I.T.A. No. 2571/Mum/2013

Shri Shailendra Kumar Yadav, Judicial Member And Shri Ramit Kochar, Accountant Member

Shri Surendra Mijsure For the Appellant :
Shri C.W. Angolkar For the Respondent :

ORDER

The order of the Bench was delivered by

Ramit Kochar, Accountant Member-This is an Appeal by the assessee company directed against the Order by the learned Commissioner of Income Tax (Appeals)-4, Mumbai (‘CIT(A)’ for short) dated 09/01/2013 for the assessment year 2006-07.

2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Tribunal are as under:-

1) a) The CIT(A) has erred in confirming the disallowance of Rs. 8,39,411/- being the interest calculated at 9% on alleged interest free loans given by the appellant mentioned in the Assessment Order rejecting the appellants’ submission that they were not loans but advances given for the purposes of business.

b) The CIT(A) erred in confirming the aforesaid disallowance of interest in view of the fact that similar disallowance made in asst. year 2005-06 has been deleted by the CIT(A), Central II, Mumbai vide his order dated 23/03/2007.

2) a) The CIT(A) erred in restricting the disallowance u/s. 14A to Rs. 10,05,867/- made by the Assessing Officer in as much as no evidence was brought on record either by the Assessing Officer or the CIT(A) to show that the appellant has invested borrowed funds in assets, income from which was exempt from tax or made any other expenses to earn exempt income.

b) In fact, the appellant’s capital and reserves of Rs. 845 lakhs were much more that the investments of Rs. 768 lakhs and hence prima facie there was no reason to make the disallowance out of interest expenses u/s. 14A of the I.T. Act.
3) The CIT(A) erred in confirming the disallowance of payment to Employees’ Contribution to Provident Fund amounting to Rs. 86,358 in view of the fact that the said amount has been paid to provident Fund Authority in time.
3. The brief facts of the case are that the assessee is a company and is engaged in the business of Stevedoring.

4. During the course of the assessment proceedings u/s 143(3) read with Section 143(2) of the Income Tax Act,1961(Hereinafter called “the Act”) the learned Assessing Officer(hereinafter called “the AO”) observed that the disallowance of assessee’s claim of interest expenses was made by the AO in the assessment order passed for the assessment year 2005-06 on account of the reasons that the assessee company has not charged the interest on the loans and advances given to various parties and the AO observed that for the current year also the facts are similar whereby the assessee company has not charged interest on loans and advances given to various parties. The AO issued show cause notice dated 19.12.2008 u/s. 142(1) of the Act to the assessee company whereby the assessee company was asked to show cause as under:-

“It is seen that you have taken secured and unsecured loans of Rs. 20,10,28,597/- whereas you have paid interest amounting Rs. 35,51,007/- and claimed deduction u/s. 36(1)(iii) of the I.T. Act against the profit. It is also seen that you have advanced interest free loans to following parties on which you have not charged any interest:

Therefore, you are herby asked to show cause as to why the interest expenses claimed by you be not disallowed u/s. 36(1)(iii) of the Act because interest bearing funds have been diverted by you for non business purpose.”

The assessee company submitted that the assessee company has given the interest free advances to parties for business purposes which are in the nature of trading advances given to parties on account of commercial expediency. The assessee company also submitted that some of the parties have repaid the advances in the next financial year or the advances have been adjusted against the billing of those parties. The AO rejected the contentions of the assessee company as the assessee company did not file any documentary evidence to prove that the above advances have been given by the assessee company for business purposes. The AO held that the assessee company had diverted the interest bearing funds in giving the interest free advances to the above mentioned parties and hence, the assessee company’s claim of interest expenditure was disallowable in view of the specific provisions of Section 36(1)(iii) of the Act. Therefore, interest at the rate of 9% is charged on the above advances totaling to Rs. 93,26,789/- which is worked out at Rs. 8,39,411/- which was added to the total income of the assessee’s company income vide assessment order dated 24.12.2008 passed by the AO u/s 143(3) of the Act.

5. Aggrieved by the assessment order dated 24.12.2008 passed by the AO u/s 143(3) of the Act, the assessee company filed the first appeal before the CIT(A) and submitted vide letter dated 12/12/2012 as under:-

“Disallowance of interest amounting to Rs. 8,39,411/-. The assessee had given interest free advances for business consideration. Utilization of money borrowed on interest includes giving advances for the course of carrying business. Such trade advances may or may not carry interest depending upon the practice followed consistently by the Assessee. In the case, the trade advances do not carry any interest. Hence, from these advances, no interest income could be expected. Further these are not in the nature of interest free loans. These trades advances were being given on account of commercial expediency and that some of the parties had repaid the advances in the next year or have been adjusted against the bills of the party.

Similar disallowance was made in A.Y. 05-06 and the CIT(A) in his order has reversed the disallowance given by the Ld. Assessing Officer. Kindly find enclosed herewith copy of the CIT(A) order dated 20/08/2007.”

The CIT(A) held that the assessee company is to show that each and every advance has been given for the business purpose and, therefore, explanation and facts relating to each advances should have been brought on record by the assessee company, whereas the assessee company merely claimed that they are trade advances given for business purposes but the assessee company failed to prove that the advances are for the business purposes. Hence, the disallowance of interest of Rs. 8,39,411/- made by the AO was confirmed by the CIT(A) vide orders dated 09-01-2013.

6. Aggrieved by the orders dated 09-01-2013 passed by the CIT(A) , the assessee company filed an appeal before the Tribunal. The assessee company contended that the money has been advanced for the business purposes being trade advances and the assessee company submitted that in the preceding assessment years 2004-05 and 2005-06, the assessee company had advanced to 16 parties which was accepted by the Tribunal in ITA No. 69/Mum/2008 & 70/Mum/2008 vide orders dated 13-11-2009 as trade advances for business purposes and the additions made by the AO by way of disallowance of interest was deleted by Tribunal . The assessee company produced before us the copies of the assessment order, CIT(A) Order and ITAT Orders for the assessment year 2005-06, which are placed in file. The assessee company submitted that during the course of assessment year 2006-07, in all advances were given to 29 parties and out of which 16 parties are same parties as were before the Tribunal in the preceding assessment year i.e. 2005-06 and which was accepted by the Tribunal to be trade advances for business purposes vide orders dated 13-11-2009 . Thus, the assessee company contended that out of Rs. 93,26,789/- advances given as on 31/3/2006, Rs. 69,23,301/- were in respect of 16 parties which were existing in the immediately preceding assessment year and which was accepted by the Tribunal vide orders 13-11-2009 , being given for business purposes. The assessee company also submitted that it has interest free fund of Rs. 23,22,22,553/- as at 31-03-2006 , out of which share capital and reserves were Rs. 8.45 crores and interest free loans were Rs. 14.77 crores. The assessee company submitted that it has paid interest of Rs. 35,51,007/- during the previous year and since the advances were given for business purposes being trade advances, the interest expenditure should be allowed and the AO erred in disallowing the interest of Rs. 8,39,411/- . The assessee company relied on the decision of Hon’ble High Court of Bombay in Reliance Utilities and Power Limited reported in (2009) 178 taxman 135(Bombay) and decision of Hon’ble Supreme Court in S.A. Builders Ltd, (2007)158 taxman 74 (SC).

6. The Ld. DR on the other hand, submitted that the assessee company has mixed pool of funds which were deployed in fixed assets also. The Ld. DR submitted that the CIT(A) has given the categorical finding that the assessee company has no evidence to prove that the advance are for business purposes and hence, the CIT(A) has rightly confirmed an addition made by the AO. The Ld. DR submitted that the disallowance of interest of Rs. 8,39,411/- as made by the AO and confirmed/sustained by the CIT(A) be upheld.

7. We have considered the rival contentions and perused the material on record, we have observed that the assessee company has given the advances to various parties as per the list produced in the preceding para’s, aggregating to Rs. 94,16,789/- and the assessee company had paid interest of Rs. 35,51,007/- during the previous year . The assessee company has also claimed to have the interest free funds of Rs. 23.22 crores. We have also observed that the assessee company in the preceding assessment year has advanced money to 16 parties which has been held by the Tribunal to be advanced for business purposes in ITA No.69/Mum/2008 and ITA No. 70/Mum/2008 vide orders dated 13-11-2009. In our considered view, interest of justice will be best served if the matter is restored to the file of the AO for de-novo determination of the issue with directions to the assessee company to bring on record the cogent material / evidences before the AO to substantiate its claim and contentions that the amounts have been advanced for the purpose of business for commercial expediency. The AO will also take into account the decision of the Tribunal for the assessment year 2004- 05 and 2005-06 in ITA No. 69 &70/Mum/2008 vide orders dated 13-11-2009 whereby the advances to 16 parties were held to be trading advances for business purposes and disallowance of the interest was, therefore, deleted and also case laws relied upon by the assessee company. Needless to say that the AO will grant proper and adequate opportunity of hearing to the assessee company as per law in compliance with principles of natural justice. We order accordingly.

8. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the AO observed that the assessee company has claimed the dividend income of Rs. 17,66,345/- and Long Term Capital Gain of Rs. 84,41,989/- as exempt income from taxation. The AO observed that the assessee company has not allocated any expenditure for earning this income which has been claimed exempt from taxation . The assessee company was show caused as to why disallowance was not made u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962. The assessee company submitted that it has not incurred any expenditure in relation to earning the dividend income or long term capital gains and hence no amount can be disallowed u/s 14A of the Act. The assessee company has also submitted that Rule 8D of Income Tax Rules, 1962 is not applicable for the relevant assessment year i.e. 2006-07. The AO rejected the contentions of the assessee company and held that assessee company has derived income from business operations as well as from investments and it is necessary to apportion the expenses head wise accordingly towards exempt income and taxable income . The AO relied on the decisions of Kolkata Tribunal in the case of DCIT v. S.G. Investments and Industries Ltd.(89 ITD 44) .Thus , the AO held that the pro-rata expenses has to be disallowed incurred for earning tax exempt income . The AO held that it cannot be said that no expenses have been incurred by the assessee company to earn exempt income and held that he is not satisfied with the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for the previous year.

The AO held that the CBDT vide its notifications dated 24.03.2008 has prescribed the method for calculating expenditure in relation to exempt income by providing rule 8D in the Income Tax Rules, 1962. The AO also relied on the decisions of ITAT, Special Bench, Mumbai in the case of M/s. Daga Capital Management Pvt. Ltd. whereby Special Bench of the Tribunal held that section 14A of the Act read with rule 8D of Income Tax Rules, 1962 are retrospective in nature . Thus , the AO held that rule 8D of Income Tax Rules, 1962 is applicable to the assessee company and disallowance was made under rule 8D(2)(ii) and (iii) of Income Tax Rules, 1962 and the total disallowance of Rs. 11,82,953/- u/s 14A of the Act read with rule 8D (2) (ii) and (iii) of Income Tax Rules 1962 was made vide assessment order dated 24.12.2008 passed by the AO u/s 143(3) of the Act.

9. Aggrieved by the assessment orders dated 24.12.2008 passed by the AO u/s 143(3) of the Act, the assessee company filed the first appeal with the CIT(A) and submitted as under:-

“The amount of interest amounting to Rs. 11,82,953/- .The Assessing Officer disallowed interest amounting to Rs. 11,82,953/- by applying the provisions of Rule Rule 8D. He relied on the decision of Hon’ble Apex Court in the case of Garden Silk Weaving Factory v/s. CIT 189 ITR 517. However, that case is in no way applicable to our case. The Assessing Officer had asked the Appellant to show cause as to why disallowance should not be made u/s 14A of the Income Tax Act and Rule 8D. The company had vide its Authorized Representative letter dated 23.12.2008 submitted that no expenditure had been incurred on Long Term Capital Gains and Dividend Incomes. Reliance was also placed upon the decision of Vijaylaxmi Sugar Mills Ltd. v/s. CIT (1991) 191 ITR 641 (SC) where it was held that there was no evidence to show that the expenses sought to be disallowed were to facilitated the earning of dividend. It was also submitted that the formula under Rule 8D was brought in by notification no. 45/2008 dated 24.03.2008 and can be applied in the circumstances therein only after that date and this Rule 8D is not retrospective application.”

The CIT(A) held that Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT 328 ITR81(Bom.), has held that Rule 8D of Income Tax Rules, 1962 is applicable from the assessment year 2008-09, but for earlier years, a reasonable disallowance is to be made. The CIT(A) held that neither the AO nor the assessee company has established any nexus of funds with the investments and other activities and therefore proportionate interest disallowed by the Assessing Officer as per rule 8D(2)(ii) of Income Tax Rules,1962 of Rs. 8,28,781/- appears to be reasonable and was confirmed for the disallowance by the CIT(A) vide orders dated 09-01-2013.

The CIT(A) also held that disallowance of expenses of Rs. 3,54,172/- made by the AO under rule 8D (2)(iii) of Income Tax Rules, 1962 was held to be on higher side and the CIT(A) reduced the disallowance to 50% as was made by the AO and granted the relief to the assessee company of Rs. 1,77,086/- vide orders dated 09-01-2013.

10. Aggrieved by the orders dated 09-01-2013 passed by the CIT(A), the assessee company filed the appeal before the Tribunal and contended that Rule 8D of Income Tax Rules, 1962 is applicable from the assessment year 2008-09 as held by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd (Supra), the assessee company submitted before us that the assessee company has its own sufficient funds to the tune of the Rs. 8.45 Crores while the investment which are made are to the tune of Rs. 7.67 crores and hence own funds are utilized in making investments and the interest should not be disallowed. The assessee company relied upon the decision of the Hon’ble Bombay High Court in the case of HDFC Ltd, in ITA No, 330 of 2012 and also relied upon decision of Videocon Industries Ltd v. Addl. CIT (2015) 55 taxman in 263 (Mum Tribunal) and IOT Infrastructure & Energy Services Limited v. ACIT 39 taxmann.com 195 to contend that no disallowance can be made. On the other hand, the Ld. DR submitted that the assessee company has a mixed pool of funds and the disallowance has been rightly made by the AO and upheld by the CIT(A).

11. We have considered the rival contentions and perused the material on record .We have observed that Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (Supra) has held that Rule 8D of Income Tax Rules, 1962 is applicable only from the assessment year 2008-09 , while the relevant assessment year under appeal is 2006-07. Section u/s 14A of the Act is applicable for the relevant assessment year and the disallowance has to be made in respect of the income which does not from part of the total income . The assessee company has mixed pool of funds which are deployed for earning the taxable income and tax free income and it is for the assessee company to show with the cogent material/evidences that interest free funds are deployed in making investments which yield tax free income . In our considered view , the interest of justice will be best served if the matter is restored to the file of the AO for de-novo determination of the issue with the directions to the assessee company to produce on record cogent material/evidences to substantiate its claim that the interest free own funds are deployed for making the investments which yield tax free income and then accordingly the disallowance be worked out . The AO shall also keep in view the presumption as laid down by Hon’ble Bombay High Court in the case of HDFC Bank Limited (supra) and also other case laws relied upon by the assessee company while de-novo determination of the issue. Needless to say that the AO shall grant proper and adequate opportunity of hearing to the assessee company in accordance with law in compliance with principles of natural justice. We order accordingly.

12. The AO during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, on perusal of Annexure 3 to the tax audit report filed by the assessee company noticed that the assessee company has made delayed payments in respect of Employees’ Contribution towards PF and ESIC as under:-
PF

From the above it was observed by the AO that the assessee company has made belated payments of Rs. 86,358/- in respect of its liabilities towards Employee’s Contribution to PF beyond the time stipulated under PF Act and as per Sec. 36(1)(va) of the Act , such delayed payment cannot be allowed as deduction and hence, 86,358/- being the delayed payment towards Employee’s Contribution to PF, is disallowable and the same was added back to the total income of the assessee company by the AO vide orders dated 24.12.2008 passed u/s 143(3) of the Act.

13. Aggrieved by the assessment orders dated 24.12.2008 passed u/s 143(3) of the Act by the AO, the assessee company filed the first appeal before the CIT(A) and the CIT(A) confirmed the addition of Rs. 86,358/- as the assessee company has not filed any submission in this regard , vide orders dated 09-01-2013.

14. Aggrieved by the orders of the CIT(A) dated 09-01-2013, the assessee company is in appeal before the Tribunal, the assessee company submitted that the assessee company has made the payment of Employee Contribution to PF before the due date of filing of return of income u/s. 139(1) of the Act and as per Sec. 43B of the Act, if the payments are made before the due date of filing the return of income u/s. 139(1) the assessee company is entitled for the deduction of said amount u/s 36(1)(va) of the Act read with Section 43B of the Act. The assessee company relied upon the decision of Hon’ble Bombay High Court in CIT v. Ghatge Patil Transports Ltd. (2015) 53 taxman.com 141 (Bom). The Ld DR relied upon the order of the authorities below.

We have considered the rival contentions and perused the material on record. We have observed that the assessee company has made payments towards Employee’s PF contribution amounting to Rs. 86,358/- beyond the time stipulated i.e. due date under the relevant PF Act but however the assessee company has made the afore-stated payments of PF before the due date of filing of return of income u/s 139(1) of the Act. We have observed that this issue is squarely covered by the decision of Hon’ble Bombay High Court in Ghatge Patil Transport Ltd (Supra) and also Hon’ble Supreme Court in Alom Extrusions Ltd. (2009) 319 ITR 306(SC) in favour of the assessee company and hence the deduction is allowable with the respect to employee contribution towards PF if payment although made beyond the due date as prescribed under the PF Act but are made before the due date of filing of return of income u/s 139(1) of the Act which shall be treated as in compliance with Section 36(1)(va) of the Act read with Section 43B of the Act. We therefore order deletion of addition of Rs. 86,358/- made by the AO and as confirmed/sustained by the CIT(A) being employee’s contribution towards PF having been paid to PF authorities beyond due date as prescribed under Relevant PF Act but before the due date of filing of return of income u/s 139(1) of the Act. We order accordingly.

In the result, the assessee company’s appeal is partly allowed.

The order pronounced in the open court on January 27th, 2016.