Interest cannot be disallowed if assessee had ample funds at the time of investing in subsidiary companies

Interest paid on borrowed funds cannot be disallowed when the assessee had ample funds at the time of investing in the equity of subsidiary companies

Mid- Day Multimedia Ltd Vs Dy. CIT (ITAT Mumbai)- The provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record.

The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. In view of the ratio laid down by the Honourable jurisdictional High court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we remit the matter back to the file of the AO with a direction decide the issue afresh in the light of the said judgement of the Honourable Jurisdictional High court after providing reasonable opportunity of being heard to the assessee.

Foreign travelling expenses which are incurred exclusively for the purpose of business can not be disallowed.

 ITAT Mumbai

Mid-day Multimedia Ltd. Vs. Dy. Commissioner of Income Tax

ITA No. 2630/Mum/2010

Assessment Year: 2006- 07

Dy. Commissioner of Income Tax Vs. Mid-day Multimedia Ltd.

ITA No. 2726/Mum/2010

Assessment Year: 2006- 07

ORDER

PER V. DURGA RAO, J.M.:

These are the cross appeals directed against the order of CIT(A)-9, Mumbai, passed on 08/02/2010 for the assessment year 2006-07.

2. None appeared on behalf of the assessee at the time of hearing before us. However, we proceed to decide the appeals after hearing the learned DR and on merits.ITA NO. 2630/M/2010 – appeal by the assessee. Ground NO. 1 is regarding dis allowance of finance charges paid of Rs. 52,48,328/- on borrowed fund.4. Briefly stated the facts relating to raise this ground are that on examination of balance sheet, the AO observed that during the year under consideration, the assessee company had invested an amount of Rs. 52,13,26,800/- in the form of equity and advancement of loans to subsidiary companies. On these investments and advances no income had been earned during the year. It was further noticed that the balance sheet of the assessee had interest bearing funds to the tune of Rs. 19,20,67,163/- and the assessee company had debited interest and finance charges to the tune of Rs. 1,35,36,298/-. On being asked to explain the allowability of interest expenditure by the AO, the assessee stated that the advances and investments were made in subsidiary and associate companies over the years and in the year 1999 the assessee had raised Rs. 10 crores by fresh issue of capital specially to fund the subsidiary projects. It was further submitted that investments and loans were given/made in subsidiaries for the purpose of business, therefore, interest cost is not be disallowed and it should fully be allowed as business expenses. After considering the submissions of the assessee, the AO was of the view that the submissions of the assessee is general in nature and against the facts available on record as no prudent business man will park such huge funds without earning any income thereon. After relying on few case laws, mentioned at page 3 of his order, the AO held that in every year there were certain increase in capital, interest bearing borrowings and profits of the year. There is blending of funds because there are numerous transactions and assessee has not maintained any separate particular account from where these advances were made to subsidiaries without charging interest. Blending of funds logically leads to hold that interest bearing funds were used for advancing to subsidiaries on proportionate basis. After apportioning the interest bearing funds for investments in subsidiaries at page No3 & 4 of his order, the AO held that the assessee had made interest payment of Rs. 48,32,133/- for investment of Rs. 52,13,26,800/- out of borrowed fund and, hence, an amount of Rs. 48,32,133/- is being disallowed out of total interest claimed. Therefore, he disallowed an amount of Rs. 48,32,133/- out of interest claim of the assessee. Aggrieved, the assessee carried the matter in appeal before the CIT(A).

5. Before the CIT(A), the learned AR of the assessee submitted that the assessee had own funds of Rs. 126.83 crores and investment made in equities and loans given to subsidiaries were only Rs. 108.75 crores. He further submitted that its own fund far exceeds the investment made and loans given to subsidiary companies. In this connection, the assessee filed certificates of Chartered Accountants to prove that all borrowed funds were used for the business of the assessee. Further, the assessee relied on the decisions of the CIT(A) in the assessment year 2004-05 & 2005-06 to claim that similar additions made by the AO in those years were not upheld by the CIT(A). After considering the submissions of the assessee, the CIT(A) confirmed the action of the AO observing that the assessee prevented the AO from finding out the source of funds used for loans, the AO is justified in holding that the assessee used own funds and borrowed funds for giving loans on prorate basis and amount used for giving interest free advances is not used for the purpose of business and hence interest burden of the assessee on such loans advanced to subsidiary cannot be allowed as deduction u/s 36(1)(iii) of the Act. The CIT(A) directed the AO to rectify the disallowance amount as Rs. 52,48,328/- not as 48,32,133/-, as the amount of loans advanced to subsidiary companies is Rs. 56.62 crore and not Rs. 52.13 as taken by AO. Still aggrieved, the assessee is in appeal before the Tribunal.

6. After hearing the learned DR and perusing the relevant material on record as well as going through the orders of the authorities below, we find that assessee before the CIT(A) submitted that it had own funds of Rs. 126.83 crores and investment made in equities and loans given to subsidiaries were only Rs. 108.75 crores. He further submitted that its own fund far exceeds the investment made and loans given to subsidiary companies. In this connection, the assessee filed certificates of Chartered Accountants to prove that all borrowed funds were used for the business of the assessee. Further, the assessee relied on the decisions of the CIT(A) in the assessment year 2004-05 & 2005-06 to claim that similar additions made by the AO in those years were not upheld by the CIT(A). In this connection, we refer to the judgment of the Hon’ble jurisdictional High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom.) held that “if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company, If the interest free funds were sufficient to meet the investments.” We find that the assessee had sufficient own funds, which exceeds the investment made and loans given to subsidiary companies and assessee filed certificates of chartered accounts to prove that all borrowed funds were used for the business of the assessee. In view of the ratio laid down by the Hon’ble Jurisdictional High Court in the case of Reliance Utilities and Power Ltd.(supra), we set aside the order of CIT(A) and allow this ground of appeal of the assessee.

7. Ground No. 2 is pertaining to dis allowance of Rs. 61,87,099/- u/s 14A of the Act.

8. The assessee had earned dividend of Rs. 14,81,581/- and the assessee claimed that it had not incurred any expense to earn dividend. The AO applied the provisions of section 14A of the Act and made the dis allowance of Rs. 61,87,099/- under rule 8D of Income Tax Rules, 1962. On appeal, before the CIT(A), the assessee submitted that the AO had not established any nexus between earning of dividend and borrowed fund and therefore no dis allowance can be made as per the provisions of section 14A of the Act, for which he relied upon the decision of P&H High Court in the case of Hero Cycles Ltd., 2009 TIOL 604. The submissions were not found favour with CIT(A), therefore, he confirmed the dis allowance. Aggrieved by the order of CIT(A), the assessee is in appeal before the Tribunal.

9. After hearing the learned DR and perusing the record, we find that this issue is covered by the Honourable jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd., [2010] 328 ITR 81 (Bom.) wherein the Honourable Court held as under:-

“That the provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.”

10. In view of the ratio laid down by the Honourable jurisdictional High court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we remit the matter back to the file of the AO with a direction decide the issue afresh in the light of the said judgement of the Honourable Jurisdictional High court after providing reasonable opportunity of being heard to the assessee.

11. In the result, appeal of the assessee is treated as allowed for statistical purposes.

ITA NO. 2726/M/10 – appeal by the revenue

12. The ground raised by the revenue is in respect of deletion of addition of Rs. 19,59,000/- out of total foreign traveling expenses incurred.

13. The assessee company incurred expenses of Rs. 29,38,510/- on the foreign travel of its chairman Khalid Ansari and its Managing Director Mr. Tarique Ansari. The AO asked to explain as to how these expenses were incurred for the purpose of the business, in reply, the assessee explained that all foreign travel were carried out by the employees of the assessee, for which the assessee produced all paper cutting where director of the assessee company visited to give coverage to various events. The AO rejected the explanation and held that the assessee had not given purpose of each foreign visit and the assessee had not been able to correlate paper cutting with each foreign visit and the not filed evidence in the form of invitation of visit from the organiser of the events. The AO relied upon the decision of the Hon^Jble Supreme Court in the case of Durga Prasad More, 82 ITR 540. Aggrieved, the assessee carried the matter in appeal before the CIT(A).

14. Before the CIT(A), the assessee submitted that all the expenses were incurred by the assessee for the business purpose. He further submitted that only directors of the assessee and other employees of the assessee had undertaken the foreign visit and it had produced before the AO paper cutting of all events which were covered by these persons. The assessee brought to the notice before the CIT(A) that similar addition made by the AO in the assessment year 2004-05 and 2005-06 had been deleted by the CIT(A). After considering the submissions of the assessee, the CIT(A) deleted the dis allowance by holding as under:-

“3.3 I have gone through the facts of the case and reasoning given by the AO in making the addition. I do not agree with the AO that the supporting documentary evidence in the form of photo copies and cuttings of old newspaper are self-serving documents and have no evidentiary value. The appellant is in the business of publishing its own newspapers and individualised items need to be published in its own newspapers, which is the main source of revenue generation for the appellant. The articles published in this newspaper have the names of authors and that establishes the fact that particular authors are writing particular articles/news-items on particular place in the newspaper from the particular place in the world. The appellant has undertaken foreign travel to cover important event in the world. This is evident from the published articles cannot be said to be not incurred wholly and exclusively for business purposes at least in the specific business of the appellant. The fact should also not be ignored that the coverage of the events had helped the appellant to maintain the circulation during the year under consideration. Thus, I do not find any cogent reason for which the impugned addition should be sustained in absence of any defect in the books of account to attract the provisions of section 145 of the Act. There are clinching evidences to substantiate the claim of the assessee. In accordance with the above discussion, the foreign travelling expenses are found to have been incurred wholly and exclusively for the purpose of business and are allowable. Accordingly, the impugned addition is deleted in the facts and circumstances of the instance case. The appeal succeeds on this ground.”

15. Aggrieved by the order of CIT(A), the revenue is in appeal before the Tribunal.

16. We have heard the learned DR, perused the material on record and gone through the orders of the revenue authorities. The AO held that the assessee has not given purpose of each foreign visit and the assessee has not been able to correlate paper cutting with each foreign visit. The CIT(A) held that I do not agree with the AO that the supporting documentary evidence in the form of photo copies and cuttings of old newspaper are self-serving documents and have no evidentiary value. He further held that the assessee is in the business of publishing its own newspapers and individualised items need to be published in its own newspapers, which is the main source of revenue generation for the appellant. The articles published in this newspaper have the names of authors and that establishes the fact that particular authors are writing particular articles/news-items on particular place in the newspaper from the particular place in the world. The appellant has undertaken foreign travel to cover important event in the world. This is evident from the published articles cannot be said to be not incurred wholly and exclusively for business purposes at least in the specific business of the appellant. The fact should also not be ignored that the coverage of the events had helped the appellant to maintain the circulation during the year under consideration. On consideration of the facts of the case, we do not find any infirmity in the order of CIT(A) in deleting the disallowance of Rs. 19.59,000/- made by the AO out of foreign travel expenses. Accordingly, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue.

17. In the result, appeal of the revenue is dismissed.