The Asstt. Commissioner of Income-tax, Jalandhar V. M/s Kapsons Inds. Ltd, Jalandhar

ITA 719/ASR/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0741 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 16-05-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 02-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S K VATTA
• Keywords: Business income; Depreciation; Business expenditure; Rule of consistency; Earning of tax free income; Proportionate interest; Question of law; Notional interest; Commercial expediency
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR BEFORE SH. A.D.JAIN, JUDICIAL MEMBER AND SH. T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A NO.719(ASR)/2014 ASSESSMENT YEAR: 2011-12 ASST. CIT, CIRCLE-1, JALANDHAR. VS. M/S KAPSONS INDS. LTD., G.T. ROAD, SURANUSSI, JALANDHAR. PAN:AAACK9887G (APPELLANT) (RESPONDENT) APPELLANT BY: SH. UMESH TAKYAR (DR) RESPONDENT BY: SH. S.K. VATTA (CA) DATE OF HEARING: 16.05. 2016 DATE OF PRONO UNCEMENT: 24.05.2016 ORDER PER T. S. KAPOOR (AM): THIS IS AN APPEAL FILED BY REVENUE AGAINST THE ORDE R OF LEARNED CIT(A), JALANDHAR, DATED 26.09.2014 FOR ASST. YEAR: 2011-12. 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.30, 24,084/- WHICH WAS MADE BY THE AO OUT OF INTEREST AND OTHER EXPENSES U NDER 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.7,2 0,000/-WAS MADE BY THE AO ON ACCOUNT OF INTEREST EXPENSES UNDER SECTION 36 (1)(III) OF THE INCOME TAX ACT,1961. (III) THAT, WHILE DELETING THE ADDITION OF RS.30,24 ,084/- AND RS.7,20,000/- AS DISCUSSED IN GROUND NO. 1 AND 2 THE LD. CIT( A) HAS FAILED TO CONSIDER THE FACTS OF THE CASE AS BROUGHT OUT BY THE AO WHIL E FRAMING ASSESSMENT. (IV) THAT, IT IS PRAYED THAT THE ORDER OF THE LD. C IT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 2 3. THE BRIEF FACTS OF THE CASE AS NOTED IN THE ASSE SSMENT ORDER ARE THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ELECTRICAL STAMPING AND ALLIED PRODUCTS. THE CASE O F THE ASSESSEE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD MADE I NVESTMENT IN SHARE CAPITAL OF SISTER COMPANY AND HAD ALSO ADVANCED INT EREST FREE LOANS TO SISTER CONCERNS. THE ASSESSING OFFICER OBSERVED THA T ASSESSEE HAD INCURRED AN EXPENDITURE ON ACCOUNT OF INTEREST ON V ARIOUS LOANS, THEREFORE, THE ASSESSEE WAS REQUIRED TO GIVE DETAIL S OF SOURCES OF FUNDS FROM WHICH THE INVESTMENT WAS MADE AND WAS ALSO DIR ECTED TO EXPLAIN AS TO WHY THE PROPORTIONATE INTEREST ON ACCOUNT OF INT EREST EXPENDITURE ATTRIBUTABLE TO SUCH INVESTMENT BE NOT DISALLOWED. IN RESPONSE THE ASSESSEE FILED WRITTEN SUBMISSIONS AND STATED THAT ASSESSEE WAS A HOLDING COMPANY OF SISTER CONCERN AND THE SAID INVE STMENT WAS NOT MADE OUT OF BORROWED FUNDS. IT WAS ALSO SUBMITTED THAT A SSESSEE HAD EARNED NET PROFIT OF RS.17.73 CRORES DURING THE YEAR AND, THEREFORE, NO INTEREST EXPENSES WAS ATTRIBUTABLE TO THE INVESTMENT MADE BY ASSESSEE. THE ASSESSEE FURTHER SUBMITTED THAT IN EARLIER YEARS NO DISALLOWANCES U/S 14A WAS MADE. HOWEVER THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE REPLY OF THE ASSESSEE AND THEREFORE, HE MADE A DISALLOWANCE OF RS.13,24,084/- AS PER RULE 8D OF INCOME TAX. THE A SSESSING OFFICER FURTHER OBSERVED THAT ASSESSEE HAD MADE ADVANCES TO SOME PERSONS WHICH WERE NOT FOR BUSINESS PURPOSES AND, THEREFORE , HE MADE ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 3 DISALLOWANCE U/S 36(1)(III) OF THE INCOME TAX ACT, TAKING AVERAGE INTEREST RATE OF 12%. 4. AGGRIEVED WITH THE ORDER THE ASSESSEE FILED APPE AL BEFORE LEARNED CIT(A) AND FILED DETAILED SUBMISSIONS. THE LEARNED CIT(A) AFTER GOING THROUGH THE SUBMISSIONS DELETE BOTH ADDITIONS BY HO LDING AS UNDER: ADDITION U/S 14A 5.2 I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSE SSING OFFICER AS MADE BY HIM IN THE ASSESSMENT ORDER AS WELL AS THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE COMPANY VIDE LETTER DATED 26.09.2014 ON THE ISSUE UNDER REFERENCE. I HA VE ALSO CONSIDERED THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE AS WELL AS BY THE ASSESSING OFFICER ON THE ISSUE UNDER REFERENCE. ON CAREFUL CONSIDERED OF THE RIVAL CONTENTIONS, IT HAS BEEN NOTICED THAT ASSESSING OFFICER HAS MADE THE IMPUGNED ADDITION BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AS THE ASSESSEE COMPANY HAS MADE INV ESTMENT/CAPITAL CONTRIBUTION IN THE SISTER CONCERNS WHICH WILL FETCH EXEMPT INCOME. ON THE OTH ER HAND, THE CONTENTIONS AND SUBMISSIONS OF THE ASSESSEE COMPANY BASICALLY EMPHASIZE THAT TH E ASSESSEE COMPANY HAD SUBSTANTIAL OWN CAPITAL BASE BY WAY OF SHARE CAPITAL IN THE A.YS. 2 009-10, 2010-11 AND 2011-12 OF RS. 12.77 CRORES, RS.,16.58 CRORES AND RS.24.58 CRORES RESPEC TIVELY BESIDES FREE RESERVE TO THE TUNE OF RS.43.52 CRORES, RS.50.23 CRORES AND RS.60.95 CRORE S RESPECTIVELY (INCLUDING DEPRECIATION RESERVE SINCE DEPRECIATION IS NOT A CASH OUT FLOW) IN THE SAID YEARS, ON WHICH NO INTEREST IS BEING PAID BY THE COMPANY. IT WAS ALSO CONTENDED TH AT THE ASSESSEE COMPANY ALSO HAVE NET PROFIT BEFORE DEPRECIATION TO THE EXTENT OF RS. 12. 38 CRORES, RS. 14.63 CRORES AND RS. 17.73 CRORES IN THE A.YS. YEAR 2009-10, 201 0-11 AND 2011-12 WHICH ARE INTERNAL ACCRUALS AND THEREFORE THE COMPANY HAD SUBSTANTIAL RESOURCES OF ITS OWN TO MAKE THE INVESTMENTS IN SHARE CAPITAL OR SHARE APPLICATION OR PARTNER CAPITAL OF ITS SISTER/SUBSIDIARY COMPANIES/ CONCERNS AND NO FUNDS WERE BORROWED TO MAKE THE SAID INVESTMENTS/CONTRIBU TION. THE LD. AR OF THE ASSESSEE COMPANY ALSO STRONGLY CONTENDED WITH THE F ACTS AND FIGURES OF THE WORKING CAPITAL LOANS RAISED FROM BANKS AND THE COM PANIES AND WITH REGARD TO EMPLOYMENT OF THE TOTAL FUNDS IN THE REQUISITE W ORKING CAPITAL SUCH AS STOCKS/STORES, SUNDRY DEBTORS AND OTHER CURRENT ASS ETS. IN THE OPINION 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 PURPOSES IT WAS SA NCTIONED AND RELEASED WHICH WERE ALSO BEING REGULARLY MONITORED BY THE BA NKERS. IT WAS, THEREFORE, CONTENDED THAT NO AMOUNT OF WORKING CAPITAL FUNDS C OULD BE ASSUMED OR PRESUMED OR SAID TO HAVE BEEN DEPLOYED/OR UTILIZED FOR MAKING THE INVESTMENTS IN THE SISTER/SUBSIDIARY CONCERNS OR UT ILIZED FOR CONTRIBUTION AS PARTNERS CAPITAL. IT WAS ALSO CONTENDED THAT NO DI SALLOWANCE 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. 2010-1 1 ALTHOUGH THE ASSESSMENTS IN THOSE YEARS HAVE ALSO BEEN FRAMED UN DER SCRUTINY UNDER SECTION 143(3) OF THE ACT UNDER SIMILAR SITUATIONS AND NOTHING NEW HAS TRANSPIRED IN THE ASSESSMENT YEAR IN QUESTION WHICH WOULD NECESSITATE TO ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 4 HAVE A DIFFERENT AND CONTRARY VIEW. IT WAS FURTHER CONTENDED THAT THE DISALLOWANCES MADE BY THE ASSESSING OFFICER UNDER T HE PROVISIONS OF SECTION 14A OF THE ACT IS CONTRARY TO THE PRINCIPLES AND RU LES OF CONSISTENCY AND OF NATURAL LAW AND JUSTICE. IT HAS AGAIN BEEN CONTENDE D THAT SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER IN A.Y. 2010-11 HAS BEEN DELETED BY ME IN THE CASE OF ASSESSEE ITSELF. 1.1 IN SUPPORT OF THE ABOVE SUBMISSIONS/CONTENTIONS, TH E LD. AR OF THE ASSESSEE COMPANY HAD RELIED UPON THE JUDGMENTS OF THE HONORABLE APEX COU RT IN THE CASE OF CIT VS SHIVSAGAR ESTATE REPORTED AT (2002) 177 CTR 107 / 257 ITR 59 (SC), HONORABLE DELHI HIGH COURT IN THE CASE OF CIT VS ARJ SECURITY PROMOTERS REPORTED AT (2003) 264 ITR 276 (DELHI), HONORABLE PUNJAB & HARYANA HIGH COURT IN THE CASE O F CIT VS. MARUDHAR CHEMICALS & PHARMACEUTICALS (P) LIMITED REPORTED AT 319 ITR 75, HONORABLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES LIMITED REPORTED A T 323 ITR 518 AND PLETHORA OF OTHER SUCH JUDGMENTS ON THE ISSUE UNDER REFERENCE (DETAILS IN WRITTEN SUBMISSIONS AS REPRODUCED ABOVE). THE GIST OF THE ARGUMENTS OF THE LD. AR OF THE ASSE SSEE WITH FACTS HAVE ALSO BEEN GIVEN IN PARA 5.2 ABOVE. 5.4 I HAVE CAREFULLY CONSIDERED THE ARGUMENT OF T HE LD. AR OF THE ASSESSEE COMPANY, FACTS BROUGHT ON RECORD AND VARIOUS JUDICIAL PRONOUNCEMEN TS RELIED UPON BY HIM IN SUPPORT OF HIS ARGUMENTS. 5.5.1 1 FIRSTLY THE FINANCIAL STATEMENTS FOR THE FI NANCIAL YEARS 2008-09, 2009-10 AND 2010-11 WHICH HAVE BEEN BROUGHT ON RECORD BY THE LD . AR OF THE ASSESSEE COMPANY, SUPPORT THE CONTENTIONS, FACTS AND ARGUMENTS OF THE ASSESSE E COMPANY AS THE ASSESSEE COMPANY HAD SUBSTANTIAL OWN CAPITAL BASE AND FREE RESERVES BESI DES SUBSTANTIAL CURRENT YEAR PROFITS BEFORE DEPRECIATION (SINCE DEPRECIATION IS NOT A CASH OUT FLOW) TO THE EXTENT OF RS. 17.73 CRORE WHICH FOR EXCEEDS THE EXTENT OF INVESTMENTS IN THE SHARE CAPITAL OF SUBSIDIARY SISTER COMPANY OR OTHER ALLIED COMPANY AND A CAPITAL CONTRIBUTION IN A SISTER PARTNERSHIP CONCERN ON RECORD. THE INVESTMENT IN SUCH SHARES IS MERELY RS.2.75 CRO RES IN THE FINANCIAL YEAR 2008-09 AS AGAINST FREE FUNDS OF RS. 12.38 CRORES AND ONLY RS. 44.45 LACS AS AGAINST PROFIT OF S. 14/63 CRNRES IN THE FINANCIAL YEAR 2009-10. APART FROM TH IS, THE CONTRIBUTION AS A PARTNER IN A SISTER CONCERN DURING CURRENT YEAR IS ONLY 56,81,349/- AS AGAINST PROFITS OF RS. 17.73 CRORES IN THE FINANCIAL YEAR 2010-11. MORE SO, THE WORKING CAPITA L LIMIT AS RAISED FROM BANKS AND OTHERS ALSO REMAINED DEPLOYED IN WORKING CAPITAL REQUIREME NTS OF THE STOCKS/STORES, SUNDRY DEBTORS AND OTHER CURRENT ASSETS, INVESTMENT IN WHICH APPAR ENTLY FAR EXCEEDED SUCH WORKING CAPITAL LIMIT AVAILMENT AND THE 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 SECTION 14A OF THE ACT IN ANY OF THE PAST ASSESSMENT YEARS UNDER SIMILAR CIRCUMSTANCES EXCEPT IN A.Y. 2010-11 WHICH ALSO STANDS DELETED. THE PLEA OF THE ASSESSING OFFICER THAT EVERY YEAR IS AN INDEPENDENT YEAR AND THUS DISALLOWANCE/ADDITIONS CAN BE MADE/SUSTAINED IS ALSO NOT WELL FOUNDED ON THE F ACTS OF THE CASE AND IN VIEW OF THE RULES AND PRINCIPLES OF CONSISTENCY AS UPHELD BY THE VARI OUS DECISIONS OF THE HONORABLE SUPREME COURT AND OTHER HONORABLE COURTS. THE RULE OF CONSI STENCY IS A FACET OF RULE OF RES JUDICATA BUT BROADER IN CONCEPT THAN RES JUDICATA RULE. THE WELL-SETTLED PRINCIPLE OF CONSISTENCY HAS BEEN 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 CAS ES FOR A YEAR OR YEARS SHOULD NOT BE DEVIATED FROM THE SAME CASE OR IN OTHER CASES IN SU BSEQUENT PROCEEDINGS UNLESS THERE IS A CHANGE IN THE LEGAL OR FACTUAL SCENARIO, JUSTIFYING DEPARTURE THERE FROM. THE DELHI HIGH COURT IN THE CASE OF CIT VS. A.R.J SECURITY PRINTER S (2003) 183 CTR (DEL) 323/( 2003) 264 ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 5 ITR 276 ( DEL) HAS FOLLOWED THIS PRINCIPLE . WHEN T HE DEPARTMENT WANTED TO NEGATE THE CLAIM OF THE ASSESSEE, WHICH WAS ACCEPTED IN THE PAST, TH E HONORABLE HIGH COURT HAD HELD AS UNDER:- HAVING ACCEPTED IN THREE ASSESSMENT YEARS THAT THE ASSESSEES BUSINESS ACTIVITY OF PRINTING LOTTERY TICKETS FALLS WITHIN THE AMBIT OF SECTION 80-1, THE REVENUE CANNOT BE ALLOWED TO TURNAROUND AND CONTEN D THAT THE DEDUCTION UNDER THE SAID SECTION IS NOT AL LOWABLE IN RESPECT OF THE ASSESSMENT YEARS IN QUESTION. THE SPECIAL LEAVE PETITION FILED BY THE R EVENUE AGAINST THIS JUDGEMENT STANDS DISMISSED IN (2004) 266ITR (ST.) 4'. THE HONORABLE SUPREME COURT HAS ALSO AFFIRMED THIS VIEW IN SEVERAL CASES. IN CIT VS. SHIVSAGAR ESTATE (2002) 177 CTR (SC) 107: (2002) 25 7 ITR 59 (SC), IT HAS BEEN HELD THAT THE LEASE RENT FROM CERTAIN PROPERTY WAS SEPAR ATELY ASSESSABLE IN THE HANDS OF INDIVIDUAL CO-OWNERS AND WAS NOT ASSESSABLE IN THE HANDS OF ASSOCIATION OF PERSONS .THE COURT DECIDED THAT HAVING REGARD TO THE FACT T HAT NO APPEAL HAD BEEN CARRIED AGAINST THE ORDERS 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 SIST ER CONCERN SHOULD HAVE BEEN EXAMINED 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 BUSINESS INCLUDED E XPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT WAS IMMATERIAL IF A THIRD PARTY ALSO BENEFITTED THEREBY. IT WAS HELD THAT THE HIGH COURT AS WELL AS THE TRIBUNAL AND OTHER INCOME TAX AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THIS ANGLE AND THEY SHOULD HAVE INQUIRED AS TO WHETHER THE INTEREST FREE LOAN WAS GIVEN TO THE SISTER COMPANY AS A MEASURE OF COMMERCIAL EXPEDIENCY AND IF IT WAS, IT SHOULD HAVE BEEN ALLOW ED. THEY FURTHER HELD THAT THE EXPRESSION COMMERCIAL EXPEDIENCY WAS AN EXPRESSIO N OF WIDE IMPORT AND INCLUDED SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURRED FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, BUT IT WAS ALLOWABLE IF IT WAS INCURRED ON GROUND OF COMMERCIA L EXPEDIENCY. THE IRISDICTIONAL HIGH COURT HAVE ALSO, IN THEIR DECISION IN THE CASE OF CIT VS MARUDHAR CHEMICALS & PHARMACEUTICALS (P) LTD 319 ITR 75, HELD THAT DISAL LOWANCE OF INTEREST IN RESPECT OF INTEREST FREE ADVANCE TO SISTER CONCERN WAS NOT WAR RANTED WHERE THE ADVANCE WAS GIVEN AS A MEASURE OF COMMERCIAL EXPEDIENCY. THEY HAVE HELD THAT IT WAS NOT RELEVANT AS TO WHETHER THE ASSESSEE HAD UTILIZED TH E BORROWED AMOUNT IN ITS OWN BUSINESS OR HAD ADVANCED THE SAME AS INTEREST FREE LOAN TO ITS SISTER CONCERN, BUT HELD THAT THERE SHOULD BE SOME NEXUS BETWEEN THE FUNDS A ND PURPOSE OF BUSINESS. THE HONORABLE HIGH COURT FOLLOWED THE DECISION OF THE H ONORABLE APEX COURT IN THE CASE OF S.A. BUILDERS (SUPRA) WHILE REFERRING TO THE EAR LIER DECISION OF THE HONORABLE JURISDICTIONAL HIGH COURT IN THE CASE OF ABHISHEK I NDS LTD. 286 ITR 1 (P&H). IN MY OPINION, THE ASSESSEE HAS RIGHTLY CONTENTED THAT TH E INVESTMENTS IN EQUITY SHARES OF KAPSONS INSULATIONS PVT. LTD., WHICH IS A SUBSIDIAR Y COMPANY AND COMPANY HOLDS MORE THAN 71.35% OF EQUITY IN THE SAID COMPANY, WHI CH IS FOR PURPOSES OF EXPANSION OF BUSINESS BASE OF COMPANY AS BOTH THE END PRODUCT S PRODUCED/MANUFACTURED BY THE ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 6 COMPANY AND THE SAID SUBSIDIARY COMPANY ARE FOR MAN UFACTURE OF ELECTRIC MOTORS/TRANSFORMERS AND PRODUCTS MANUFACTURED BY EL ECTROMAGNETIC UNITS. THEREFORE, THE END USE PRODUCT OF ELECTRICAL STAMPINGS AND SE COPPER WIRE ARE WITHOUT WHICH THE SAID ELECTRICAL MOTORS, TRANSFORMER OR ELECTROMAGNE TIC FINISHED PRODUCTS CANNOT BE MANUFACTURED AND FUNCTIONAL AT ALL. SIMILARLY, THE CONTRIBUTION AS A PARTNER CAN BE ASSUMED OUT OF OWN FUNDS AS THE ASSESSEE COMPANY HA S 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 CYC LE LIMITED (2012) 323 ITR 518 ON THE SUBJECT MATTER OF APPARENT LARGE INTEREST FR EE OWN SHARE CAPITAL BASE, FREE RESERVE & SURPLUS IS QUITE RELEVANT AND SQUARELY AP PLIES 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 SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CAN NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY MO LLIFY THE MANDATE OF SECTION 14A, CAN NOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES F INDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITU RE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CAN NOT STAND. 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 INDUSTRIES LIMITED, CHANDIGARH) DECIDED ON 25.08.2009, WHEREIN IT WAS OBSERVED AS UNDER: 6. CONTENTION RAISED ON BEHALF OF THE REVENUE IS T HAT 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, DISALLOWANC E 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 O N LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBL E WHEN LOAN WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HA VING NEXUS WITH THE BUSINESS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRE SENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE AN Y CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION I 4A COULD HAVE NO APPLICATION. 5.7 SIMILARLY, THE OTHER HONORABLE HIGH COURTS HAVE WHILE DECIDING ABOUT THE APPLICABILITY OF SECTION 14A OF THE ACT AND DISALLO WANCE OF INTEREST AND EXPENDITURE VIS A VIS AVAILABILITY OF OWN CAPITAL FUNDS, FREE R ESERVES AND SUFFICIENCY OF INTERNAL ACCRUAL GENERATIONS HAVE ALSO HELD IN FAVOUR OF THE ASSESSEE. IN CIT VS RELIABLE UTILITIES & POWER LIMITED (2009) 313 ITR 340 (BOMBA Y), THE HONORABLE COURT HAVE HELD AS UNDER:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS O F ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE R ELEVANT 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 THER EFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE M ADE OUT OF INTEREST BEARING FUNDS. ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 7 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 E XPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME AS THE INVES TMENTS WERE MADE FROM ITS OWN FUNDS AND NOT BORROWED FUNDS REVENUE HAS NOT BEEN ABLE TO SHOW HOW THE FINDING O FFACT 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 WAS JUSTIFIED DOES NOT IN VOLVE ANY QUESTION OF 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 ADVANCES TO ANOTHER COMPANY - FINDING OF THE TRIBUNAL THAT THE ASSESSEE MADE INTEREST FREE ADVANCES TO ANOTHER COMPANY OUT OF ITS OWN FUNDS AND THUS THE DISALLOWA NCE ON ACCOUNT OF NOTIONAL INTEREST CANNOT BE SUSTAINED BEING ESSENTIALLY FINDING OFFAC T, NO INTERFERENCE IS WARRANTED - NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATIO N. 5.7.3 IN CIT VS GUJARAT STATE FERTILIZER & CH EMICALS LTD.(2014) 101R( GUJ) 175, THE HONORABLE COURT HAS HELD AS UNDER: IN THE CASE OF AN INCOME, LIKE DIVIDEND INCOME, WH ICH DOES NOT FORM PART OF THE TOTAL INCOME, ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATIO N TO SUCH NON-TAXABLE INCOME, THE CLAIM OF DEDUCTION OF SUCH EXPENSES INCURRED CAN NOT BE ALLO WED. THE MOOT QUESTION HERE IS AS TO WHETHER THE CIT(A) AND THE TRIBUNAL WERE RIGHT IN S ETTING ASIDE THE ORDER OF AO, WHEREBY IT DISALLOWED THE SUM OF RS.91.80 LAKHS, APPLYING THE PROVISIONS OF S. 14A ON THE GROUND THAT THE ASSESSEE HAD USED INTEREST BEARING BORROWED FUNDS F OR EARNING DIVIDEND DURING THE ASSESSMENT YEAR UNDER QUESTION. THE DIVIDEND INCOME EARNED WAS OF RS.9.80 CRORE AND THE ESTIMATE OF EXPENDITURE WAS ASSESSED @10 PERCENT OF THE TOTAL INCOME. HAD THE REVENUE BEEN SUCCESSFUL IN ESTABLISHING THAT THE ASSESSEE HAD IN CURRED THE EXPENSES TO EARN THE DIVIDEND INCOME FROM THE BORROWED FUNDS, THE ENTIRE DISCUSSI ON OF APPLICATION OF S. 14A COULD BE UNDERSTOOD. HOWEVER, WHEN BOTH THE CIT(A) AND THE T RIBUNAL HAVE NOTED THAT THE ASSESSEE HAD SUFFICIENT FUNDS AVAILABLE WITH IT, WHICH WERE MORE THAN THE AMOUNT IT INVESTED FOR EARNING BY THE DIVIDEND INCOME, BOTH THESE AUTHORIT IES HAVE CORRECTLY APPROACHED THE ISSUE BY SETTING ASIDE THE ORDER OF IS ALLOWANCE UNDER S. 14 A IN RESPECT OF INTEREST EXPENDITURE. WHEN THE VERY BASIS FOR EMPLOYING S. 14A ON FACTUAL METR IC IS LACKING, THE DISALLOWANCE TO THE EXTENT OF 10 PERCENT OF DIVIDEND INCOME WAS NOT PERMISSIBL E. WHEN IT TRANSPIRES FROM RECORD THAT THE ASSESSEES OWN FUNDS WERE HIGHER THAN THE INVESTMEN T MADE BY IT AND WITH NOTHING TO INDICATE THAT THE BORROWED FUNDS WERE UTILIZED FOR THE PURPO SE OF INVESTMENT IN SHARES AND FOR EARNING DIVIDENDS, THE TRIBUNAL COMMITTED NO ERROR IN DISAL LOWING THE SUM OF RS. 91.80 LAKHS. 5.7.4 THE HONORABLE MADRAS HIGH COURT IN CIT VS RPG TRANSMISSIONS LTD. (2014 100 DTR (MAD) 338 HAVE HELD AS UNDER: - BUSINESS EXPENDITURE INTEREST ON BORROWED CAPITAL CAPITAL BORROWED FOR INVESTMENT IN SHARES F GROUP COMPANY THERE BEING PROXIMATE NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE COMPANY AND THAT OF THE COMPANY IN WHICH INVESTMENT S WERE MADE IN THE FORM OF SHARES, INTEREST ON CAPITAL BORROWED FOR SAID INVESTMENT IS ALLOWABLE BUSINESS EXPENDITURE SECTION 36(L)(III) DOES NOT REQUIRE THAT THE AMOUNTS SO INV ESTED SHOULD BE WHOLLY 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: ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 8 THE TRIBUNAL HAS FOUND THAT THERE IS PROXIMATE NEXU S BETWEEN THE BUSINESS OF THE ASSESSEE AND THAT OF THE COMPANY IN WHICH INVESTMEN TS 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 AND WHEN, THE SHARES ARE LIQUIDATED, THERE IS EXPECTANC Y OF SUBSTANTIAL GAINS WHICH FACT HAS BEEN GLOSSED OVER BY THE AO WHILE CONFINING HIS FINDINGS THAT THE 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 MORE, S. 36(L)(III) DO ES NOT CONTEMPLATE ANY TEST THAT THE AMOUNTS SO INVESTED SHOULD BE WHOLLY AND EXCLUSIVELY FOR M AKING OR EARNING SUCH INCOME FURTHERMORE, THE SECTION ALSO DOES NOT PLACE ANY EM BARGO FOR INVESTMENTS TO BE MADE IN GROUP CONCERNS AND SUBSIDIARY CONCERNS. THE APPELLA TE AUTHORITY AND THE TRIBUNAL FOUND THAT THE INVESTMENT MADE IN SHARES BY THE ASSESSEE BY UT ILIZING BORROWED CAPITAL WAS FOR STRATEGIC BUSINESS PURPOSES BECAUSE THE COMPANIES WERE PROMOT ED AS SPECIAL PURPOSE COMPANIES TO STRENGTHEN AND PROMOTE ITS EXISTING BUSINESS BY COM BINING DIFFERENT BUSINESS SEGMENTS AND, THEREFORE, THE CLAIM WAS FULLY ALLOWABLE UNDER S. 3 6(L)(III). THE REVENUE DID NOT ADDUCE ANY MATERIAL TO SHOW THAT THE BORROWED CAPITAL WAS UTIL IZED BY THE ASSESSEE FOR NON-BUSINESS PURPOSES. THE APPELLATE AUTHORITY WAS CORRECT IN AL LOWING THE CLAIM OF THE ASSESSEE AND DELETING THE DISALLOWANCE MADE BY THE ASSESSING AUT HORITY - CIT RA SPENCERS & CO. LTD (2014) 100 DTR (MAD) 314 FOLLOWED. 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 A BOVE, THE CONTENTIONS AND ARGUMENTS OF THE LD. AR OF THE ASSESSEE COMPANY, TH E LAW LAID DOWN ON THE ISSUE OF DISALLOWANCE OF INTEREST AND EXPENDITURE B Y THE HONORABLE COURTS AND MORE PARTICULARLY MY OWN DECISION IN THE CASE O F THE ASSESSEE COMPANY ITSELF FOR THE A.Y. 2010-11 ON THE IDENTICAL ISSUE, THE ADDITIONS/DISALLOWANCE OF RS.30,24,084/- MADE BY THE ASSESSING OFFICER BY INV OKING THE PROVISIONS OF SECTION 14A OF THE ACT IS, THEREFORE, DIRECTED TO B E DELETED. IN THE RESULT, GROUNDS NO. L(I) TO L(VI), 2 AND 3 OF APPEAL TAKEN BY THE ASSESSEE COMPANY ARE ALLOWED. ADDITION ON ACCOUNT OF SECTION 36(1)(III) 6. VIDE GROUNDS NO. 4(I) AND 4(II) OF APPEAL, THE ASSESSEE COMPANY HAS CHALLENGED THE ACTION OF THE ASSESSING OFFICER IN M AKING ADDITION OF RS.7,20,000/- ON ACCOUNT OF DISALLOWANCE OF INTEREST ON INTEREST FREE ADVANCES UNDER THE PROVISIONS OF SECTION 36(1) (III) OF THE ACT. WHILE MAKING THE IMPUGNED ADDITION, THE ASSESSING OFFICER HAS OBSERVED IN THE RELEVANT PARAS OF THE ASSESSMENT ORDER AS UNDER:- 5) FORWARDING OF ADVANCES FOR NON BUSINESS PURPOSES A) UPON PERUSAL OF THE DETAILS FILED BY THE ASSESSEE WITH RESPECT TO ADVANCE FORWARDED, THE FOLLOWING ENTRIES REQUIRES TO BE MENTIONED: E) AN AMOUNT OF RS.25.00.000/- ADVANCED TO SRI HL KATV AL ON 04.02.2010 THE ASSESSEE CONTINUES TO HAVE THIS ADVANCE AS AN O UTSTANDING DURING THE ENTIRE YEAR AND HENCE TO THAT EXTENT THIS FUND CONTINUES TO BE LOCKED WITH S RI KATYAL WHICH OTHERWISE COULD HAVE BEEN USED TO MEET THE WORKING CAPITAL REQUIREMENT. THE ASSESS EE HAD ADMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR A.Y.2010-11 THAT THIS AM OUNT IS IN THE NATURE OF INTEREST FREE LOAN AND ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 9 IS NOT ON ACCOUNT OF ANY 'BUSINESS TRANSACTION. IN VIEW OF THE ABOVE PROVISIONS OF SEC 36(L)(III) IS ATTRACTED AND INTEREST EXPENSE ATTRIBUTABLE TO THIS LOAN IS DISALLOWABLE U/S 36(1) (III) OF THE INCOME TAX ACT.' F) FORWARDING OF RS.35.00,000/- TO M/S ORIEL VENTURES ON 06.02.2010 IT WAS SUBMITTED BY THE ASSESSEE THAT THIS ADVANCE WAS FORWARDED FOR TH E PURPOSE OFPROVIDING CONSULTANCY FOR INCREASING THE EQUITY SHARE CAPITAL OF THE ASSESSEE BY ARRANGING FOR PRIVATE EQUITY PARTICIPATION. HOWEVER IT WAS SEEN SUBSEQUENTLY THAT THE PARTY WAS NOT PERFORMING AS PER THEIR EXPECTATION AND SO THE CONTRACT WAS CANCELLED. THIS AMOUNT HAS TILL DATE NOT BEEN RECEIVED BACK AN D LITIGATION IS GOING ON FOR ITS RECOVERY. -. B) UPON APPRECIATION OF THE FACTS OF THE CASE AS SUBM ITTED BY THE ASSESSEE, FOLLOWING POINTS EMERGE: A) THE ADVANCE TO SRI H L KATYAL IS IN THE NATURE OF INTEREST FREE LOAN WITH ABSOLUTELY NO BUSINESS CONNECTION. B) THE ADVANCE TO M/S ORIEL VENTURES IS ON ACCOUNT OF EXPENSES LIABLE TO BE INCURRED FOR THE PURPOSE OF INCREASING THE EQUITY SHARE CAPITAL. SUCH EXPENSES 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 OFFUND, WHEREIN BOTH THE BORROWED FUNDS AND THE FUNDS OUT OF ITS INTERNAL ARE DEPOSITED AND HAVE THE SAME CHARACTER, THE POSSIBILITY OF HAV ING ADVANCED BEARING FUNDS TO THE ABOVE MENTIONED PERSON IS NOT RULED OUT. IN VIEW OF THE A BOVE, P IDE NOTE SHEET NOTING DATED 19/12/2013, THE ASSESSE E WAS ASKED TO EXPLAIN AS TO WHY PROPORTIONATE INTEREST, OUT OF THE TOTAL INTEREST P AYMENT, ATTRIBUTABLE TO THESE ADVANCES SHOULD NOT BE ADDED BACK U/S 36(L)(III) OF THE INCO ME-TAX ACT. 5.3) IN REPLY, THE ASSESSEE FILED A WRITTEN SUBMISSION DATED 26/12/2013 & MADE THE FOLLOWING DEFENSE: C) THE LOAN TAKEN IS EITHER FOR THE PURPOSE OF WORKIN G CAPITAL REQUIREMENT OR FOR THE PURPOSE OF ACQUISITION OF SPECIFIC ASSET. MOREOVER THE INVESTMENT IN STOCK & DEBTORS ARE MUCH IN EXCESS OF THE WORKING CAPITAL LIMIT RAISED BY THE C OMPANY & HENCE NO INTEREST PAYMENT IS ATTRIBUTABLE TO THIS ADVANCE. D) NO SPECIFIC LOAN HAS BEEN TAKEN TO FORWARD THESE A DVANCES AND HENCE NO INTEREST PAID IS ATTRIBUTABLE TO THESE ADVANCES. E) THE ADVANCES MADE ARE FROM OWN RESERVES AND SURPLU S AND NOT BORROWED FUNDS. 5.3) THE CONTENTION OF THE ASSESSEE HAS BEEN DULY CONSID ERED BUT THE SAME IS NOT ACCEPTABLE AND IS DISPOSED OFF AS UNDER: G) TL'IE INTEREST PAYMENT ON WORKING CAPITAL LOAN IS D IRECTLY PROPORTIONAL TO THE AMOUNT OF DEBIT BALANCE OUTSTANDING. THIS ISSUE HAS ALREADY B EEN DISCUSSED IN DETAIL IN PARA 4.4 ABOVE AND HENCE IS NOT BEING PRODUCED AGAIN TO AVOID DUPLICAT ION. NEEDLESS TO SAY THAT THE INTEREST PAYMENT WOULD HAVE BEEN REDUCED ATLEAST TO THAT EXTENT TO W HICH THE ADVANCES HAVE BEEN FORWARDED. H) THIS CONTENTION IS ALSO NOT ACCEPTABLE AS THE INCOM E TAX ACT ACCEPTS THE PRINCIPLE OF DIRECT AND INDIRECT EXPENSES FOR ALL TRANSACTIONS. THE CONTENTION GIVEN BY THE ASSESSEE IS ACCEPTABLE TO THE EXTENT OF ACCEPTING THAT NO DIREC T EXPENSES ARE ATTRIBUTABLE TO THESE ADVANCES. HOWEVER THE CONCEPT OF INDIRECT OR ATTRIBUTABLE EXP ENSES IS VERY MUCH VALID FOR THIS TRANSACTION. I) THIS ISSUE HAS ALREADY BEEN DISCUSSED IN DETAIL IN PARA 4.4 OF THIS ORDER AND HENCE IS NOT BEING REPRODUCED TO AVOID DUPLICATION. IN VIEW OF THE ABOVE, THE CONTENTION OF THE ASSESSE E THAT NO INTEREST EXPENSE IS ATTRIBUTABLE TO THESE ADVANCES IS REJECTED AND THE FOLLOWING INTEREST, CO MPUTED AS UNDER, TAKING THE AVERAGE RATE OF BORROWING @ 12% PER ANNUM, IS DISALLOWED U/S 36(1) (III) OF THE INCOME TAX ACT. INTEREST ATTRIBUTABLE TO ADVANCE GIVEN TO SRI H L KATYAL RS. 3,00,000/- INTEREST ATTRIBUTABLE TO ADVANCE GIVEN TO M/S ORIEL RS.4,20,000/- TOTAL INTEREST ATTRIBUTABLE TO NON BUSINESS ADVANCE S RS. 7,20,000/- THUS AN AMOUNT OF RS. 7,20,000/- IS DISALLOWED OUT OF THE INTEREST PAYMENT DEBITED IN THE 'ROFIT & LOSS ACCOUNT AND ADDED BACK TO THE TOTAL INCOME. PE NALTY U/S 271(1)(C) IS INITIATED ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 10 FOR FURNISHING INACCURATE PARTICULARS OF INCOME AFT ER TAKING INTO ACCOUNT THE FACT THAT THESE EXPENSES WERE NEVER ALLOWABLE AS A REVENUE EXPENDIT URE. 6.1 IN SUPPORT OF GROUNDS NO. 4(I) AND 4(II) OF APP EAL, THE ASSESSEE COMPANY HAS FILED WRITTEN SUBMISSIONS VIDE LETTER DATED 26.09.2 014, THE RELEVANT PARAS OF WHICH READ AS UNDER:- 5. THAT THE PROPORTIONATE DISALLOWANCE OF INTEREST OF RS. 72, 000/- ON THE GROUNDS OF PAYMENT OF INTEREST ADVANCES TO THE FOLLOWING PERSONS/PARTIES FOR PURPORTEDLY ALLEGED NON BUSINESS PURPOSES, IS ABSOLUTELY WRONG, UNJUSTIFIED UNFOUNDED AND CONT RARY TO THE FACTS AND THE LEGAL PROVISIONS U/S 36(L)(III) OF THE INCOME TAX ACT, AS SHALL BE EVIDE NT FROM THE SUBMISSIONS, FACTS, LEGAL PROVISIONS AND RELIANCE ON THE LEGAL CITATIONS AS UNDER: (A). M/S ORIEL VENTURES ADVANCE RS.35 LACS - DISALL OWANCE OF INTEREST RS.4,20,000/- THE FACTS ARE THAT THE SAID ADVANCE WAS PAID FOR TH E PURPOSES TO ARRANGE FINANCE FOR EXPANSION PLANS TO MEET THE WORKING CAPITAL REQUIREMENTS BY I SSUING CONVERTIBLE DEBENTURES ON PRIVATE PLACEMENT BASIS OF RS. 70 CRORE. A COPY OF THE AGRE EMENT WAS ALSO PLACED ON RECORD WITH OUR EXPLANATIONS VIDE SUBMISSIONS OF 21 S ' FEB., 2013, THE NATURE OF THE SAID TRANSACTION IS VERY MUCH OF REVENUE NATURE AND NOT FOR CAPITAL NATURE PURPOSES. THE SAID ADVANCE WAS CALLED BACK AND RECEIVED ON FINDING THEIR ADEQUACY TO RENDER ADEQUA TE PURPOSES, BUT AS THE SAID CHEQUE, AS RECEIVED WAS DISHONORED, THE AMOUNT WAS THUS PENDIN G DUE RECOVERABLE. WHEREAS CONTRARY TO THE SAID FACTS, THE LEARNED DCI T HAS OBSERVED AND MISDIRECTED HIMSELF THAT THE ADVANCES WAS FOR THE PURPOSES OF EXPENSES LIABL E TO BE INCURRED FOR THE PURPOSES OF INCREASING EQUITY SHARES CAPITAL AND THEREFORE SUCH EXPENSES A RE CAPITAL IN NATURE AND NOT ALLOWABLE AS DEDUCTIONS, WHICH ARE CONTRARY TO AFORESAID FACTS B ROUGHT ON RECORD AND WHICH WAS NOT CLAIMED AS EXPENSE IN THE RELEVANT YEAR BUT STANDING AS ADVANC E RECOVERABLE. SINCE THE ADVANCE PAID WAS FOR THE PURPOSE OF THE B USINESS OF THE COMPANY TO MEET ITS WORKING CAPITAL REQUIREMENTS BY RAISING OF REDEEMABLE DEBEN TURES WHICH ARE NOTHING BUT LOAN DOCUMENTS AND NOT SHARES CAPITAL THEREFORE, THE CONTENTION TH AT THE SAID ADVANCE TO A NON RELATED PARTY OR TO A NON ASSOCIATE CONCERN IS NOT FOR THE PURPOSE OF B USINESS IS FACTUALLY WRONG AND MISPERCEIVED CONTENTION BY THE WORTHY JCIT. COPIES OF THE SAID AGREEMENT WITH AND COPIES OF TH E SETTLEMENT OF ACCOUNTS ARE ANNEXED. OUR HONOUR, YOUR APPEAL ORDER FOR ASSTT. YEAR 2010- 11 HAVE DELETED THE SAID ADDITIONS AND UPHELD THE SUBMISSIONS OF THE ASSESSEE. (B). H.L. KATYA! RS. 25 LACS - INTEREST DISALLOWANC E OF RS.3,00,000/- THE FACTS ARE THAT THE SAID PERSON IS LIASONING AND PROCURING ORDERS FOR THE PRODUCTS OF THE COMPANY SINCE THE VERY INCEPTION OF THE COMPANY IN 1991-92 AND VERY RELIABLE BUSINESS ASSOCIATE OVER THE COMPLETE TRANSACTION OF THE COMPANY FROM 1 999 TO COMPANY HAVING TURNOVER OF RS.324.88 CRORE. THE SAID ADVANCE WAS THEREFORE, WAS PAID TO A BUSIN ESS ASSOCIATE FOR CONSIDERATION OF CONTINUED BUSINESS RELATIONSHIP AND THEREFORE, THE OBSERVATIO NS OF THE LD. JCIT, THAT THE SAME IS FOR NOT BUSINESS CONSIDERATION IS WRONG. EXCEPT THE FACT THAT THE SAID GENTLEMAN IS A BUSINE SS ASSOCIATE AND WORKING WITH COMPANY, THERE IS NO OTHER RELATIONSHIP WITH HIM NOR HE IS A RELATIVE OF ANY OF THE DIRECTORS/SHAREHOLDERS OF THE COMPANY. THE BUSINESS LINK IS ESTABLISHED AND CONTI NUED. THE COMPANY HAS ITS OWN LARGE CAPITAL BASE AND FREE RESERVES BESIDES SUBSTANTIAL INTERNAL ACCRUAL GENERATIONS OF RS. 17.63 CRORE FOR THE YEAR IN QUESTION. NO LOAN HAS BEEN RAISED FOR PAYME NT OF THIS AMOUNT. THE COPIES OF THE ACCOUNT FOR THE YEAR AND SUBSEQUE NT YEAR ALSO REFLECTS THAT THE AMOUNT HAS BEEN SINCE RECEIVED BACK IN SUBSEQUENT YEAR. ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 11 THE ALLEGED USE OF WORKING CAPITAL LIMITS IS FACTUA LLY WRONG ALSO SINCE WHOLE OF THE WORKING CAPITAL LIMITS BY THE BANKS REMAIN DEPLOYED IN STOC KS/STORES, SUNDRY DEBTORS ETC. THERE WAS ALSO AN AVAILABILITY OF LARGE SUNDRY CRED ITORS OF RS.51.19 CRORE ON WHICH NO INTEREST WAS PAID. THE AFORESAID DISALLOWANCE/ADDITIONS IN RESPECT OF THE SAID PERSON WAS DELETED AND DUE RELIEF WAS ALLOWED IN APPEAL ORDER FOR THE ASSTT. YEAR 2010-11 ALSO. THEREFORE, IN VIEW OF THE DECISION OF HON ABLE COU RTS AS RELIED ON PARA 11 (C) SUPRA THE SAID ADDITIONS/DISALLOWANCE WAS ABSOLUTELY WRONG AND UNJ USTIFIED AND IT IS PRAYED THAT SOUGHT FOR RELIEF BE GRANTED BY DELETING THE SAID ADDITIONS/DISALLOWA NCES. THAT THE HON ABLE COURTS HAVE HELD THAT IN VIEW OF APPARENT OWN FUNDS AND SUBSTANTIAL NAL ACCRUAL GENERATION AND ALSO LARGE 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 T HE TAX AUTHORITIES. THE RELIANCE IS ALSO PLACED BY THE ASSESSEE COMPANY ON THE FOLLOWING DECISIONS: I)CIT VS RPG TRANSMISSIONS LTD (2014) 100 DTR338 (M ADRAS) II)CIT VS AMARJOTHL GRANITES INDIA (P) LTD (2013) 2 63 CTR (RAJ) 621 III) SA BUILDERS LTD 288ITR 1 (SUPEME COURT) IV) CIT VS MURUDHAR CHEMICALS AND PHARMACEUTICALS(P ) LTD 319 ITR 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 AS SESSING OFFICER AS MADE BY HIM IN THE ASSESSMENT ORDER AS WELL AS THE WRITTEN SUBM ISSIONS FILED BY THE ASSESSEE COMPANY VIDE LETTER DATED 26.09.2014 ON THE ISSUE U NDER REFERENCE. I HAVE ALSO CONSIDERED THE 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 DOCUMENTS PLACED ON RECORD, IT TRANSPIRES TO ME THAT ALL THE INTEREST FREE ADVANCES AS MADE BY THE ASSESSEE COMPANY ARE CLEARL Y FOR BUSINESS PURPOSES AND FOR THE REQUIREMENTS TO CARRY ON THE BUSINESS OF TH E ASSESSEE COMPANY AND ARE ALSO DIRECTLY RELATABLE TO ITS BUSINESS TRANSACTION S IN COURSE OF NORMAL BUSINESS OPERATIONS AND ACTIVITIES. THE ASSESSEE COMPANY ALS O HELD SUBSTANTIAL OWN FUNDS AND RESERVES BESIDES IT HAD CURRENT NET CASH ACCRUA L INTERNAL GENERATIONS, PROFITS BEFORE DEPRECIATION, TO THE EXTENT OF RS. 17.73 CRO RES ON WHICH NO INTEREST IS PAYABLE BY THE COMPANY AND ARE IN THE NATURE OF NON INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE. THE ASSESSEE COMPANY H AS ALSO NOT BORROWED ANY FUNDS FOR MAKING SUCH ADVANCES TO PERSONS/PARTIES. THE WORKING CAPITAL FUNDS AS PER BANKS LIMITS ALSO REMAINED DEPLOYED IN WORKING CAPITAL FUND REQUIREMENTS IN STOCKS AND STORES, SUNDRY DEBTORS AND OTHER CURRENT ASSETS AS PER FINANCIAL FIGURES BROUGHT ON RECORD. THE ARGUMENTS OF THE ASSESSING O FFICER THAT ASSESSEE HAS MIXED KITTY OF FUNDS WHEREIN BOTH THE BORROWED FUND S AND FUNDS OUT OF ITS OWN INTERNAL ACCRUALS AND THE POSSIBILITY OF HAVING ADV ANCED INTEREST BEARING FUNDS TO THE SAID PERSONS/PARTIES ARE NOT RULED OUT APPEARS TO BE MORE PRESUMPTIONS AND ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 12 SURMISES IN VIEW OF APPARENT AVAILABILITY OF INTERE ST FREE FUNDS OF OWN CAPITAL, FREE RESERVE AND CURRENT YEAR INTERNAL ACCRUALS GENERATI ONS. 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 AS SESSEE COMPANY WHICH WAS ALSO FILED AT THE ASSESSMENT STAGE ALSO REFLECTS TH AT THE ARRANGEMENT WAS FOR ARRANGING WORKING CAPITAL REQUIREMENTS BY ISSUING O F CONVERTIBLE DEBENTURES 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 PERFORMANCE OF THE SAID PARTY, THE ADVANCE WAS CALLED FOR, REPAYMENT ALSO RECEIVED BY CHEQUE WHICH WAS SUBSEQU ENTLY DISHONORED AND AMOUNT WAS THUS REFLECTED AS OUTSTANDING, AS THE AM OUNT WAS ADVANCED FOR THE PURPOSES OF WORKING CAPITAL WHICH IS OF REVENUE NAT URE AND VERY MUCH FOR THE NORMAL BUSINESS OPERATIONS AND PURPOSES AND THEREFO RE, ON THIS GROUND ALSO AND IN VIEW OF SUBSTANTIAL INTERNAL ACCRUAL GENERATION OF THE COMPANY ON THE RELEVANT YEAR, THE BASIS OF DISALLOWANCE IS NOT TENABLE. 6.4 IN RESPECT OF THE ADVANCE PAID TO SHRI H.L, KAT YAL OF RS.25 LACS AND DISALLOWANCE OF INTEREST ON THE SAID ADVANCE, IN VI EW OF THE FACTS BROUGHT ON RECORD AND ARGUMENTS OF THE ASSESSEE, THE SAID ADVA NCE IS CLEARLY RELATED TO A BUSINESS ASSOCIATE. THE ASSESSING OFFICER ALSO HAS NOT BROUGHT ON RECORD THAT HE IS EITHER A RELATIVE OR RELATED PERSON. THE SUFFICI ENCY AND AVAILABILITY OF OWN NON- INTEREST BEARING FUNDS, OF OWN CAPITAL BASE, FREE R ESERVE AND INTERNAL ACCRUAL GENERATIONS BEING APPARENTLY ESTABLISHED AND BROUGH T ON RECORD BY THE ASSESSEE COMPANY, AND AS SUCH ARGUMENTS OF MIXED FUNDS AND N ON BUSINESS PURPOSES BY THE ASSESSING OFFICER IS NOT TENABLE. 6.5 IN VIEW OF THE ABOVE STATED FACTS AND IN THE CI RCUMSTANCES OF THE CASE AND MORE PARTICULARLY MY OWN ORDER IN THE CASE OF ASSES SEE ITSELF FOR THE A.Y. 2010-11, THE ADDITION OF RS.7,20,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF INTEREST IS, THEREFORE, NOT JUSTIFI ED AND IS DIRECTED TO BE DELETED. IN THE RESULT, GROUNDS NO. 4(I) AND 4(II) OF APPEAL TA KEN BY THE ASSESSEE COMPANY ARE ALSO ALLOWED. 5. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 6. THE LEARNED DR, AT THE OUTSET, HEAVILY PLACED HI S RELIANCE ON THE ORDER OF ASSESSING OFFICER WHEREAS THE LEARNED AR H EAVILY PLACED HIS RELIANCE ON THE ORDER OF LEARNED CIT(A). ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 13 7. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE TH ROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT IN RESPECT OF DISALLOWANCE U/S 14A, THE ASSESSEE SUBMITTED COMPLETE DETAILS OF THE CAPITAL AND RESERVES OF ASSESSEE AND ALSO SUBMITTED THE PROFITS EARNED D URING THE YEAR. THE LEARNED CIT(A) HAS MADE A FINDING OF FACT THAT ASSE SSEE HAD MADE AN INVESTMENT OF RS.2.75 CRORES IN THE F.Y. 2008-09 AS AGAINST FREE FUNDS OF RS.12.38 CRORES. THE LEARNED CIT(A) HAS ALSO MADE A FINDING OF FACT THAT ASSESSEE HAD EARNED NET PROFIT OF RS.17.33 CRORES D URING THE YEAR WHICH IS FAR IN EXCESS OF THE INVESTMENT MADE IN THE CAPI TAL OF SUBSIDIARY COMPANY. THE LEARNED CIT(A) FURTHER HELD THAT IN EA RLIER YEARS ON SIMILAR FACTS AND CIRCUMSTANCES THE ADDITION U/S 14A WAS NO T MADE AND KEEPING IN VIEW THE RULE OF CONSISTENCY THE ADDITION WAS NO T SUSTAINABLE IN THE PRESENT YEARS. WHILE RECORDING DETAILED FINDINGS TH E LEARNED CIT(A) HAS ALSO RELIED UPON A NUMBER OF CASE LAWS. THE LEARNED DR WAS NOT ABLE TO CONTROVERT ANY OF THE FINDINGS OF LEARNED CIT(A), A ND, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LEARNED CIT(A) A ND THEREFORE, GROUND NO.1 OF APPEAL IS DISMISSED. 8. NOW COMING TO OTHER GRIEVANCE OF REVENUE, WE FIN D THAT LEARNED CIT(A) HAS MADE A FINDINGS OF FACT THAT THAT ASSESS EE WAS HAVING FREE RESERVES FAR MORE THAN ADVANCES TO TWO FIRMS. THE L EARNED CIT(A) HAS ALSO CATEGORICALLY HELD THAT THE ASSESSEE HAD GIVEN ADVANCES TO TWO FIRMS UNDER NORMAL BUSINESS OPERATIONS AND, THEREFORE, HE HAD RIGHTLY HELD ITA NO.719 (ASR)/2014 ASST. YEAR : 2011-12 14 THAT DISALLOWANCE U/S 36(1)(III) WAS NOT WARRANTED. THE LEARNED DR WAS NOT ABLE TO CONTROVERT ANY OF THE FINDINGS OF LEARN ED CIT(A), AND, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF LEARNED CIT(A). IN VIEW OF THE ABOVE, THE SECOND GRIEVANCE IS ALSO NOT JUSTIFIED AND THEREFORE, GROUND NO.2 IS ALSO DISMISSED. 9. IN NUTSHELL, THE APPEAL FILED BY REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH MAY, 2016. SD/- SD/- (A.D. JAIN) (T. S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED:24.05.2016. /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