Expenditure towards scholarship to a student not associated with company not allowable

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:

14. In the income-tax return, while computing the income, the assessee had offered an amount of Rs.64,16,418/-, the calculation whereof is available in the calculation sheet.

15. While computing the disallowance, first of all the assessee had worked out the total average investment of the assessee at Rs. 1,66,37,04,454/- irrespective whether the investment is yielding any tax free income or taxable income and then 0.5% thereof is worked out at Rs.83,18,523/-. Out of this amount, the assessee reduced an amount of Rs. 19,02,105/- being the amount worked out in proportion to the dividend received from Dabur India Ltd. which was roughly about 23% of the overall non-taxable interest because on earning the dividend from Dabur India Ltd. the assessee has not incurred any expenses in relation thereto as the assessee is one of the holding companies of Dabur India Ltd.

16. During the course of assessment proceedings, the assessee had brought to the knowledge of the Assessing Officer that while making disallowance under Rule 8D(2)(iii) of the Income-tax Rules, 1962, the disallowance has to be restricted to the extent of 0.5% of the income yielding assets which works out to Rs.30,66,585/-, the details whereof have been placed at pages 94 and 95 of the paper book.

17. However, the Assessing Officer has worked out the disallowance under Rule 8D at Rs. 1,41,26,270/-, the details whereof have been given at pages 11 and 12 of the assessment order and then final extra addition of Rs.77,09,852/- was made after deducting the suo moto disallowance of Rs.64,16,418/-. While working out the disallowance, the Assessing Officer also added Rs.52,40,372/- being the proportionate PMS paid to the fund managers maintaining the portfolio and wherefrom the income from current investment was shown and offered to tax.

18. While considering the disallowance for PMS charges, the Assessing Officer at page 11 of the order observed as under:

“It is noticed that the PMS charge paid in the last year was approx. Rs.2 crores which has increased upto 14 Crores in this year. The assessee has responded that the increase in PMS Charges is owing to fact that additional investment of Rs. 150 Crores were in debt instrument treated as current investment or say stock-in-trade and the increase is attributed to such taxable instruments. I have considered the response of the assessee and find merit in the same. In line of the addition made on PMS charges last year of 2 crores, I have considered the investment to the tune of Rs.11,58,84,45,822/-(previous year Rs.242,76,12,297/-) made by the assessee which can earn exempt income. Hence, the proportionate disallowance on account of PMS Charges is worked out at Rs.52,40,372/- under rule 8D(i).”

19. In this connection, it is stated that first of all the figures adopted by the Assessing Officer in the above paragraph for making proportionate disallowance out of PMS charges are not correct. In the preceding year, the assessee had paid the PMS charges only to the extent of Rs.1.09 crore and not Rs.2 crore as made by the Assessing Officer. Similarly, last year the current investment was only Rs.3.65 crore as against Rs. 153.58 crore in the year under appeal.

20. As per the assessee, as stated before the Assessing Officer also, that the PMS charges have been paid by the assessee to two portfolio managers, namely, M/s Guardian Advisors Pvt. Ltd. and M/s Value Quest Capital LLP for management of the portfolios in respect of the mutual funds and other debt funds as well as short term investment shown under the head “Current Investment” and not in relation to any exempted income.

21. From the current investment, the income has been earned by the assessee at Rs. 14,98,87,000/- and also has incurred short term capital S loss amounting to Rs.6,89,97,159/-, the details whereof have been given by at page 98 of the paper book, which have been offered for the assessment.

22. Therefore, the PMS charges should not have been considered for the purpose of disallowance under Rule 8D(2)(i) of the Rules and consequently even if it is required to be made, though not admitted, it has to be made keeping in mind the quantum of investment dealt in the preceding year and this year as well as income from current investment shown by the assessee.

23. As far as disallowances required to be made under Rule 8D(2)(ii), it has to be restricted to 0.5% of the average investment yielding exempt income and not whole investment and that too is worked out only at Rs.30,66,585/-. Reliance was placed on the following case laws:

> ACIT vs. Vireet Investment (P) Ltd. 165 ITD 27 (Delhi) (Special Bench)

> ACB India Ltd. vs. ACIT 374 ITR 108 (Del)

> CIT vs. Shriram Ownership Trust318 CTR 233 (Mad)

24. In the case of dividend from Dabur India Ltd., the assessee has not incurred any expenses at all because the assessee is one of the holding companies of Dabur India Ltd. and only a dividend warrant has been issued and deposited. Hence no expenses should be said to have been incurred by the assessee. The AO is directed to re-compute the disallowance taking into consideration the dividend yielding investments and to exclude PMS charges for computation of disallowance u/s 14A. The appeal of the assessee on this ground is allowed.

Subscription expenses:

25. It was submitted by the ld. AR that the assessee is NBFC and engaged in the business of financing and investment which requires not only economic analysis about the financial sector but also requires a firsthand knowledge about various financial sectors for the purpose of investment. Having in mind such future requirement as well as the expansion, the 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 of the company, but the sponsorship has been made on account of commercial expediency keeping in mind to have such type of person in its business.

26. Time and again the issue arose before the courts whether the foreign educational expenses of the children of the director or their relatives are allowable as an expenditure or not. In the following cases, the courts have held that if the expenses have been incurred on account of commercial expediency keeping in mind the nature of business carried out by the assessee, then such expenses deserve to be allowed:

> Kostub Investment 288 CTR 54 (Del)

> Krishna Fabrications Ltd. vs. JCIT 343 ITR 126 (Karn)

> CIT vs. Kohinoor Paper Products 226 ITR 220 (MP)

> Sakai Papers vs. CIT114 ITR 256 (Bom)

27. The written submission of the ld. AR is as under:

“Apart from above, it is also brought to your kind notice that our society is a socio-economic society and running on social justice concept. In the case of Shahzada Nand & Sons vs. CIT in 108 ITR 358 at pages 366 & 367, the Hon’ble Supreme Court observed that in the modern days of time, the business is not confined to only business activities for self- interest but under the present era, the modern socialistic thought which deeply rooted faith in social and economic democracy. No business can survive in disregard to socio community obligations. Under the current socio-economic thinking, the general interest of community places above personal interest.

If we consider the sponsorship of Vinne Vandal on this Gandhian concept of socio-economic thoughts which places the common interest of community above personal interest, the sponsorship expenses by the assessee, though incurred on account of commercial expediency, but also for the development and intellectuality amongst the meritorious Students who are the future of the nation and ultimately helpful in building the country amongst the global scenario. Therefore, the sponsorship expenses of Vinne Vandal as incurred by the assessee deserve to be allowed.”

28. We have gone through the peculiar facts of the instant case. 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.

Service charges paid to Dabur Securities:

29. Dabur Securities Pvt. Ltd. is one of the group companies and carries out all the accounting works, secretarial charges, taxation work – whether direct or indirect – TDS work as well as the voucher reconciliation for all the group companies involved in finance. Whatever the expenses Dabur Securities incur, the same are allocated amongst the group companies in the ratio of turnover. Such expenses have also been incurred in the preceding year and no disallowances have ever been made. Copy of the agreement between the assessee and Dabur Securities has been placed at page 102 of the paper book. In subsequent years also, no disallowances have been made even after enquiry.

30. Having gone through the facts on record, we hereby hold that the services charges paid is an allowable expenditure.

31. In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 09/12/2022.