DCIT Vs Dcom Systems Limited (ITAT Ahmedabad)
The case of DCIT vs. Dcom Systems Limited, as heard by the Income Tax Appellate Tribunal (ITAT) in Ahmedabad, revolves around an appeal filed by the Revenue against the Commissioner of Income Tax (Appeals)-1, Ahmedabad. The dispute pertains to the assessment order for the Assessment Year 2014-15 under section 143(3) of the Income Tax Act, 1961.
Facts of the Case: Dcom Systems Limited, engaged in the manufacturing and trading of metal equipment, filed its income tax return for the Assessment Year 2014-15, declaring a loss of Rs. 53,01,335/-. The return underwent scrutiny assessment, resulting in the disallowance of interest expenses amounting to Rs. 2,61,90,163/ and a further disallowance of Rs. 29,85,830/- under section 14A read with Rule 8D. The total assessed income was determined as Rs. 2,38,16,658/-.
The appellant, aggrieved by the assessment, filed an appeal before the Commissioner of Income Tax (Appeals), challenging the disallowances made by the Assessing Officer.
Commissioner of Income Tax (Appeals) Decision:
i. Disallowance of Interest Expenses (Section 36(1)(iii)): The Commissioner of Income Tax (Appeals) considered the appellant’s submission that the advances made to Jaihind Projects Ltd. (JPL) were in the nature of share investment, not loans. The appellant argued that the funds given to JPL were for business expediency, as required by lending banks, and were interest-free. The Commissioner, after considering various judicial pronouncements, found that the disallowance under section 36(1)(iii) was not justified. The disallowance was restricted to Rs. 16,05,213/-, and the balance was directed to be deleted.
ii. Disallowance under Section 14A read with Rule 8D: The Commissioner observed that the appellant had not earned any exempt income from investments during the year. Relying on judicial precedents, including the decision in CIT vs. Corrtech Energy Pvt. Ltd., the Commissioner held that disallowance under section 14A read with Rule 8D cannot be made when no exempt income is earned. The disallowance of Rs. 29,85,830/- was deleted.
Appeal before the Income Tax Appellate Tribunal:
The Revenue appealed the Commissioner’s decision before the Income Tax Appellate Tribunal, raising two grounds:
i. Disagreement with the restricted disallowance of interest expenses.
ii. Disagreement with the deletion of the disallowance under section 14A read with Rule 8D.
Income Tax Appellate Tribunal Decision:
The Income Tax Appellate Tribunal considered the arguments presented by the Revenue and the findings of the Commissioner. The Tribunal noted that the appellant had interest-free funds exceeding the advances made, and the disallowance under section 36(1)(iii) was limited to Rs. 16,05,213/-. The Tribunal found no infirmity in the Commissioner’s order in this regard.
Regarding the disallowance under section 14A read with Rule 8D, the Tribunal concurred with the Commissioner’s decision, emphasizing that no exempt income was earned from investments. The Tribunal dismissed the appeal filed by the Revenue.
Conclusion:
The case of DCIT vs. Dcom Systems Limited highlights the importance of establishing a nexus between interest-bearing funds and advances when making disallowances under section 36(1)(iii). Additionally, it underscores that disallowances under section 14A read with Rule 8D should be based on the presence of exempt income. The Tribunal’s decision reflects a thorough consideration of the facts and applicable legal principles, resulting in the dismissal of the Revenue’s appeal
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Revenue as against the appellate order dated 30.05.2017 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2014-15.
2. The brief facts of the case is that the assessee is a company engaged in the business of manufacturing and trading of metal equipments. For the Assessment Year 2014-15, the assessee filed its Return of Income on 30.11.2014 declaring a loss of Rs.53,01,335/-. The return was taken up for scrutiny assessment and interest expenses of Rs. 2,61,90,163/- was disallowed, since the above interest expenses incurred were other than the business purposes and not allowable u/s. 36(1)(iii) of the Act. The Ld. A.O. also made disallowance u/s. 14A r.w. Rule 8D of Rs. 29,85,830/-and assessed the total income as Rs.2,38,16,658/-.
3. Aggrieved against the same, the assessee filed an appeal before Commissioner of Income Tax (Appeals). After considering various submissions and judicial precedents, the Ld. CIT(A) restricted the disallowance u/s. 36(1)(iii) to the extent of Rs. 16,05,213/- by observing as follows:
“…After considering facts of the case and various judicial pronouncements as argued by A.R of the appellant(supra), the utilization of funds, interest free loans and advances given and availability of interest-free funds with the appellant it can be seen that the appellant has given total advances of Rs.26,15,95,884/-. It is also seen that total interest free funds available comes to Rs. 28,40,84,158/- against which the interest free advances are Rs.26,15,95,884/- only which is less than the amount of interest free funds available. The appellant has stated that amount given as advances (as above) to Jaihind Projects Ltd (JPL) are in the nature of share investment and not in the nature of loans and advances The appellant company has made strategic investment in JPL and as per the terms of lenders and the Corporate Debt Restructuring Package approved by the CDR cell which is govered by Reserve Bank of India. The funds given to Jaihind Projects Ltd (JPL) were as per the requirement of lending banks to infuse funds by promoters in the JPL Accordingly, the same was for business expediency to give the funds to JPL by the Appellant without interest. Further, the Appellant contended that the amount was not in the nature of loans and advances but the same is to be converted into equity investment and in view of this it was not be disallowed under section 36(1)(ii) of the Act.
In view of the above submission of the appellant and also on the facts, as the A.O. has not established as to how the advances made to subsidiary company Jaihind Projects Ltd (JPL), is made out of the interest bearing funds. It is seen that total interest free funds available comes to Rs.28,40,84,158/- against which the interest free advances are Rs 26,15,95,884/- only which is less than the amount of funds available. It can be safely held as has been held in by Hon’ble Gujarat High Court in case of Gujarat Narmada Valley Fertilizers Co. Ltd. that if the company is having own funds far excess than advance to the sister concern and without establishing the nexus by the assessing officer the disallowance of interest u/s 36(1)(iii) is not justified. Hon’ble Supreme Court held in case of S.A. Builders that interest free advance given for commercial expediency, the interest is not disallowable In the case of the advance made to subsidiary company Jaihind Projects Ltd (JPL), the appellant has fulfilled both the conditions – the advances given are from the interest free funds and are given for commercial expediency/business purposes. In view of the above facts and the various judicial pronouncements(supra), the submission by the appellant seems to be acceptable for the reasons discussed as above. However, in the cases sr nos. 2 to 7 of the table on page 16 of this order in the cases of Tolani Projects Pvt. Ltd, Hiranand Thakor Das, Gunjan Suresh Aswani, Manghan Das Thaoomal, Sushila N. Aswani have been made for non-business purposes and interest has not been charged. Therefore, addition to the extent of Rs.16,05,213/- added by the A.O. u/s. 36(1)(iii) of the Act is confirmed. Accordingly, the disallowance of interest u/s. 36(1)(iii) is restricted to Rs. 16,05,213/- and the balance addition of Rs. 2,45,84,950/- is directed to be deleted. The ground of the appellant is partly allowed.”
3.1. Regarding the 2nd issue namely disallowance u/s. 14A r.w. Rule 8D of Rs. 29,85,830/-, the Ld. CIT(A) deleted the entire addition since there is no exempt income earned by the assessee during the year by observing as follows:
“5. I have carefully considered the assessment order and the submission filed by the appellant. It is noticed that Assessing Officer has made disallowance by invoking provisions of section 14A read with Rule 8D and same is worked out as under:-
