VIC Enterprises Pvt. Ltd. Vs ACIT (ITAT Delhi)
ITAT Delhi held that the scholarship to a student who was neither an employee nor associated with the company for any commercial or business purpose doesn’t satisfy the provisions of section 36 and section 37 and hence not allowable as deduction.
Facts- The assessee is one of the holding companies of Dabur India Ltd. and is also an NBFC carrying on its business of financing and investment.
AO disallowed the total interest paid amounting to Rs. 4,68,52,493/- on the ground that the assessee had made various interest free advances. Had the assessee charged interest from those parties, being an NBFC the interest income would have been more than whatever has been paid by the assessee and accordingly disallowed the whole of the interest paid by the assessee.
Assessee had sponsored a meritorious student Miss Vinne Vandal to study in California University under the Faculty of Economics. Miss Vinne Vandal is not a relative of any director, but the sponsorship has been made on account of commercial expediency keeping in mind to have such type of person in its business.
Conclusion- Held that where an assessee is enjoying interest free funds more than interest free advances, then there is a presumption that the interest free advances have been made out of the interest free funds available with the assessee and in that situation no interest paid by the assessee can be disallowed.
The incumbent student was neither an employee nor associated with the company for any commercial or business purpose. The expediency of sponsoring the student has not been brought on record. Neither the student had contributed in any manner for augmenting, contributing to the business of the assessee. At the most, the sponsorship can be treated as a “charity” or “gratis” by the assessee company. Hence, none of the provisions of Section 36 and Section 37 are applicable to the expenditure in question. Hence, the appeal of the assessee on this ground is dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
The present appeal has been filed by the assessee against the order of ld. CIT(A)-36, New Delhi dated 21.10.2019.
2. Following grounds have been raised by the assessee:
“1. In the facts and circumstances of the case, the Ld. CIT (A) erred in summarily dismissing the appeal filed by the assessee without discussing the grounds on merits which is unjustified, illegal and against the provisions of the Act.
2. In the facts and circumstances of the case, the Ld. CIT (A) erred in stating that the assessee has not attended the hearings on various dates when the assessee has attended and taken adjournments on one occasion on receipt of hearing notices and the last date of hearing was inadvertently skipped by the authorizes representative as he was busy in filing the time barring ITR due on 31.10.2019.
3. Without prejudice to above, in the facts and circumstances of the case the CIT(A) erred in dismissing the appeal filed by the appellant thereby confirming the addition of Rs. 4,68,52,493/- made by the AO keeping in view the interest free advances given by the appellant company.
4. Without prejudice to above, in the facts and circumstances of the case the CIT (A) erred in dismissing the appeal filed by the appellant thereby confirming the addition of Rs. 77,09,852/- made by the AO u/s 14A.
5. Without prejudice to above, in the facts and circumstances of the case the CIT (A) erred in dismissing the appeal filed by the appellant thereby confirming the addition of Rs. 37,21,186/- made by the AO on account of Subscription fees incurred for the purposes of its business u/s 37.
6. Without prejudice to above, in the facts and circumstances of the case the CIT (A) erred in dismissing the appeal filed by the appellant thereby confirming the addition of Rs. 27,43,037/- made by the AO on account of Service charges incurred for the purposes of its business u/s 37.
7. In the facts and circumstances of the case, while the assessee did not get justice from the Assessing Officer, he was denied the 3 principles of natural justice by the Ld. CIT (A) also, which is unjustified, illegal and against the provisions of the Act.”
Disallowance of Rs.4,68,52,493/-:
3. The assessee is one of the holding companies of Dabur India Ltd. and is also an NBFC carrying on its business of financing and investment. During the year under consideration, the assessee had paid an interest of Rs.4,68,52,493/-, the details whereof have been mentioned at page 3 of the assessment order. On the credit side, the assessee had declared interest income including interest on tax free bond at Rs.5,48,76,739/-. The Assessing Officer had found that the assessee had also shown the loans and advances amounting to Rs. 310.39 crore as on 31st March 2016 as against Rs.250.10 crore as on 31st March 2015.
4. The Assessing Officer disallowed the total interest paid amounting to Rs. 4,68,52,493/- on the ground that the assessee had made various interest free advances. Had the assessee charged interest from those parties, being an NBFC the interest income would have been more than whatever has been paid by the assessee and accordingly disallowed the whole of the interest paid by the assessee.
5. During the year under consideration the share capital and reserves, which are interest free capital, were available at Rs.530.91 crore which was more than the interest free advances made by the assessee.
6. It is a settled proposition of law as also held by various High Courts and the Hon’ble Supreme Court from time to time that where an assessee is enjoying interest free funds more than interest free advances, then there is a presumption that the interest free advances have been made out of the interest free funds available with the assessee and in that situation no interest paid by the assessee can be disallowed.
> South India Bank Ltd. vs. CIT 438 ITR 1 (SC)
> CIT vs. Gujarat Reclaim & Rubber Products Ltd. 383 ITR 236 (Bom)
> CIT vs. Reliance Utilities 8s Power Ltd. 313 ITR 340 (Bom)
> CIT vs. Kapsons Associates 381 ITR 204 (P&H)
> CIT vs. HDFC Bank Ltd. 366 ITR 505 (Bom)
> CIT vs. Prem Heavy Engg Works P. Ltd. 285 ITR 554 (All)
7. In the case of the appellant also, the ITAT in Assessment Years 2008-09 and 2009-10 also held the same and deleted the disallowances made by the Assessing Officer out of the interest.
8. In Assessment Years 2010-11 to 2013-14, in assessee’s own case in ITAs No. 2104/Del/2017 to 2107/Del/2017, the ITAT vide order dated 29th January 2020 had deleted the disallowance as made by the Assessing Officer on this issue. Hence the appeal of the assessee on this ground is allowed.
Disallowance u/s 14A of IT Act:
9. The assessee has also raised additional grounds of appeal which are as under:
“The Assessing Officer ought not to have included the disallowances made u/s 14A of the Income Tax Act, 1961 made in normal computation of income, while computing the income u/s 11 5JB of the I. T. Act.”
10. Admission of the additional ground has been opposed in principle by the ld. DR. Keeping in view, the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the judgment is as under:
“5. Under Section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.
6. In the case of Jute Corporation of India Ltd. v. C.I.T. this Court, while dealing with the powers of the Appellate Assistant Commissioner observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.
7. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal [vide e.g. C.I.T. v. Anand Prasad (Delhi), C.I.T. v. Karamchand Premchand P. Ltd. and C.I.T. v. Cellulose Products of India Ltd. . Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits.”
11. Respectfully following the above judgment of the Hon’ble Apex Court, the additional grounds taken up by the assessee are hereby admitted.
12. The assessee filed return of income on 17.10.2016 declaring an income of Rs.82,97,17,926/-. The assessee company is engaged in the business of trading in units and investment in shares, securities, debentures etc.
13. During the year under consideration, the assessee had received the exempt income as under:
