY I.E; VARDHMAN LIFE SCIEN CE (P) LTD., WAS FOR THE PURPOSE OF BUSINESS. WE THEREFORE HOLD THAT NO DISALLOWANCE UNDER SECTION 36(1)(III) US WARRANTED IN THIS CASE. THE CASE LAWS RELIED UPON BY THE LD. DR, WE FIND, A RE OF DISTINGUISHABLE, SINCE IN BOTH THE CASES THERE WAS A CLEAR FINDING OF FACT TH AT THE ADVANCE WAS NOT GIVEN FOR BUSINESS PURPOSE. LD. AR HAS ALTERNATIVELY PLEADED BEFORE US THAT COM PANY HAD ENOUGH INTEREST FREE FUNDS IN THE FORM OF RESERVES AMOUNTING TO RS. 27.94 CRORES TO MAKE THE IMPUGNED ADVANCE OF RS. 7,35,45,100/- AND THUS IT S HOULD BE PRESUMED THAT THE ADVANCE HAD BEEN MADE OUT OF THE INTEREST FREE FUND S. NO DISALLOWANCE THUS, WAS WARRANTED UNDER SECTION 36(1)(III) OF THE ACT OF RS. 7,35,45,100/- . THE LD. AR RELIED UPON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF HERO CYCLES (P) LTD. VS. CIT(LUDHIANA) IN CIVIL APPEAL N O. 514 OF 2008 DT. 05/11/2015 AND THE JURISDICTIONAL HIGH COURT IN THE CASE OF BR IGHT ENTERPRISES(P) LTD VS. CIT, JALANDHAR IN ITA NO. 224 OF 2013 DT. 24/07/2015 IN THIS REGARD. WE FIND MERIT IN THIS CONTENTION OF THE LD. AR ALSO SINCE THE DETAILS OF THE BALANCE SHEET OF THE ASSESSEE PLACED BEFORE US REV EALS THAT THE RESERVES AVAILABLE WITH THE ASSESSEE COMPANY AS AT THE BEGIN NING OF THE YEAR AMOUNTED TO RS. 27.94 CRORES WHILE ADVANCES MADE WAS ONLY TO THE EXTENT OF 7.35 CRORES. THEREFORE, UNDENIABLY, THE ASSESSEE HAD ENOUGH INTE REST FREE FUNDS TO MAKE THE IMPUGNED ADVANCES AND IN SUCH CIRCUMSTANCES THE PRE SUMPTION IS THAT THE ADVANCES HAD BEEN MADE OUT OF THE INTEREST FREE FUN DS. THIS VIEW HAS BEEN AFFIRMED BY THE HONBLE SUPREME COURT IN THE CASE O F HERO CYCLES LTD.(SUPRA) WHERE IN IT HAS HELD AS FOLLOWS: 10 IN SO FAR AS THE LOANS TO DIRECTORS ARE CONCERNED , IT COULD NOT BE DISPUTED BY THE REVENUE THAT THE ASSESSEE HAD A CREDIT BALANCE IN T HE BANK ACCOUNT WHEN THE SAID ADVANCE OF RS. 34 LAKHS WAS GIVEN. REMARKABLY, AS OBSERVED BY THE CIT(APPEAL) IN HIS ORDER, THE COMPANY HAD RESERVE/S URPLUS TO THE TUNE OF ALMOST 15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COUL D IN ANY CASE, UTILIZE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. THE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT INDUSTRIES HAS ALSO UPHELD THIS VIEW FOLLOWING THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 34 0 AND HAS HELD AT PARA 16 OF ITS ORDER AS FOLLOWS: 16. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD R AISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTERES T-FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTI CAL WORKS LTD. VS. CIT[1997] 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECISI ON OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (1982) 134 ITR 219 WHE RE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOU LD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID O UT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITL ED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSI DERABLE FORCE, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BE EN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN W OOLCOMBERS OF INDIA LTD.S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HA D COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PRO FITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUS INESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THE REFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAF T 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 INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPT ION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER OF INC OME TAX(APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL. RESPECTFULLY FOLLOWING THE SAME WE HOLD THAT IN ANY CASE THE ASSESSEE HAD ENOUGH INTEREST FREE FUNDS TO MAKE IMPUGNED ADVANCE S AND THEREFORE IT WAS TO BE PRESUMED THAT THE ADVANCES HAD BEEN MADE OUT OF INTEREST FREE FUNDS AND NO DISALLOWANCE UNDER SECTION 36(1)(III) WAS THEREF ORE WARRANTED IN THIS CASE. IN VIEW OF THE ABOVE WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND DELETE THE DISALLOWANCE OF INTEREST AMOUNTING TO RS. 33,92,141 /- MADE UNDER SECTION 36(1)(III) OF THE ACT BY HOLDING THAT THE ADVANCES HAD BEEN MADE FOR BUSINESS PURPOSES AND THAT THE ASSESSEE HAD ENOUGH INTEREST FREE FUNDS FOR MAKING THE SAME. 11 14. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED . 15. WE NOW TAKE UP THE APPEAL FILED BY THE REVENUE IN ITA NO. 488/CHD/2015. 16. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE PROVIS IONS OF SECTION 14A AS CLARIFIED BY CBDT CIRCULAR NO. 5 OF 2014, WERE NOT ATTRACTED AS THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME DURING THE YEAR DE SPITE THE FACT THAT THE ASSESSEE HAD INVESTED A HUGE SUM FROM WHICH NO INCO ME WAS SHOWN WHILE THERE WAS A CONSIDERED FINANCIAL OUTGO ON INTEREST / FINANCIAL CHARGES ON BORROWED FUNDS. 2. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION M ADE ON ACCOUNT OF DISALLOWANCE MADE UNDER SECTION 40(A)(IA) OF THE AC T WITHOUT GETTING ANY ENQUIRY MADE ON THIS ISSUE OR PROVIDING AN OPPORTUN ITY OF BEING HEARD TO THE AO PARTICULARLY WHEN THE MATTER WAS DULY EXAMINED B Y THE AO UNDER SCRUTINY U/S 143(3) OF THE INCOME TAX ACT, 1961. 17. IN GROUND NO. 1 THE REVENUE HAS CHALLENGED THE DELETION OF DISALLOWANCE MADE UNDER SECTION 14A AMOUNTING TO RS. 40,28,526/- . 18. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD MADE INVESTMENT IN THE SHARE OF ITS ASSOCIATE CONCERN M/S VARDHMAN LIFE SCIENCES PRIVATE LTD. OF RS. 12,57,97,435/-. DURING ASSESSMENT PROCEEDINGS L D. AO CONFRONTED THE ASSESSEE AS TO WHY DISALLOWANCE AS PER SECTION 14A READ WITH RULE 8D BE NOT MADE IN THE PRESENT CASE SINCE THE INCOME EARNED FR OM THE INVESTMENT IN THE NATURE OF DIVIDEND WOULD BE EXEMPT FROM TAX. THE AS SESSEE SUBMITTED THAT IT HAD NOT EARNED ANY INCOME FROM THE IMPUGNED INVESTM ENT AND HENCE NO DISALLOWANCE UNDER SECTION 14A WAS WARRANTED. LD. A O REJECTED THE CONTENTION OF THE ASSESSEE AND COMPUTED THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D AT RS. 40,28,526/- AND ADDED THE SAME TO TH E INCOME OF THE ASSESSEE. 19. BEFORE THE LD. CIT(A) THE ASSESSEE PLEADED THAT SINCE IT HAD NOT EARNED ANY EXEMPT INCOME ON THE INVESTMENT MADE, NO DISALL OWANCE UNDER SECTION 14A WAS TO BE MADE, IN VIEW OF THE JUDGMENT OF JURI SDICTIONAL HIGH COURT IN THE CASE OF CIT VS. LAKHANI MARKETING IN ITA NO. 970 OF 2008. LD. CIT(A) AGREED WITH THE CONTENTION OF THE ASSESSEE AND DIRECTED THE AO TO VERIFY WHETHER ANY 12 EXEMPT INCOME HAD BEEN EARNED DURING THE YEAR AND I F NO SUCH INCOME WAS EARNED NO DISALLOWANCE UNDER SECTION 14A WAS TO BE MADE. 20. BEFORE US THE LD. DR ARGUED THAT IN VIEW OF THE CBDT CIRCULAR NO. 5/2014 WHEREIN IT HAS BEEN CLARIFIED BY THE BOARD THAT DIS ALLOWANCE OF EXPENDITURE UNDER SECTION 14A READ WITH RULE 8D HAS TO BE MADE EVEN IF NO EXEMPT INCOME HAS BEEN EARNED IN A PARTICULAR YEAR, THE LD. CIT(A ) HAD ERRED IN DELETING THE DISALLOWANCE MADE IN THE CASE OF THE ASSESSEE. LD. DR STATED THAT THE DECISION OF THE APEX COURT IN THE CASE OF CIT VS. WALFORT SH ARE AND STOCK PVT. LTD. (2010) 326 ITR 1 SC, SUPPORTED THIS VIEW. 21. LD. AR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LD. CIT(A) AND FURTHER STATED THAT THE HONBLE APEX COURT IN THE C ASE OF COMMISSIONER OF CENTRAL EXCISE VS. M/S RATAN MELTING & WIRE INDUST RIES IN CIVIL APPEAL NO. 4022 OF 1999 HAS CATEGORICALLY HELD THAT WHEN THE SUPREME C OURT OR THE HIGH COURT DECLARES THE LAW ON QUESTION RAISING FOR CONSIDERAT ION IT WOULD NOT BE APPROPRIATE FOR COURTS TO DIRECT THAT CIRCULARS SHO ULD BE GIVEN EFFECT TO AND NOT THE VIEW EXPRESSED IN THE DECISION OF THIS COURT OR THE HIGH COURT. LD. AR THEREFORE STATED THAT THE VIEW EXPRESSED BY THE JUR ISDICTIONAL HIGH COURT IN THE CASE OF LAKHANI MARKETING (SUPRA) WOULD PREVAIL OVE R THE CIRCULAR ISSUED BY THE CBDT AND IN THE ABSENCE OF ANY EXEMPT INCOME EARNED BY THE ASSESSEE NO DISALLOWANCE UNDER SECTION 14A WAS TO BE MADE HAS H ELD BY THE LD. CIT(A). 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. 23. THE ONLY ISSUE IN THE PRESENT GROUND BEFORE US IS WHETHER DISALLOWANCE UNDER SECTION 14A CAN BE MADE IN THE ABSENCE OF ANY EXEMPT INCOME BEING EARNED SINCE AS PER THE FACT OF THE PRESENT CASE UN DENIABLY NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE IN THE IMPUGNED YEA R ON THE INVESTMENT OF RS. 12,57,97,435/- MADE BY THE ASSESSEE COMPANY IN ITS WHOLLY OWNED SUBSIDIARY I.E. M/S VARDHMAN LIFE SCIENCES PRIVATE LTD. 13 WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD . CIT(A), WHO DELETED THE DISALLOWANCE MADE FOLLOWING THE DECISION OF THE JUR ISDICTIONAL HIGH COURT IN THE CASE OF LAKHANI MARKETING (SUPRA). THE ARGUMENT OF THE LD. DR THAT THE CBDT CIRCULAR NO. 5/2014 DT. 11/02/2014 STATING THAT EV EN IN THE ABSENCE OF ANY EXEMPT INCOME DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE, IS BINDING ON THE REVENUE AUTHORITY, WE FIND HAS NO MERIT. THE HO NBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF CENTRAL EXCISE, BOLPUR VS. M/S RATAN MELTING & WIRE INDUSTRIES IN CIVIL APPEAL NO. 4022 OF 1999 DT. 14/ 10/2008, HAS CATEGORICALLY HELD THAT DECISION OF THE HIGH COURT / SUPREME COURT WO ULD OVERRULE CIRCULARS ISSUED BY THE BOARDS. THE HONBLE COURT HELD AT PARA 6 OF ITS ORDER AS FOLLOWS: CIRCULARS AND INSTRUCTION ISSUED BY THE BOARD ARE NOT DOUBT BINDING IN LAW ON THE AUTHORITIES UNDER THE RESPECTIVE STATUTES, BUT WHEN THE SUPREME COURT OF THE HIGH COURT DECLARES THE LAW ON THE QUESTION ARISING FOR CONSIDERATION, IT WOULD NOT BE APPROPRIATE FOR THE COURT TO DIRECT THAT THE CIRCUL AR SHOULD BE GIVEN EFFECT TO AND NOT THE VIEW EXPRESSED IN A DECISION OF THIS COURT OR THE HIGH COURT. SO FAR AS THE CLARIFICATIONS / CIRCULARS ISSUED BY THE CENTRAL GO VERNMENT AND OF THE STATE GOVERNMENT ARE CONCERNED THEY REPRESENT MERELY THEI R UNDERSTANDING OF THE STATUTORY PROVISIONS. THEY ARE NOT BINDING UPON THE COURT. IT IS FOR THE COURT TO DECLARE WHAT THE PARTICULAR PROVISION OF STATUTE SA YS AND IT IS NOT FOR THE EXECUTIVE. LOOKED AT FROM ANOTHER ANGEL, A CIRCULAR WHICH IS C ONTRARY TO THE STATUTORY PROVISIONS HAS REALLY NO EXISTENCE IN LAW. IN VIEW OF THE ABOVE, WE REJECT THE CONTENTION OF T HE LD. DR IN THIS REGARD. FURTHER THE RELIANCE PLACED BY THE LD. DR ON THE DE CISION OF THE APEX COURT IN WALFORT SHARE & STOCK PVT. LTD. (SUPRA), WE FIND IS MISPLACED. THE HONBLE APEX COURT, HAD IN THAT CASE LAID DOWN THE BASIC PRINCIP LES GOVERNING SECTION 14A STATING THAT EXPENSES ALLOWED CAN ONLY BE IN RESPEC T OF EARNING TAXABLE INCOME. THE ISSUE BEFORE THE COURT IN THAT CASE WAS NOT THE APPLICATION OF SECTION 14A IN THE ABSENCE OF EARNING ANY EXEMPT IN COME. THEREFORE THE DECISION RENDERED IN THAT CASE CANNOT BE INTERPRETE D OTHERWISE. THIS SPECIFIC ISSUE WAS DEALT WITH BY THE JURISDICTIONAL HIGH COU RT IN THE CASE OF LAKHANI MARKETING(SUPRA) AND WHICH HAS RIGHTLY APPLIED BY T HE LD. CIT(A) IN THE PRESENT CASE. 24. GROUND NO. 1 RAISED BY THE REVENUE IS THEREFORE DISMISSED. 14 25. IN GROUND NO. 2 THE REVENUE HAS AGITATED AGAINS T THE DELETION OF ADDITION MADE ON ACCOUNT OF DISALLOWANCE UNDER SECT ION 40(A)(IA)AMOUNTING TO RS. 64,37,342/-. 26. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG THE IMPUGNED AY THE ASSESSEE HAD DEBITED AN AMOUNT OF RS. 64,37,342/- O N ACCOUNT OF SERVICE FEE PAID FOR AVAILING LETTER OF CREDIT SERVICES. DURIN G ASSESSMENT PROCEEDINGS THE AO FOUND THAT NO TAX HAD BEEN DEDUCTED ON THE SAME. HE QUESTIONED THE ASSESSEE ABOUT APPLICABILITY OF THE SECTION 40(A)(I A) OF THE ACT TO THE SAME, TO WHICH THE ASSESSEE SUBMITTED THAT THE PAYMENT WAS M ADE TO SCHEDULED BANKS AND THUS THERE WAS NO REQUIREMENT TO DEDUCT TAX AT SOURCE. THE ASSESSING OFFICER BRUSHED ASIDE THE CONTENTION OF THE ASSESSE E AND PROCEEDED TO DISALLOW THE IMPUGNED AMOUNT UNDER SECTION 40(A)(IA) OF THE ACT. 27. BEFORE THE LD. CIT(A)THE ASSESSEE REITERATED TH E CONTENTION MADE BEFORE THE AO, AFTER CONSIDERING WHICH LD. CIT(A) DELETED THE DISALLOWANCE MADE BY HOLDING AT PARA 5.3 OF HIS ORDER AS FOLLOWS: 5.3 I HAVE CONSIDERED FACTS OF THE ISSUE. THE PAYME NT OF RS. 64,37,342/- WAS MADE BY THE APPELLANT TO SCHEDULED BANKS FOR OPENING LET TERS OF CREDIT. AS PER THE PROVISIONS OF SECTION 2(28A) OF THE ACT, INTEREST M EANS INTEREST PAYABLE IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED AND INCLUDE S ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF ANY CREDIT FACILITY, WHICH HAS NOT BEEN UTILIZED. THEREFORE, THE AMOUNT PAID FOR OPENING LETTERS OF CREDIT OR EVEN S ERVICE FEE HAS TO BE TREATED AS INTEREST AND SINCE THE AMOUNT HAS BEEN PAID TO SCHE DULED BANKS, TAX WAS NOT REQUIRED TO BE DEDUCTED AT SOURCE ON THIS PAYMENT A S PER PROVISIONS OF SECTION 194A(3)(III) AND SO PROVISIONS OF SECTION 40(A)(IA) WILL NOT BE APPLICABLE. THE ADDITION HAS WRONGLY BEEN MADE ON THIS ACCOUNT AND SO THE SAME IS DELETED. GROUND OF APPEAL IS DISMISSED. 28. BEFORE US THE LD. DR RELIED UPON THE ORDER OF T HE AO AND STATED THAT THE ASSESSEE HAVING FAILED TO DEDUCTED TDS ON LETTER OF CREDIT OPENING CHARGES, IT WAS A VIOLATION OF THE PROVISIONS OF SECTION 40(A)( IA), AND THE SAME WAS REQUIRED TO BE DISALLOWED. 29. LD. AR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LD. CIT(A). 30. WE HAVE HEARD THE RIVAL SUBMISSION AND ORDER OF THE AUTHORITIES BELOW AND ALSO THE DOCUMENTS PLACED BEFORE US. 15 31. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF TH E LD. CIT(A) DELETING THE DISALLOWANCE BY HOLDING THAT THE IMPUGNED PAYMENT W AS NOT LIABLE TO TAX DEDUCTION AT SOURCE IN VIEW OF SECTION 194A(3) AND THUS COULD NOT BE A SUBJECT MATTER OF DISALLOWANCE UNDER SECTION 40(A)(IA) OF T HE ACT. UNDENIABLY THE IMPUGNED PAYMENT OF RS. 64,37,342/- MADE BY THE ASS ESSEE TO SCHEDULED BANKS FOR OPENING LETTERS OF CREDIT WAS IN THE NATURE OF INTEREST AS PER THE PROVISIONS OF SECTION 2(28A) OF THE ACT BUT SINCE THE AMOUNT HAD BEEN PAID TO SCHEDULED BANKS NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE ON THE SAME IN VIEW OF THE PROVISIONS OF SECTION 194A (3)(III) WHICH CATEGORIC ALLY EXCLUDE INTEREST PAID TO BANKS FROM THE PERVIEW OF TAX DEDUCTION AT SOURCE S ECTION 194A(3)(III) STATE AS FOLLOWS: SECTION 194A. 3. THE PROVISIONS OF SUB-SECTION (1)SHALL NOT APPLY (III) TO SUCH INCOME CREDITED OR PAID TO (A) ANY BANKING COMPANY TO WHICH THE BANKING REGULATION ACT, 1949 (10 OF 1949), APPLIES, OR ANY CO-OPERATIVE SOCIETY ENGAGED IN CAR RYING ON THE BUSINESS OF BANKING (INCLUDING A CO-OPERATIVE LAND MORTGAGE BAN K), OR (B) ANY FINANCIAL CORPORATION ESTABLISHED BY OR UNDER A CENTRAL, STATE OR PROVINCIAL ACT, OR (C) THE LIFE INSURANCE CORPORATION OF INDIA ESTABLISHED UNDER THE LIFE INSURANCE CORPORATION ACT, 1956 (31 OF 1956), OR (D) THE UNIT TRUST OF INDIA ESTABLISHED UNDER THE UNIT TRUST OF INDIA ACT, 1963 (52 OF 1963), OR (E) ANY COMPANY OR CO-OPERATIVE SOCIETY CARRYING ON THE BUSINESS OF INSURANCE, OR (F) SUCH OTHER INSTITUTION, ASSOCIATION OR BODY OR CLAS S OF INSTITUTIONS, ASSOCIATIONS OR BODIES WHICH THE CENTRAL GOVERNMENT MAY, FOR REASON S TO BE RECORDED IN WRITING, NOTIFY IN THIS BEHALF IN THE OFFICIAL GAZETTE; IN VIEW OF THE ABOVE SINCE THE ASSESSEE WAS NOT REQ UIRED TO DEDUCT TAX AT SOURCE IN THE IMPUGNED PAYMENTS THE PROVISIONS OF S ECTION 40(A)(IA) WERE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AND LD. CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE MADE ON THIS ACCOUNT. THIS GROUND RAISED BY THE REVENUE IS THEREFORE DISMISSED. 32. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :22/04/2016 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR