Case Law Details
As the funds were mixed, it is not possible to ascertain whether the investment in tax free bonds is out of the assessee’s own funds. The source of investment in the tax free bonds was not identified. The AO did not establish any nexus between the borrowed funds and the investments in the tax free bonds. The cash flow of the assessee was not seen. Therefore, the apportionment on a pro rata basis was improper in the absence of anything brought by the AO to rebut the assessee’s stand that the investment in the tax free bonds had been made out of the funds of own funds (Minda Investments, Hero Cycles 323 ITR 518 (P&H) and Winsome Textile Industries 319 ITR 204 (P&H) followed);
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH “B” DELHI)
ITA No. 4063(Del)2006
Assessment year: 2003- 04
Dy.Commissioner of Income Tax Versus M/s. Maharashtra Seamless Ltd.
ORDER
PER A.D. JAIN, J.M.
This is Department’s appeal for the assessment year 2003-04. Grounds taken are as under:-
“1. Whether, on the facts and in the circumstances of the case, the ld. CIT(A) was justified in deleting the dis allowance on account of interest expenditure amounting to Rs. 16,65,919/- relatable to the tax free income invoking provisions of section 14A without taking into consideration the ratio of the decision in the case of ‘CIT v. H.R. Sugar Factory (P)Ltd.’ 187 ITR 363, where it has been held that if part of the funds have been utilized for non business purposes, part disallowance of interest is justified.
2. Whether, on the facts and in the circumstances of the case, the ld. CIT(A) was justified in deleting the dis allowance on account of interest expenditure amounting to Rs. 16,65,919/- relatable to the tax free income invoking provisions of sec. 14A without taking into consideration the ratio of the decision in the case of ‘India Metals & Ferro Alloys Ltd. v. CIT’ 193 ITR 344, where it was held that it is for the assessee to prove that the borrowed fund has been utilized for business purposes.”
2. During the assessment proceedings, the AO observed that the assessee had earned tax free income of Rs. 57,98,695/- and, at the same time, it incurred interest expenditure of Rs. 1,36,41,749/-; that the assessee would have saved interest expenditure, if the money invested in the interest bearing bonds had been utilized for normal business purposes other than investments; and that, however, the assessee’ s claim of having share holders’ fund of Rs. 203.17 crores could also not be ignored. The AO, as such, disallowed interest of Rs. 16,65,919/- on a pro-rata basis, invoking the provisions of section 14A of the I.T. Act.
3. The learned CIT(A), by virtue of the impugned order, deleted the dis allowance.
4. Aggrieved, the Department is in appeal.
5. The learned DR has argued that the ld. CIT(A) has erred in deleting the dis allowance on account of interest expenditure relatable to tax free income of the assessee, without taking into consideration the ratio in ‘CIT v. H.R. Sugar Factory P.Ltd.’, 187 ITR 363(All), wherein it has been held that if part of the funds have been utilized for non-business purposes, it is justified to disallow part of interest; that the ld. CIT(A) failed to take into consideration the decision in ‘India Metals & Ferro Alloys Ltd. v. CIT’, 193 ITR 344(Orr), wherein it was held that it is for the assessee to prove that the borrowed funds have been utilized for business purposes.
6. The learned counsel for the assessee, on the other hand, has strongly supported the impugned order. Reliance has been placed on the decision dated 13.10.2010, of the ‘E’ Bench of the Tribunal in ‘Minda Investments Ltd. v. DCIT’, in ITA No. 4046(Del)2009 for assessment year 2006- 07,(copy placed on record), authored by one of us (the J.M.).
7. We have heard the parties and have perused the material on record. The ld. CIT(A), while deleting the dis allowance, has observed, that the assessee had maintained that the interest expenditure in question was incurred in respect of the borrowing on cash credit limits utilized for normal business purposes of the assessee; that no part of the borrowed funds had been utilized by the assessee for making investment in the tax free bonds ; that Rs. 17 crores had been invested in the tax free bonds out of the assessee’s own funds of Rs. 203.17 crores, as available with the assessee, as per the assessee’ s balance sheet; that there were borrowings to the tune of Rs. 57.2 crores; that, however, the funds were mixed and it was not possible to ascertain as to whether the investment in the tax free bonds was out of the assessee’ s own funds or from borrowed funds; that this could only have been ascertained, if the cash flow of the assessee had been examined, and the source of investment in the tax free bonds clearly identified, which had not been done by the AO; that the AO had not established any nexus between the borrowed funds and the investments in the tax free bonds ; and that therefore, apportionment on a pro-rata basis was not proper. Nothing has been brought on record to counter the assessee’s contention that the investment in the tax free bonds had been made out of the share holders’ funds.
8. We do not find any error in the order of the ld. CIT(A). It remains undisputed that the funds are mixed and it is not possible to ascertain as to whether the investment in the tax free bonds was out of the assessee’s own funds. The source of investment in the tax free bonds was not identified. The AO did not establish any nexus between the borrowed funds and the investments in the tax free bonds. The cash flow of the assessee was not seen. Therefore, the ld. CIT(A) is correct in opining that the apportionment on a pro rata basis was improper in the absence of anything brought by the AO to rebut the assessee’ s stand that the investment in the tax free bonds had been made out of the funds of the share holders of the AO.
9. In ‘Minda Investments Ltd. v. DCIT’(supra), it has been observed, inter alia, that :
“6.3 Secondly, the assessee has urged that no expenditure has been identified to have been incurred to exempt income. Neither the AO nor the ld. CIT(A) has rebutted these (sic. this )submissions. The AO has gone into (sic. on) to make the ad-hoc estimate which is not sustainable in the light of the Hon’ble Punjab and Haryana High Court decision above [sic. ‘CIT v. Hero Cycles Ltd.’ 323 ITR 518 (P&H)].
10. The matter is also covered by ‘CIT v. Winsome Textile Industries’, 319 ITR 204 (P&H) wherein, the submissions on behalf of the Department were similar to those raised in the present case. It was held that:-
“Even if the assessee had made investments in shares, out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was kin common kitti, as held by this court in ‘CIT v. Abhishek Industries Ltd.’ [2006] 205 CTR (P&H) 304: 286 ITR 1(P&H) and, therefore, disallowance u/s 14A was justified. We do not find any merit in this submission. The judgment of this court in ‘CIT v. Abhishek Industries Ltd. ’(supra) was in issue of allowability of interest paid on loans given to sister concern, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The disallowance made therein have to be read in that context.”
11. The Department has not been able to demonstrate the applicability of ‘CIT v. H.R. Sugar Factory P. Ltd.’(supra) and ‘India Metals & Ferro Alloys Ltd. v. CIT’ (supra), in pursuance of ‘Hero Cycles Ltd.’(supra), ‘CIT v. Winsome Textile Industries’(supra) and ‘Minda Investments Ltd. v. DCIT’ (supra).
12. The reliance placed by the Revenue on the judgment in the case of ‘India Metals and Ferro Alloys Ltd. v. CIT’ (supra) in support of its contention is misplaced, so far as the present case is concerned.
13. In the said case, the issue before the court was deduction of the expenditure on account of the interest on the loans taken from the various banks. Considering the dates of investments and advances to the subsidiary companies, the interest was disallowed . The factual finding given by the Tribunal was that the borrowed funds carrying interest were not utilized for the purposes of business and as such the dis allowance was proper. Based on these facts, it was held that where an assessee seeks to deduct certain items from his business profits, the onus of proving the same falls on him. Accordingly, for claiming deduction of the interest in terms of section 36 of the Act, the assessee has to place material in support of his entitlement to the deduction. The court further held that the Tribunal with reference to the factual aspects held that the money utilized was from the borrowed funds and the advances given to the subsidiary company cannot be held to be for the purpose of the business and on this finding of facts the dis allowance was upheld.
14. It is to be further noted that in the said case itself, the court has not refused to grant relief in respect of profit earned during the year being more than the investment and the advances only on the ground that the assessee had not placed material to show that it had generated surplus in excess of the investment and advance prior to such investment and advances. There is a categorical finding by the court that no material was placed in this regard by the assessee. The obvious implication of this observation is that the assessee been able to show that it has got surplus before the investment then it could claim that such investments have been made out of the surplus not from borrowed funds. In the present case, as explained above, the assessee has placed sufficient material to show that it has surplus in excess of the invesement much prior to the date of the investment. The assessee has also been able to show in this case that the funds borrowed have been utilized for the business of the company as is evident that the bank loans have been obtained for the working capital of the company. A reading of the assessment order makes it very clear that the AO had disallowed the interest on the ground that had assessee not made the investments, it would have saved the interest expenditure incurred on loans as the investment amount would have gone to reduce the loan. In view of this, the reliance placed by the revenue on this judgment is misplaced.
15. The revenue has also placed reliance on the judgment in the case of ‘CIT v. H.R. Sugar Factory Pvt. Ltd.’, 187 ITR 363 on the plea that if a part of the funds has been utilized for non-business purposes, part dis allowance of interest is justified. There can’t be two opinions to this fact that if a part of funds has been utilized on which interest has been paid for non-business purposes, then part dis allowance of interest will be justified. But, the issue is whether part of the funds on which interest has been paid has been utilized for non-business purposes or not. In the present case, as is evident from the assessment order, the assessee has explained the utilization of the funds on which interest has been paid for purposes of the business. The AO has not controverted this factual aspect. The argument of the AO, as stated in the assessment order, that the assessee would have definitely saved interest expenditure, if the amount of the investment made would have been utilized for normal business purposes rather than in investment. As such, it is not the case of the AO that borrowed funds, on which interest has been paid, have been utilized for making investment but the case of the AO is had the money not been utilized for investment, this money would have gone to reduce the borrowings and in consequence the interest expenditure would have been less. The argument of the revenue is far-fetched, as it is for the assessee to decide how he is going to use his own funds. The assessee is entitled to take his own decision and to carry on the business with more of the borrowed funds rather than using his own funds. In that case, it cannot be said that interest expenditure has not been the expenditure for the purpose of business and hence need to be disallowed.
16. In the case of ‘H.R. Sugar Factory Pvt. Ltd.’(supra) the issue before the court was that the assessee company has been advancing loans to its Directors out of the cash credit account with the banks and this loan amount went on mounting up. The company was charging interest @ 5 per cent on these loan amounts, whereas it was paying interest @ 8 per cent per annum on the moneys borrowed by it from the bank. The rate of interest being charged from the Directors was further reduced to 2.5 per cent. The AO has disallowed a part of the interest on the ground that the interest being charged from the Directors was further reduced to 2.5 per cent. The AO has disallowed a part of the interest on the ground that the interest being charged is less than the interest being paid and as such the borrowing is not meant for business purposes.
17. It was in this background that the court has upheld the dis allowance. It was not the case of the assessee that the amount advanced was not out of the borrowed funds. Accordingly, this judgment is also not relevant for the issue in the present appeal.
18. In view of above, the order of the ld. CIT(A) is found to be justified and is upheld as such. The grounds raised by the Department are rejected.
19. In the result, the appeal filed by the Department is dismissed. Order pronounced in the open court on 16.12.2010.
Sd/-
(K.D. Ranjan)
Accountant Member
sd/-
(A.D. Jain)
Judicial Member
Dated: 16.12.2010
Subsection 3 of Section 40A of Income Tax is applicable to cash paid to daily labour wages