M/s Hero Cycles Ltd., Ludhiana V. Addl. CIT, Ludhiana

ITA 720/CHANDI/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5241 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 11-08-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAVI SARANGA L
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Proportionate interest; Notional interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.720/CHD/2014 (ASSESSMENT YEAR : 2010-11) M/S HERO CYCLES LTD., VS. THE ADDL.CIT, G.T. ROAD, HERO NAGAR, RANGE-V, LUDHIANA. LUDHIANA. PAN: AAACH4073P AND ITA NO.758/CHD/2014 (ASSESSMENT YEAR : 2010-11) THE A.C.I.T., VS. M/S HERO CYCLES LTD., CIRCLE V, G.T. ROAD, HERO NAGAR, LUDHIANA. LUDHIANA. PAN: AAACH4073P (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SUBHASH AGGARWAL DEPARTMENT BY : SHRI RAVI SARANGAL, CIT DR DATE OF HEARING : 05.01.2017 DATE OF PRONOUNCEMENT : 03.04.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : BOTH THE APPEALS, BY THE ASSESSEE AND THE REVENUE, HAVE BEEN FILED AGAINST THE ORDER OF LEARN ED COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA D ATED 9.6.2014 FOR ASSESSMENT YEAR 2010-11. 2. WE WILL FIRST TAKE UP THE APPEAL OF THE ASSESS EE IN ITA NO.720/CHD/2014. 2 ITA NO.720/CHD/2014 (ASSESSEES APPEAL) : 3. THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIV E GROUNDS OF APPEAL: 1. THAT THE LEARNED CIT(A)-II HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.24950657/- U/S 14A / RULE 8D OF THE IT RULES, AFTER GIVING CREDIT OF RS.22997000/- ALREADY DISALLOWED BY THE APPELLANT. 2. THAT THE DISALLOWANCE CONFIRMED BY THE CIT(A)-II U/ S 14A / RULE 8D IS AS UNDER : - UNDER RULE 8D(II) RS.27743861 UNDER RULE 8D(III) RS.20203796 TOTAL RS.47947657 LESS: ALREADY DISALLOWED RS.22997000 BALANCE DISALLOWANCE RS.24950657 3.THAT THE LEARNED CIT(A)-II HAS FAILED TO APPRECIATE THE FOLLOWING SUBMISSIONS:- A) THAT WHILE MAKING THE DISALLOWANCE TH E GROSS INTEREST AT RS.70088642/- OF THE MAIN UNIT AND OF T HE SAHIBABAD UNIT HAS BEEN CONSIDERED WHILE ONLY THE INTEREST PAIDBYTHEMAINUNITATRS.67143369/- WAS LIAB LE TO BE CONSIDERED. B) THAT INTEREST RECEIVED AT RS.8,40,86,604/- HAS NOT BEEN DEDUCTED FROM THE FIGURE OF INTEREST PAID. C) THAT THE INTEREST OF RS.2,78,564/- CAPITALIZED BY TH E AO HAS NOT BEEN REDUCED FROM THE AMOUNT OF INTEREST. D) THAT THE INVESTMENTS MADE IN THE EARLIER YEARS, WHICH HAVE BEEN HELD BY THE APPELLATE AUTHORITIES ARE OUT OF OWN FUNDS, HAVE WRONGLY BEEN CONSIDERED AS INVESTMENTS FOR COMPUTING DISALLOWANCE U/S!4A RULE 8D. E) THAT THE INVESTMENTS, ON WHICH NO EXEMPT INCOME HAS , BEEN DERIVED DURING THE YEAR, ARE NOT COVERED U/S.14 A. F) THAT THE INVESTMENTS WHICH HAVE POTENTIALITY TO EARN BOTH TAXABLE AND EXEMPT INCOME ARE NOT COVERED U/S.1 4A. G) THAT THE INVESTMENTS MADE IN SUBSIDIARY COMPANIES F OR THE PURPOSES OF ACQUIRING THE CONTROL AND BUSINESS DEALING ARE NOT TO BE CONSIDERED FOR MAKING DISALLOWANCE U/S 14A / RULE 8D. H) THAT THE TOTAL ASSETS OF THE UNIT STYLED AS CR D IVISION HAVE WRONGLY BEEN DIRECTED TO EXCLUDE BY CIT(A)-II WHILE CALCULATING THE VALUE OF TOTAL ASSETS OF THE COMPAN Y. 3 4. THAT IT HAS BEEN IGNORED THAT THE INVESTMENT WAS MADE OUT OF OWN GENERATED INCOME/FUNDS AND THUS NO DISALLOWANCE OF INTEREST U/S.14A R.W. RULE 8D WAS CALLED FOR. 5. THAT THE LD. CIT(A)-II HAS WRONGLY HELD THAT THERE IS PROPER SATISFACTION RECORDED BY THE AO. AS PER THE STATUTORY REQUIREMENT. 6. THAT THE LEARNED CIT(A)-II HAS COMPLETELY IGNORED THE WRITTEN SUBMISSIONS FILED BY THE APPELLANT. 7. THAT IN ANY CASE THE DISALLOWANCE CONFIRMED BY CIT(A )-II U/S. !4A/RULE 8D IS AGAINST THE LAW AND FACTS OF THE C ASE. 8. THAT THE LD. CIT(A)-II HAS ERRED IN CONFIRMIN G THE DISALLOWING OF RS.55,57,069/- BEING THE DIFFERENCE O F INTEREST CHARGED FROM HERO MOTORS LTD. @ 6% AND TH E INTEREST RATE ADOPTED AT 7.38% IGNORING THE FACT TH AT H- E ADVANCES WERE OUT OF OWN FUNDS. 9. THAT THE LEARNED CIT(A)-II HAS ERRED IN CONFIRM ING THE CAPITALIZATION OF INTEREST OF RS. 2,78,564/- ON THE AS SETS APPEARING UNDER THE HEAD CAPITAL WORK IN PROGRESS' BY ADOPTING THE INTEREST RATE @ 7.38% IGNORING THE FACTS THAT ALL THE INVESTMENTS WERE OUT OF APPELLANT'S OWN FUND S. 10. THAT THE CIT(A)-II HAS WRONGLY FAILED TO ALLOW THE CONSEQUENT CLAIM OF DEPRECIATION MADE DURING THE ASSESSMENT PROCEEDINGS AT RS. 58,12,752/- IN RESPECT OF EXPENSES WHICH HAD BEEN CAPITALIZED IN THE EARLIER Y EARS AND ALSO WHICH DEPRECIATION WAS ALLOWED IN A.Y. 2008-0 9. 4. GROUND NOS. 1 TO 7 RAISED BY THE ASSESSEE RELAT E TO DISALLOWANCE MADE U/S 14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) AMOUNTING TO RS.2,49,50,657/-. 5. BRIEF FACTS ARE THAT THE ASSESSING OFFICER NOTE D THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.180,55,19,030/- AND LONG TERM CAPITAL GAIN OF RS.6,46,83,545/- DURING THE YEAR. THESE INCOMES WE RE CLAIMED EXEMPT UNDER THE PROVISIONS OF THE ACT. TH E ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE H AD INVESTMENTS OF RS.387,34,93,407/-AND RS.420,80,25,1 28/- AS ON 31.3.2009 AND 31.3.2010 RESPECTIVELY, THE INC OME FROM WHICH WAS NOT INCLUDIBLE IN THE TOTAL INCOME. THE ASSESSING OFFICER ALSO NOTED THAT THE ASSESSEE HAD CLAIMED 4 INTEREST EXPENSES OF RS.15,80,83,002/-. THE ASSESS ING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY THE PROVI SIONS OF SECTION 14A R.W.R. 8D OF THE INCOME TAX RULES MA Y NOT BE APPLIED IN THIS CASE. THE ASSESSEE SUBMITTED RE PLY IN THE MATTER. THE ASSESSING OFFICER OBSERVED THAT TH E COMPUTATION OF DEDUCTION U/S 14A R.W.R. 8D WAS NOT AS PER SAID SECTION AND RULE. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY THE COMPUTATION SUBMITT ED BY THE ASSESSEE MAY NOT BE REJECTED AND THE COMPUTATIO N MAY NOT BE MADE FOR DISALLOWANCE U/S 14A OF THE ACT IN ACCORDANCE WITH RULE 8D. AFTER CONSIDERING ASSESSE ES SUBMISSIONS ON THIS ISSUE THE ASSESSING OFFICER COM PUTED DISALLOWANCE UNDER RULE 8D(2)(I) AT NIL, RULE 8D(2) (II) AT RS.6,11,67,005/- AND UNDER RULE 8D(2)(III) AT RS.2,02,03,796/-, AND THE TOTAL DISALLOWANCE WAS ACCORDINGLY COMPUTED AT RS.8,13,70,801/-. THE ASSE SSING OFFICER FURTHER NOTED THAT THE ASSESSEE HAD HIMSELF DISALLOWED AN AMOUNT OF RS.2,29,97,000/- AND ACCORD INGLY COMPUTED THE DISALLOWANCE TO BE MADE U/S 14A AT RS.5,83,73,801/-, OVER AND ABOVE THE AMOUNT DISALLO WED BY THE ASSESSEE. 6. BEFORE THE LD. CIT (APPEALS), THE ASSESSEE MADE DETAILED SUBMISSIONS REPRODUCED AT PARA 4.2 OF THE ORDER, THE GIST OF WHICH WAS THAT NO DISALLOWANCE U/S 14A WAS WARRANTED SINCE ALL THE BROUGHT FORWARD INVESTMENTS HAD BEEN MADE OUT OF OWN FUNDS OF THE ASSESSEE AND NO BORROWINGS HAD BEEN MADE FOR THE SAME. THAT THE 5 INVESTMENTS HAD BEEN MADE ON ACCOUNT OF REINVESTMEN T OF INCOME FROM THE EXISTING INVESTMENTS AS WELL AS FRO M THE INTERNAL ACCRUALS, WHICH WAS ENOUGH TO MAKE THE INVESTMENTS. THE ASSESSEE ALSO SUBMITTED THAT ALL INTEREST BEARING FUNDS HAD BEEN UTILIZED FOR BUSINE SS PURPOSE AND NOT FOR MAKING THESE INVESTMENTS. THE ASSESSEE ALSO SUBMITTED THAT IT HAD THREE INDEPENDE NT UNITS OUT OF WHICH INVESTMENTS HAD BEEN MADE MAINLY IN MAIN UNIT AT LUDHIANA AND ONE INVESTMENT HAD BEEN M ADE IN UNIT-2 AT SAHIBABAD WHILE NO INVESTMENT HAD BEEN MADE IN THE COLD ROLLING DIVISION AT LUDHIANA. THE ASSESSEE, THEREFORE, CONTENDED THAT THE INTEREST EXPENDITURE INCURRED IN THAT UNIT SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF MAKING DISALLOWANCE U /S 14A OF THE ACT. THE ASSESSEE ALSO CONTENDED THAT T HE FIGURE OF TOTAL ASSET HAD BEEN WRONGLY TAKEN FOR TH E PURPOSE OF COMPUTING THE DISALLOWANCE U/S 14A BY REDUCING THE CURRENT LIABILITIES FROM THE SAME. TH E LD. CIT (APPEALS) FORWARDED THE COPY OF THE ASSESSEES SUBMISSIONS TO THE ASSESSING OFFICER FOR HIS REPORT , WHICH WAS IN TURN GIVEN TO THE ASSESSEE FOR OBTAINING HIS SUBMISSIONS. THE LD. CIT (APPEALS) AFTER CONSIDERI NG RIVAL SUBMISSIONS HELD THAT THE FOLLOWING ISSUES AROSE IN THE PRESENT GROUND: I) DISALLOWANCE MADE U/S 14A R.W.R. 8D IS WRONG AND THE ASSESSING OFFICER HAS WRONGLY APPLIED RULE 8D. 6 II) THE ASSESSING OFFICER HAD NOT CONSIDERED AND REDUCED THE INTEREST RECEIVED OUT OF GROSS INTEREST EXPENDITURE. III) THE ASSESSING OFFICER HAS WRONGLY CONSIDERED THE FIGURE OF INTEREST OF ALL THE UNITS INSTEAD OF THE INTEREST PAID BY THE MAIN UNIT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 14A R.W.R. 8D AND; IV) COMPUTATION OF DISALLOWANCE U/S 14A IS NOT CORRECT IN AS MUCH AS THE VALUE OF TOTAL ASSETS HAS NOT BEEN CORRECTLY TAKEN BY THE ASSESSING OFFICER. 7. THEREAFTER THE LD. CIT (APPEALS) DEALT WITH EAC H ISSUE AND HELD THAT THE DISALLOWANCE MADE BY APPLYI NG RULE 8D WAS CORRECT AND HELD THAT IT WAS THE GROSS INTEREST EXPENDITURE ONLY WHICH WAS TO BE CONSIDERED FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE. FURTHER THE LD. CIT (APPEALS) AGREED WITH THE ASSESSEE THAT SINCE N O INVESTMENTS WERE MADE BY THE C.R. DIVISION OF THE ASSESSEE, THE INTEREST INCURRED BY THAT DIVISION HA D TO BE EXCLUDED FOR THE PURPOSE OF CALCULATING DEDUCTION U /S 8D (2)(II) OF THE ACT. HE FURTHER DIRECTED THAT EVEN THE ASSETS OF THE C.R. DIVISION WERE TO BE EXCLUDED IN THE TOT AL ASSETS TO BE TAKEN FOR THE PURPOSE OF COMPUTING DISALLOWAN CE UNDER RULE 8D(2)(II) OF THE ACT. THE LD. CIT (APPE ALS) ALSO AGREED WITH THE ASSESSEES CONTENTION THAT THE TOTA L ASSETS TO BE TAKEN FOR THE PURPOSE OF COMPUTING THE DISALL OWANCE WAS TO BE TAKEN AT THE TOTAL VALUE AS DISCLOSED IN THE BALANCE SHEET AND THE CURRENT LIABILITIES AND PROVI SIONS 7 WERE NOT TO BE DEDUCTED FROM THE SAME. HE ACCORDIN GLY DIRECTED THE ASSESSING OFFICER TO RECOMPUTE THE DISALLOWANCE IN ACCORDANCE WITH THE AFORESAID FINDI NGS. 8. AGGRIEVED BY THE ADDITION UPHELD BY THE LD. CIT (APPEALS) THE ASSESSEE HAS NOW COME UP IN APPEAL BE FORE US. DURING THE COURSE OF HEARING BEFORE US, THE LD . COUNSEL FOR THE ASSESSEE STATED THAT THE ISSUE IS C OVERED IN ITS FAVOUR BY THE DECISION OF THE I.T.A.T., CHAN DIGARH BENCH IN THE CASE OF THE ASSESSEE FOR ASSESSMENT Y EAR 2008-09 & 2009-10. THE LD. COUNSEL FOR THE ASSESSE E POINTED OUT THAT ON IDENTICAL SET OF FACTS THE I.T. A.T. HAD HELD THAT THERE WAS NO CASE FOR MAKING ANY DISALLOW ANCE OF INTEREST U/S 14A R.W.R. 8D(2)(II) OF THE ACT, IN VIEW OF THE FACTS THAT THERE WERE ENOUGH SURPLUS FUNDS FOR THE PURPOSE OF MAKING THE INVESTMENT AVAILABLE WITH THE ASSESSEE. 9. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LD. CIT (APPEALS). 10. WE HAVE HEARD BOTH THE PARTIES. WE HAVE ALSO GONE THROUGH THE ORDER OF THE I.T.A.T. IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2008-09 IN ITA NO.192/CHD/2013 DATED 29.10.2015. WE FIND THAT IDENTICAL ISSUE WAS THERE BEFORE THE I.T.A.T. IN TH AT CASE WHEREIN DISALLOWANCE U/S 14A HAD BEEN MADE AND RULE 8D HAD BEEN APPLIED FOR WORKING OUT THE SAME SINCE IT WAS FOUND THAT THE ASSESSEE HAD MADE HUGE INVESTMENTS A ND 8 HAD EARNED EXEMPT INCOME FROM THE SAME IN THE FORM OF DIVIDEND AND LONG TERM CAPITAL GAIN. THE I.T.A.T. IN THE SAID CASE DELETED THE DISALLOWANCE MADE ON ACCOUNT OF INTEREST U/S 14A, BY HOLDING THAT OWN FUNDS AND RES ERVES OF THE ASSESSEE WERE MORE THAN SUFFICIENT TO COVER THE INVESTMENTS MADE DURING THE YEAR AND IN SUCH A SCEN ARIO IT COULD BE CONVENIENTLY PRESUMED THAT ALL THE INVE STMENTS HAD BEEN MADE OUT OF OWN FUNDS. THE I.T.A.T. RELIE D UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COU RT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS. CIT I N ITA NO.624 OF 2013 (O&M) DATED 24.7.2015 IN THIS REGARD . FURTHER AS REGARD THE ADMINISTRATIVE EXPENSES DISAL LOWED BY APPLYING RULE 8D(2)(III), THE I.T.A.T. DELETED T HE SAME BY HOLDING THAT THERE WAS NO SATISFACTION RECORDED BY THE ASSESSING OFFICER AS TO WHY THE CALCULATION MADE BY THE ASSESSEE WHILE MAKING SUO MOTO DISALLOWANCE U/S 14A OF THE ACT WAS INCORRECT. THE RELEVANT FINDINGS OF TH E I.T.A.T. AT PARAS 8 TO 10 OF THE ORDER ARE AS FOLLO W: 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF THE BALANCE SHEET AND OTHER DOCUMENTS FILED IN THE PAPER BOOK, WE SEE THAT THE TOTAL INVESTMENT IN SHARES AND MUTUAL FUNDS AS ON 31.3.2007 WAS OF RS.3,83,82,47,226/- WHILE THE INVESTMENT AS ON 31.3.2008 IS OF RS.4,64,37,73,922. THEREFORE, THERE WAS AN INCREASE OF AROUND RS.80 CRORES IN THE INVESTMENT DURING THE YEAR. WHILE RESERVES AND OWN FUNDS 9 OF THE ASSESSEE COMPANY AS ON 31.3.2008 ARE AMOUNTING TO RS.6,24,18,74,854/-. FROM THESE FIGURES, IT IS QUITE CLEAR THAT OWN FUNDS AND RESERVES OF THE ASSESSEE ARE MORE THAN SUFFICIENT TO COVER THE INVESTMENT MADE DURING THE YEAR. IN SUCH A SCENARIO, IT CAN BE VERY CONVENIENTLY PRESUMED THAT ALL THE INVESTMENT HAVE BEEN MADE OUT OF OWN FUNDS. FOR THIS PURPOSE, RELIANCE IS PLACED ON THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS. CIT IN ITA NO.624 OF 2013 (O&M) DATED 24.7.2015, WHEREBY IT HAS BEEN HELD AS UNDER : 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APP ELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS.10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AG REEMENT WITH THE JUDGMENT OF THE BOMBAY HIGH COURT IN COMMISSIONER O F INCOME TAX VS. RELIANCE UTILITIES & POWER LTD., (2009) 313 ITR 340 , PARA-10, THAT IF THERE ARE INTEREST FREE FUNDS AVAILABLE A PRESUMPTION WOU LD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SU FFICIENT TO MEET THE INVESTMENT. 9. THEREFORE, IN SUCH CIRCUMSTANCES, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT ON ACCOUNT OF INTEREST CAN BE MADE. THOUGH THE LEARNED COUNSEL FOR THE ASSESSEE HAS MADE ALTERNATIVE SUBMISSIONS ON THE COMPUTATION MADE BY THE ASSESSING OFFICER UNDER RULE 8D OF THE INCOME TAX RULES, IN VIEW OF OUR FINDING THAT NO DISALLOWANCE ON ACCOUNT OF INTEREST UNDER SECTION 14A AN BE MADE, WE DO NOT FIND ANY NEED TO ADJUDICATE THESE ISSUES. 10. AS REGARDS ADMINISTRATIVE EXPENSES, IT IS A FACT ON RECORD THAT THE ASSESSEE HIMSELF HAD DISALLOWED AN AMOUNT OF RS.2,73,13,827/- ON 10 ACCOUNT OF EXPENSES INCURRED FOR EARNING TAX FREE INCOME AND THE ASSESSING OFFICER HAS NOWHERE RECORDED A FINDING AS TO WHY THE DISALLOWANCE SO MADE BY THE ASSESSEE IS NOT CORRECT. RELIANCE IS PLACED ON THE JUDGMENT OF THE HON'BLE JURISDICTIONAL PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. DEEPAK MITTAL (2014) 361 ITR 131 TO THE EFFECT THAT IN THE ABSENCE OF ANY SATISFACTION RECORDED BY THE ASSESSING OFFICER AS TO WHY THE CALCULATION MADE BY THE ASSESSEE IS NOT CORRECT, THE DISALLOWANCE MADE BY HIM ON ACCOUNT OF ADMINISTRATIVE EXPENSES UNDER RULE 8D OF THE INCOME TAX RULES IS NOT AS PER LAW. IN VIEW OF THE ABOVE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14 OF THE ACT READ RULE 8D OF THE INCOME TAX RULES IS DELETED. 11. THE FACTS IN THE PRESENT CASE, WE FIND, ARE IDENTICAL TO THAT IN ASSESSMENT YEAR 2008-09 ABOVE. IN THE IMPUGNED YEAR ALSO, WE FIND THAT IT HAS BEEN DEMONSTRATED BEFORE US THAT THERE WAS ENOUGH OWN FU NDS AVAILABLE WITH THE ASSESSEE TO MAKE THE IMPUGNED INVESTMENTS. THE BALANCE SHEET OF THE ASSESSEE PLA CED AT PAPER BOOK PAGE NO.176 DEMONSTRATES THAT THE INVESTMENTS HAD SHOWN AN INCREASE FROM RS.478.77 CR ORES TO 571.67 CRORES I.E. AN INCREASE OF RS.92.90 CRORE S APPROXIMATELY, WHILE A PERUSAL OF THE PROFIT & LOSS A/C FOR THE YEAR SHOWS THAT THE PROFIT FOR THE YEAR EARNED BY THE ASSESSEE IN ITSELF WAS 342.98 CRORES, WHICH WAS MOR E THAN SUFFICIENT TO MAKE THE INVESTMENTS DURING THE YEAR OF RS.92.90 CRORES. THUS WITH RESPECT TO DISALLOWANCE MADE U/S 8D(2)(II) OF THE ACT, PERTAINING TO INTEREST, T HE 11 DECISION RENDERED BY THE I.T.A.T., CHANDIGARH BENCH IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2008- 09 SQUARELY APPLIES FOLLOWING WHICH ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST U/S 14A IS DELE TED. 12. AS FAR AS DISALLOWANCE MADE ON ACCOUNT OF ADMINISTRATIVE EXPENSES AS PER RULE 8D(2)(III) OF T HE ACT, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT HAD SUO MOTO MADE A DISALLOWANCE OF RS.2,29,97,000/- ON ACC OUNT OF THE SAME, WHILE AS PER THE ORDER OF THE LD. CIT (APPEALS) THE DISALLOWANCE WAS TO BE RS.2,02,03,796 /-. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD SUO MOTO DISALLOWED MORE THAT WHAT WAS DIRECTED BY THE LD. CIT (APPEALS), NO FURTHER DISAL LOWANCE FOR ADMINISTRATIVE EXPENSES AS PER RULE 8D(2)(III) OF THE ACT WAS CALLED FOR. THE LD. DR DID NOT DISPUTE THE SAME. IN VIEW OF THE SAME SINCE WE FIND THAT THE ASSESSEE SUO MOTO HAD MADE MORE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES U/S 14A R.W.R. 8D(2)(III) T HAN WHAT WAS DIRECTED BY THE LD. CIT (APPEALS), THERE I S NO REASON FOR MAKING ANY FURTHER DISALLOWANCE AND DISALLOWANCE MADE IS, THEREFORE, DELETED. 13. IN GROUND NO.8 RAISED BY THE ASSESSEE, THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LD.CIT(A) IN UPHOLDING THE DISALLOWANCE OF INTEREST OF RS.55,57, 069/- MADE ON ACCOUNT OF DIFFERENCE OF INTEREST CHARGED F ROM HERO MOTORS ON LOAN OF RS.60 CRS. 12 14. THE BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT THE ASSESSING OFFICER NOTED DURING ASSESSMENT PROCEEDIN GS THE ASSESSEE HAD GIVEN LOAN OF RS.60 CRORES TO M/S HERO MOTORS LTD. @ 6%, WHEREAS TO ALL OTHER PARTIES, THE LOANS HAD BEEN GRANTED @ 12% TO 15%. THE ASSESSING OFFIC ER ALSO POINTED OUT THAT THE ASSESSEE HAD TAKEN INTERE ST BEARING SECURED AS WELL AS UNSECURED LOANS ON WHIC H INTEREST HAD BEEN PAID @ 7.38%. THE ASSESSING OFFI CER ACCORDINGLY HELD THAT THE ASSESSEE HAD GRANTED LOAN AT A SUBSIDIZED RATE TO M/S HERO MOTORS LTD. BECAUSE BOT H THE COMPANIES BELONGED TO M/S HERO GROUP AND HELD THAT THE SAID ADVANCE TO M/S HERO MOTORS LTD. WAS NOT FOR BUSINESS PURPOSE AND ACCORDINGLY DISALLOWED THE DIFFERENTIAL INTEREST @ 1.38% AMOUNTING TO RS.55,57 ,069/- OUT OF THE TOTAL INTEREST EXPENSES. 15. THE LD. CIT (APPEALS) UPHELD THE DISALLOWANCE SINCE SIMILAR DISALLOWANCE MADE IN ASSESSEES CASE FOR ASSESSMENT YEAR 2009-10 HAD BEEN UPHELD IN APPEAL. 16. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE DISALLOWANCE MADE IN ASSESSMENT YEA R 2009-10 HAD BEEN DELETED BY THE I.T.A.T., CHANDIGAR H BENCH VIDE ITS ORDER IN ITA NO.314/CHD/2013 DATED 16.2.2016 ON THE GROUND THAT THE LOAN HAD GIVEN OUT OF OWN FUNDS. 17. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 13 18. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. WE HAVE ALSO GONE THROUGH THE ORDER OF THE I.T.A.T. , CHANDIGARH BENCH IN ASSESSEES OWN CASE FOR ASSESSM ENT YEAR 2009-10. ON PERUSING THE SAME, WE FIND IDENTI CAL ISSUE HAS BEEN DEALT WITH BY THE I.T.A.T. WHEREIN A S PER THE FACTS OF THE SAID CASE A LOAN OF RS.10 CRORES H AD BEEN GIVEN TO M/S HERO MOTORS LTD. @ 6%, WHEREAS TO OTHE R PERSONS LOAN WAS GRANTED @ 12% TO 15%. THE ASSESSI NG OFFICER IN THE SAID CASE NOTED THAT THE AVERAGE RAT E OF INTEREST PAYMENT MADE BY THE ASSESSEE ON LOANS RAIS ED BY IT WAS 7.75% AND, THEREFORE, THE EXCESS INTEREST PA YMENT @ 1.75% ON THE LOANS PAID AS AGAINST INTEREST RECOV ERED FROM M/S HERO MOTORS LTD., WAS DISALLOWED. THE I.T .A.T. IN THE SAID CASE HAD HELD THAT THE ASSESSEE HAD AMP LY DEMONSTRATED THAT IT WAS A CASH RICH COMPANY HAVING OWN HUGE FUNDS AND IN SUCH A SCENARIO IT COULD BE SAFEL Y PRESUMED THAT THE LOANS WERE GIVEN OUT OF OWN FUNDS . THE I.T.A.T. HAD FURTHER HELD THAT THE RATE OF INTEREST AT WHICH THE LOAN WAS GIVEN BY THE ASSESSEE BEING A BUSINESS DECISION OF THE ASSESSEE COULD NOT BE CHALLENGED BY THE REVENUE AND FOLLOWED THE DECISION OF THE HON'BLE DE LHI HIGH COURT IN THE CASE OF CIT VS. M/S DALMIA CEMEN T LTD. (2002) 254 ITR 377. THE I.T.A.T. ALSO OBSERV ED THAT THE HON'BLE SUPREME COURT IN ASSESSEES OWN CASE HA D HELD THAT NO NOTIONAL ADDITION ON ACCOUNT OF LESSER RATE OF 14 INTEREST CHARGED COULD BE MADE. THE RELEVANT FINDI NGS OF THE I.T.A.T. AT PARA 16 OF THE ORDER ARE AS FOLLOW: 16. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE HAS GIVEN LOAN OF RS.10 CRORES TO M/S HERO MOTORS LTD. @ 6%. IT HAS AMPLY BEEN DEMONSTRATED BEFORE US THAT THE COMPANY IS A CASH RICH COMPANY AND HAS HUGE OWN FUNDS WHICH GOES TO THE TUNE OF AROUND 652 CRORES, WHILE THE TOTAL LOANS AND ADVANCES GIVEN BY IT ARE AT AROUND 116 CRORES. IN THIS SCENARIO, IT CAN SAFELY BE PRESUMED THAT THE ASSESSEE HAD GIVEN LOANS OUT OF ITS OWN FUNDS. HOWEVER, IN THE SAID CASE, THE ASSESSEE HAD NOT GIVEN INTEREST FREE LOANS, RATHER THE CASE OF THE ASSESSING OFFICER IS THAT THE INTEREST CHARGED IS AT A LESSER RATE. IT HAS BEEN HELD IN THE CASE OF CIT VS. DALMIA CEMENT LTD. (2002) 254 ITR 377 (DEL) THAT THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF A BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE SAID ROLE TO DECIDE HOW MUCH IS A REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT WAS FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMISE ITS PROFITS. AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD WORK. THE AUTHORITIES MUST LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. EVEN THE HON'BLE SUPREME COURT IN ASSESSEES OWN CASE AS REFERRED HEREINABOVE HAD HELD THAT APPLYING THE SAID RATIO TO THE FACTS OF 15 THE CASE THAT NO SUCH NOTIONAL ADDITION ON ACCOUNT OF LESSER RATE OF INTEREST CHARGED CAN BE MADE BY THE ASSESSEE. IN VIEW OF THIS, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION MADE BY HIM. THE GROUND NO.8 IS ALLOWED. 19. THE FACTS IN THE PRESENT CASE, WE FIND, ARE IDENTICAL TO THAT IN ASSESSMENT YEAR 2009-10. IN T HE IMPUGNED YEAR THE LOAN GIVEN IS RS.50 CRORES,RS.10 CRORE BEING ADVANCED IN THE PRECEDING YEAR, WHILE THE PRO FIT OF THE ASSESSEE FOR THE IMPUGNED YEAR IS RS.342.98 CRO RES. CLEARLY THE ASSESSEE HAD ENOUGH AND SUFFICIENT OWN FUNDS TO GIVE THE IMPUGNED LOAN AND FOLLOWING THE DECISIO N OF THE I.T.A.T. IN ASSESSEES CASE FOR ASSESSMENT YEAR 2009- 10 IT CAN BE SAFELY PRESUMED THAT THE LOAN HAD BEEN GIVEN OUT OF THE OWN FUNDS OF THE ASSESSEE AND, THEREFORE , CALLED FOR NO DISALLOWANCE TO BE MADE ON ACCOUNT OF INTERE ST. FURTHER HAS HELD BY THE I.T.A.T. IN ASSESSMENT YEAR 2009- 10, THE ASSESSING OFFICER CANNOT SIT IN THE ARM CHA IR OF THE ASSESSEE AND DECIDE THE RATE OF INTEREST AT WHI CH THE LOAN OUGHT TO HAVE BEEN GIVEN AND MOREOVER THE HON' BLE SUPREME COURT HAS ALSO DELETED THE ADDITION MADE ON ACCOUNT OF NOTIONAL INTEREST EARNED IN ASSESSEES C ASE. IN VIEW OF THE SAME, THE DISALLOWANCE MADE AMOUNTING T O RS.55,57,069/- ON ACCOUNT OF DIFFERENTIAL INTEREST CHARGED FROM M/S HERO MOTORS LTD. IS THEREBY DELETED. THE GROUND OF APPEAL NO.8 RAISED BY THE ASSESSEE IS, THEREFORE , ALLOWED IN ABOVE TERMS. 16 20. IN GROUND NO.9 THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LD.CIT(A)IN UPHOLDING THE CAPITALIZAT ION OF INTEREST OF RS.2,78,564/- ON INVESTMENT UNDER THE H EAD CAPITAL WORK IN PROGRESS-BUILDING UNDER CONSTRUCT ION. 21. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER CALLED FOR DETAILS FOR CAPITAL WO RK-IN- PROGRESS FOR THE YEAR AND ASKED THE ASSESSEE AS TO WHY INTEREST ON THE SAME MAY NOT BE CAPITALIZED. THE AS SESSEE SUBMITTED THAT C.R.(COLD ROLLING) DIVISION OF THE A SSESSEE HAD ALREADY CAPITALIZED INTEREST ON CAPITAL WORK-IN - PROGRESS AT RS.5,69,168/- AND FURTHER SUBMITTED THA T THE REMAINING EXPENDITURE ON CAPITAL WORK-IN-PROGRESS W AS ONLY ROUTINE TYPE TOWARDS MODIFICATION/REPLACEMENT IN THE EXISTING MACHINERY INSTALLED AND, THEREFORE, WAS IN THE NATURE OF EXTENSION OF EXISTING MACHINERY. THE ASS ESSING OFFICER WAS NOT SATISFIED WITH ASSESSEES SUBMISSIO NS AND WORKED OUT TOTAL INTEREST TO BE CAPITALIZED ON THE WORK-IN- PROGRESS AT RS.8,47,732/- AND ACCORDINGLY DISALLOWE D THE ADDITIONAL AMOUNT OF RS.2,78,564/- OUT OF THE INTER EST EXPENDITURE. 22. THE LD. CIT (APPEALS) UPHELD THE DISALLOWANCE FOLLOWING HIS DECISION IN ASSESSEES CASE FOR ASSE SSMENT YEAR 2009-10. 23. BEFORE US, LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT IDENTICAL ISSUE HAD BEEN DEALT WITH BY THE I.T.A.T., CHANDIGARH BENCH IN ASSESSEES CASE FOR 17 ASSESSMENT YEAR 2009-10 IN ITA NO.314/CHD/2013 DATE D 16.2.2016 WHEREIN THE DISALLOWANCE MADE HAD BEEN DELETED ON ACCOUNT OF THE FACT THAT THE ASSESSEE HA D ENOUGH OWN FUNDS FOR THE PURPOSE OF INVESTING IN TH E CAPITAL WORK-IN-PROGRESS. THE I.T.A.T. FOLLOWING T HE DECISION OF THE I.T.A.T., CHANDIGARH BENCH IN THE C ASE OF DCIT VS. SAMRAT FORGINGS LTD. IN ITA NO.975/CHD/201 1 DATED 24.5.2012 HAD DELETED THE DISALLOWANCE MADE. THE RELEVANT FINDINGS OF THE I.T.A.T. AT PARA 22-23 OF THE ORDER ARE AS UNDER: 22. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. ON PERUSAL OF THE ORDER OF THE I.T.A.T., CHANDIGARH BENCH IN THE CASE OF SAMART FORGINGS LTD. (SUPRA), WE SEE THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE I.T.A.T. AT PAGE 9 OF THE SAID OR, WHICH READS AS UNDER : 9. THE PROVISIONS OF MAIN SECTION AND THE PROVISO ARE IN RELATION TO THE AMOUNT OF INTEREST PAYABLE O N CAPITAL BORROWED. THE FIRST JUNCTURE THUS TO BE SE EN IS WHETHER THE ASSESSEE HAD BORROWED ANY CAPITAL FOR THE PURPOSES OF INVESTMENT IN CAPITAL ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION. IN T HE FACTS OF THE PRESENT CASE, THERE IS NO FINDING BY T HE ASSESSING OFFICER IN RESPECT OF THE BORROWALS MADE BY THE ASSESSEE FOR THE PURPOSES OF INVESTMENT IN CAPITAL WORK-IN-PROGRESS. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD SHOWN CAPITAL WORK-IN- PROGRESS IN ITS BALANCE SHEET AND CONSEQUENTLY COMPUTED DISALLOWANCE IN VIEW OF THE PROVISIONS OF PROVISO TO SECTION 36(1)(III) OF THE ACT. THE CIT 18 (APPEALS) HAS GIVEN THE FINDING THAT NO LOAN HAD BEEN RAISED BY THE ASSESSEE COMPANY FOR THE PURCHASE OF FURNACE OR FOR THE CONSTRUCTION OF BUILDING. THE SAID FINDING OF THE CIT (APPEALS) HA D NOT BEEN CONTROVERTED BY THE LEARNED D.R. FOR THE REVENUE. FURTHER THE CIT (APPEALS) HAS ALSO NOTED THAT THE TOTAL INVESTMENT MADE BY THE ASSESSEE DURING THE YEAR ON CAPITAL WORK-IN-PROGRESS WAS RS.42.46 LACS SPENT ON FURNACE AND RS.33.23 LACS ON THE BUILDING AS AGAINST THE NET PROFIT OF THE ASSES SEE FOR THE YEAR AT RS.1.97 CRORES. IN VIEW OF THE ABO VE SAID FACTS AND CIRCUMSTANCES, WE FIND NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. UPLOADING THE ORDER OF THE CIT (APPEALS) WE DISMISS GROUND NO.1 RAISED BY THE REVENUE. 23.SINCE NO DISTINGUISHING FACTS WERE BROUGHT TO OU R NOTICE DURING THE COURSE OF HEARING,RESPECTFULLY FOLLOWING THE ORDER OF THE COORDINATE BENCH,WE ALLOW THIS GROUND OF APPEAL 24. THE FACTS IN THE PRESENT CASE ARE IDENTICAL TO THAT IN THE PRECEDING YEAR. THE INVESTMENTS MADE I N CAPITAL WORK-IN-PROGRESS IN THE IMPUGNED YEAR AMOUN TED TO RS.6,06,85,936/-. THE PROFITS EARNED BY THE ASS ESSEE DURING THE IMPUGNED YEAR AMOUNTED TO RS.342.98 CROR ES. THUS THE ASSESSEE HAD SUFFICIENT FUNDS FOR THE PURP OSE OF MAKING INVESTMENT IN THE CAPITAL WORK-IN-PROGRESS A ND THE DECISION RENDERED IN ASSESSEES CASE FOR ASSESSMENT YEAR 2009-10 WILL, THEREFORE, SQUARELY APPLY IN THE PRES ENT CASE ALSO FOLLOWING WHICH WE HOLD THAT NO DISALLOWANCE O F INTEREST ON ACCOUNT OF INVESTMENT MADE IN CAPITAL W ORK-IN- PROGRESS IS WARRANTED AND DISALLOWANCE MADE TO THE EXTENT OF RS.2,78,564/- IS, THEREFORE, DIRECTED TO BE DELE TED. 19 GROUND NO.9 OF ASSESSEES APPEAL IS, THEREFORE, ALL OWED IN THE ABOVE TERMS. 25. GROUND NO.10 RAISED BY THE ASSESSEE WAS NOT PRESSED BEFORE US AND IS, THEREFORE, TREATED AS DIS MISSED. 26. THE APPEAL OF THE ASSESSEE IS THEREFORE PARTLY ALLOWED. ITA NO.758/CHD/2014(REVENUES APPEAL) : 27. GROUND NO.1 RAISED BY THE REVENUE READS AS UNDER: 1.(A) THAT THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN LAW AS WELL AS ON FACTS IN DIRECTING THE AO TO RE-COMPUTE T HE DISALLOWANCE U/S 14A READ WITH RULE 8D AND THEREBY GI VING RELIEF TO THE ASSESSEE TO THE TUNE OF RS.3,34,23,144/- O N THIS ACCOUNT. (B) THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN NOT APPRECIATING THE FACT THAT THE AO HA D ADOPTED THE VALUE OF TOTAL ASSETS AS APPEARING IN THE BALANC E SHEET OF THE ASSESSEE WHICH IS AS PER ACCOUNTING STANDARD AN D ACCEPTABLE BY THE INCOME TAX ACT, 1961 AND ANY CHANGE S THEREOF WOULD ENTAIL MODIFICATION TO THE RULE 8D OF THE INC OME-TAX RULES, 1962. 28. IN THE SAID GROUND, THE REVENUE IS AGGRIEVED BY THE RELIEF GIVEN TO THE ASSESSEE TO THE TUNE OF RS.3,34,23,144/- ON ACCOUNT OF DISALLOWANCE OF INTE REST MADE U/S 14A R.W.R. 8D OF THE ACT. THIS ISSUE HAS ALREADY BEEN DEALT WITH BY US IN GROUND NOS.1 TO 7 OF THE 20 ASSESSEES APPEAL IN ITA NO.720/CHD/2014 WHEREIN WE HAVE HELD THAT NO DISALLOWANCE ON ACCOUNT OF INTER EST U/S 14A R.W.R. 8D (2)(II) OF THE ACT IS WARRANTED SINCE THE ASSESSEE HAS DEMONSTRATED THE AVAILABILITY OF ENOUG H OWN FUNDS FOR THE PURPOSE OF MAKING INVESTMENT FOR EARN ING TAX FREE INCOME. ON ACCOUNT OF THE SAME, GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS DISMISSED. 29. GROUND NO.2 RAISED BY THE REVENUE READS AS UNDER: 2. (A) THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ENTIRE ADDITION OF RS.7,55,24 ,848/- ON A/C OF DISALLOWANCE OF EXCESSIVE COMMISSION EXPENSE S PAID TO M/S MUNJAL SALES CORPORATION AS THE ASSESSEE FAILE D TO EXPLAIN THE GENUINENESS OF THE SAME DESPITE OFFERING IT A NUMBER OF OPPORTUNITIES OF BEING HEARD DURING THE C OURSE OF ASSESSMENT PROCEEDINGS AND THIS BEING EXORBITANT AND UNJUSTIFIABLE IS NOT BEING WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. (B) THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN FAILING TO APPRECIATE THAT EVEN THOUGH M/S MUNJAL SALES CORPORATION AND M/S HERO CYCLES LTD. ARE NOT STRICTLY RELATED AS PER SECTION 40A(2) OF THE ACT, THE PARTNE RS OF THE FORMER ARE FAMILY MEMBERS OF THE DIRECTORS OF THE LATTER AND THUS THE KEY PERSONNEL OF BOTH THE CONCERNS ARE RELATED;- AND HENCE, THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF C/T VS. GLAXO SMITH/DINE ASIA PVT. LTD. (236 CTR 113) IS NOT APPLICABLE IN THIS CASE. 30. THIS GROUND IS AGAINST DELETION OF DISALLOWANC E OF COMMISSION PAID TO M/S MUNJAL SALES CORPORATION AMOUNTING TO RS.7,55,25,848/-. 21 31. BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID COMMISSION AMOUNTING TO RS.9,79,45,458/- TO M/S MUN JAL SALES CORPORATION. THE ASSESSING OFFICER ASKED THE ASSESSEE TO FURNISH THE DETAILS OF THE TERMS ON WHI CH THE COMMISSION WAS PAID, TO JUSTIFY THE SERVICE RENDERE D BY THE AGENT, TO PROVIDE THE QUALIFICATION OF THE EMPL OYEES OF THE AGENT AND NATURE OF JOB TO JUSTIFY THE PAYMENT MADE WHEN ALREADY HEAVY SALARIES WERE BEING PAID TO THE DIRECTORS AND TO ALSO STATE SUBSTANTIAL INTEREST OF THE ASSESSEE IN THE COMMISSION AGENT. THE ASSESSEE FIL ED DETAILED SUBMISSIONS DURING ASSESSMENT PROCEEDINGS IN RESPONSE TO THE ABOVE QUERY OF THE ASSESSING OFFICE R, WHICH ARE MENTIONED AT PARA 5.1 OF THE LD. CIT (APP EALS)S ORDER. THE ASSESSING OFFICER WAS NOT SATISFIED WIT H THE ASSESSEES SUBMISSIONS AND OBSERVED THAT THE JUSTIF ICATION FOR THE COMMISSION @ 1% GIVEN TO MUNJAL SALES CORPORATION HAD NOT BEEN ANSWERED BY THE ASSESSEE. THE ASSESSING OFFICER ALSO POINTED OUT THAT THE TOTAL EXPENDITURE OF MUNJAL SALES CORPORATION WAS ONLY RS.1,85,34,025/- AS AGAINST WHICH COMMISSION INCOME OF RS.8,87,99,145/- HAD BEEN EARNED. |THUS THE ASSESS ING OFFICER OBSERVED THAT THE COMMISSION EXPENSES WERE CLEARLY HIGHLY EXORBITANT AND UNJUSTIFIABLE. THE A SSESSING OFFICER REFERRED TO ANNEXURE-XIX TO THE TAX AUDIT R EPORT AND POINTED OUT THAT THE NET PROFIT/TURNOVER OF THE ASSESSEE WAS 20.97% AND APPLYING THE SAME WORKED OU T JUSTIFIABLE AMOUNT OF EXPENSES TO BE PAID BY THE AS SESSEE 22 TO MUNJAL SALES CORPORATION AT THE SAID MARGIN WHIC H WORKED OUT TO RS.2,24,20,610/-. ACCORDINGLY, EXCESS AMOUNT OF COMMISSION PAID OF RS.7,55,24,848/- WAS DISALLOWED BY THE ASSESSING OFFICER. 32. DURING ASSESSMENT PROCEEDINGS THE ASSESSEE FILED WRITTEN SUBMISSIONS REPRODUCED AT PARA 5.3 OF THE ORDER OF CIT (APPEALS). THE COMMENTS OF THE ASSESS ING OFFICER ON THE SAME WERE CALLED FOR WHICH WERE GIVE N TO THE ASSESSEE FOR FILING HIS REPLY. AFTER CONSIDERI NG RIVAL SUBMISSIONS THE LD. CIT (APPEALS) DELETED THE DISALLOWANCE MADE BY HOLDING THAT AS PER THE FACTS OF THE CASE WHEREIN THE COMMISSION HAD BEEN APPROVED BY TH E BOARD OF DIRECTORS AND SHAREHOLDERS AND ALSO THE MI NISTRY OF CORPORATE AFFAIRS AND CONSIDERING THE FACT THAT MUNJAL SALES CORPORATION HAD PAID TAXES AT THE SAME RATE A T WHICH THE ASSESSEE HAD PAID TAXES AND THE TRANSACTI ON WAS THEREFORE REVENUE NEUTRAL, THE COMMISSION PAYME NT COULD NOT BE HELD TO BE EXCESSIVE. FURTHER THE LD. CIT (APPEALS) HELD THAT IN VIEW OF THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF CIT VS. GLAXO SMITHKLINE ASIA (P) LTD. (2010) 195 TAXMAN 35 (SC), NO DISALLOWANCE IN THE PRESENT CASE COULD BE MADE SINCE THE PARTIES WE RE NOT RELATED AS PER SECTION 40(A)(2) OF THE ACT AND ENTI RE EXERCISE WAS A REVENUE NEUTRAL EXERCISE THE RELEVA NT FINDINGS OF THE LD. CIT (APPEALS) AT PARAS 5.8 TO 5 .10 OF THE ORDER ARE AS FOLLOW: 23 5.8. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IT IS AN ADMITTED FACT ON RECORD THAT M/S MUNJAL SALES CORPO RATION HAD RENDERED SERVICES TO THE APPELLANT COMPANY DURING THE YEAR. THIS IS EVIDENT FROM THE FACT THAT THE AO HAS NOT HELD THAT THE COMMISSION EXPENSES WERE BOGUS OR THAT NO SERVICES WERE RENDERED BY M/S MUNJAL SALES CORPORATION TO THE APPELLANT COMPANY. THE AO HAS HELD THAT THE EXPENDITUR E AMOUNTING TO RS. 1,85,34,025/- WAS GENUINE EXPENSES. TH E AO HAS HELD THAT THE COMMISSION EXPENSES PAID BY THE APPELLANT TO M/S MUNJAL SALES CORPORATION WERE EXCESSIV E AND AFTER ALLOWING THE GROSS PROFIT OF 20.97%, THE AO H AS HELD THAT THE REMAINING EXPENSES WERE EXCESSIVE AND HAS DISALLOWED THE SAME. THE ONLY ISSUE TO BE CONSIDERED HERE IS THAT IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE', WAS THE AO JU STIFIED IN DISALLOWING A PART OF THE COMMISSION EXPENSES ON TH E GROUND THAT THE SAME WERE EXCESSIVE OR NOT. IN THIS REGARD THE FOLLOWING FACTS NEED CONSIDERATION: 1. M/S MUNJAL SALES CORPORATION, A PARTNERSHIP CONCERN, ESTABLISHED IN THE YEAR 1962 HAD BEEN ACTING AS A S OLE SELLING AGENT FOR THE APPELLANT COMPANY SINCE ITS INCEPTION . 2. M/S MUNJAL SALES CORPORATION HAD ALSO ACTED AS SOLE SELLING AGENT FOR OTHER GROUP CONCERNS NAMELY M/S MAJESTIC A UTO LTD., M/S ROCKMAN INDUSTRIES LTD., M/S HIGHWAY INDUS TRIAL LTD. 3. THE APPELLANT COMPANY HAS PASSED A RESOLUTION IN THE BOARD MEETING HELD ON 29.03.2007 FOR REAPPOINT MENT OF M/S MUNJAL SALES CORPORATION AS SOLE SELLING AGEN T OF THE APPELLANT COMPANY FOR A FURTHER PERIOD OF 5 YEA RS W.E.F. 01.08.2007ONTHEOLDTERMSANDCONDITIONS MENTION ED IN THE AGREEMENT. 4. THE APPELLANT COMPANY HAD FILED AN APPLICATION IN F ORM 1 TO THE MINISTRY OF CORPORATE AFFAIRS FOR REAPPOIN TMENT OF SOLE SELLING AGENT. 5. THE MINISTRY OF CORPORATE AFFAIRS, GOVT. OF INDIA HA D APPROVED THE REAPPOINTMENT OF M/S M/S MUNJAL SALES CORPORATION AS SOLE SELLING AGENT ON THE OLD RATE OF COMMISSION @ 1% ON TURNOVER. 6. THE BOARD OF DIRECTORS HAD APPROVED THE RATE OF COMMISSION AS PER PAST. 7. 7. M/S MUNJAL SALES CORPORATION HAD ALSO ACTED AS SOLE SELLING AGENT OF M/S HIGHWAY INDUSTRIAL LTD., M/S ROCKMAN INDUSTRIES LTD., AND M/S MAJESTIC AUTO LTD., ON 24 WHICH COMMISSION WAS APPROVED BY THE MINISTRY OF CORPORATE AFFAIRS @ 2%. 8. THE RATE OF COMMISSION OF 1% HAD BEEN PAID TO M/S MUNJAL SALES CORPORATION FOR THE LAST MANY YEARS AND HAD ALWAYS BEEN ACCEPTED BY THE DEPARTMENT. 9. THE RETURNED INCOME OF M/S MUNJAL SALES CORPORATION AND THE APPELLANT COMPANY FOR THE LAST 5 YEARS AND T HE YEARS SUBSEQUENT TO THE ASSESSMENT YEAR ARE AS FOLLOWS: ASSESSMENT YEAR HERO CYCLES LTD. (RS.) MUNJAL SALES CORP. 2012-13 1310649510 102596810 2011-12 2111707624 106352354 2010-11 1521475260 95072250 2009-10 813393500 75290510 2008-09 437366646 52061320 2007-08 606299210 31584380 2006-07 986908810 45145250 2005-06 457757450 30293070 IT IS SEEN THAT FOR THE ASSESSMENT YEAR 2010-11 M/S MUNJAL SALES CORPORATION HAD FILED RETURN OF INCOME DECLARING INCOME OF RS. 95072250/-. FURTHER THE RAT ES OF TAXES BEING THE SAME FOR THE APPELLANT AND M/S MUNJ AL SALES CORPORATION THERE WAS NO LOSS OF REVENUE AND THE TR ANSACTION WAS REVENUE NEUTRAL. IN FACT THE APPELLANT HAD PAID SERVICE TAX TO THE TUNE OF RS. 91.46 LACS AND AS SUCH THE APPELLANT HA D PAID MORE TAX IN VIEW OF THIS COMMISSION PAYMENT TO M/S MUNJAL CORPORATION AS COMPARED TO THE SITUATION WHE RE NO COMMISSION HAD BEEN PAID TO M/S MUNJAL SALES CORPORA TION. 10. MUNJAL SALES CORPORATION IS NOT A PERSON COVERED U/S 40A(2) OF THE I.T. ACT. 5.9. THERE ARE TWO ISSUES TO BE CONSIDERED IN TH IS GROUND OF APPEAL:- 1. WHETHER THE PAYMENTS MADE BY THE APPELLANT TO M/S MUNJAL SALES CORPORATION WERE EXCESSIVE. 2. WHETHER A PART OF THE PAYMENTS MADE BY THE APPELLAN T TO M/S MUNJAL SALES CORPORATION CAN BE DISALLOWED IN THE FACTS AND CIRCUMSTANCES OF THE CASE ON THE GROUND THAT TH E SAME WERE EXCESSIVE EVEN THOUGH M/S MUNJAL SALES CORPORAT ION IS NOT A PERSON COVERED UNDER SECTION 40A(2)(B) OF THE I .T. ACT. EACH OF THE TWO ISSUES IS BEING CONSIDERED AS UNDER: 25 5.9.1. WHETHER THE PAYMENTS MADE BY THE APPELLANT T O M/S MUNJAL SALES CORPORATION WERE EXCESSIVE. FROM THE DETAILED FACTS MENTIONED ABOVE IT IS APPARENT THAT THE APPELLANT WAS PAYING COMMISSION TO M/S MUNJAL S ALES CORPORATION AT THE SAME RATE OF 1% FOR THE LAST MAN Y YEARS AND THE SAME HAD BEEN ACCEPTED BY THE DEPARTMENT. IT IS E VIDENT THAT THE COMMISSION HAD BEEN APPROVED BY THE BOARD OF DIRECTORS AND THE SHARE HOLDERS AND ALSO BY THE MINIS TRY OF CORPORATION AFFAIRS. MOREOVER BOTH THE APPELLANT AS WE LL AS M/S MUNJAL SALES CORPORATE HAD PAID TAXES AT THE SAME RATE AND THE TRANSACTION WAS REVENUE NEUTRAL. IN FACT, ON ACCOUNT OF THE PAYMENT OF SERVICE TAX BY THE APPELLANT WITH R ELATION TO THE COMMISSION PAID TO M/S MUNJAL SALES CORPORATION, T HE TOTAL AMOUNT OF TAX PAID ON ACCOUNT OF THE AFORESAID TRANSACTION WAS MORE THAN THE TAXES WHICH WOULD HAV E BEEN REQUIRED TO BE PAID BY THE APPELLANT IN CASE THE COMMISS ION WAS NOT PAID. IN VIEW OF ALL THE AFORESAID FACTS AND CI RCUMSTANCES OF THE CASE IT CANNOT BE HELD THAT THE COMMISSION PAYME NT MADE BY THE APPELLANT TO M/S MUNJAL SALES CORPORATION WE RE EXCESSIVE. REFERENCE IN THIS REGARD MAY BE MADE TO THE DECISION OF THE HON'BLE P&H HIGH COURT IN THE CASE OF CIT VS. SIYARAM GARG HUF (2011) 49 DTR 126. IN THIS CASE THE AO HAD MADE AN ADDITION U/S 40A (2) OF THE I.T. ACT ON THE GROUND THAT THE APPELLANT HAD PAID HIGHER RATE TO IT S SISTER CONCERN WHILE PURCHASING THE COTTON AND WASTE. THE C IT(A) ALLOWED THE APPEAL OF THE APPELLANT. ON FURTHER APPEAL, TH E HON'BLE ITAT HELD AS UNDER: 'ON THIS ISSUE, WE FIND THAT INDEED, THE DETAILS FILED BY THE ASSESSEE SHOWED THAT ITS SISTER CONCERNS WERE BEING TAXED AT THE SAME RATE AT WHICH THE ASSESSEE WAS BEING TAXED , PROVING THAT THERE WAS NO REASON FOR THE ASSESSEE TO SHOW H IGHER RATE PURCHASES MADE BY THE ASSESSEE FROM ITS SISTER CONCERNS. THE ASSESSEE'S SISTER CONCERN HAD OFFERED THEIR INCOME FROM SUCH SALES, WHICH FACT HAS NOT BEEN DISPUTED. THEREFORE, THE AO ERRED IN INVOKING THE PROVISIONS OF S. 40A(2) OF THE ACT AND THE LEARNED CIT(A) HAS CORRECTLY DEL ETED THE DISALLOWANCE. ' THE HON'BLE P&H HIGH COURT UPHELD THE ORDER OF THE HON'BLE TRIBUNAL AND DISMISSED THE APPEAL OF THE DEPARTMENT. 5.9.2. WHETHER A PART OF THE PAYMENTS MADE BY THE APPELLANT TO M/S MUNJAL SALES CORPORATION CAN BE DISALLOWED IN THE FACTS AND CIRCUMSTANCES OF THE CA SE 26 ON THE GROUND THAT THE SAME WERE EXCESSIVE EVEN THOUGH M/S MUNJAL SALES CORPORATION IS NOT A PERSON COVERED UNDER SECTION 40A(2)(B) OF THE I.T. ACT. A) IT IS AN UNDISPUTED FACT ON RECORD THAT M/S MUNJA L SALES CORPORATION IS NOT A PERSON COVERED U/S 40A(2) OF THE I.T. ACT. IT IS NOT THE AO'S CASE THAT M/S MUNJAL SALES CORPORATION IS RELATED PERSON U/S 40(A)(2)(B). TH E APPELLANT'S CONTENTION THAT M/S MUNJAL SALES CORPOR ATION IS NOT A PERSON COVERED U/S 40A(2) AND THEREFORE NO DISALLOWANCE CAN BE MADE IN IT'S CASE ON THE GROUND S THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE AND THE APPELLANT'S RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. GLAXO SM ITHKLINE ASIA PVT. LTD. 236 CTR 113 WAS ALSO BROUGHT TO THE N OTICE OF THE AO. THE AO IN HIS REPORT DATED 06.03.2014 HAS SUBMITTED THAT THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF CIT VS. GLAXO SMITHKLIN E ASIA PVT. LTD. (SUPRA) WAS NOT APPLICABLE TO THE APPELLANT ; A THIS DECISION WAS ON THE ISSUE OF TRANSACTION BETWEEN RELATED PARTIES U/S 40A(2). THIS SUBMISSION OF THE AO IS NOT BASED ON CORRECT APPRECIATION OF FACTS. TH E HON'BLE ITAT HAD GIVEN A CLEAR FINDING OF FACT IN THIS CASE THAT THE TWO PARTIES WERE NOT RELATED U/S 40(A)(2) AND THEREFOR E NO DISALLOWANCE COULD BE MADE IN THIS CASE ON THE GROUND THAT THE PAYMENTS WERE EXCESSIVE. B) IN CIT V. GLAXO SMITHKLINE ASIA (P.) LTD. (2010) 36 (I) ITCL 588 (SC): (2010) 195 TAXMAN 35 (SC), IT SO HAPPENED THAT THE ASSESSEE DID NOT HAVE ANY EMPLOYEE OTHER THAN A COMPANY SECRETARY AND ALL ADMINISTRATIVE SERVICES RELATING TO MARKETING, FINANCE , HR ETC., WERE PROVIDED BY GLAXO SMITH KLINE CONSUMER HEALTHCARE LTD. (GSKCH) PURSUANT TO AN AGREEMENT UN DER WHICH THE ASSESSEE AGREED TO REIMBURSE THE COSTS INCURRED BY GSKCH FOR PROVIDING THE VARIOUS SERVICES PLUS 5 O. THE COSTS TOWARDS SERVICES PROVIDED TO THE ASSESSEE WER E ALLOCATED ON THE BASIS SUGGESTED BY A FIRM OF CAS. THE ASSESSING OFFICER DISALLOWED A PART OF THE CHAR GES REIMBURSED ON THE GROUND THAT THEY WERE EXCESSIVE A ND NOT FOR BUSINESS PURPOSES WHICH WAS UPHELD BY THE COMMISSIONER OF INCOME TAX (APPEALS). HOWEVER, THE TRIBUNAL DELETED THE DISALLOWANCE ON THE GROUND THA T THERE WAS NO PROVISION TO DISALLOW EXPENDITURE ON THE GROUN D THAT 27 IT WAS EXCESSIVE OR UNREASONABLE UNLESS THE CASE OF T HE ASSESSEE FELL WITHIN THE SCOPE OF SECTION 40A(2). IT WA S HELD THAT AS IT WAS NOT THE CASE OF THE DEPARTMENT THAT SECTION 40A(2) WAS ATTRACTED, THE DISALLOWANCE COULD NOT BE MA 4E. THE DEPARTMENT CHALLENGED THE DELETION BEFORE THE H ON'BLE SUPREME COURT BY FILING A SPECIAL LEAVE PETITION (SLP). THE HON'BLE SUPREME COURT DISMISSED THE SLP ON THE FOLLOWING GROUNDS: (I) THE AUTHORITIES BELOW HAVE RECORDED A CONC URRENT FINDING THAT THE SAID TWO COMPANIES ARE NOT RELATED COMPANIES UNDER SECTION 40A(2), AND (II) SINCE THE ENTIRE EXERCISE WAS A REVENUE NEUTRAL EX ERCISE. C) THE AO IN HIS REPORT HAS EMPHASIZED THAT THE ADDI TION HAS NOT BEEN MADE U/S 40 A(2) AND THAT NOWHERE IN T HE ORDER HAS THIS SECTION BEEN REFERRED TO AND THAT THE ADDITION HAS BEEN MADE U/S 37(1). THUS THE FACTS IN THE APPEL LANT'S CASE ARE SIMILAR TO THE FACTS IN THE CASE OF CIT VS. GLAXO SMITHKLINE ASIA PVT. LTD. (SUPRA), IN AS MUCH AS, THE AO HAS RECORDED A FINDING THAT THE APPELLANT AND M/S MUNJA L SALES CORPORATION ARE NOT RELATED COMPANIES UNDER SECTION 40 A(2), AND AS DISCUSSED IN PARA 5.9.1 ABOVE, ENTIRE EXERCISE WAS A REVENUE NEUTRAL EXERCISE. AS SUCH THE DECISION IN THE CASE OF CIT VS. GLAXO SMITHKLINE ASIA PVT. LTD. (SU PRA) IS APPLICABLE TO THE APPELLANT'S CASE. D) REFERENCE IN THIS REGARD MAY ALSO BE MADE TO THE CASE OF BAKEMAN'S HOME PRODUCTS VS. ITO (1984) 7 ITD 371 (CHD). IN THIS CASE, THE CONTENTION OF THE ASSESSEE BEFORE THE HON'BLE ITAT, AS BROUGHT OUT IN THE ORDER OF THE HON'BLE ITAT, WAS AS UNDER: 9. THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED BEFORE US THAT INSOFAR AS THE TERMS OF THE AGREEMENT ARE CONCE RNED, THE FACT OF PAYMENT IS NOT IN DOUBT, THE AGREEMENT HAS B EEN ACCEPTED AND THE REVENUE HAS DISALLOWED PART OF PAYM ENT ON THE GROUND THAT THEY ARE EXCESSIVE OR UNREASONABLE CONSIDERING THE PROVISIONS OF SECTION 40A(2)(A). HE HOWEVER, SUBMITTED THAT THE AUTHORITIES BELOW HAVE FAILED TO S HOW HOW THE PROVISIONS OF THIS SECTION WERE APPLICABLE AND TH E DISALLOWANCE IS MERELY ON CONJECTURES AND SURMISES. HE SUBMITTED THAT INSOFAR AS THE REASONABLENESS OF THE PAYMENT IS CONCERNED, THE BEST JUDGE IS THE BUSINESS MAN AND NOT THE REVENUE IN VIEW OF THE FOLLOWING JUDGMENT S-CIT 28 V. WALCHAND & CO. (P.) LTD. [19671 65 ITR381 (SC), J.K. WOOLLEN MANUFACTURERS V. CIT [1969] 72 ITR 612 (SC) AND ALUMINIUM CORPN. OF INDIA LTD. V. CIT [1972] 86 ITR 11 (SC). IT WAS, THUS, CONTENDED BY THE LEARNED COUNSE L FOR THE ASSESSEE THAT IT WAS FOR THE LESSEE TO DECIDE WHAT I S REASONABLE PAYMENT FOR EXPLOITATION OF ASSETS OF ANOT HER BUSINESS MAN AND TAKING INTO ACCOUNT SUCH COMMERCIA L CONSIDERATION THE AGREEMENT REFERRED TO SUPRA HAD B EEN ENTERED INTO WHICH IS NOT IN DOUBT AND THE PAYMENTS MA DE THEREUNDER, THEREFORE, ARE NOT COVERED BY THE SECTI ON INVOKED BY THE AUTHORITIES BELOW. AMOUNTS PAID MAY B E FULLY ALLOWED.' THE HON'BLE ITAT HELD AS UNDER: ' 20. THE PAYMENTS MADE UNDER THE AGREEMENT DULY REACHED THE LESSOR AND THE LESSOR COMPANY HAS BEEN ASSESSED TO TAX ON THESE SUMS IN THE ASSESSMENT YEA RS 1978-79 AND 1979-80. THUS, APPLYING THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE CASE OF J.K. WOOLLEN MANUFACTURERS, WE GIVE A FINDING OF FACT THAT OUR CO NCLUSION ON FACTS IS THAT THE PAYMENTS ENVISAGED UNDER THE AG REEMENT ARE REAL, THAT THESE HAVE BEEN INCURRED BY THE ASSE SSEE-FIRM IN THE CHARACTER OF A TRADER AND THAT THESE ARE WHO LLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE AGREEMENT WAS A GENUINE DOCUMENT AND A CTED UPON BY THE PARTIES. THE PAYMENTS ARE ON FACTS OF TH E CASE NOT EXCESSIVE OR UNREASONABLE. 21. THE ITO REFERRED TO CLAUSE (A) OF SUB-SECTION ( 2) OF SECTION 40A, BUT HE FAILED TO APPRECIATE THE DEPTH AN D EXPENSE OF THIS SECTION 40A(2) AS A WHOLE. HE ONLY S AW PART (A) OF SUB-SECTION (2) WHICH INVESTED HIM WITH THE POW ERS TO FIDDLE WITH THE PAYMENTS. HE, HOWEVER, FAILED TO PI CK OUT ANY SPECIFIC PROVISIONS FROM SUB-CLAUSES (I) TO (VI) GIV EN UNDER CLAUSE (B) IBID AND TO CLINCH THE ISSUE BY SHOWING FACTUAL BASIS FOR IT. HE HAD AS SUCH NO LEGAL AUTHORITY TO DIS ALLOW THE PAYMENTS AS HE DID BECAUSE HE CANNOT MERELY DISA LLOW A PAYMENT ACTUALLY AND FACTUALLY MADE WITHOUT SHOWING BY WHAT STATUTORY PROVISION IT HAS BEEN PARTICULARLY HIT AND WHAT IS THE MATERIAL ON RECORD FOR ITS APPLICATION. TH E PROVISIONS THAT HE THOUGHT AS APPLICABLE DID NOT WARR ANT HIS ACTION AND THE COMMISSIONER (APPEALS) ERRED IN SUPPORT ING HIM WITHOUT HIMSELF ANALYSING THE RELEVANT PROVISIO NS AND SHOWING THEIR APPLICABILITY TO THE FACTS OF THE CASE. THIS 29 SECTION IS NOT APPLICABLE TO THE FACTS OF THIS CASE AS DISCUSSED BY US ABOVE. FOR THE YEARS UNDER APPEAL TH E ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE ARE, TH EREFORE, SET ASIDE AND THE ENTIRE PAYMENTS MADE BY THE LESSEE T O THE LESSOR IN TERMS OF THE IMPUGNED- AGREEMENT ARE DIRECT ED TO BE ALLOWED. THE ASSESSEE SUCCEEDS ON THIS ISSUE IN EACH YEAR.' FURTHER, AS PER THE SUBMISSIONS OF THE APPELLANT, THE ECISION OF THE HON'BLE ITAT WAS ACCEPTED BY THE DEPARTMENT AND NO APPEAL WAS FILED ON THIS ISSUE. E). FURTHER, AS DISCUSSED IN PARA 5.8 ABOVE M/ S MUNJAL SALES CORPORATION HAD ACTED AS A SOLE SELLING AGENT FOR THE APPELLANT, SINCE 1962 AND HAD PAID COMMISSION @ 1% IN THE LAST MANY YEARS WHICH WAS ALLOWED BY THE DEPARTMENT IN ASSESSMENTS U/S 143(3). F) MOREOVER, THE PAYMENTS OF COMMISSION @ 1% HAD BEEN APPROVED BY THE BOARD OF DIRECTORS, BY THE MEE TING OF SHAREHOLDERS AND ALSO BY THE MINISTRY OF CORPORATE AFFAIRS. G) IN VIEW OF THE AFORESAID FACTUAL AND LEGAL POSIT ION, IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, I T IS HELD THAT NO DISALLOWANCE CAN BE MADE ON THE GROUND THAT THE PAYMENTS/EXPENSES ARE EXCESSIVE. 5.10. KEEPING IN VIEW THE AFORESAID FACTUAL AND LEGA L POSITION THE DISALLOWANCE MADE BY THE AO IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 33. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE REL IED UPON THE ORDER OF THE LD. CIT (APPEALS) WHILE THE L D. DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 34. WE HAVE HEARD BOTH THE PARTIES. WE HAVE GONE THROUGH THE FINDINGS OF THE LD. CIT (APPEALS) AND W E FIND NO INFIRMITY IN THE SAME. THE LD. CIT (APPEALS) HA S DEALT WITH THE ISSUE IN DETAIL OUTLINING THE FACTS THAT T HE SAID AGENT HAD BEEN ACTING AS THE SOLE SELLING OF THE AS SESSEE SINCE 1962 AND RELEVANT APPLICATION HAD BEEN FIELD TO THE MINISTRY OF CORPORATE AFFAIRS ON ITS REAPPOINTMENT AS SOLE 30 SELLING AGENT ON 29.3.2007 WHICH THE MINISTRY HAD APPROVED ON OLD COMMISSION RATE OF 1% OF TURNOVER. THE LD. CIT (APPEALS) HAS ALSO GIVEN A FINDING THAT THE BOARD OF DIRECTORS HAD ALSO APPROVED THE SAID RATE. THE LD. CIT (APPEALS) HAS FURTHER POINTED OUT THAT THIS RATE OF COMMISSION HAS ALWAYS BEEN ACCEPTED BY THE DEPARTME NT IN THE PAST. THE LD. CIT (APPEALS) HAS ALSO POINTE D OUT THE FACT THAT BOTH THE ASSESSEE AND MUNJAL SALES CORPORATION HAD BEEN PAYING TAXES AT THE SAME RATE AND THAT MUNJAL SALES CORPORATION WAS NOT A PERSON COVE RED U/S 40(A) OF THE ACT. ALL THESE FACTS HAVE NOT BEE N CONTROVERTED BY THE LD. DR BEFORE US. IN VIEW OF T HE ABOVE FACTS, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT (APPEALS) HOLDING THAT THE PAYMENT OF COMMISSION WA S NOT EXCESSIVE SINCE IT WAS APPROVED BY THE MINISTRY OF CORPORATE AFFAIRS AND BY THE BOARD RESOLUTION AND E VEN ACCEPTED BY THE REVENUE IN THE PAST YEARS AND HAD B EEN PAID AT THE SAME RATE SINCE 1962. THE FACT THAT MU NJAL SALES CORPORATION HAD BEEN PAYING TAX AT THE SAME R ATE AS THE ASSESSEE, THE TRANSACTION WAS REVENUE NEUTRAL TRANSACTION AND SINCE MUNJAL SALES CORPORATION WAS NOT RELATED PERSON AS PER SECTION 40(A)(2) OF THE ACT, THERE WAS NO CASE FOR MAKING ANY DISALLOWANCE AT ALL, AS HELD BY THE HON'BLE APEX COURT IN THE CASE OF GLAXO SMITHKLINE ASIA (P) LTD. (SUPRA). 35. IN VIEW OF THE SAME WE UPHOLD THE ORDER OF THE LD. CIT (APPEALS) IN DELETING DISALLOWANCE MADE OF 31 COMMISSION AMOUNTING TO RS.7,55,25,848/-. THE GROU ND OF APPEAL NO.2 RAISED BY THE REVENUE IS DISMISSED. 36. GROUND NO.3 RAISED BY THE REVENUE READS AS UNDER: 3 (A) THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 2,09,66,9947- ON A/C O F DISALLOWANCE OF INTEREST U/S 36(1)(1II). (B) THAT THE LD. CIT(A) HAS ERRED IN LAW AND 9N FAC TS IN NOT APPRECIATING THE FACT THAT THE HUGE DEBIT BALAN CES, THAT TOO TO GROUP CONCERNS FOR AN UNREASONABLE PERIOD OF TIME SINCE THERE IS AN INDIRECT COST ATTACHED TO IT WHICH LEADS TO REDUCTION OF PROFIT OF THE ASSESSEE. THE RATIO OF DECISION OF THE HON'BLE PUNJAB & HARYANA COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES LTD 298 ITR 1 SQUARELY APPLIES TO THIS CASE. 37. THE BRIEF FACTS ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER CALLE D THE DETAILS OF DEBTORS STANDING IN THE BALANCE SHEET OF THE ASSESSEE AS ON 31.03.2010. THE ASSESSING OFFICER NO TED THAT THERE WAS A DEBIT BALANCE OF RS.17,02,59,780/- IN THE NAME OF M/S HERO EXPORTS AND A DEBIT BALANCE OF RS.2,41,53,924/- IN THE NAME OF M/S HERO MOTORS LTD . AS ON 31.03.2010. WITH REGARD TO THE DEBIT BALANCE IN THE CASE OF M/S HERO EXPORTS, THE ASSESSING OFFICER OBS ERVED THAT THERE WAS A NET OPENING BALANCE OF RS.26,39,28 ,512/- AS ON 01.04.2009 AND A NET CLOSING DEBIT BALANCE OF 17,02,59,780/- AS ON 31.03.2010. THE ASSESSING OFFI CER FURTHER OBSERVED THAT THOUGH THERE WERE REGULAR TRANSACTIONS BETWEEN THE TWO CONCERNS BUT THROUGHOU T THE 32 YEAR, NEITHER THE BALANCE HAD BEEN SQUARED OF NOR T HE DEBIT BALANCE HAS BEEN TURNED INTO CREDIT BALANCE. THE ASSESSING OFFICER ALSO POINTED OUT THAT THE PAYMENT S RECEIVED BY THE ASSESSEE FROM M/S HERO EXPORTS IN T HE SAID ACCOUNT WERE PROPORTIONATELY TOO SMALL TO THE AMOUNT OUTSTANDING AS ON ANY OF THE DATES ON WHICH THE PAY MENTS WERE RECEIVED. FOR EXAMPLE THE FIRST PAYMENT OF RS.12CRORES IN THIS ACCOUNT WAS RECEIVED ON 15.05.2 009 WHEREAS THE OUTSTANDING BALANCE ON THE DATE AFTER T HIS PAYMENT WAS RS.8,75,23,245/-. THE ASSESSING OFFICE R WAS OF THE VIEW THAT THE DEBIT BALANCES IN THE ACCO UNT OF M/S HERO EXPORTS WAS IN THE NATURE OF PROVIDING INT EREST FREE ADVANCES. THE ASSESSING OFFICER ASKED THE ASSE SSEE TO EXPLAIN WHY THE ADVANCES STANDING IN THE NAME OF M/S HERO EXPORTS AND M/S HERO MOTORS MAY NOT BE CONSIDE RED IN THE NATURE OF INTEREST FREE ADVANCE. THE APPELLA NT SUBMITTED THAT ALL THE TRANSACTIONS MADE BY THE ASS ESSEE WITH M/S HERO EXPORTS WERE IN RESPECT OF SALES OF C YCLES AND CYCLE PARTS TO THAT FIRM. THERE WAS NOT EVEN A SINGLE TRANSACTION INVOLVING ANY AMOUNT ADVANCED BY THE ASSESSEE COMPANY TO M/S HERO EXPORTS DURING THIS YE AR. THE ASSESSEE FURTHER SUBMITTED THAT THE OPENING BALANC E IN THIS ACCOUNT WAS RS.26.39 CRORES. THE ASSESSEE H AD SOLD PRODUCTS TO M/S HERO EXPORTS WORTH RS.57.48 CR ORES AGAINST WHICH THE FIRM HAD ALSO MADE PAYMENTS TO TH E TUNE OF RS.63.77 CRORES AND THE NET CLOSING BALANCE WAS 17.02 CRORES. THE ASSESSEE SUBMITTED THAT THE PAYME NTS FROM M/S HERO EXPORTS WERE BEING RECEIVED IN DUE CO URSE. 33 THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE APPELLANT'S SUBMISSIONS THE ASSESSING OFFICER POINT ED OUT THAT M/S HERO EXPORTS AND M/S HERO CYCLES LTD. WERE A PART OF THE HERO GROUP AND THE DEBIT OUTSTANDING IN THE NAME OF M/S HERO EXPORTS WAS USED BY M/S HERO EXPOR TS TO GIVE INTEREST FREE ADVANCES AS UNDER: M/S HERO EXPORTS PVT. LTD. RS. 22,20,73,011/- M/S PROVIDENCE PVT. LTD. RS. 17,64,51,881/- 38. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE TRANSACTION WAS AN ARRANGEMENT SO AS TO DIVERT THE INTEREST BEARING FUNDS OF THE ASSESSEE FOR THE BUSI NESS OF HERO EXPORTS. THE ASSESSING OFFICER HELD THAT THE CORRESPONDING INTEREST ON THE DEBIT BALANCE WAS TO BE DISALLOWED OUT OF INTEREST EXPENDITURE U/S 36(L)(II I) OF THE I.T. ACT. 39. AS REGARDS THE DEBIT BALANCES OF HERO MOTORS LTD. THE ASSESSING OFFICER POINTED OUT THAT THERE WERE DEBIT BALANCES OUTSTANDING IN THE CR DIV ISION, AUTO RIM DIVISION AND THE MAIN DIVISION AND THAT AL L THE ADVANCES WERE CLEARLY IN THE NATURE OF INTEREST FREE ADVANCES. THE ASSESSEE SUBMITTED THAT THE BALA NCE DUE FROM M/S HERO MOTORS WAS ON ACCOUNT OF SUPPLY T O CR STRIPS AND AUTO RIMS. THE ASSESSEE FURTHER SUBMITTED THAT THE ACCOUNTS OF M/S HERO MOTORS WITH CR DIVISION WERE RUNNING ACCOUNTS WITH REGULAR SUPPLY AND RECEIPTS OF PAYMENT IN THE NORMAL COURSE. THE 34 ASSESSEE FURTHER SUBMITTED THAT THE BALANCE DUE IN THE AUTO RIM DIVISION AND THE MAIN UNIT WAS ON ACCOUNT OF SUPPLY OF AUTO RIMS FOR TWO WHEELERS AND THAT DUE T O SOME UNAVOIDABLE REASONS DURING THE LAST YEAR PRODU CTION OF TWO WHEELERS WAS TOTALLY STOPPED AND HENCE THE PAYMENTS WERE STUCK UP. THE BALANCE DUE FOR BOTH THE ABOVE UNITS HAD BEEN SETTLED DURING THE YEAR UN DER CONSIDERATION. THE ASSESSING OFFICER WAS NOT SATISF IED WITH THE ASSESSEES SUBMISSIONS. THE AO OBSERVED TH AT HERO MOTORS LTD. WAS A GROUP CONCERN OF THE APPELLA NT AND HELD THAT THESE AMOUNTS WERE INTEREST FREE ADVANCES TO THE GROUP CONCERNS AND ACCORDINGLY DISALLOWED PROPORTIO NATE INTEREST ON THESE DEBIT BALANCES @ 7.38%. THE TOTAL DISALLOWANCE ON THE AFORESAID ADVANCES TO M/S HERO EXPORTS AND HERO MOTORS WAS MADE AT RS. 2,09,66,994 /-. 40. THE LD. CIT (APPEALS) DELETED THE DISALLOWANCE FOLLOWING HIS DECISION IN THE ASSESSEES CASE FOR ASSESSMENT YEAR 2009-10. 41. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE LD. CIT (APPEALS)S ORDER FOR ASSESSMENT YEAR 2009-10 HAD BEEN CONFIRMED BY THE I.T.A.T. IN ITS ORDER IN ITA NO.493/CHD/2013 DATED 16.2.2016. 42. WE HAVE HEARD BOTH THE PARTIES. WE HAVE GONE THROUGH THE ORDER OF THE I.T.A.T. IN ITA NO.493/CHD /2013. AT PARAS 35 AND 36 OF THE SAID ORDER, THE I. T.A.T. HAS 35 AFFIRMED THE FINDINGS OF THE LD. CIT (APPEALS) AND HELD THAT SINCE THE ASSESSEE WAS MAKING CONSISTENT SALE AND PURCHASE FROM THESE TWO CONCERNS, ANY DEBIT BALANCE REMAINING IN THE ACCOUNTS OF THESE CONCERNS CANNOT BE PRESUMED TO BE IN THE NATURE OF LOANS AND ADVANCES AND, THEREFORE, DELETED THE DISALLOWANCE MADE U/S 36(1)( III) OF THE ACT. THE RELEVANT FINDINGS OF THE I.T.A.T. ARE AS FOLLOWS: 35. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. ON PERUSAL OF THE ORDER OF THE LEARNED CIT (APPEALS), WE SEE THAT HE HAS GIVEN HIS FINDING AT PAGE 19 OF HIS ORDER, WHICH READS AS UNDER : THE ISSUE WHICH NEEDS CONSIDERATION IS THAT GIVEN THE AFORESAID FACTS AND CIRCUMSTANCES OF THE CASE W HETHER ANY INTEREST NEEDS TO BE DISALLOWED OUT OF THE INTERE ST EXPENDITURE ON THE GROUND THAT THE FUNDS WERE DIVER TED FOR NON-BUSINESS PURPOSES. IT HAS BEEN DECIDED BY THE HON 'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES LTD. THAT WHERE THE FUNDS OF THE APPELLANT HAD BEEN DIVERTED FOR NON-BUSINESS PURPOSES THEN THE PROPORTIONATE INTEREST NEEDS TO BE DISALLOWED. HOW EVER THE CASE OF M/S ABHISHEK INDUSTRIES LTD. IS APPLICAB LE ONLY WHERE ANY AMOUNT WAS ADVANCED AS LOAN. IN THIS REGAR D REFERENCE MAY BE MADE TO THE CASE OF M/S POWER DRUG S LTD. VS. ADDITIONAL CIT, RANGE-III, CHANDIGARH IN ITA NO.313/CHD/2011. IN THIS ORDER, THE HON'BLE I.T.A.T., CHANDIGARH OBSERVED AS UNDER :- ON HEARING THE RIVAL CONTENTIONS OF THE PARTIES, WE FIN D THAT IT IS AN ADMITTED POSITION THAT THE AMO UNT WAS 36 ADVANCED FOR ACQUISITION OF NEW ASSET WHICH WAS CLA IMED TO BE FOR THE FURTHERANCE OF THE BUSINESS ACTIVITY O F THE ASSESSEE BEFORE US. ADMITTEDLY, THE AMOUNT WAS NOT ADVANCED AS A LOAN AND WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW IN APPLYING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA). ' THIS OBSERVATION OF THE HON'BLE IT AT WAS ALSO NOTED BY THE HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF POWER DRUGS LTD. VS. CIT (2011) 62 DTR(P&H) 276. KEEPING IN VIEW THE AFORESAID DECISIONS OF THE HON'BLE ITAT AND HON'BLE JURISDICTIONAL HIGH COURT, IT IS HELD THAT THE CASE OF M/S ABHISHEK INDUSTRIES LTD. IS NOT APP LICABLE WHERE ANY AMOUNT WAS NOT ADVANCED AS LOAN. IN THE INSTANT CASE, THE UNDISPUTED FACT IS THAT NO AMOUNT OF DEBIT BALANCE IS ON ACCOUNT OF ANY LOAN GIVEN BY THE APPE LLANT TO M/S HERO EXPORTS LTD. OR TO M/S HERO MOTORS LTD. THIS FACT HAD BEEN STATED BY THE APPELLANT DURING THE COURSE O F ASSESSMENT PROCEEDINGS. THE SAME WAS NOT CONTROVERTE D BY THE AO. THE AO MERELY HELD THAT IN VIEW OF THE FAC T THAT THE THREE COMPANIES ARE GROUP CONCERNS AND IN VIEW OF THE FACT THAT HUGE AMOUNTS WERE OUTSTANDING FROM BOTH M/ S HERO EXPORTS LTD. AND M/S HERO MOTORS LTD. THE SAME I S IN THE NATURE OF INTEREST FREE ADVANCE. THIS OBSERVATIO N OF THE AO IS NOT BASED ON PROPER APPRECIATION OF FACTS AS DISCUSSED IN THE FINDINGS ABOVE. THE TOTAL SALES TO M/ S HERO EXPORTS LTD. WERE OF THE AMOUNT OF RS.68.55 CRORES OUT OF WHICH THE APPELLANT HAD RECEIVED MORE THAN RS.42.00 CRORES. THUS ABOUT 2/3 RD OF THE PAYMENTS ON ACCOUNT OF SALES MADE TO M/S HERO EXPORTS LTD. WERE ACTUALLY RECEIVED BY THE APPELLANT DURING THE YEAR. KEEPING IN VIEW THE AFORESAID FACTUAL AND LEGAL POSITION, I HOLD THAT THE AO WAS NOT JUSTIFIED IN DISAL LOWING THE PROPORTIONATE INTEREST EXPENDITURE ON DEBIT BALAN CE OUTSTANDING IN THE NAMES OF GROUP COMPANIES. THESE GROUNDS OF APPEAL ARE ACCORDINGLY ALLOWED. 37 36. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS) AS IT IS AN UNDISPUTED FACT THAT THE ASSESSEE WAS MAKING CONSTANT SALE AND PURCHASES FROM THESE TWO CONCERNS AND AMOUNTS OF MONEY COMING AND GOING WERE ON ACCOUNT OF REGULAR BUSINESS OF THE ASSESSEE. DURING THE COURSE OF BUSINESS IF SOME AMOUNT REMAINS AT THE DEBIT OF THE OTHER COMPANY, THE ASSESSING OFFICER CANNOT JUST PRESUME IT TO BE IN THE NATURE OF LOANS AND ADVANCES. HERE ALSO, THE OBSERVATIONS OF THE DELHI HIGH COURT IN THE CASE OF DALMIA CEMENT LTD. (SUPRA) IS PERTINENT, WHEREBY IT WAS HELD THAT IT IS NOT THE PREROGATIVE OF THE DEPARTMENT TO DICTATE THE TERMS OF THE BUSINESS AND REVENUE CANNOT IMPOSE ITS VIEW ON THE BUSINESSMAN WHEN TO GIVE ANY MONEY AND WHEN TO RECEIVE IT BACK. THE TRANSACTIONS ARE GOING ON WITH THE SISTER CONCERNS ON REGULAR BUSINESS. STEPS ARE BEING MADE AND EVEN IF SOME AMOUNT REMAINS AT THE DEBIT, THE ASSESSING OFFICER CANNOT CONSIDER THE SAME AS LOAN AND CANNOT MAKE ADDITION UNDER SECTION 36(1)(III) OF THE ACT ON THE SAME. 43. SINCE THE FACTS OF THE PRESENT CASE ARE IDENTI CAL TO THAT IN ASSESSMENT YEAR 2009-10 AND NO DISTINGUI SHING FACTS WERE BROUGHT TO OUT NOTICE, THE DECISION OF T HE I.T.A.T. IN ASSESSMENT YEAR 2009-10 SQUARELY APPLIE S TO THE PRESENT CASE ALSO FOLLOWING WHICH WE CONFIRM TH E ORDER OF THE LD. CIT (APPEALS) IN DELETING DISALLOWANCE M ADE U/S 36(1)(III) OF THE ACT OF RS.2,09,66,994/-. 38 44. THE GROUND OF APPEAL NO.3 RAISED BY THE REVENU E IS, THEREFORE, DISMISSED. 45. THE APPEAL OF THE REVENUE IS DISMISSED. 46. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 3 RD APRIL, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH