No Section 14A Disallowance if investments are business expediency & strategic investments

DCIT Vs. Sri Rikhab Chand Jain (ITAT Kolkata)

Payment for Purchase of Advertisement Materials would not attract TDS Under Section 194C of Income Tax Act, 1961

Expenses were claimed, by the assessee for poster, calendar, flex board, umbrella, air bag, hawker bags, cloth banner, pad, jute bags and pens etc. The AO had treated these payments as job work charges to various persons treated as contractors by the AO whereas the assessee claimed these expense as purchase price for procurement of various materials. We note that the assessee had claimed that the expenditure was not consideration for works contract but were for purchase of various materials to be used in advertising activity. The same issue on almost identical facts came up in assessment year 2009-10 and 2010-11 also, where the CIT(A) used to delete said additions on identical facts. The CIT(A) in these assessment years had decided the issue in favour of the assessee and the department did not file the appeal. Following the principle of consistency, we are of the view that in the assessment year under consideration the department can not take a different view. We note that the CIT(A) has been consistently accepting that no dis allowance should be made under section 40(a)(ia) of the Act, therefore, we uphold the order of the ld. CIT(A) following the Rule of consistency. For that we rely on the order of the Hon’ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC).

We also note that the said issue of the assessee is fully covered by the judgment of the coordinate Bench in assessee`s own case in ITA No. 907/Kol/2013, A.Y.2009- 10, wherein it was held that the assessee had made payments for purchase of material and had admittedly not supplied the materials to the job worker and hence the same would not fall under the definition of ‘work’ as per section 194C of the Act, hence there is no violation of section 194C warranting any dis allowance u/s 40(a) (ia) of the Act.

No Disallowance under Section 14A  read with Rule 8D if investments are business expediency and strategic investments

We note that the assessee had claimed `that own capital of about Rs. 16 crore was utilized for acquisition of TT shares. Including the capital of financial year 2005-06 the cash flow had been shown at Rs.19.12 crore. Therefore, the assessee has proved that TT shares worth Rs.16.12 crore has been financed from own fund or profit of business accumulated in the past several years. The AO has failed to even point out whether any dividend was received or due from TT shares in the current year.

We also note that the said issue is fully covered by the coordinate Bench Kolkata in assessee`s own case, vide ITA No. 907/kol/201 3, A.Y.2009-1 0, wherein it was held that no dis allowance U/s 14A of the Act need to be made by invoking the provisions of Rule 8D (2) (ii) of the Rules as the investments admittedly are business expediency investments and strategic investments. Since the investments were held to be business expediency investments, there is no case for making any dis allowance by adopting Rule 8D (2) (iii) of the Rules also.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The captioned appeal filed by the Revenue and cross-objections filed by the assessee, pertaining to assessment year 2011-12, is directed against the order passed by the ld. Commissioner of Income Tax (Appeals)–10, Kolkata dated 12.06.2015, which in turn arises out of an order passed by the Assessing officer u/s.143(3) of the Income Tax Act 1961, (hereinafter referred to as the ‘Act’), dated 27.03.2014.

2.First, we take Revenue’s appeal (in ITA No. 1129/Kol/2015, A.Y 2011-12), wherein the grounds of appeal raised by the Revenue reads as under:

1. On the facts and circumstances of the case, the CIT(A) has erred in deleting the dis allowances of Rs. 1,12,07,224/- made by the AO correctly u/s 40(a)(ia) of the Income Tax Act.

2. On the facts and circumstances of the case, the CIT(A) has erred in deleting the dis allowances of Rs. 1,95,30,660/- made by the AO u/s 14A read with Rule 8D of the IT Act.

3. The assessee craves the leave to make any addition, alteration, modification of ground at the appellate stage.

3. First ground raised by the Revenue relates to dis allowance of Rs. 1,12,07,224/- made by the AO u/s 40(a)(ia) of the Income Tax Act.

3.1 .The brief facts qua the issue are that the assessee is a sole proprietor of M/s TT Industries which is the owner of TT Brand. By way of its franchisees, who use the brand “TT”, the assessee earns royalty income. The TT brand is well known brand in hosiery and undergarments both in India and around the globe. The manufacturing of TT products is done by different franchisees throughout India. The assessee gets royalty for use of the said TT Brand from its franchisees. For increasing sales and to earn a higher royalty, the assessee distributes advertisement material (like Canvas bag and big umbrella, air bag set, banners and flex boards banners, bags, umbrella, TT printed pens, calendars etc. In addition to this, dealers are encouraged to achieve higher sales target in competitive markets by allowing them target achievement gifts like TV, ginnis, silver coins, etc for brand promotion. The assessee, in the previous year has incurred Rs. 14,94,297/- against advertisement expense and Rs. 82,83,604/- purchase advertisement material (after realizing 30,24,563/- from his franchisees). The assessee had given advertisement contracts to various agencies for advertising in magazines, newspapers, etc.Further, the assessee had incurred expense in purchase of advertisement materials like air bags, umbrella, dangler, diaries and note pads, etc on which “TT” was printed. The details of advertisement material are as under:

During the assessment proceedings, it was clarified by the assessee that the Finance Act, 1995, has enlarged the scope of income tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professionals bodies on the scope of tax deduction at source. To clarify the Central Board of direct Taxes issued a public circular in the form of question answers vide Circular No. 715 dated 8.8.1999. The relevant applicable part is given below:

Question: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications?

Answer: Yes

The clarification by the Board is explanatory one, not curative to the provision of the section 194C. It means the above payments on account advertisement come within the purview of the provisions of section 194C. So the assessee should have made TDS at the time of credit or payment, whichever is earlier.

During the assessment proceedings, the assessing officer noted that assessee has debited expenses under the head advertisement material but the assessee did not deduct TDS on advertising material on which “TT” has been printed whereas considering the fact that it was the nature of job work. Therefore, the Assessing Officer asked the assessee that why TDS has not been deducted on advertisement material.

In response to the same, vide letter dated 18.03.2014, the assessee submitted before the AO, following:

1) The assessee has purchased Advertisement Material e.g. Umbrellas, Bags, Pen, Pad etc. valuing Rs. 82.84 lacs for distributing to the customers.

2) That the payment was for outright purchase of Materials and not for execution of any contract. The transaction constituted transaction of purchase and sale of goods and involves no element of execution of any contract. Provisions of section 194C cannot be stretched to circumscribe transaction of purchase of goods.

3) That no contract for job is involved as every Material Purchased and supplied bears the Logo “TT”.

4) The big companies like Bata always purchases and sell goods by providing therein Logo on all goods and they are in fact transactions of purchase and sale & Section 1 94C cannot be applied for outright purchase of Materials.

5) That CIT(A) in appeal against Assessment Order, for A.Y. 2009-10 has held inter alia that no contracts exists between the parties concerned which can be said to be covered u/s 194(C) of the I.T. Act as the transaction between parties is purely in the nature of sale and purchase and provision u/s 1 94C is not attracted in such transaction of purchase of Advertising Material.

6) That parties concerned from whom Advertising Material have been purchased have fully paid the tax on their Income as per copies of I.T. Acknowledgement for the A.Y. 2011-12

7) In view of the above facts you may kindly allow the Advertising Expenses fully incurred for the purpose of business.

However, the assessing officer did not accept the contention of the assessee. The AO observed that it is important to categorically look into the nature of expenses and how they are treated as job work and why TDS u/s 194C should be deducted. The AO observed that Purchase of umbrella, diary, pads, danglers etc.and “TT” is printed on the material that has been purchased. Assessee was right in claiming that printing cost is miniscule compared to cost of material. However, it must be taken into account that printing of TT logo or mark can only be done only if the material supplier is asked to do so and that constitutes the job work. Hence, material is supplied an order with a specification that TT should be printed on it. Hence, Section 194C is attracted. Therefore, sums paid to the following parties attract Section 194C:

Therefore, total dis allowance of Rs. 1,12,07,224/- was made by AO against advertisement material u/s 40(a)(ia) of the I.T. Act, 1961.

3.2 Aggrieved by the addition of Rs. 1,12,07,224/- made by AO against advertisement material, u/s 40(a)(ia) of the I.T. Act, 1961, the assessee filed an appeal before the CIT(A), who has deleted the addition. The ld CIT(A) observed that these expenses were claimed for poster, calendar, flex board, umbrella, air bag, hawker bags, cloth banner, pad, jute bags and pens etc. The AO had treated these payments as job work charges to various persons treated as contractors by the AO whereas the assessee claimed these expense as purchase price for procurement of various materials.The CIT(A) observed that assessee had claimed that the expenditure was not consideration for works contract but were for purchase of various materials to be used in advertising activity. The same issue on almost identical facts came up in assessment year 2009-10 and 2010-11 also. The CIT(A) in these assessment years had decided the issue in favour of the assessee. Since the CIT(A) decided the issue in favour of assessee in preceding previous years, therefore he did not take a different view in the current assessment year 2011-12. Therefore, CIT(A) following the decision of the predecessor CIT(A) in the said two previous years, deleted the addition u/s 40a(ia) of the Act.

3.3 Not being satisfied with the order of CIT(A), the Revenue is in appeal before us.The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee defended the order passed by the CIT(A).

3.4 We have given a careful consideration to the rival submissions. We note that the expenses were claimed, by the assessee for poster, calendar, flex board, umbrella, air bag, hawker bags, cloth banner, pad, jute bags and pens etc. The AO had treated these payments as job work charges to various persons treated as contractors by the AO whereas the assessee claimed these expense as purchase price for procurement of various materials. We note that the assessee had claimed that the expenditure was not consideration for works contract but were for purchase of various materials to be used in advertising activity. The same issue on almost identical facts came up in assessment year 2009-10 and 2010-11 also, where the CIT(A) used to delete said additions on identical facts. The CIT(A) in these assessment years had decided the issue in favour of the assessee and the department did not file the appeal. Following the principle of consistency, we are of the view that in the assessment year under consideration the department can not take a different view. We note that the CIT(A) has been consistently accepting that no dis allowance should be made under section 40(a)(ia) of the Act, therefore, we uphold the order of the ld. CIT(A) following the Rule of consistency. For that we rely on the order of the Hon’ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC).

We also note that the said issue of the assessee is fully covered by the judgment of the coordinate Bench in assessee`s own case in ITA No. 907/Kol/2013, A.Y.2009- 10, wherein it was held that the assessee had made payments for purchase of material and had admittedly not supplied the materials to the job worker and hence the same would not fall under the definition of ‘work’ as per section 194C of the Act, hence there is no violation of section 194C warranting any dis allowance u/s 40(a) (ia) of the Act.

Thus, respectfully following the decision of the Coordinate Bench in assessee`s own case, (supra), in the immediately preceding assessment year 2009-10, whereby the issues were decided in favour of the assessee company, as set out above, we hold that no dis allowance under section 40(a)(ia) of the Act should be made, therefore, we confirm the order passed by CI T(A). So, we uphold the order of the ld. CIT(A) and dismiss ground No.1 raised by the Revenue.

3.5 In the result, appeal filed by the Revenue ( in ground No. 1), is dismissed.

4. Ground No. 2 raised by the Revenue relates to addition of Rs. 1,95,30,660/- made by the AO u/s 14A read with Rule 8D of the IT Act.

4.1 The brief facts qua the issue are that the assessee had disclosed a dividend income of Rs. 2,870/- which he claimed exempt income u/s 10(32) of the I.T. Act, 1961. In the light of above, during the course of assessment proceeding, the assessee was asked why dis allowance u/s 14A read with Rule 8D should not be made.In response to the same, the assessee replied to the assessing officer that the assessee has controlling interest and is holding shares value of Rs. 16.12 crores therein and has income therefrom in form of Managerial Remuneration amounting to Rs. 38.40 lacs., Royalty income of Rs. 2.96 crores both assessed as business income. The assessee was running two Wind Mills as priority Industry Projects as its Proprietor and generates Electrical Energy sold wholly to Tamilnadu Electricity Board Ltd. which is also assessed as Business Income. The assessee has no Dividend income from T.T. Ltd., during the year. The dividend income Rs. 2,870/- has been received from Stock-in-trading of shares of Rs. 11 .90 lacs,against which Capital Gain has been assessed and taxed separately. The assessee was holding shares as Controlling Interest amounting of Rs. 15.89 crores in M/s T.T. Ltd. as on 31.03.2010 and further investment made in shares of Rs. 22.72 lacs in M/s T.T. Ltd. during financial year 2010-11, made out of own funds.

The AO rejected the contention of the assessee and held that assessee was holding shares of Rs.16.92 crores as controlling interest in T.T. Ltd. as on 31.03.2011. It was immaterial what had been the utilization of fund as regards purchase of shares for the AY 2011-1 2. What is important to know is a huge part of borrowed funds have been utilized for the purpose of acquiring shares even in prior years and interest was still being paid on those loans. Hence, there is an expenditure on those shares which mayor shall yield dividend income which is exempt. The same has been held in the case of Dhanuka & Sons Vs. Commissioner of Income Tax (Central)-1 [339 ITR 319 (Cal.)] . The AO further observed that Section 14A read with Rule 8D applies for all investments, the income from which does not or shall not form part of the total income. Hence, even if the shares have not yielded dividend during the assessment year in question, they are capable of yielding dividend. And hence, any expenditure on such investment is considered to be expenditure which may yield an exempt income. The AO noted that interest was not only on loan taken during the Financial Year 2010-11 but also in Financial years preceding to this. Therefore, assessee’s claim that “no dividend income from TT Limited during the year” was not accepted by the AO and he computed the dis allowance u/s 14A read with Rule 8D as under:

4.2 Aggrieved by the order of Assessing Officer, the assessee filed an appeal before the CIT(A), who has deleted the addition made by AO. Aggrieved by the order of CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. Whereas, the ld Counsel for the assessee has defended the order passed by the CIT(A).

4.3 We have given a careful consideration to the rival submissions. We note that the assessee had claimed `that own capital of about Rs. 16 crore was utilized for acquisition of TT shares. Including the capital of financial year 2005-06 the cash flow had been shown at Rs.19.12 crore. Therefore, the assessee has proved that TT shares worth Rs.16.12 crore has been financed from own fund or profit of business accumulated in the past several years. The AO has failed to even point out whether any dividend was received or due from TT shares in the current year.

We also note that the said issue is fully covered by the coordinate Bench Kolkata in assessee`s own case, vide ITA No. 907/kol/201 3, A.Y.2009-1 0, wherein it was held that no dis allowance U/s 14A of the Act need to be made by invoking the provisions of Rule 8D (2) (ii) of the Rules as the investments admittedly are business expediency investments and strategic investments. Since the investments were held to be business expediency investments, there is no case for making any dis allowance by adopting Rule 8D (2) (iii) of the Rules also.

Thus, respectfully following the decision of the Coordinate Bench in assessee`s own case, (supra), in the immediately preceding assessment year 2009-10, whereby the issues were decided in favour of the assessee company, as set out above, we hold that no dis allowance under section 14A should be made, therefore, we confirm the order passed by CIT(A).

4.4 In the result, the appeal filed by the Revenue, ( in ground no. 2), is dismissed.

Now, we deal with cross-objection filed by the assessee wherein the assessee has raised the following grounds of appeal:

“1. That the ld. CIT(A) erred in sustaining addition of Rs.20,00,000/- being interest attributed to alleged working capital employed in Wind Mill Unit although the Unit’s Balance Sheet reflects outflow by Rs. 1.10 crores to Consolidated Account.

2. That the ld. CIT(A) erred in law as well as on facts in disallowing claim amounting to Rs. 20,00,000/- u/s 80IA of the Income Tax Act.

3. That the assessee craves leave to add/alter all or any of the ground of cross ”

5.1 The brief facts qua the issue are that the assessee has two windmills plants, Unit No. 1 and Unit No. 2. Windmill Unit No. 2 had been established in March 2011 U/s 80IA of the I.T. Act. The profits and gains from windmill Unit No. 1 have been claimed as deduction u/s 80IA. This is the second year in which the assessee has claimed deduction u/s 80IA. The assessee furnished before AO separate profit and loss accounts and balance sheets of windmill units as well as one consolidated balance sheet. One set of accounts was reflected a consolidated picture of assessee’s entire income and expenditure thereon. The other set of accounts depicted the exclusive picture of windmill account of Unit No. 1 and Unit No. 2. On perusal of windmill account of Unit No. 1, it was observed by the AO, that assessee had a profit of Rs. 32,62,326/- from the unit on which he claimed deducted u/s 80IA. Further, the assessee had booked only four expenses in the profit and loss account of the windmill the details of which is as under:

The interest on loan for windmill has been paid to State Bank of Mysore from which loan was taken for purchase of fixed asset for the windmill unit. The AO noted that to run a unit, capital is required both for the purchase of fixed asset and working capital for running the unit on a day to day basis. During the assessment proceedings, the Assessing Officer asked the assessee to explain why expenses on interest claimed in the books of TT Industries should not be apportioned between royalty segment, capital gains segment and windmill segment? Why the excess claim of interest claimed in the books of TT Industries should not be disallowed and added back to total income?

In response to the same, the assessee submitted the followings:

(i) That audited Profit & Loss & Balance Sheet of Wind Mill for the year ended 31.03.2011 together with Reports u/s10CCB was filed by the assessee.

(ii) That audited Profit & Loss A/c truly reflects the facts that operation of Wind Mill does not require any work force, but day to day maintenance and repairing whenever required is done by Suzlon Infrastructure Services Ltd. who has been paid as follows:

The assessee submitted that in addition to above, no other Working expenses are required to be incurred for operation and running of Wind Mills except Insurance expenses Rs.36,792/- and Interest on secured Loan taken from Bank of Mysore Rs. 22,20,722/-.

(iii) That Wind Mills are automatically operated by natural Winds (i.e., no operators are required for operation) & Electricity so generated is automatically transmitted to the connected Electric Towers of Tamilnadu Electricity Board Ltd. for utilization. The Tamilnadu Electricity Board sends monthly reports of units of Electricity manufactured by the Wind Mill &thereupon assessee raises the monthly sales bills. The audited Profit & Loss A/c shows that assessee has billed sales of Rs. 64.34 Lacs during the year.

(iv) That Ld. ACIT vide in Clause No. (8) of page (9) of the last Asst. Order for A.Y. 2010-11 had wrongly assumed that working Capital is required for running the Wind Mill unit. Without considering the fact that receipts of sales amounting to Rs.69.34 lacs during the FY (Rs. 82.59 lacs), 2010-11 is suffice to cover the above expenses and Net result as per Profit and Loss Account is surplus of Rs.32.62lacs (P.Y. Rs. 30.62Iacs) after providing Depreciation on the Wind Mill for the year.

(v) That Balance Sheet of Wind Mill No. (1) clearly reflects, that there was Debit Balance of Rs. 1.10 Crores in Capital Account, which means Capital of Wind Mill Unit No.-1 amounting to Rs.1.10 Crores is being used in other consolidated business of the assessee, and as such no other fund from consolidated business is used in the Wind Mill unit.

(vi) That cash fund flow statement of Wind Mill for FY 2010-11, Asst. year 2011-12 (as on 31.03.2011) reflects the fact that total out flow of cash is covered by total cash inflow from the wind mill unit no. (1) and no other Loan and/or fund from consolidated Account has been used in Wind Mill business.

Therefore, the assessee submitted that apportionment of interest expense to Wind Mill Unit no. (1) for AY 2011-12 cannot be made on above facts and apportionment of Interest expense made by Rs. 45.67 lacs in A.Y 2010-11 on similar facts was arbitrary, uncalled for.

After getting the reply from the assessee, the AO did the analysis of the windmill account of the assessee since its inception, as follows:

The AO observed that from the above, it was clear that since the beginning i.e. AY 2007-08, assessee’s own fund in windmill unit had a negative balance and even in the AY 2011-12, it is negative balance. Further, loan of Rs. 6.2 crore was taken from State Bank of Mysore to purchase fixed asset and the assessee has been repaying the loan each year, such that principal amount has fallen substantially over the six years. It appears that the assessee has been utilizing its borrowed funds each year to repay the loan taken from State Bank of Mysore. Even in the AY 2011-12, assessee has repaid principal amount of Rs. 93,49,233/- for the said loan. Moreover, assessee has also paid Rs. 22,20,722/- as interest on loan. The total of both principal and interest is Rs. 1,15,69,955/- while the profit of windmill unit is Rs. 32,62,326/- and proprietor’s capital is negative, meaning hereby that there has been some other source of fund for repayment of loan amount. Hence, the assessee has not been able to explain the source of fund for payment of principal and interest amount of loan.

The windmill unit was running under losses till AY 2009-1 0, hence there was no profit that the assessee earned to run and maintain the unit. Further, the assessee while explaining the application of loan showed that loan were applied in the windmill unit as working capital and for Tamil Nadu Electricity Board amounting to Rs. 39,12,871/-. Hence, a part of the loan reflected in consolidated account of the assessee has been used by the Windmill Unit No. 1 claiming 80-IA deduction.

Current asset consists of the following:

The AO noted that based on the above, it was clear that a part of the loan which is in the mixed fund has been utilized for running the windmill unit and also repayment of loan taken from State Bank of Mysore. The assessee has neither apportioned borrowed funds for running the windmill unit nor has debited any interest expense on loan used for running the windmill unit. Only interest on loan taken from State Bank of Mysore taken for purchase of fixed asset has been debited. By doing so, assessee has subsidized its windmill unit by allocating more expense to its other businesses, thereby increasing the profit of windmill unit and decreasing the profit of other business. Therefore, it is clear that there has been a wilful attempt on the part of the assessee to increase profit of unit claiming 80IA deduction and deflating the profit of other businesses, thereby intending to reduce his taxable income.

Thereafter, the AO, did the calculation of interest expense for windmill unit, which is as under:

This way the amount Rs. 29,04,452/- was added back to profits and gains from other businesses.

5.2 Aggrieved by the order of AO, the assessee filed an appeal before the CIT(A) who has partly allowed the appeal of the assessee observing the followings:

“The AO has observed that the wind mill has been financed heavily by the borrowings. Interest expenditure of Rs. 3,35,15,000/- has been apportioned by the AO to wind mill unit on page 19 of the assessment order and the said sum apportioned has been arrived at Rs. 29,04,452/-. The AO has reduced the said disallowed interest from the profit of wind mill claimed as Rs. 32,62,326/- and has thus assessed the profit from the said unit at Rs. 3,57,874/-. This apportionment has resulted in the addition of Rs. 29,04,452/-.

4.1.1. The AO has depicted on page 17 of his order profit and various items in respect of five assessment years. The table sums up the account of the unit since inception as presented by the assessee. The AO has thus pointed out that even in assessment year 2011-12 the own fund is negative and a loan of Rs. 6.2 crore was taken from State Bank of Mysore to purchase fixed assets or to repay earlier loan in para 6.4. The AO has observed that a part of the loan from the fund was utilized for running wind mill and for repayment of loan taken from State Bank of Mysore. It has further been noted that no apportionment of borrowings was made towards wind mill. The AO has thus noted that wind mill unit was subsidized by allocating more expenses to its other business and thereby increasing the profit of the wind mill and decreasing the profit of other business. According to the A. O, Section 80IA deduction has thus wrongly been claimed upto the amount of Rs. 29,04,452/-.

4.1.2 The assessee vide his submission dated 05/06/1 5 in page 5 in clause 3(d) has claimed that the cash fund flow statement as on 31/03/11 reflects that the total out flow of cash is covered by total inflow from the wind mill and no other loan or fund from the consolidated account has been used in the wind mill business. In support the AR pointed out to the balance sheet of wind mill II wherein capital account debt of Rs. l,10,12,230/- is shown. In other words the AR relied on the balance sheet as on 31/03/11 which shows negative capital account of about Rs 1,10,00,000/- apparently indicating net cash out flow from the unit I to the consolidated fund.

4.1.3 After considering the reasons and the formula adopted for allocation of common interest expenses and the submission of the AR on the point I see that the A. O is not entirely correct in allocating common interest to the extent of about Rs. 29 lakh to unit I. At the same time the assessee is also not correct in claiming that there is no inflow of loan from the consolidated balance sheet. While agreeing with the A.O’s observation that there was some inflow of common loan to unit I, the formula adopted by the A. O for apportionment of interest suffers from one defect being that it completely ignored the heavy borrowings in unit II where only sales of Rs 649/- has been shown but the un-depreciated value of wind mill in the said unit II is of about Rs. 6.70 crore. The A.O has ignored completely this unit’s borrowings while adopting the formula for apportionment and basing it on gross business receipts. The interest cost is the cost of money invested and the formula adopted by the A.O has effectively allocated no common interest to unit II which is clearly in more debt than the unit 1. On reading the two balance sheet for the said units it can be seen that about Rs 2 crore of borrowings from common fund can be said to be in unit II but in unit I about Rs. 1.5 crore of loan can be said to find its way from the common fund. To elaborate it little more from Rs 19 crore of consolidated cash flow as discussed herein- before on allowing about Rs 16 crore of investment in TT about Rs.3 crore of own fund or profit may be said to be available for allocation for asset or activities other than TT shares. The said Rs. 3 crore may be considered for allocation between unit I and II and keeping the un- depreciated value of wind mill assets in mind it can be seen that in unit I additional Rs 1.5 crore of borrowings can be said to have been utilized from the common borrowings. The assessee cannot claim to have completely financed the unit I from indicated secured loan of Rs. 1.5 crore as common borrowings and common own fund along with profit and aggregate depreciation leave very little to explain or claim that unit I wind mill has utilized only indicated secured loan. Keeping in mind the fallacy or difficulty in the allocation formula adopted by the A. O and unsubstantiated claim of the assessee that there is no scope for further allocation of loan towards unit II see it reasonable and correct to apportion borrowings of about Rs 1.5 crore to unit I. By allocating the said amount of loan own fund or cash flow of about Rs. 3 crore gets considered completely in Unit I. As regards unit II an allocation could have only academic significance as this unit is in heavy loss which gets set off against profit of other activities and so no profit calculation in respect of 80IA is required of unit II.

4.1.4 For the purpose of allocation of interest towards unit I borrowings, common fund loans allocated to the unit is thus taken at Rs. 1.5 crore as discussed above. This figure is arrived on the last day of the financial year. Unit I has cash flow of about Rs. 35 lakh in the current year and this has to be considered for deriving the common loan utilized in unit I, at the beginning of year. Thus average fund from the common borrowings for the entire financial year comes to Rs. 1.5 + .35/2=1.68 crore. Taking average interest rate of 12%,interest on the said allocation comes to 20 lakh. Thus, the addition on account of allocated interest is restricted to Rs. 20 lakh and the balance addition of Rs. 9,04,452/- is deleted. In other words the profit of the unit I as assessed by the AO is increased by Rs. 9,04,452/- which results in higher allowable deduction u/s 80IA. The above decision has the impact of addition in the assessed income of Rs. 20 lakh as against Rs. 29,04,452/- determined by the AO. The addition is restricted to Rs.20 lakhs and the balance Rs. 9,04,452/- is deleted. The ground is thus partly allowed.

5.3 Not being satisfied with the order of CIT(A), the assessee is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

5.4 on the other hand, the ld Counsel for the assessee submitted before us that as per the Ld. AO and CIT(A) the assessee used the amount of consolidated fund for repayment of Secured loan in Wind Mill No.1 and the said amount was paid from consolidated fund where interest have been paid by the assessee. Therefore, as per the AO and CIT(A), by repaying the secured loan from borrowed funds in consolidated account, the AO and CIT(A) presumed that part of the borrowed funds were used for such repayment and thereby disallowed part of the interest while calculating the deduction u/s 80IA. The ld Counsel pointed out before us that both the Ld. AO and CIT(A) have proceeded on presumption that the repayment was made out of consolidated or mixed fund and as such the borrowed funds were used for repayment of loan in Wind Mill No.1. The dis allowance cannot be made on presumption. The Counsel submitted before us the cash flow statement. Wind Mill had debit in capital account and have received back such debit. The Counsel also submitted before us consolidated account. The payment from consociated fund was made out of receipt of Royalty Income and repayment of earlier loans which have been received back in the capital account. The entire amount is therefore out of the receipts other than the secured loan in consolidated fund. Therefore no part of the interest can be attributed to the secured loan and as such interest cannot be apportioned. Moreover, the loans in consolidated account were taken for business expediency and the entire interest was allowed as business expenditure by the ITAT in assessment year 2009-10. When entire amount was allowed as business expenditure, nothing remains for further dis allowance from interest account.

5.5 We have given a careful consideration to the rival submissions. We note that during the course of hearing, the ld Counsel submitted before us the cash flow statement of TT Industries (Wind Mill No. 1), which is given below for ready reference:

TT Industries ( Wind Mill No.1)

Prop Rikhab Chand Jain

Cash flow statement for the Year ended 31^st March, 2011

We note that it is not a cash flow statement at all. Accounting Standard-3 issued by ICAI provides the method to draw the cash flow statement having operating investment and financing activities. Cash flow statement should explain on what account the cash is coming in the organization and on what account cash is going out side the organization. This statement shows ‘electricity sale’ in sources and ‘decrease in debtors’ in application which does not have any scene. What includes in ‘further debts’ of Rs. 14,13,885/- has not been explained. We also note that figures explained to assessing officer and figures mentioned in the above cited cash flow statement does not tally. Considering the factual position explain above, we are of the view that order passed by the ld CIT(A) does not have any infirmity and hence we confirm the order passed by ld CIT(A).

5.6 In the result, the cross objection filed by the assessee is dismissed.

Order pronounced in the open court on this 22/12/2017.