Case Law Details
CA Sandeep Kanoi
The Brief facts of the case are that assessee company is engaged in the business of manufacturing and dealing in flexible packaging material. During the assessment proceedings u/s 143(3) read with section 143(2) of the Income Tax Act,1961 , the assessing officer noticed that the assessee company has received dividend of Rs. 48,925/- which was claimed as exempt income by the assessee company . The assessee company was asked to explain why the expenditure incurred and claimed in respect of the afore-stated exempt income should not be disallowed as per section 14A of The Income Tax Act,1961 (Hereinafter called “the Act”) read with rule 8D of the Income Tax Rules, 1962 . The assessee company submitted that the assessee company has incurred interest expenditure for running of business requirement and not for earning exempt income and hence provisions of section 14A of the Act are not applicable. The Assessing Officer rejected the contention of the assessee company that interest free funds are being invested for making investments , rather the assessing officer held that substantial interest expenditure has been incurred by the assessee company. The assessing officer held that the assessee company has not furnished any fund flow statement highlighting that no interest bearing fund was utilized for making the investments, the income of which is exempt from tax with necessary supporting bank statements. The assessing officer held that the assessee company has made substantial investments in shares , the income of which is exempt and also the assessee company drastically increased its equity share holding in M/s Umax Packaging Ltd. from Rs. 8 crores to Rs. 19.37 crores during the assessment year which is an entity covered u/s 40A(2)(b) of the Act and the assessee company borrowings has also increased during the period on which interest paid is Rs. 1,39,21,886/-. The assessing officer held that the assessee company is engaged in the business of flexible packaging and is not an investment company and hence had the assessee company not made investments in shares , it would not have required borrowings on which the interest is paid by the assessee company because the assessee company has sufficient funds of its own to invest in its business. Thus, the assessing officer disallowed the expenditure to the extent of Rs. 42,43,553/- out of which Rs. 32,21,526/- is disallowed towards the interest expenditure and Rs. 7,22,027/- is disallowed towards the administrative expense at 0.5% of the average investments after applying Section 14A of the Act read with rule 8D(2)(ii) and (iii) of Income Tax Rules, 1962.
DR relied upon the order of the assessing officer and contended that interest expenses of Rs.35,21,526/- are to be disallowed as the assessee company has made huge investment of Rs 20.41 crores in shares and mutual funds, the income of whom will be exempt from tax and hence on the same analogy expenses are to be disallowed as per mandate of Section 14A of the Act read with rule 8D(2)(ii) of the Income Tax Rules,1962.
The assessee company on the other hand reiterated its submissions made before the authorities below and relied upon the order of the CIT(A) . The assessee company also relied upon the orders of Delhi Bench of Tribunal in the case of Interglobe Enterprises Ltd. v. DCIT (2014) 40 CCH 022 and contended that the assessee company had utilized interest free funds to make investments . The assessee company submitted that the investment of Rs.19.37 crores out of total investment of Rs. 20.41 crores is in 100% subsidiary company Umax Packaging Limited which is a strategic investment. The assessee submitted that the assessing officer has failed to bring any material on record to establish that any expenditure has been incurred by the assessee company to earn exempt income for the relevant assessment year particularly when the assessee company has denied having spent any expenditure for earning any exempt income. The assessee company submitted that it has total investments of Rs. 20.41 crores as at the end of the assessment year, and own funds consisting of equity capital and reserve and surplus is Rs. 41.64 crores as at the end of assessment year which is sufficient to make the investment. The assesee company submitted that it has made investment of Rs 11.93 crores during the assessment year (including investment in 100% subsidiary company Umax Packaging Limited of Rs. 1123.42 lacs) for which it has used the proceeds of fresh share capital raised during the assessment year to the tune of Rs.9.86 crores and own reserves and surplus to the tune of Rs. 2.07 crores were utilised for making the afore-stated investment. The assessee company also submitted that it has borrowed money by way of under-mentioned amounts as at year end which are utilized for the specific purpose for which the said loans were raised such as acquisition of fixed assets, book debts, stock and car.
(a) Term Loans from Banks –Rs 2.01 crores- utilised for acquiring fixed assets
(b) Cash Credit Limit- Rs.10.16 crores –utilised for stocks and book debts
(c) Car Loan-Rs0.03 crores- utiliised for acquiring car
(d) Unsecured loans
(i) interest bearing- NIL
(ii) Interest free- Rs.2.33 crores
Thus , assessee company submitted that either it has its own fund to the tune of Rs. 41.64 cores or interest free unsecured loans to the tune of Rs. 2.33 crores which are utilized towards the investments in the share capital while interest bearing loans to the tune of Rs 12.20 crores were raised from the bank and utilised by the assessee company for the purposes for which the said interest bearing funds were raised by the assessee company from the bank and the assessee company stated that it is debarred from diverting bank loans for any other purpose other than for which the bank loans were raised .
ITAT heard the rival submissions and perused the material on record. ITAT observed that assessee company has its own funds amounting to Rs. 41.64 crores and the investment are to the tune of Rs. 20.41 crores. We have also observed that assessee company has duly demonstrated that the interest bearing funds to the tune of Rs.12.20 crores on which the assessee company has paid interest have been raised from the banks towards the acquisition of fixed assets, car loan, book debts and stocks .The assessee company has also raised during the financial year , fresh equity capital of Rs. 9.86 crores and free reserve of Rs. 2.07 crores were utilised to make fresh investments of Rs. 11.93 crores during the assessment year. Thus , ITAT held that assessee has sufficient own funds to make investment and the assessee has also proved by cogent evidences that no interest bearing funds are utilized for making investments as the assesee company has demonstrated that the interest bearing funds are bank loans raised by the assessee company for specific purposes and also utilised for the said purposes from which diversion of fund is not permitted and hence the disallowance of the interest expenditure of Rs. 35,21,564/- under Ruled 8D2(ii) by the revenue is hereby deleted and order of the CIT(A) is upheld.
