S. 36(1)(iii): Dept's argument that Maxopp Investment/Avon Cycles 402 ITR 640 (SC) overrules the presumption that advances to sister concerns are made from own funds and not borrowed funds is not correct. Law on interpretation of judgements explained

This appeal has been preferred by the Revenue against
the order of learned Commissioner of Income Tax (Appeals) ,
Panchkula (hereinaf ter referred to as CIT(Appeals) dated
21.2.2018 relat ing to assessment year 2014-15.
2. Ground No.1 raised by the Revenue reads as under:
“1. Whether on the facts and circumstances of the case
the Ld. CIT(A) has erred in allowing the appeal of the
assessee and deleting the disallowance of
Rs.18,44,482/-u/s 36(l)(iii) which is not correct because
the assessee has given interest free advances of
Rs.3,55,00,000/- to Shivaks Impex Limited, sister
concern which is for non business purposes.”
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3. Brief facts relevant to the issue are that during
assessment proceedings, the Assessing Of f icer noted that the
assessee had given interest free advance of Rs.3,55,00,000/-
to Shivaks Impex Ltd. , a sister concern. On the other hand,
the assessee had paid interest of Rs.33,40,780/- on loan
raised from banks but had not charged any interest on the
loans advanced to M/s Shivaks Impex Ltd. The Assessing
Of f icer asked the assessee as to why interest expenses
should not be disal lowed u/s 36( l ) ( i i i ) of the Income Tax Act ,
1961 ( in short ‘ the Act ’ ) and added to the taxable income.
The assessee f i led i ts reply, which is reproduced in para 2 of
the assessment order. Brief ly put the assessee contended
that the impugned advances were business advances and
therefore no disal lowance, of interest paid on funds ut i l ized
i f any for making the advances, was warranted. The assessee
also contended al ternately that i t had ut i l ized i ts own
interest free funds for making the advances and therefore
also no disal lowance of interest u/s.36(1) ( i i i ) was warranted.
Af ter considering the reply f i led by the assessee, the AO
rejected the same and on the basis of reasons recorded in
para 2.1 of the assessment order interest amount ing to
Rs.18,44,482/- was disal lowed and added to the income of
the assessee. The AO held that the assessee had fai led to
prove business exigency for making the advances, and
therefore, as per the decision of the Jurisdictional High
Court in the case of Abhishek Industries Ltd. , reported in
286 ITR 1 and of the Apex court in the case of S.A. Bui lders,
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reported in 288 ITR 1, the disal lowance of interest was
warranted .
4. During appel late proceedings the assessee contended
that i t had suf f icient own funds for making the investment
and, therefore, no disal lowance u/s.36(1) ( i i i ) of the Act
warranted. Rel iance was placed on a number of decisions of
the Hon’ble Jurisdict ional High Court in this regard and also
on decisions of the ITAT Chandigarh Bench. The
Ld.CIT(Appeals) on appreciat ing the content ion of the
assessee deleted the disal lowance made fol lowing the
decision of the Hon’ble Jurisdict ional in the case of CIT Vs.
Max India Ltd. in ITA No.210/Chd/2013 and CIT vs. Stock
Kapsons Associates, 381 ITR 204 (P&H) . The relevant
f indings of the CIT(A) at para 5.2 of the order is as under:
“5.2 I have gone through the facts of the case and
wr i tten submission f iled by the appel lant. It is noted f rom
the balance sheet f rom A.Y.2013-14 & A.Y.2014-15
respectively that appel lant’s share capi tal, f ree reserves
and interest f ree current l iabil i ties far exceeded the
advance of Rs.3.55 Crores given to the sister concern
Shivaks Impex Ltd. during Assessment Year 2013-14. The
average f ree funds available in the A.Y.2013-14 are
Rs.1560 lacs and in A.Y.2014-15 are Rs.1491 lacs. Thus
the appel lant has demonstrated the availabil i ty of enough
surplus funds for making interest f ree advance to the
sister concern. The Hon’ble jurisdictional High Court has
held in the case of CIT vs Max India Ltd. ITA
No.210/Chd/2013 dated 08.03.2017 that if an assessee
establishes that its interest free funds were equal to or more than
the interest bearing funds it would be open to it to contend that
presumption arises that investments have been made out of the
same. Similarly reliance placed by the appellant on CIT vs. Kapsons
Associates, 381 ITR 204(P&H) is also found to be supporting the
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facts of its case. Therefore, no portion of the interest paid on
borrowed funds is required to be disallowed in the case of the
appellant and addition made on this account for both the years
under appeal are ordered to be deleted. This ground of appeal is
allowed.”
5. Aggrieved by the same the Revenue has come up in
appeal before us.
6. During the course of hearing before us, the Ld. DR
contended that the proposi t ion laid down by the Hon’ble
Jurisdict ional High Court in the decision rel ied upon by he
CIT(Appeals) whi le delet ing the disal lowance was no longer
good law. I t was pointed out that the Hon’ble Jurisdict ional
High Court in various decisions had laid down that where
the assessee could demonstrate suf f iciency of own funds, the
presumpt ion that would arise was that i t had used i ts own
funds for the purpose of making interest free non business
advances, cal l ing for no disal lowance of interest u/s.
36(1) ( i i i ) of the Act . The Ld. DR pointed out that this
presumpt ion theory had now been overruled by the Hon’ble
Apex Court in i ts decision in group of cases wi th the lead
case being Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR
640 (SC) , wherein in the context of sect ion 14A the decision
of the Hon’ble Jurisdict ional High Court in the case of Avon
Cycles Ltd. Vs. CIT in ITA No.277 of 2013 was also under
considerat ion. The Ld. DR pointed out from the order of the
Hon’ble Apex Court that in the said case the Hon’ble
Jurisdict ional High Court had upheld the disal lowance of
interest u/s 14A where mixed funds were deployed by the
assessee, and this proposi t ion was af f irmed by the Hon’ble
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5
Apex Court also in the aforementioned appeal before i t . Our
at tent ion was drawn to para 42 of the order of the Hon’ble
Apex Court in this regard as under:
40. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited,
Ludhiana, wherein the AO had invoked section 14A of the Act read
with Rule 8D of the Rules and apportioned the expenditure. The CIT(A)
had set aside the disallowance, which view was upturned by the ITAT
in the following words:
“…Admittedly the assessee had paid total interest of Rs.2.92
crores out of which interest paid on term loan raised for specific
purpose totals to Rs.1.70 crores and balance interest paid by the
assessee is Rs.1.21 crores. The funds utilized by the assessee
being mixed funds and in view of the provisions of Rule 8D(2)(ii) of
the Income Tax Rules the disallowance is confirmed at
Rs.10,49,851/-, we find no merit in the ad hoc disallowance
made by the CIT (Appeals) Rs.5,00,000/-. Consequently, ground
of appeal raised by the Revenue is partly allowed and ground
raised by the assessee in cross-objection is allowed…” –
Taking note of the aforesaid finding of fact, the High Court has
dismissed the appeal of the assessee observing as under:
“In the present case, after examining the balance-sheet of the
assessee, a finding of fact has been recorded that the funds
utilized by the assessee being mixed funds, therefore, the interest
paid by the assessee is also an interest on the investments made.
Such being a finding of fact, we do not find that any substantial
question of law arises for consideration of this Court.
After going through the records and applying the principle of
apportionment, which is held to be applicable in such cases, we do not
find any merit in Civil Appeal No. 1423 of 2015, which is accordingly
dismissed.”
The Ld. DR stated that i t was clearly evident from the
above order of the Hon’ble Apex Court that the presumpt ion
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6
theory laid down by the Hon’ble Jurisdict ional High Court in
various decisions, now stood overruled and where mixed
funds were deployed by the assessee, disal lowance of
interest on proport ionate basis was to be made to the extent
of interest free non business advances made by the assessee.
In sum and substance, the Ld. DR contended that the mixed
funds theory had been conf irmed to be the Law of the Land
as opposed to the presumpt ion theory laid down by the
Hon’ble Jurisdict ional High Court .
7. The Ld. counsel for assessee, on the other hand,
vehement ly opposed this content ion of the Ld. DR. The Ld.
counsel for assessee pointed out that the decision rendered
in the case of Avon Cycles Ltd. (supra) was on a di f ferent set
of facts and the proposi t ion laid down therein was to be read
in the context of the facts relat ing to i t . I t was contended
that before the Hon’ble Supreme Court the only fact before
the Hon’ble Court was that there were mixed funds avai lable
wi th the assessee and in the l ight of this l imi ted fact , the
Hon’ble Supreme Court upheld the disal lowance of interest
u/s 14A of the Act af ter holding in the lead case i .e. Maxopp
Investment Ltd. (supra) that the apport ionment rule was to
be appl ied for the purpose of making disal lowance of
expenses incurred in relat ion to earning exempt income,as
per sect ion 14A of the Act . The content ion of the Ld. counsel
for assessee was that i t was nei ther submi t ted to the court
that suf f icient own interest free funds were avai lable, nor
were any arguments made raising the presumpt ion that
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would arise in such case. I t was pointed out that even the
quest ion before the Hon’ble Court was not relating to the
correctness of the presumpt ion theory and therefore, also
the disal lowance u/s 14A was not deal t wi th by the Hon’ble
Supreme Court in this context . I t was contended therefore,
that the decision rendered in the case of Avon Cycles Ltd.
(supra) had to be read in the restricted sense, of meaning
that where the fact si tuat ion revealed the l imi ted fact of
mixed funds avai lable wi th the assessee, disal lowance u/s
14A was warranted. The Ld. counsel for assessee thereaf ter
contended that in fact the Hon’ble Apex Court , in the case of
Hero Cycles Pvt . Ltd. Vs. CIT, 379 ITR 347(SC) , had upheld
the presumpt ion theory of ut i l izat ion of own interest free
funds for making non business advances where suf f iciency of
such funds is adequately demonstrated. I t was pointed out
that the Hon’ble Supreme Court in the said case ,on the
issue of disal lowance of interest u/s 36(1) ( i i i ) on advances
made to directors had held that where the assessee had
suf f icient surpluses i t could have ut i l ized those funds for
giving advances to i ts directors.
8. The Ld. counsel for assessee stated that i t is clearly
evident from the above that the Hon’ble Apex Court had
upheld the proposi t ion that where suf f icient own interest
free funds are avai lable no disal lowance of interest u/s
36(1) ( i i i ) of the Act was warranted. Our at tent ion was also
drawn to various decisions of the Hon’ble Jurisdict ional High
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8
Court which had also upheld the presumpt ion theory as
under:
“1. Br ight Enterpr ises P. Ltd. vs. CIT, (2016) 381 ITR 107
(P&H)
2. CIT vs. Kapsons Associates, (2015) 381 ITR 204 (P&H)
3. Gurdas Garg vs. CIT, ITA No.413/2014 dated
16.7.2015 (P&H) ,
4. Pr.CIT vs. M/s. Malhotra Book Depot, ITA No.31 of
2017 dated 23.02.2017 (P&H)
5. Pr.CIT vs. M/s. Holy Fai th Internat ional Pvt . Ltd. ,
ITA No.87 of 2017 dated 24.07.2017 (P&H)
6. Trident Infotech Corporat ion Ltd. vs. CIT & Anr,
(2016) 385 ITR 335 (P&H)
7. CIT vs. Max India Ltd. , (2017) 398 ITR 209 (P&H) ”
9. We have careful ly considered the content ions of both
the part ies and have also gone through various case laws
referred to before us. The issue to be adjudicated,as
narrowed down from the arguments made before us by both
the part ies, is whether in relat ion to disal lowance of
interest made u/s.36(1) ( i i i ) of the Act , the proposi t ion laid
down by the Hon’ble Jurisdict ional High Court in a number
of decisions, that where the assessee had suf f icient own
interest free funds along wi th interest bearing funds and had
made or advanced sums for non business purposes wi thout
charging any interest , the presumpt ion that would arise is
that the investment had been made out of interest free funds
generated or avai lable wi th the assessee, is st i l l a good law
in the l ight of the decision of the Hon’ble Apex Court in the
case of Hero Cycles Ltd. (supra) .
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10. We are in agreement wi th the content ion of the Ld.
counsel for assessee. Undoubtedly, proposi t ion of law laid
down by courts have to be read in the context of the facts
before them and the issue deal t wi th by them. Rel iance
should not be placed on a decision wi thout discussing how
the factual si tuat ion f i ts in wi th the factual si tuat ion of the
decision on which rel iance is placed. The Hon’ble High Court
of Bombay in the case of CIT vs Sudhir, 214 ITR 154 (Bom)
has observed that a case is an authori ty for what i t actual ly
decides and not what may come to fol low from some
observat ion which may f ind place therein. The Hon’ble High
court observed as under:
“It is well-settled that the ratio of a decision alone is binding, because a
case is only an authority for what it actually decides and not what may
come to follow from some observations which find place therein. The ratio of
the decision has to be distinguished from propositions assumed by the Court
to be correct for the purpose of disposing of the particular case, because it
is the ratio and not the propositions which are relevant and binding. It is,
therefore, not proper to regard every word, clause or sentence occurring in
a judgment of the Court as containing a full exposition of the law.
Judgments of the Courts should not be construed as statutes. They must be
read as a whole and observations made therein should be considered in the
light of the facts and circumstances of that case and the questions before
the Court. A decision of the Court takes its colour from the questions
involved in the case in which it is rendered.”
In the case of CIT vs Sun Engineering Works Pvt . Ltd.
198 ITR 297(SC) , the Hon’ble Supreme Court observed that
Judgements must be read as a whole and observat ions in
judgements should be considered in the context in which
ITA No.470/Chd/2018
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10
they are made and in the l ight of the quest ion that were
before the court :
“ I t is nei ther desirable nor permissible to pick out a word
or a sentence f rom the judgement of the Supreme Cour t
divorced f rom the context of the quest ion under
considerat ion and treat i t to be the complete law declared
by the cour t. The judgement must be read as a whole and
the observat ion f rom the judgement have to be considered
in the l ight of the quest ions which were before the
cour t.A decision of the Supreme Cour t takes i ts colour
f rom the quest ion involved in the case in which i t is
rendered and whi le applying the decision to a later
case,cour ts must careful ly try to ascer tain the true
pr inciple laid down by the decision.”
11. The Hon’ble apex court in the case of Goodyear India
Ltd & Ors vs State of Haryana & Another and State of
Maharashtra & Another reported in 188 ITR 402(1991) have
held that a decision on a quest ion that has not been argued
cannot be treated as a precedent . The Hon’ble Kerala High
Court in the case of CIT vs K. Ramakrishnan (1993) 202 ITR
997 held that a precedent is an authori ty only for what i t
actual ly decides and not for what may remotely or even
logical ly fol low from i t .
Having said so we f ind that in the case of Avon Cycles
Ltd. (supra) the issue was relat ing to disal lowance of
expendi ture u/s 14A of the Act . The Hon’ble Apex Court
deal ing wi th the bunch of cases relat ing to said issue, took
up the case of Maxopp Investment Ltd. (supra) as the lead
case and proceeded to answer the quest ion which arose
under various circumstances before them that whether the
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investment made in shares and stocks for the purpose of
retaining the control over the company or as stock-in-trade
and from which exempt income by way of dividend was
generated would at tract the provisions of sect ion 14A of the
Act , cal l ing for disal lowance of expendi ture incurred in
relat ion to earning the said dividend income and the
quest ion arose for the reason that i t was the content ion of
the assessee, which had been upheld by various High
Courts, that the dominant purpose for making the
investment in the shares not being earning of dividend
income, i t cal led for no disal lowance of expendi ture u/s 14A
of the Act . Answering this quest ion the Hon’ble Supreme
Court held that the dominant purpose test was irrelevant
and the fact remaining that the exempt income had been
earned which was at tributable to the dividend income had to
be disal lowed and could not be treated as business
expendi ture. The Hon’ble Apex Court reaf f irmed the theory of
apport ionment of expendi ture between taxable and non
taxable income laid down by i t in the case of CIT Vs. Wal fort
Share & Stock Brokers Pvt . Ltd. , 326 ITR 1. Af ter holding so,
the Hon’ble Apex Court deal t wi th the appeal f i led in the
case of Avon Cycles Ltd. (supra) and taking note that the
fact in that case was that the funds ut i l ized by the assessee
were mixed funds, the Hon’ble Apex Court held that the
principle of apport ionment was to be appl ied and, therefore,
dismissed the appeal of the assessee. The same is evident
from a bare reading in the case of Maxopp Investment Ltd.
(supra) and more speci f ical ly para 42 of the said order
ITA No.470/Chd/2018
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12
wherein the case of Avon Cycles Ltd. (supra) has been deal t
wi th and which is reproduced again hereunder:
41. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited,
Ludhiana, wherein the AO had invoked section 14A of the Act read with
Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had
set aside the disallowance, which view was upturned by the ITAT in
the following words:
“…Admittedly the assessee had paid total interest of Rs.2.92 crores out
of which interest paid on term loan raised for specific purpose totals to
Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21
crores. The funds utilized by the assessee being mixed funds and in
view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the
disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad
hoc disallowance made by the CIT (Appeals) Rs.5,00,000/-.
Consequently, ground of appeal raised by the Revenue is partly
allowed and ground raised by the assessee in cross-objection is
allowed…”
Taking note of the aforesaid finding of fact, the High Court has
dismissed the appeal of the assessee observing as under:
“In the present case, after examining the balance-sheet of the assessee,
a finding of fact has been recorded that the funds utilized by the
assessee being mixed funds, therefore, the interest paid by the
assessee is also an interest on the investments made. Such being a
finding of fact, we do not find that any substantial question of law
arises for consideration of this Court.
After going through the records and applying the principle of
apportionment, which is held to be applicable in such cases, we do not
find any merit in Civil Appeal No. 1423 of 2015, which is accordingly
dismissed.”
12. I t is evident from the above that the issue before the
Hon’ble Apex Court was not whether the presumpt ion theory
would apply or not where there are mixed funds and the
assessee had demonstrated avai labi l i ty of suf f icient own
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funds for making the investments . No discussion on this
aspect has also been done by the Hon’ble Apex Court and
merely not ing that the assessee had ut i l ized mixed funds,
the Hon’ble Apex Court held that the principle of
apport ionment would apply. Wi thout any discussion or
del iberat ion on the presumpt ion theory, the proposi t ion laid
down in the case of Avon Cycles Ltd. (supra) by the Hon’ble
Apex Court has to be restricted to the extent of the issue
before the Hon’ble Apex Court and facts before i t and not
beyond that . And on that basis the decision of the Hon’ble
Supreme Court in the case of Avon Cycles Ltd. (supra) can
be read only to the extent of upholding the principle of
apport ionment of expenses incurred in the context of the
l imi ted fact of mixed funds avai lable wi th assessee and no
further. The proposi t ion laid down cannot be stretched even
logical ly to address the fact si tuat ion where suf f icient own
interest free funds are avai lable wi th assessee, which fact
was not there before the Hon’ble Apex court in the case of
Avon Cycles (supra) , and to negate the presumpt ion that the
own funds were used for making the investment , which was
nei ther the quest ion raised before the apex court and
therefore not addressed by i t also.
13. Going further from here we f ind that the presumpt ion
theoory was upheld by the Hon’ble Supreme Court in the
case of Hero Cycles Pvt . Ltd. (supra) wherein on the issue of
disal lowance of expendi ture u/s.36(1) ( i i i ) of the Act on
interest free advance made to Directors, the Hon’ble Apex
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Court held that in view of the f indings of fact that the
assessee had suf f icient credi t balance in i ts bank account
for making the impugned advances and had suf f icient own
interest free funds, the assessee company could in any case
ut i l ize those funds for giving advances to i ts Directors. The
f indings of the Hon’ble Apex Court at para 16 of this order to
this ef fect are as under:
“16. Insofar as the loans to directors are
concerned, i t could not be disputed by the Revenue
that the assessee had a credi t balance in the bank
account when the said advance of Rs.34 lakhs was
given. Remarkably, as observed by the CIT(A) in his
order, the company had reserve/surplus to the tune
of almost Rs.15 crores and, therefore, the assessee
company could in any case, ut i l ise those funds for
giving advance to i ts directors.”
14. I t is evident from the above that the Hon’ble Apex Court
had in very clear terms held that where suf f icient own
interest free funds are avai lable wi th the assessee, the
presumpt ion arises that the assessee had ut i l ised those
funds for the purpose of making interest free non business
advances. Thus in very clear terms the Hon’ble Apex Court
in the case of Hero Cycles Pvt . Ltd. (supra) have upheld he
presumpt ion theory.
15. Considering both the judgments of the Hon’ble Apex
Court and reading and interpret ing them in the l ight of facts
and the issue before the Hon’ble Apex Court we f ind that the
judgments compl iment each other. In the case of Avon
Cycles Ltd. (supra) the Hon’ble Apex Court held that in the
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15
fact si tuat ion where mixed funds are ut i l ized by the
assessee, the disal lowance of interest to the extent the funds
are ut i l ized for the purpose of non business advance is
warranted. Going forward from there, the presumpt ion
theory would come into operat ion i f in the case of mixed
funds, the assessee is able to demonstrate/ establ ish
avai labi l i ty of interest free funds equal to or more than
interest free non business advances/investments thus
raising the presumpt ion that the same have been made out
of the interest free funds of the assessee.
16. In view of the above, we hold that the decision of the
Hon’ble Apex Court in the case of Avon Cycles Ltd. (supra)
does not displace the presumpt ion theory which has been
upheld by the Hon’ble Apex Court in the case of Hero Cycles
Pvt . Ltd. (supra) and the same st i l l holds. In view of the
above, since the Ld.CIT(Appeals) , we f ind, has al lowed the
assessee’s appeal delet ing the disal lowance of interest made
on f inding that it had suf f icient own interest free funds for
making the investment , which fact has not been controverted
by the Revenue, we see no reason to interfere in the order of
the Ld.CIT(Appeals) and the ground raised by the Revenue,
therefore, is dismissed.
17. The Ld. counsel for assessee had also raised the
content ion before us that the advance made was for business
purpose. In this regard, the Ld. counsel for assessee
contended that the advance was made to Shivaks Impex Ltd.
which was a step down subsidiary of the assessee company.
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16
The Ld. counsel for assessee stated that the assessee had
invested in a whol ly owned subsidiary which in turn was the
holding company of Shivaks Impex Ltd. and which made
Shivaks Impex Ltd. a step down subsidiary of the assessee
company, meaning thereby that the assessee had a indirect
interest and control over the Shivaks Impex Ltd. . The Ld.
counsel for assessee further stated that the advances made
to Shivaks Impex Ltd. , who was in the same l ine of business
as was the assessee, was ut i l ized for the purpose purchasing
raw material . In this regard our at tent ion was drawn to the
copy of bank account of Shivaks Impex Ltd. ref lect ing the
deposi t of advance made by the assessee of Rs.3.55 crores in
the same and the ut i l izat ion of the same for the purpose of
releasing a let ter of credi t issued in the regular course of i ts
business. The Ld. counsel for assessee, therefore, stated
that the advance had been made for the purpose business of
Shivaks Impex Ltd. which being a step down subsidiary of
the assessee, i t was contended that the assessee company
would have been severely impacted i f the said advance would
not have been made. Our at tent ion was drawn to the
fol lowing documents placed in the paper book f i led on 06-07-
18, to substant iate i ts aforesaid content ion:
( i ) copy of ledger account of Shivaks Impex Ltd. in
the books of appel lant for Assessment Year 2013-
14.
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( i i ) Copy of Ledger account of Shivaks Impex Ltd.
in the books of appel lant for Assessment Year 2014-
15.
( i i i ) Copy of relevant Bank statements of Shivaks
Impex Ltd.
( iv) Shareholder l ist of various Group Companies.”
18. The Ld. DR, on the other hand, rel ied upon the order of
the Assessing Of f icer reject ing this content ion of the
assessee and stated that no business exigency for making
the advance had been establ ished by the assessee.
19. Af ter considering the rival submissions we hold that
commercial expediency of the said advance had been
adequately establ ished by the assessee. The facts relat ing to
the impugned transact ion have not been controverted by the
Revenue. That Shivaks Impex Ltd. was a step down
subsidiary of the assessee company, has not been disputed
by the Revenue. The fact that the assessee, i ts subsidiary
and Shivaks Impex Ltd. were al l in the same l ine of business
has also not been disputed by the Revenue. I t is also not
disputed that the advance made has been ut i l ized for the
purpose of making purchases. I t is evident that had the said
advance not been made i t would have seriously af fected the
business of Shivaks Impex Ltd. , which in turn would have
af fected the assessee also since the value of i ts investment
in i ts subsidiary would have been af fected on account of the
poor resul ts shown by Shivaks Impex Ltd. . Therefore, the
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18
commercial expediency of the advance has been establ ished
and for this reason also, no disal lowance u/s 36(1) ( i i i ) of the
Act could have been made.
20. In view of the above we hold that on account of the
avai labi l i ty of suf f icient own funds and on account of the
advances having been made for business purpose ,no
disal lowance of interest pertaining to funds ut i l ized for
making the same was warranted. We therefore uphold the
order of the CIT(A) delet ing the disal lowance of interest u/s
36(1) ( i i i ) of the Act , amount ing to Rs.18,44,482/-.
21. Ground of appeal No.1 raised by the Revenue is
therefore dismissed.
22. Ground No.2 raised by the Revenue reads as under:
“1. Whether on the facts and circumstances of the case the Ld. CIT(A) has
erred in allowing the appeal of the assessee and deleting the disallowance of
Rs. 25,43,299/- u/s 14A which is not correct because the assessee had made
investments, to the tune of Rs. 5,23,00,000/- and on the other side, assessee
has shown outstanding secured loan from Banks on which the assessee has
claimed interest expenses of Rs. 1,13,06,258/-.”
23. The above ground relates to disallowance made of expenses
relating to exempt income earned by the assessee as per the
provisions of Section 14A of the Act read with Rule 8D of the
Income Tax Rules, 1962.
24. Briefly stated the impugned disallowance was made by the
Assessing Officer in relation to the investments made by the
assessee in the shares of sister concern M/s. KVS International
Pvt. Ltd. of Rs.5,23,00,000/-. The Assessing Officer relying upon
various judgments made a disallowance of Rs.25,43,299/- u/s.14A
of the Act.
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25. Ld. CIT(A) deleted the disallowance made on finding that no
exempt income had been earned by the assessee from the
impugned investments made. Relevant findings of the Ld. CIT(A) at
paragraph 6.2 of our order deleting the said disallowance is as
under:
“6.2 I have gone through the facts of the case and written
submission filed by the appellant. As no exempt income has been
earned during the year on the impugned investments made in shares of
sister concern in the earlier year and there is no claim of any other
exempt income in the computation of income, therefore placing reliance
on the ratio of CIT vs. M/s Lakhani Marketing Inc. [2014] 272 CTR 265
(P&H) and jurisdictional ITAT Chandigarh decision in the case of
Swami Automobiles (P) Ltd. ITA No.74/Chd/2015 dated 10.02.2016,
it is held that no disallowance u/s 40A read with rule 8D of the Income
tax Rules was warranted in this case . Therefore addition of
Rs.25,43,299/- made by the AO on this account for A.Y.2014-15 is
ordered to be deleted. This ground of appeal is allowed.”
26. During the course of hearing before us, Ld. DR, though relied
upon the order of the Assessing Officer, was unable to controvert
the factual and the legal findings of the Ld. CIT(A), we therefore see
no reason to differ with the Ld. CIT(A) deleing the disallowance
made u/s.14A in the light of the admitted fact that no exempt
income was earned by the assessee during the impugned year from
the impugned investments made.
Our decision is forfeited by the order of the Hon’ble Apex
Court in the case of Commissioner of Income Tax,(Central ),1
vs Chettinad Logistics (P) Ltd dated 2nd July
2018,.reported in 257 Taxman 2, in which the Hon’ble
apex court has, we find, dismissed on merits the SLP f i led
by the Revenue against order of the Hon’ble Madras High
Court holding that where no exempt income was earned
no disallowance u/s 14A was warranted. The Hon’ble High
Court had in its order, reported in 248 Taxman 55, held
as under:
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20
“6.The record shows that during the course of arguments before the
Tribunal, the Assessee advanced a submission, to the effect, that in
cases, where, investments are made in sister concern(s), out of interest
free funds, for strategic purposes, the provisions of Section 14 A of the
Act, could not be invoked. In support of this submission, the Assessee
relied upon the judgment of the Tribunal in the case of: Rane Holdings
Ltd., Vs. ACIT, passed in ITA No.115/Mds/2015, dated 06.01.2016.
7. It is, in this background, that the Tribunal remanded the matter to the
Assessing Officer, so as to reach a conclusion as to whether investments
had been actually made, in sister concerns of the Assessee, out of interest
free funds, albeit, for strategic purposes.
8. According to us, this exercise, in the given facts which emerge from the
record, was clearly unnecessary, as the CIT(A) had returned the finding of
fact that no dividend had been earned in the relevant assessment year,
with which, we are concerned, in the present appeal.
9. In our opinion Section 14 A of the Act, can only be triggered, if, the
Assessee seeks to square off expenditure against income which does not
form part of the total income under the Act.
9.1. The legislature, in order to do away with the pernicious practice
adopted by the Assessees’, to claim expenditure, against income exempt
from tax, introduced the said provision.
10. In the instant case, there is no dispute that no income i.e., dividend,
which did not form part of total income of the Assessee was earned in the
relevant assessment year.
10.1. Therefore, to our minds, the addition made by the Assessing Officer
by relying upon Section 14 A of the Act, was completely contrary to the
provisions of the said Section.
10.2. Mr.Senthil Kumar, who appears for the Revenue, submitted that the
Revenue could disallow the expenditure even in such a circumstance by
taking recourse to Rule 8D.
10.3. According to us, Rule 8D, only provides for a method to determine
the amount of expenditure incurred in relation to income, which does not
form part of the total income of the Assessee.
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10.4. Rule 8 D, in our view, cannot go beyond what is provided in Section
14 A of the Act.
11. Furthermore, we may note that a similar argument was sought to be
advanced by the Revenue in the matter concerning, M/s.Redington (India)
Limited Vs. The Additional Commissioner of Income Tax, which was,
subject matter of T.C.A.No.520 of 2016.
11.1. A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016,
rejected the plea of the Revenue advanced in that behalf.
11.2. As a matter of fact, a perusal of the judgment would show that the
Revenue had sought to argue that because exempt income could be
earned in future years, therefore, recourse could be taken to the
provisions of Section 14A of the Act, to disallow expenditure. In other
words the stand taken by the Revenue was irrespective of the fact
whether or not income was earned in the concerned assessment year
expenditure under Section 14A could be disallowed against anticipated
income.
11.3. Pertinently, the Division Bench in M/s.Redington (India) Limited
case has repelled this precise argument.
12. The Division Bench, in our view, quiet correctly held that, the
computation of total income, in terms of Section 5 of the Act, is made qua
real income and not, vis-a-vis, notional income.
12.1. The Division Bench went on to hold that Section 4 of the Act brings
to tax, that income, which is relatable to the assessment year in issue.
The Division Bench, thus, held that where no exempt income is earned in
the previous year, relevant to the assessment year in issue, provisions of
Section 14 A of the Act, read with Rule 8 D could not be invoked.
12.2. While coming to this conclusion, the Division Bench also took note of
the aforementioned Circular, issued by the Board.
12.3. The reasoning of the Division Bench is contained in the following
part of the judgment:
“4. The admitted position is that no exempt income has been earned by
the assessee in the financial year relevant to the assessment year in
issue. The order of assessment records a finding of fact to that effect. The
issue to be decided thus lies within the short compass of whether a
disallowance in terms of s.14A of the Act read with Rule 8D of the Rules
ITA No.470/Chd/2018
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can be contemplated even in a situation where no exempt income has
admittedly been earned by the assessee in the relevant financial year.
7. Per contra, Sri T. Ravi kumar appearing on behalf of the revenue drew
our attention to the marginal notes of s.14 A pointing out that the
provision would apply not only where exempted income is ‘included’ in the
total income, but also where exempt income is ‘includable’ in total income.
8. He relied upon a Circular issued by the Central Board of Direct taxes in
Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was
intended to cover even those situations whether there is a possibility of
exempt income being earned in future. The Circular, at paragraph 4,
states that it is not necessary for exempt income to have been included in
the income of a particular year for the disallowance to be triggered.
According to the Learned Standing Counsel, the provisions of s.14A are
made applicable, in terms of sub section (1) thereof to income ‘under the
act’ and not ‘of the year’ and a disallowance under s.14A r.w. Rule 8D
can thus be effected even in a situation where a tax payer has not earned
any taxable income in a particular year.
9. We are unable to subscribe to the aforesaid view. The provisions of
section 14A were inserted as a response to the judgments of the Supreme
Court in Commissioner of Income Tax Vs. Maharashtra Sugar Mills
Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing
Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in
terms of which, expenditure incurred by an assessee carrying on a
composite business giving rise to both taxable as well as non-taxable
income, was allowable in entirety without apportionment. It was thus that
s.14A was inserted providing that no deduction shall be allowable in
respect of expenditure incurred in relation to the earning of income exempt
from taxation. As observed by the Supreme Court in the judgment in the
case of Commissioner of Income Tax vs. Walfort Share and Stock Brokers
(P) Ltd (2010) 326 ITR 1
‘…. The mandate of s.14A is clear. It desires to curb the practice to claim
deduction of expenses incurred in relation to exempt income against
taxable income and at the same time avail of the tax incentive by way of
an exemption of exempt income without making any apportionment of
expenses incurred in relation to exempt income.’
10. The provision this is clearly relatable to the earning of actual income
and not notional or anticipated income. The submission of the Department
to the effect that s.14A would be attracted even to exempt income
‘includable’ in total income would entail the assessment of notional
income, assumed to be exempt in the future, in the present assessment
ITA No.470/Chd/2018
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23
year. The computation of total income in terms of s.5 of the Act is on real
income and there is no sanction in law for the assessment of admittedly
notional income, particularly in the context of effecting a disallowance in
connection therewith.
11.The computation of disallowance in terms of Rule 8D is by way of a
determination involving direct as well as indirect attribution. Thus,
accepting the submission of the Revenue would result in the imposition of
an artificial method of computation on notional and assumed income. We
believe this would be carrying the artifice too far.
(emphasis is ours)”
13. Mr. Senthil Kumar, seeks to distinguish the judgment in M/s.
Redington (India) Limited case based on the fact that Rule 8D had not
kicked-in by AY 2007-08, which was the AY being considered in the said
case.
14. According to us, this was not the argument, put forth, before the
Division Bench. As a matter of fact, the Revenue relied heavily on Rule
8D.
14.1. Mr. Ravi kumar, who appeared for the Revenue, in that matter and
who is present in this Court, informs us that he had in fact argued that
the Rule was clarificatory in nature and would apply retrospectively, and
that, the Division Bench, therefore, discussed the impact of Rule 8D of the
Rules.
15. However, it is, our view, as indicated above, independent of the
reasoning given in M/s. Redington (India) Limited case that Rule 8D
cannot be read in a manner, which takes it beyond the scope and content
of the main provision, which is, Section 14 A of the Act.
15.1. Therefore, as adverted to above, Rule 8D, cannot come to the rescue
of the Revenue.”
SLP fi led against the said judgment was dismissed
by the apex court both on merits as wel l as on the ground
of delay.
27. In view of the above, we uphold the order of the CIT(A)
deleting the disallowance made u/s. 14A of the Act.
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