• Oct
  • 16
  • 2011

Disallowance on the ground that the assessee has diverted interest bearing funds into tax-free income can not be made where the assessee owes ample interest free funds on the date of investment

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 Weikfield Products Co.(I)Pvt. Ltd. v. DCIT (ITAT Pune)

Relevant Extract from the Case law

4. At the outset of hearing, the Ld. A.R. pointed out that the issue raised in the grounds of the appeal is fully covered by the decision of Pune Bench of the Tribunal in the case of assessee itself for the A.Y. 2000-01 to 2003-04 vide ITA No. 1053/PN/2007 and others, order dated 30thJune 2009. The Ld. A.R. pointed out further that similar decision on the issue has been followed by the Pune Bench of the Tribunal in the case of assessee for the A.Y. 2004-05 in ITA No. 1462/PN/2007 and others vide order dated 11 September 2009. The Ld. A.R. submitted that no interest was charged on advance given to the sister concerns but some interest was debited. He submitted that it was in business expediency and placed reliance on the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT(2007) 288 ITR 1(SC). He referred page No. 18 & 19 of the Paper Book filed on behalf of the assessee to support his submission that sum advanced was given during the year. He submitted that under similar facts, the Tribunal had allowed the claimed interest u/s. 36(1)(iii) of the Act in earlier five years. The A.O disallowed the entire interest whereas Ld CIT(A) has worked out some formula to distinguish business requirement. The Ld. A.R. drew our attention to page No. 19 of the Paper Book with this submission that there was investment in Mutual Fund shown in item-D in the Schedule F regarding investments. The Ld. A.R. submitted that the issue relating to provisions u/s. 14A in case of Mutual Funds is also covered by the recent decision of Hon’ble jurisdictional Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.) and Godrej & Boyce Mfg. Co. Ltd., v/s. DCIT 328 ITR 81 (Bom.)

5. The Ld. D.R. did not dispute the above submission of the Ld. A.R., but he tried to justify the assessment order in this regard. He submitted further that A.O has made disallowance of interest separating the same in view of the provisions laid down u/s. 14A and Others and Ld CIT(A) has made disallowance as per Rule 8D of I.T. Rules.
6. The relevant facts are that A.O made disallowance of Rs. 72,88,204/- u/s. 36(1)(iii) and 14A. He observed that interest bearing fund to the extent of Rs. 5,83,34,802/- were deployed in investments, income whereof is not includible in the total income. After calculating average cost of borrowing at 10.75%, he worked out interest attributable to investments out of borrowed capital at Rs. 62,70,991/- and disallowed the same by invoking the provisions of section 14A. The A.O. observed further that as the interest free funds were exhausted by investments, no interest free funds were available to cover the interest-free advances granted to sister concerns, therefore, assessee’s act of making interest free advances to sister concerns out of interest bearing funds called for disallowance u/s. 36(1)(iii) of the Act. He, accordingly, after excluding the amount of Rs. 5,83,34,802/- (already considered for disallowance u/s. 14A) from the interest bearing funds of Rs. 6,78,22,983/- worked out interest disallowable u/s. 36(1)(iii) at Rs. 10,19,982/-. As the total disallowance of interest u/s. 14A and u/s. 36(1)(iii) exceeded the interest debited in the Profit & Loss Account of Rs. 72,88,204/-, the A.O restricted the total disallowance at Rs. 72,88,204/-.

7. Before the Ld CIT(A), the assessee contended that the issue has been decided by the first appellate authority in favour of it in A.Ys. 2000-01 to 2004-05 and there is no change in the facts during the year on the issue of interest disallowance u/s. 36(1)(iii) of the Act.

7.1. In respect of disallowance u/s. 14A, the assessee contended that provisions of Section 14A applies to the situation, where there has been certain expenditure incurred in relation to the income which has not been included in the total income for the purpose of computation of income  tax. In the present case such amount is Rs. 1,71,605/- which is by way of dividend on Mutual Funds. The total investments apportioned for the purpose of disallowance is Rs. 5,83,34,802/- as against the total investment in the the Mutual Fund of Rs. 2,51, 10,000/-. It is absured and not in accordance with the facts and circumstances prevailing in the case. It was contended further that the additional investment in the Mutual Fund is Rs. 41,98,725/- which has been financed out of the  interest free advances received from IT Citi Info Park Pvt. Ltd. amounting to Rs. 50,00,000/- and income earned by the company as there is direct nexus as can be seen from the bank statement. It was pointed out that this Bank Statement was not submitted at the time of assessment since question raised by the A.O was general one and no specific issue pertaining to investment in Mutual Fund in general and the increase in the investment in Mutual Fund in particular was raised.

8. It was submitted that the available interest free funds with the assessee was already explained in their letters by the assessee before the A.O. Those were in much excess of the investment made by the assessee yielding tax free income. It was required to be considered while working out the disallowance, if any. It was contended that the word “incurred” used in Section 14A requires factual finding that interest bearing funds have really gone into financing the asset generating tax free income. The assessee also made following submissions on relevant facts ~

“iii) The investment in Weikfield Overseas Ltd. of Rs.26,69,747/- has directly resulted into the income by way of Royalty from Weikfield International (UAE) of Rs. 7,21,535/-. Weikfield Overseas Ltd it a joint venture alongwith Dabar who market the products by using the trade name of “Weikfield’. The joint venture is known as “Weikfield International (UAE)’. It is for the user of the name the company gets the royalty. Therefore this investment is a business investment & cannot qualified for disallowance of any u/s. 36(1)(iii)/section 1 4A.

iv) The interest paid to the bank of Rs.28,95,382/- is on account of cash credit / overdraft facilities taken from State Bank/Dena Bank which is secured against the hypothecation of stocks & debtors. The total limit sanctioned by the bank against such hypothecation is Rs. 1,50,00,000/-. The withdrawals from such account however are governed by the drawing power which is ascertained with reference to the levels of stocks & debtors on monthly / quarterly basis. Therefore there is direct nexus between the utilization of such loans & the business carried out by the assessee. The stocks at the end of the year were Rs.5,24,57,467/- & the debtors at Rs. 68,11,529/- as against this the loans availed outstanding at the end of the year were just Rs. 3,30,27,850/-. Very strong ground therefore arises in favour of the assessee that entire cash credit limits were utilized pertaining to stocks & debtors & therefore no part of the interest paid on this account should become liable for disallowance. The submissions made in this respect may kindly be considered in proper perspective.”

9.  Considering the above submissions and in view of first appellate order in the case of assessee on the issue for the A.Ys. 2003-04 and 2004-05, the Ld CIT(A) held that interest expenses to the extent of Rs. 16,95,102/- are to be disallowed u/s. 36(1)(iii) of the Act.
10. With regard to disallowance u/s. 14A, the Ld CIT(A) worked out the amount disallowable u/s. 14A read with rule 8D at Rs. 2,50,448/-. He, however, observed that after disallowance of an amount of Rs. 16,95,102/-, no amount out of interest debited to the Profit & Loss Account is available for disallowance u/s. 14A as per his working in para No. 5.7 of the first appellate order. For a ready reference, the relevant extract of para 5.7 of the first appellate order is reproduced hereunder ~

‘The bifurcation of the interest debited to the profit and loss is as under:

Interest on CC account with Dena Bank              Rs.16,98,569/-

Interest on CC account with Standard

Chartered Bank                                                    Rs. 3,40,875/ –

Interest on packing credit(export account)

and Bill discounting charges                             Rs. 8,55,938/ –

Interest on unsecured loans                              Rs.36,36,478/ –

Interest on security deposit                          Rs. 3,68,763/-

Vehicle loan interest                                    Rs.3,05,224/-

Interest on ICD                                           Rs. 82,357/-

Total                                                            Rs. 72,88,204/ -

Out of the above, interest on CC account with Dena Bank and Standard Chartered Bank, interest on unsecured loans and interest on lCD has already been considered for disallowance u/s 36(1)(iii). The other items viz. interest on packing credit and bill discounting charges, interest on security deposit and vehicle loan interest are not relatable to the investments, the income from which is not includible in the taxable income of the assessee. Therefore, since interest expenses of Rs. 16,95,102 have already been disallowed, no further disallowance u/s 14A is called for. Accordingly, the total  disallowance of Rs. 72,88,204/- is reduced and restricted to Rs.1 6,95,1 02.”

The parties are accordingly in cross appeals.

11. Considering the above submissions, we find that the issue raised in the above grounds of the appeals preferred by the parties in relation to the disallowance made Under Sections 36(1)(iii)/14A of the Act are fully covered by the decision of Pune Bench of the Tribunal in the case of assessee itself for A.Ys. 2000-01 to 2004-05 (Supra) vide orders dated 30th June 2009 and 11th September 2009. The Tribunal has followed the decision of Hon’ble jurisdictional Bombay High Court in the case of CIT v/s. Reliance Utilities and Power Ltd. (2009), 313 ITR 340 (Bom.). The  Ld. A.R. also placed reliance on some other decisions referred to hereinabove on the issues. We thus set aside the matter to the file of the A.O to decide the same afresh as per above cited decision of the Tribunal in the case of the assessee itself for the A.Ys. 2000-01 to 2004-05 and in view of the decisions relied upon by the Ld. A.R. The A.O is directed to afford adequate opportunity of being heard to the assessee while deciding the issues. The grounds are thus allowed for statistical purposes.

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Full text of the judgment is as follows:-

ITAT Pune

 Weikfield Products Co.(I)Pvt. Ltd. v. DCIT

ITA Nos. 655 & 6561PN12009
(Asstt. Years: 2005-06 & 2006-07)

ACIT v.  Weikfield Products Co.(I)Pvt. Ltd.

ITA Nos. 786 & 8331PN12009
(Asstt. Years: 2005-06 & 2006-07)

 ORDER

Per I.C. Sudhir JM

Asstt. Year: 2005-06

The    assessee has questionned first appellate order on the following Grounds ~

“1. On facts & circumstances prevailing in the case & as per provisions of law, it be held that disallowance / addition of Rs. 16,95,102/- sustained by the CIT(A) out of the disallowance of Rs. 72,88,204/- made by the Assessing Officer on account of interest paid by the appellant company u/s 36(1)(iii)/ 14A is improper & contrary to the provisions of law & facts prevailing in the case. It  further be held that no disallowance is justified & warranted pertaining to claim of interest. The part of addition/ disallowance sustained by the 1st appellate authority be deleted. The appellant be granted just & proper relief in this respect.

  1. On facts & circumstances prevailing in the case & as per provisions of law, it be held that addition/ disallowance of Rs. 3,85,000/- on account of advertisement expenditure is unjustified & contrary to the provisions of law & facts prevailing in the case. The claim of advertisement expenditure be allowed. The appellant be granted just & proper relief in this respect.
  2. On facts & circumstances prevailing in the case & as per provisions of law, it be held that the disallowance of Rs. 3,31,730/- & Rs. 3,69,796/- out of vehicle expenses & telephone expenses respectively is not in accordance with provisions of the Act. The disallowance so made be deleted. The appellant be granted just & proper relief in this respect.
  3. On facts & circumstances prevailing in the case & as per provisions of law, it be held that disallowance of Rs. 7,97,902/- on account of depreciation on cars is contrary to the provisions of the Act & facts prevailing in the case. The disallowance so made be deleted. The appellant be granted just & proper relief in this respect.
  4. On facts & circumstances prevailing in the case & as per provisions of law, it be held that disallowance of Rs. 11,58,461/- made by invoking the provisions of section 40(ia) on account of non deduction of the Act & such disallowance being unwarranted be deleted. The appellant be granted just & proper relief in this respect.”

2. The Revenue, on the other hand, questionned first appellate order on the following Grounds :

“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in restricting disallowance made by A.O u/s 14A and 36(i)(iii)

2.  On the facts and in the circumstances of the case and in law the learned CIT(A) erred in ignoring the fact that the interest free advances to sister concerns have no concern with the business of the assessee and same sare liable to proportionate disallowance of interest out of interest cost.

3 On the facts and in the circumstances of the case and in law the learned CIT(A) erred in restricting the disallowance made u/s 14A and 36(i)(iii) from 72,88,204/- to Rs. 16,95,102/-“

3. We have hearsd and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.Ground No. 1 (assessee) and Ground Nos. 1 to 3 (Revenue)

4. At the outset of hearing, the Ld. A.R. pointed out that the issue raised in the grounds of the appeal is fully covered by the decision of Pune Bench of the Tribunal in the case of assessee itself for the A.Y. 2000-01 to 2003-04 vide ITA No. 1053/PN/2007 and others, order dated 30th June 2009. The Ld. A.R. pointed out further that similar decision on the issue has been followed by the Pune Bench of the Tribunal in the case of assessee for the A.Y. 2004-05 in ITA No. 1462/PN/2007 and others vide order dated 11 September 2009. The Ld. A.R. submitted that no interest was charged on advance given to the sister concerns but some interest was debited. He submitted that it was in business expediency and placed reliance on the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT(2007) 288 ITR 1(SC). He referred page No. 18 & 19 of the Paper Book filed on behalf of the assessee to support his submission that sum advanced was given during the year. He submitted that under similar facts, the Tribunal had allowed the claimed interest u/s. 36(1)(iii) of the Act in earlier five years. The A.O disallowed the entire interest whereas Ld CIT(A) has worked out some formula to distinguish business requirement. The Ld. A.R. drew our attention to page No. 19 of the Paper Book with this submission that there was investment in Mutual Fund shown in item-D in the Schedule F regarding investments. The Ld. A.R. submitted that the issue relating to provisions u/s. 14A in case of Mutual Funds is also covered by the recent decision of Hon’ble jurisdictional Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.) and Godrej & Boyce Mfg. Co. Ltd., v/s. DCIT 328 ITR 81 (Bom.)

5. The Ld. D.R. did not dispute the above submission of the Ld. A.R., but he tried to justify the assessment order in this regard. He submitted further that A.O has made disallowance of interest separating the same in view of the provisions laid down u/s. 14A and Others and Ld CIT(A) has made disallowance as per Rule 8D of I.T. Rules.
6. The relevant facts are that A.O made disallowance of Rs. 72,88,204/- u/s. 36(1)(iii) and 14A. He observed that interest bearing fund to the extent of Rs. 5,83,34,802/- were deployed in investments, income whereof is not includible in the total income. After calculating average cost of borrowing at 10.75%, he worked out interest attributable to investments out of borrowed capital at Rs. 62,70,991/- and disallowed the same by invoking the provisions of section 14A. The A.O. observed further that as the interest free funds were exhausted by investments, no interest free funds were available to cover the interest-free advances granted to sister concerns, therefore, assessee’s act of making interest free advances to sister concerns out of interest bearing funds called for disallowance u/s. 36(1)(iii) of the Act. He, accordingly, after excluding the amount of Rs. 5,83,34,802/- (already considered for disallowance u/s. 14A) from the interest bearing funds of Rs. 6,78,22,983/- worked out interest disallowable u/s. 36(1)(iii) at Rs. 10,19,982/-. As the total disallowance of interest u/s. 14A and u/s. 36(1)(iii) exceeded the interest debited in the Profit & Loss Account of Rs. 72,88,204/-, the A.O restricted the total disallowance at Rs. 72,88,204/-.

7. Before the Ld CIT(A), the assessee contended that the issue has been decided by the first appellate authority in favour of it in A.Ys. 2000-01 to 2004-05 and there is no change in the facts during the year on the issue of interest disallowance u/s. 36(1)(iii) of the Act.

7.1. In respect of disallowance u/s. 14A, the assessee contended that provisions of Section 14A applies to the situation, where there has been certain expenditure incurred in relation to the income which has not been included in the total income for the purpose of computation of income  tax. In the present case such amount is Rs. 1,71,605/- which is by way of dividend on Mutual Funds. The total investments apportioned for the purpose of disallowance is Rs. 5,83,34,802/- as against the total investment in the the Mutual Fund of Rs. 2,51, 10,000/-. It is absured and not in accordance with the facts and circumstances prevailing in the case. It was contended further that the additional investment in the Mutual Fund is Rs. 41,98,725/- which has been financed out of the  interest free advances received from IT Citi Info Park Pvt. Ltd. amounting to Rs. 50,00,000/- and income earned by the company as there is direct nexus as can be seen from the bank statement. It was pointed out that this Bank Statement was not submitted at the time of assessment since question raised by the A.O was general one and no specific issue pertaining to investment in Mutual Fund in general and the increase in the investment in Mutual Fund in particular was raised.

8. It was submitted that the available interest free funds with the assessee was already explained in their letters by the assessee before the A.O. Those were in much excess of the investment made by the assessee yielding tax free income. It was required to be considered while working out the disallowance, if any. It was contended that the word “incurred” used in Section 14A requires factual finding that interest bearing funds have really gone into financing the asset generating tax free income. The assessee also made following submissions on relevant facts ~

“iii) The investment in Weikfield Overseas Ltd. of Rs.26,69,747/- has directly resulted into the income by way of Royalty from Weikfield International (UAE) of Rs. 7,21,535/-. Weikfield Overseas Ltd it a joint venture alongwith Dabar who market the products by using the trade name of “Weikfield’. The joint venture is known as “Weikfield International (UAE)’. It is for the user of the name the company gets the royalty. Therefore this investment is a business investment & cannot qualified for disallowance of any u/s. 36(1)(iii)/section 1 4A.

iv) The interest paid to the bank of Rs.28,95,382/- is on account of cash credit / overdraft facilities taken from State Bank/Dena Bank which is secured against the hypothecation of stocks & debtors. The total limit sanctioned by the bank against such hypothecation is Rs. 1,50,00,000/-. The withdrawals from such account however are governed by the drawing power which is ascertained with reference to the levels of stocks & debtors on monthly / quarterly basis. Therefore there is direct nexus between the utilization of such loans & the business carried out by the assessee. The stocks at the end of the year were Rs.5,24,57,467/- & the debtors at Rs. 68,11,529/- as against this the loans availed outstanding at the end of the year were just Rs. 3,30,27,850/-. Very strong ground therefore arises in favour of the assessee that entire cash credit limits were utilized pertaining to stocks & debtors & therefore no part of the interest paid on this account should become liable for disallowance. The submissions made in this respect may kindly be considered in proper perspective.”

9.  Considering the above submissions and in view of first appellate order in the case of assessee on the issue for the A.Ys. 2003-04 and 2004-05, the Ld CIT(A) held that interest expenses to the extent of Rs. 16,95,102/- are to be disallowed u/s. 36(1)(iii) of the Act.
10. With regard to disallowance u/s. 14A, the Ld CIT(A) worked out the amount disallowable u/s. 14A read with rule 8D at Rs. 2,50,448/-. He, however, observed that after disallowance of an amount of Rs. 16,95,102/-, no amount out of interest debited to the Profit & Loss Account is available for disallowance u/s. 14A as per his working in para No. 5.7 of the first appellate order. For a ready reference, the relevant extract of para 5.7 of the first appellate order is reproduced hereunder ~

‘The bifurcation of the interest debited to the profit and loss is as under:

Interest on CC account with Dena Bank              Rs.16,98,569/-

Interest on CC account with Standard

Chartered Bank                                                    Rs. 3,40,875/ –

Interest on packing credit(export account)

and Bill discounting charges                             Rs. 8,55,938/ –

Interest on unsecured loans                              Rs.36,36,478/ –

Interest on security deposit                          Rs. 3,68,763/-

Vehicle loan interest                                    Rs.3,05,224/-

Interest on ICD                                           Rs. 82,357/-

Total                                                            Rs. 72,88,204/ –

Out of the above, interest on CC account with Dena Bank and Standard Chartered Bank, interest on unsecured loans and interest on lCD has already been considered for disallowance u/s 36(1)(iii). The other items viz. interest on packing credit and bill discounting charges, interest on security deposit and vehicle loan interest are not relatable to the investments, the income from which is not includible in the taxable income of the assessee. Therefore, since interest expenses of Rs. 16,95,102 have already been disallowed, no further disallowance u/s 14A is called for. Accordingly, the total  disallowance of Rs. 72,88,204/- is reduced and restricted to Rs.1 6,95,1 02.”

The parties are accordingly in cross appeals.

11. Considering the above submissions, we find that the issue raised in the above grounds of the appeals preferred by the parties in relation to the disallowance made Under Sections 36(1)(iii)/14A of the Act are fully covered by the decision of Pune Bench of the Tribunal in the case of assessee itself for A.Ys. 2000-01 to 2004-05 (Supra) vide orders dated 30th June 2009 and 11th September 2009. The Tribunal has followed the decision of Hon’ble jurisdictional Bombay High Court in the case of CIT v/s. Reliance Utilities and Power Ltd. (2009), 313 ITR 340 (Bom.). The  Ld. A.R. also placed reliance on some other decisions referred to hereinabove on the issues. We thus set aside the matter to the file of the A.O to decide the same afresh as per above cited decision of the Tribunal in the case of the assessee itself for the A.Ys. 2000-01 to 2004-05 and in view of the decisions relied upon by the Ld. A.R. The A.O is directed to afford adequate opportunity of being heard to the assessee while deciding the issues. The grounds are thus allowed for statistical purposes.

Ground No. 2 (Assessee)

12. The A.O disallowed the claimed expenditure of Rs. 3,85,000/- for construction of Dome type structure in jogging park for advertisement of its products on the basis that, it is of enduring nature, hence capital expenditure. Before the CIT(A), the assessee contended that company had constructed the Dome and handed it over to PMC. Thus, it had not retained property in its structure. By the said construction of dome, the assessee had achieved the twin object of advertisement and meeting the social commitment as well. No benefit of enduring nature was created out of this structure, hence expenses so incurred deserves to be allowed as revenue expenditure u/s. 37 of the Act. The Ld CIT(A) did not agree and upheld the action of the A.O.
13. Similar argument has been advanced by the Ld. A.R. in support of the Ground. We find substance in the contention of the Ld A.R. that no benefit of enduring nature was created out of the structure since after construction of it, the same was donated to the PMC. Thus expenses incurred on the construction is revenue in nature within the meaning of Section 37 of the Act. The A.O is directed to allow the same as such. Ground No. 2 is accordingly allowed.

Ground No. 3 (Assessee)

14. In absence of log book and telephone calls’ records the A.O. disallowed 20% of the expenses claimed on account of motor vehicles and telephones. It resulted into disallowance of Rs.3,31,730/- out of the claimed vehicle expenses and Rs.3,69,796/- out of the claimed telephone expenses. The assessee contended the same before the Ld CIT(A) relying upon the decision of Hon’ble Gujarat High Court in the case of Sayaji Iron and Steel Co., 253 ITR 749 (Guj.) that the Company being an inanimate object cannot incur any personal expenditure. The Ld CIT(A) has uphled the disallowance on the basis that possibility of debiting non-business expenditure under the heads of vehicle and telephone expenses in absence of maintenance of proper details cannot be ruled out.

15. Similar arguments have been advanced by the Ld. A.R. before us in support of the Ground. He has advanced an alternative argument that disallowances in question is on higher side and requested restriction thereof upto 5%. Ld. D.R., on the other hand, placed reliance on the orders of the authorities below.
16. Considering the above submissions, we do not find reason to interfere with the orders of the authorities below since in absence of maintenance of log book for vehicles movement and register for telephone calls, the possibility of personal user of these facilities cannot be ruled out. The Ground No. 3 (assessee) is accordingly partly allowed. Secondly the claimed expenditure can be allowed if the assessee company is able to establish that these facilities of vehicle and telephone were allowed to its employees as perquisites as per terms of the agreement with them. In the above cited decision the fact was different as in that case the facilities were included in the remuneration of the directors. We, however, restrict the disallowances to 10% of the claimed amount under the facts of the present case. It is ordered accordingly.
17. The assessee claimed depreciation of Rs. 7,97,902/- on 5 Cars purchased in the names of the directors of the assessee company. The A.O. relying upon the order dated 31st August 2007 of Pune Bench of the Tribunal in the case of    (name of the case not referred in the assessment order) ITA No. 778/PN/2004 disallowed the claim of depreciation on the cars on the basis that the basic condition u/s. 32 of the Act for claiming depreciation is that the asset should be owned by the claimant. The disallowance has resulted into an addition of Rs. 7,97,902/- to the income of the assessee. Ld CIT(A) has upheld the same.
18. In support of the Ground, the Ld. D.R. pointed out that the issue raised is covered in favour of the assessee in view of the decision of Hon’ble Bombay High Court in the case of Dilip Singh Sardar Singh Bagga, 201 ITR 995 (Bom.). He submitted further that the issue is also covered by the decision of Pune Bench of the Tribunal in the case of Rohan Builders and Developers (P.) Ltd. v/s. ACIT in ITA No. 942/PN/2006, A.Y. 2004-05, order dated 29th August 2008. Ld. D.R., on the other hand, tried to justify the orders of the authorities below. Considering the above submissions, we find that the Hon’ble Bombay High Court in the case of Dilip Singh Sardar Singh Bagga ( Supra) has been pleased to hold that where an assessee has purchased a motor vehicle for valuable consideration and used the same for its business cannot be denied the benefit of depreciation on the ground that the transfer was not recorded under the Motor Vehicles Act or that the vehicle stood in the name of the vendor on the records of the authorities under the Motor Vehicle Act. Following the ratio laid down therein by the Hon’ble jurisdictional High Court, the Pune Bench of the Tribunal has decided an identical issue in case of Rohan Builders and Developers (P.) Ltd. v. ACIT (Supra). Following this cited decision, we direct the A.O. to allow the claimed depreciation on the vehicles undisputedly purchased from the funds of the assessee company for its business purposes. Ground No. 4 is accordingly allowed.

Ground No.5 (assessee)

19. Invoking the provisions of Section 40(ia), the A.O. disallowed the expenses to the extent of Rs.11,58,261/- on the basis that TDS was not made in respect of Surcharge and Education Cess. Before the Ld CIT(A), assessee submitted that entire TDS as applicable has been deducted and paid. Thus, there was no default on account of deduction or payment of TDS either in amount or time. It was only the Surcharge and Education Cess that has neither been deducted nor paid. It was contended that there is no enabling provision requiring the assessee to consider the Surcharge and Education Cess for the purposes of deducting tax at source, in absence of guidance, mandate or provision made in the Act in that respect. Ld CIT(A) did not agree with the assessee and upheld the action of the A.O.
20. Before us, the Ld. A.R. referred page No. 34 and 35 of the Paper Book i.e. the details of disallowance due to non-payment of Surcharge and Education Cess referred in Tax Audit Report. He submitted that Rs.47,380/- was paid on 15.3.2009 on account of TDS. The assessee did not claim Rs. 11,58,461/- as expenses in any subsequent Assessment Year. He also placed reliance on the decision of Jaipur Bench of the Tribunal in the case of Jaipur Vidyut Vitaran Ltd . (2009) 123 TTJ (Jp. ) 888 as well as decision of Hyderabad Bench of the Tribunal in the case of Teja Constructions Vs. ACIT (2010), 129 TTJ (Hyd.) 57 to support his contention that S. 40(a)(ia) applies only when the amount is payable and not when the expenditure is paid.. The ld. AR also pointed out that even Pune Bench of the Tribunal has followed these decisions in several cases. He submitted further that subsequently TDS was paid alongwith interest u/s. 201 of the Act.
21. The Ld. D.R., on the other hand, tried to justify the orders of the authorities below. He pointed out that the issue decided in the above cited decisions of Jaipur and Hyderabad Benches of the Tribunal is now pending adjudication before the Special Bench. He however did not cite any reference in support.
22. Considering the above submissions, especially the claim of the assessee that it had subsequently paid the TDS alongwith interest u/s 201 of the Act,  we are of the view that the issue needs fresh consideration after verification of certain basic fact. This verifiable material fact is, as to whether the TDS was paid before the filing of the return u/s. 139(1) for the year under consideration. We thus set aside the matter to the file of the ld. CIT(A) to get verified the above stated material fact and decide the issue afresh in view of the decision of Mumbai Bench of the Tribunal in the case of Bansal Parivahan (India) (P) Ltd vs. ITO (2011) 53 DTR (Mum) (Trib) 40 after hearing the parties. We have occasion to go through this decision of Mumbai Bench wherein it has been held that amendments made by the Finance Act, 2010 w.e.f. 1.4.10 to the provisions of S. 40(a)(ia) being curative/remedial nature are applicable retrospectively. As per the amendments if the tax has been deducted in the relevant previous year and the same has been paid on or before the due date of filing return of income for the said previous year as specified in S. 139(1), the corresponding amount from which such tax has been deducted shall be allowed as deduction.    In view of the above action on the basic fact, the contention of the assessee that S.40(a)(ia) applies only when the amount is payable and not where the expenditure is paid and other contentions on the issue has become academic, hence do not need adjudication. The ground no. 5 (assessee) is thus allowed for statistical purposes.
23. In result, appeal preferred by the Revenue is dismissed and that by the assessee is partly allowed.

Asstt. Year 2006-07 (Revenue)

24. The  Revenue has questioned the first appellate order on the following Grounds ~

“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in restricting disallowance made by A O u/s 14A and deleting the addition made u/s 36(i)(iii)

2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in ignoring the fact that the interest free advances to sister concerns have no concern with the business of the assessee and same are liable to proportionate disallowance of interest out of interest cost.
3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in restricting the disallowance made u/s 14A and 36(i)(iii) from 32,44,356/- to 07,29,485/- and deleted the addition of Rs 42,42,218/- made u/s. 36(i)(iii) of the I T Act 1961.”

Asstt. Year 2006-07(Assessee)

25. The assessee has questioned first appellate order on the following Grounds ~

“1. On facts & circumstances prevailing in the case & as per provisions of law, it be held that disallowance /addition of Rs.7,29,485/- sustained by the CIT(A) out of the disallowance of Rs.32,44,356/- made by the Assessing Officer by applying the provisions of section 14A is improper & contrary to the provisions of law & facts prevailing in the case. It further be held that no disallowance is justified & warranted on application of rule 8D of the Income Tax Rules. The part of addition/disallowance sustained by the 1st appellate authority be deleted. The appellant be granted just & proper relief in this respect.

2. On facts & circumstances prevailing in the case & as per provisions of law, it be held that disallowance of Rs.9,52,790/- on account of depreciation on cars is contrary to the provisions of the Act & facts prevailing in the case. The disallowance so made be deleted. The appellant be granted just & proper relief in this respect.”

26. Similar issues have been raised in the above Grounds for the A.Y. 2006-07. The parties have adopted similar arguments as advanced by them hereinabove on identical issues raised in the appeals for A.Y. 2005-06Ground No. 1 to 3 (Revenue) and Ground No.1(Assessee)

27. We have adjudicated upon an identical issue raised in this Ground hereinabove for the A.Y. 2005-06. Following the same, we set aside the matter to the file of the A.O. as directed hereinabove in para No. 11, to decide the issue afresh. The Grounds are thus allowed for statistical purposes.Ground No. 2 (Assessee)

28. The A.O disallowed the claimed depreciation of Rs.9,52,790/- on  cars on the basis that the cars were not purchased in the name of the assessee but the Directors. Ld CIT(A) has upheld the action of the A.O. An identical issue has been decided hereinabove in the appeal of the assessee for the A.Y. 2005-06 in Ground No. 4. Following the decision taken therein under similar facts, we direct the A.O to allow the claimed depreciation. The Ground No.2 is accordingly allowed.

29. In result, appeal preferred by the Revenue is allowed for statistical purposes and that preferred by the assessee is partly allowed.

30. In summary, appeals preferred by Revenue are allowed for statistical purposes and those by the assessee are partly allowed.

The order is pronounced in the open Court on 30th June 2011.


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