KSH International Pvt.Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 9, Pune

ITA 516/PUN/2018

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KSH International Pvt. Ltd. appealed against the order of the Commissioner of Income Tax (Appeals)-6, Pune, which had upheld a disallowance of Rs.1,00,05,967 made by the Assessing Officer under section 14A read with rule 8D of the Income Tax Act, 1961. The disallowance was initially made on the grounds that the assessee used borrowed funds for investments in a sister concern, which allegedly generated exempt income. However, the CIT(A) later invoked sections 36(1)/37 to justify the disallowance, despite the absence of any exempt income during the year. The Tribunal, referencing a previous decision in the assessee's own case and the Supreme Court's ruling in CIT Vs. Reliance Industries Ltd., found that the disallowance was not justified as there was no exempt income and the investments could be covered by the interest-free funds available with the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134322 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 04-12-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 21-03-2018
• Other Referred Cases: CIT Vs. Reliance Industries Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 37; 143(3); 14A

Judgement Text

आयकर अपीलीय अिधकरण “बी” Ɋायपीठ पुणेमŐ। IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES “B” :: PUNE BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.516/PUN/2018 िनधाᭅरण वषᭅ / Assessment Year : 2014-15 KSH International Pvt. Ltd., Gat No.11/3, 11/4 Village Birdewadi, Chakan, Tal. Khed, Pune – 410501. PAN: AAACB 1897 K V s The Deputy Commissioner of Income Tax, Circle-9, Pune. Appellant/ Assessee Respondent / Revenue Assessee by Shri A N Kothary – AR Revenue by Shri Ramnath P Murkunde – DR Date of hearing 05/12/2022 Date of pronouncement 24/01/2023 आदेश/ ORDER PER DR. DIPAK P. RIPOTE, AM: This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeal)-6, Pune dated 14.12.2017 emanating from the assessment order dated 23.11.2016 under section 143(3) of the I.T.Act, 1961 for the A.Y.2014-15. The Assessee has raised the following grounds of appeal: “1. Disallowing an amount of Rs. 1,00,05,967/-, as disallowable interest, by invoking the provisions of Sec 37 or 36(1 )(iii) on the ground that these provisions are not invoked by the Assessing Officer. This action of the CIT(A) being not in accordance with the law it is prayed that the addition be deleted. 2. Making an addition of Rs. 1,00,05,967/- as disallowable interest on the assumption and presumptions without regard to the facts of the case. It is prayed that the said addition be deleted. ITA No.516/PUN/2018 KSH International Pvt. Ltd., [A] 2 3. invoking the provisions of Secs. 37 or 36, while deleting the addition of Rs.1,00,05,967/- made by the AO U/s 14A, to disallow the said amount by holding that the interest is attributable to the borrowed funds utilised for investing in associate company. The action of CIT (A) being not in accordance of the law and not based on the facts it is prayed that this addition be deleted. 4. Disallowing an amount of Rs. 1,00,05,967/- without considering the submissions made by the assessee that the assessee had sufficient funds of its own to invest and as such no borrowed funds have been used for the purpose of investments in sister concern. The action of CIT (A) being bad in law and on facts it is prayed that the addition be deleted. The appellate named above craves leave to add, to alter and to modify the grounds of appeal if and when required.” 2. Brief facts of the case: In this case, the Assessing Officer(AO) made disallowance under section 14A read with rule 8D of Rs.1,00,05,967/-. Aggrieved by the same, the assessee filed appeal before the ld.CIT(A). 3. The ld.CIT(A) held that since there was no exempt income during the year disallowance under section 14A is unwarranted. However, the ld.CIT(A) invoked section 36(1)/37. The ld.CIT(A) gave the finding that investment in the sister concern are to the tune of Rs.16,85,22,113/- at the end of the year. The short term borrowings were Rs.46,60,78,489/- as on 31.03.2014. Therefore, the ld.CIT(A) held that interest bearing funds have been utilized for investment in sister concern. Accordingly, the ld.CIT(A) calculated the interest of Rs.1,02,69,983/- to be disallowed but restricted it to Rs.1,00,05,967/-. ITA No.516/PUN/2018 KSH International Pvt. Ltd., [A] 3 4. Aggrieved by the order of the ld.CIT(A), the assessee filed appeal before this Tribunal. Ld.AR submissions: 5. The ld.Authorised Representative(ld.AR) of the assessee filed chart giving the fund position which is reproduced as under : OWN FUNDS 31/03/ 2014 31/03/ 2013 31-03- 2012 31/03/ 2011 31/03/ 2010 31/03/ 2009 31/03/ 2008 Share Capital 5.88 0.96 0.96 0.96 0.96 0.53 0.53 Reserves and surplus 29.93 28.73 28.42 26.64 19.76 11.95 9.45 Total interest free funds 35.81 29.69 29.38 27.60 20.72 12.48 9.98 INVETSMENT IN SISTER CONCERNS 16.85 16.45 9.70 8.88 6.24 3.15 1.99 Increase over earlier year 0.40 6.75 0.82 2.64 3.09 1.16 1.99 6. The ld.AR invited our attention to the fact that total interest free funds were Rs.35.81 crores whereas investments in sister concern was 16.85 crores. The ld.AR relied on various decisions in the proposition that when interest free funds are available no disallowance can be made. Ld.DR submissions : ITA No.516/PUN/2018 KSH International Pvt. Ltd., [A] 4 7. The ld.Departmental Representative(ld.DR) for the Revenue relied on the orders of the AO and ld.CIT(A). Findings & Discussion : 8. We have heard both the parties and perused the records. It is an admitted fact that there was no exempt income during the year. The ITAT Pune in assessee’s own case for A.Y. 2013-14 has allowed the appeal of the assessee with reference to disallowance under section 14A of the Act. The relevant part of the ITAT order is reproduced here as under: “9. In view of categorical findings of the Hon’ble Delhi High Court, which has further been upheld by the Hon’ble Supreme Court by dismissal of Special Leave Petition, we hold that in the absence of earning of any exempt income during the year under consideration, there is no merit in making any disallowance under section 14A of the Act read with Rule 87D of the Rules. The ground of appeal raised by Revenue is thus dismissed.” 9. Thus, respectfully following the ITAT Pune’s order in assessee’s own case for earlier years, it is held that no disallowance can be made under section 14A when there is no exempt income. 9.1 Regarding the disallowance of interest, it is observed from the balance sheet of the assessee that total interest free funds were Rs.35.81 crores. The assessee has invested Rs.16.85 crores in the sister concern. So whenever there is ITA No.516/PUN/2018 KSH International Pvt. Ltd., [A] 5 interest free funds and investment it is presumed that interest free funds were utilized for making investment in the sister concern unless proved otherwise. In this case, Department has not produced any evidence to establish that interest bearing funds were utilized for investment in sister concern. The Hon’ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. (2019) 102 taxmann.com 52 (SC) has held as under: “7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.” 10. Thus, respectfully following the Hon’ble Supreme Court it is held that since interest free funds were available with the assessee, it is presumed that interest free funds were utilized for investments in sister concern. Therefore, the AO is directed to delete the disallowance of Rs.1,00,05,967/-, accordingly, grounds of appeal raised are allowed. ITA No.516/PUN/2018 KSH International Pvt. Ltd., [A] 6 11. In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 24 th January, 2023. Sd/- Sd/- (S.S.GODARA) (DR. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 24 th Jan, 2023/ SGR* आदेशकᳱᮧितिलिपअᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीयᮧितिनिध, आयकर अपीलीय अिधकरण, “बी” बᱶच, पुणे / DR, ITAT, “B” Bench, Pune. 6. गाडᭅफ़ाइल / Guard File. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.