A taxpayer can retract a mistaken suo moto disallowance under Section 14A if there’s a valid basis, such as having sufficient own funds to cover investments.
Issue
Can an assessee withdraw a disallowance under Section 14A that was mistakenly made in the return of income, and what are the grounds for deleting such a disallowance?
Facts
- In its tax return for AY 2012-13, the assessee voluntarily made a disallowance under Section 14A. This included a disallowance for interest expenditure under Rule 8D(2)(ii) and for administrative expenses under Rule 8D(2)(iii).
- During proceedings, the assessee argued that these disallowances were made in error.
- It contended that the interest disallowance was unnecessary because its own interest-free funds were much larger than its investments, a position accepted by the tax authorities in its own case in prior years.
- It also argued that the administrative expense disallowance was incorrectly calculated by including all investments, rather than just those that yielded exempt income during the year.
Decision
The Tribunal ruled in favour of the assessee on both points.
- On Interest Disallowance: The Tribunal followed the reasoning from the assessee’s prior year assessments. It held that since the assessee had sufficient own funds to cover its investments, it’s presumed that borrowed funds were not used. Therefore, the mistaken suo moto disallowance of interest was directed to be deleted.
- On Administrative Disallowance: The Tribunal also affirmed the legal principle that only the value of investments that actually generate exempt income during the year should be considered for the calculation under Rule 8D(2)(iii). It directed the Assessing Officer to re-compute the disallowance and delete the excess amount.
Key Takeways
- Sufficient Own Funds Precludes Disallowance: When an assessee’s own interest-free funds (like share capital and reserves) exceed the value of their investments, the presumption is that borrowed funds were not used to make those investments. In such cases, no disallowance of interest expenditure under Section 14A is warranted.
- Mistakes in Returns Can Be Corrected: A taxpayer is not permanently bound by an error made in their return of income. A voluntary disallowance made by mistake can be challenged and withdrawn in subsequent proceedings.
- Correct Calculation of Rule 8D: For calculating the 0.5% disallowance for administrative expenses, the formula must only consider the average value of those specific investments that have actually yielded tax-exempt income during that particular year.
No interest can be disallowed on advances given from sufficient own funds, particularly when they are for reasons of commercial expediency.
Issue
Can a portion of a company’s interest expenditure be disallowed under Section 36(1)(iii) when the company has provided interest-free advances to its subsidiary or sister concerns?
Facts
- The assessee-company had provided interest-free advances to its wholly-owned subsidiary for business expansion and to a sister concern for its real estate business.
- The Assessing Officer (AO) disallowed a proportionate amount of the assessee’s own interest expenditure, claiming that interest-bearing funds had been diverted for these non-interest-earning purposes.
- The assessee countered this by arguing two main points:
- The advances were given for reasons of commercial expediency to support its business interests through group companies.
- It had sufficient own interest-free funds (share capital and reserves) to cover the amounts advanced.
- It was also a fact that no such disallowance had been made in the previous year when the loan to the subsidiary was first granted.
Decision
The Tribunal ruled in favour of the assessee and deleted the disallowance.
- The Tribunal accepted that the advances were made for commercial expediency, which is a valid business purpose.
- It also found that the assessee had adequate own funds, creating a presumption that the interest-free advances were made from these funds and not from borrowed capital.
- Furthermore, it applied the rule of consistency, noting that since the loan was not questioned in the year it was given, a disallowance in a subsequent year was not justified.
Key Takeways
- Commercial Expediency Justifies Advances: Providing financial support to a subsidiary or group company to protect or enhance one’s own business is a well-accepted form of commercial expediency. Interest on funds used for such a purpose is an allowable business expense.
- The Own Funds vs. Borrowed Funds Test: If an assessee has sufficient own funds to cover any interest-free advances it has made, the legal presumption is that the advances were sourced from these own funds, and no disallowance of interest on its general borrowings is permissible.
- Consistency is Key: The tax department should not take a different stance on an ongoing transaction (like a loan) in a later year if it was accepted in the year of its origin, unless new facts or laws have emerged.
IN THE ITAT CHANDIGARH BENCH ‘A’
Deputy Commissioner of Income -tax
v.
Hero Cycles Ltd.
Rajpal Yadav, Vice President
and KRINWANT SAHAY, Accountant Member
and KRINWANT SAHAY, Accountant Member
IT Appeal No. 473 and 588 (Chd.) OF 2018
[Assessment year 2012-13]
[Assessment year 2012-13]
SEPTEMBER 8, 2025
Manav Bansal, CIT-DR for the Appellant. Ashwani Kumar, Ashish Aggarwal and Ms. Deepali Aggarwal, CAs for the Respondent.
ORDER
Krinwant Sahay, Accountant Member. – The present appeal is filed by the Revenue and Cross Appeal is filed by the Assessee against the order of the Ld. CIT(A)-2, Ludhiana dt. 15/02/2018 pertaining to Assessment Year 2012-13.
2. Since both the above appeals were h eard together therefore they are being disposed off by this consolidated order for the sake of convenience and brevity.
3. At the first instance we will deal with the appeal of the department in ITA No. 588/Chd/2018 wherein following grounds have been raised.
| I. | Whether on the facts and circumstances of the case and in law, the CIT(A) was right in deleting the disallowance of Rs. 14,15,10,213/-made u/s 14A of the Act without establishing the fact whether own funds were actually used for making investments while ignoring the fact that the assessee had huge borrowings on which interest expenses were claimed and also ignoring the CBDT circular No. 5 of 2014? |
| II. | Whether on the facts and circumstances of the case and in law, the CIT(A) was right in deleting the disallowance of Rs. 8,98,66,194/-made on account of excessive commission expenses while ignoring the fact that a clear relation existed between the assessee company and the firm, as a director of the assessee company was also a partner in the firm concerned? |
| III. | Whether on the facts and circumstances of the case and in law, the CIT(A) was right in deleting the disallowance u/s 36(1)(iii) of the Act on account of advances made to /debit balances of M/s Hero Exports and M/s Hero Motors Ltd. on the ground of sufficient own funds while ignoring that the assessee has huge borrowings on which interest expenses were claimed? |
4. Vide ground no. 1 the grievance of the Department relates to the deletion of disallowance of Rs. 14,15,10,213/- made by the A.O. by invoking the provisions of Section 14A of the Income Tax Act, 1961. (hereinafter referred to as Act).
5. Facts of the case in brief are that the assessee filed its return of income on 20/03/2014 declaring an income of Rs. 140,32,08,590/- which was processed under section 143(1) of the Act. Later on the case was selected for scrutiny. The A.O. during the course of assessment proceedings noticed that the assessee earned dividend income of Rs.9,19,28,102/- and LTCG taxable Rs. 7,59,39,798/- and Rs.6,06,39,256/-which were claimed exempt under section 10(38) of the Act and that the assessee had an investment, income of which is not includible in total income of Rs.5,70,97,51,129/- and Rs.6,06,97,35,636/- as on 31/03/2011 and 31/03/2012 respectively. The A.O. also observed that the assessee claimed interest expenditure of Rs.38,91,69,331/- during the year under consideration. He asked the assessee to explain and submit the details of expenditure relating to the earning of tax free income. The assesse furnished the reply which has been reproduced by the A.O. at page no. 2 to 15 of the assessment order dt. 03/03/2015, avoiding repetition the same is not being reproduced herein. The A.O. after considering the submission of the assesse invoked the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules 1962. The A.O. worked out the disallowance under section 14A of the Act at Rs.14,15,10,213/-, the calculations are given at page no. 22 & 23 of the aforesaid assessment order.
6. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submission which have been reproduced by the Ld. CIT(A) at page no. 6 to 42 of the impugned order. The Ld. CIT(A) after considering the submissions of the assessee, deleted the disallowance made by the A.O. by observing in para 5.2 of the impugned order as under:
5.2 I have considered the observations of the Assessing Officer as made by him in para 4 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable IT AT, Chandigarh in the case of Assessee Company itself for A.Ys. 2008-09, 2009-10 and 201011 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A. Y. 201112 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the orders of the Honourable IT AT, Chandigarh in IT A No. 192/Chd/2013 for the A.Y. 2008-09 dated 29.10.2015, IT A No. 314/Chd/2013 for the A.Y. 2009-10 dated 16.02.2016 and ITA Nos. 720 & 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 for the A. Y. 2011-12 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Ys. 2008-09, 2009-10 & 201011 was deleted by the Honorable jurisdictional IT AT. Not only this, I have also deleted identical addition made by the Assessing Officer in A. Y. 2011-12 vide my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Ys. 2008-09, 2009-10, 2010-11 & 2011-12 and there is no material difference in the facts, the ratio of the decisions of Honorable IT AT, Chandigarh for the A.Ys. 2008-09, 2009-10 & 2010-11 and my own decision for the A. Y. 2011-12 is squarely applicable to the case of the assessee company for the year under consideration. So, respectfully following the orders of the Honourable IT AT, Chandigarh in the case of the assessee company itself for the Assessment Years 200809, 2009-10 and 2010-11 (supra) and my own order in appeal No. 347/IT/CIT(A)-2/Ldh/2013-14 dated 09.08.2017 for the A.Y. 2011-12, the addition of Rs. 14,15,10,213/-made by the Assessing Officer in this case on account of disallowance of expenses by invoking provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 on the ground that the assessee company had made investment in shares/mutual funds, the income from which in the form of dividend or long term capital gains is exempt from tax under section 10 of the Act is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable IT AT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008-09, 2009-10 and 2010-11 while deleting the identical addition in these years. In the result, the grounds No. 1, 2 and 3(a) to 3(m) of appeal taken by the assessee company are allowed.
7. Now the Department is in appeal.
8. The Ld. CIT DR reiterated the observations made by the A.O. and supported the assessment order.
9. In his rival submissions the Ld. Counsel for the Assessee at the very outset stated that this issue is covered in favour of the assessee vide earlier order of the ITAT in assessee’s own case for the Assessment Year 2008-09 to 2011-12 copy of ITAT Order for A.Y. 2011-12 is placed in the paper book filed by the assessee. He accordingly submitted that the Ld. CIT (A) rightly deleted the disallowance made by the A.O. by following the earlier orders of the ITAT in assessee’s own case, therefore there is no merit in the appeal of the Department.
10. We have considered the submissions of both the parties and perused the material available on the record. In the present case it is noticed that an identical issue has been decided by the ITAT in assessee’s favour in the earlier AYs 2008-09 to 2011-12. We deem it appropriate to reproduce the findings of the ITAT in Hero Cycles Ltd. v. ACIT [IT Appeal No. 192(Chd) of 2013, dated 29-10-2015] given at para 8 to 10 which read as under:
8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. From the perusal of the balance sheet and other documents filed in the Paper Book, we see that the total investment in shares and mutual funds as on 31.3.2007 was of Rs.3,83,82,47,226/- while the investment as on 31.3.2008 is of Rs.4,64,37,73,922. Therefore, there was an increase of around Rs.80 crores in the investment during the year. While reserves and own funds of the assessee company as on 31.3.2008 are amounting to Rs.6,24,18,74,854/-. From these figures, it is quite clear that own funds and reserves of the assessee are more than sufficient to cover the investment made during the year. In such a scenario, it can be very conveniently presumed that all the investment have been made out of own funds. For this purpose, reliance is placed on the judgment of Hon’ble Jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. v. CIT in ITA No.624 of 2013 (O&M) dated 24.7.2015, whereby it has been held as under :
“16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs.10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax v. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment.”
9. Therefore, in such circumstances, no disallowance under section 14A of the Act on account of interest can be made. Though the learned counsel for the assessee has made alternative submissions on the computation made by the Assessing Officer under Rule 8D of the Income Tax Rules, in view of our finding that no disallowance on account of interest under section 14A an be made, we do not find any need to adjudicate these issues.
10. As regards administrative expenses, it is a fact on record that the assessee himself had disallowed an amount of Rs.2,73,13,827/- on account of expenses incurred for earning tax free income and the Assessing Officer has nowhere recorded a finding as to why the disallowance so made by the assessee is not correct. Reliance is placed on the judgment of the Hon’ble Jurisdictional Punjab & Haryana High Court in the case of CIT v. Deepak Mittal 361 ITR 131 (Punjab & Haryana) to the effect that in the absence of any satisfaction recorded by the Assessing Officer as to why the calculation made by the assessee is not correct, the disallowance made by him on account of administrative expenses under Rule 8D of the Income Tax Rules is not as per law. In view of the above disallowance made by the Assessing Officer under section 14 of the Act read Rule 8D of the Income Tax Rules is deleted.
The aforesaid order has been followed by the ITAT in the Assessment Year’s i.e. 2009-10 and 2011-12, we, therefore do not see any valid ground to interfere with the findings of the Ld. CIT (A) who rightly deleted the disallowance made by the A.O. by following the earlier orders of the ITAT in assessee’s own case for the A.Y. 2010-11. Accordingly, Revenue appeal on ground No. 1 is dismissed.
11. Vide ground no. 2 the grievance of the Department relates to the deletion of disallowance of Rs. 8,98,66,194/- made by the A.O. on account of excessive commission.
12. The facts related to this issue in brief are that the A.O. during the course of assessment proceedings noticed that the assessee paid the commission of Rs.110234965/- to sole selling agents. The A.O. asked the assessee to reply on the following issues:
| (i) | Terms and conditions of payment |
| (ii) | Details of services rendered |
| (iii) | Rate at which commission is paid |
| (iv)The | partners of Munjal Sales Corporation are related to the Directors of M/s Hero Cycles Ltd. Why this expense should not be considered as excessive? |
| (v) | What is the rationale of commission expenses when other selling expenses are incurred. |
12.1 In response the assessee submitted its reply vide letter dated 06.02.2015. The assessee again submitted a second reply vide letter dated 10.02.2015 in response to show cause which is reproduced in para 5.2 of the assessment order dated 03.03.2015. To avoid repetition the aforesaid submissions are not being reproduced herein.
12.2 The A.O. however was not satisfied from the submission of the assesse and made the addition of Rs. 89866194/- by observing in para 5.5.2, 5.6 & 5.7 as under:
5.5.2 Thus the issue being raised regarding the justification of Commission expenses being paid by the assessee to MSC leads clearly to the conclusion that the Commission expenses are highly exorbitant and unjustifiable. Therefore, the claim of the assessee that the whole of said expenses are to be allowed is rejected. The assessee in the Annexure ‘XX’ to the tax Audit Report states that the Net Profit/Turnover of the assessee Company is 5.89%.
5.6 Accordingly, the approximation of the justifiable amount of expenses to be paid by the assessee Company to the MSC are calculated by providing a Net Margin of 5.89% over the expenses of Rs. 1,92,35,783/- incurred by MSC which comes to=”1,92,35,783/-” x 105.89% =”2,03,68,771/
5.7 Thus the excess amount of Commission paid of Rs. 8,98,66,194/-(Rs. 11,02,34,965/- -Rs. 2,03,68,771/-) is disallowed and added back to the total income of the assessee as being the expenditure not wholly and exclusively for the purposes of business and is added back to the total income of the assessee.”
13. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submissions dt. 14.12.2017 which had been incorporated by the Ld. CIT(A) in para 6.1 at page no. 43 to 55 of the impugned order, for the cost of repetition, the same are not being reproduced herein.
13.1 The Ld. CIT(A) after considering the submissions of the assessee, remand report of the A.O. and counter comments of the assessee deleted the addition by observing in para 6.2 of the impugned order as under:
6.2 I have considered the observations of the Assessing Officer as made by him in para 5 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2010-11 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh/2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A. Y. 2010-11 as well as by the order of the Honourable ITA T, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. I have also deleted identical addition made by the Assessing Officer in A.Y. 2011-12 vide my order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the Assessment Years 2010-11 and 2011-12 and there is no material difference in the facts, the ratio of the decisions of the learned CIT(A)-2, Ludhiana and Honorable IT AT, Chandigarh for the A.Y. 2010-11 and my own decision in the case of the assessee company for the A. Y. 2011-12 is squarely applicable to the case of the assessee company for the year under consideration. So, respectfully following the orders of the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 (supra) and my own decision in the case of the assessee company for the A.Y. 2011-12, the addition of Rs.8,98,66,194/-in this case on account of disallowance out of commission paid by the assessee company to M/s Munjal Sales Corporation on the ground that the commission paid is excessive is directed to be deleted on the basis of same reasoning and logic as adopted by the learned CIT(A)-2, Ludhiana and Honourable IT AT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 and by me in A.Y. 2011-12 while deleting the identical addition in Assessment Years 2010-11 and 2011-12. In the result, the grounds No. 6(a), 6(b), 6(c) of appeal taken by the assessee company are allowed.
14. Now the Department is in appeal.
15. The Ld. CIT DR strongly supported the assessment order passed by the A.O and reiterated the observations made therein. It was further submitted that the Ld. CIT (A) was not justified in deleting the addition made by the A.O.
16. In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the Ld. CIT (A). It was further submitted that this issue is squarely covered by the earlier order of the ITAT for the preceding A.Y. 2010-11 in Hero Cycles Ltd. v. Addl. CIT [IT Appeal No. 720(Chd) of 2014, dated 3-4-2017] which has been followed by the ITAT in AY 2011-12 vide order dated 15.6.2021 in Dy. CIT v. Hero Cycles Ltd. [IT Appeal No. 1493 of 2017.
17. We have considered the submissions of both the parties and perused the material available on the record. In the present case it is noticed that an identical issue has been decided by the ITAT in assessee’s favour in the earlier AYs 2010-11 and 2011- 12. In A.Y. 2010-11 in Hero Cycles Ltd. (supra) on the similar issue having identical facts the relevant findings have been given in para 34 and 35 which read as under:
34. We have heard both the parties. We have gone through the findings of the Ld. CIT (Appeals) and we find no infirmity in the same. The Ld. CIT (Appeals) has dealt with the issue in detail outlining the facts that the said agent had been acting as the sole selling of the assessee since 1962 and relevant application had been field to the Ministry of Corporate Affairs on its reappointment as sole selling agent on 29.3.2007 which the Ministry had approved on old commission rate of 1% of turnover. The Ld. CIT (Appeals) has also given a finding that the Board of Directors had also approved the said rate. The Ld. CIT (Appeals) has further pointed out that this rate of commission has always been accepted by the Department in the past. The Ld. CIT (Appeals) has also pointed out the fact that both the assessee and Munjal Sales Corporation had been paying taxes at the same rate and that Munjal Sales Corporation was not a person covered u/s 40(A) of the Act. All these facts have not been controverted by the Ld. DR before us. In view of the above facts, we find no infirmity in the order of the Ld. CIT (Appeals) holding that the payment of commission was not excessive since it was approved by the Ministry of Corporate Affairs and by the Board Resolution and even accepted by the Revenue in the past years and had been paid at the same rate since 1962. The fact that Munjal Sales Corporation had been paying tax at the same rate as the assessee, the transaction was revenue neutral transaction and since Munjal Sales Corporation was not related person as per section 40(A)(2) of the Act, there was no case for making any disallowance at all, as held by the Hon’ble Apex Court in the case of Glaxo Smithkline Asia (P) Ltd. (supra).
35. In view of the same we uphold the order of the Ld. CIT (Appeals) in deleting disallowance made of commission amounting to Rs.7,55,25,848/-. The ground of appeal No.2 raised by the Revenue is dismissed.
Since the facts for the year under consideration are similar to the facts involved in the A.Y. 2010-11, so respectfully following the aforesaid referred order dt.03/04/2017 in Hero Cycles Ltd. v. Addl. CIT [IT Appeal No. 720(Chd) of 2014, dated 3-4-2017]/ITA No. 720/Chd/2014 in assessee’s own case, we are of the view that the Ld. CIT (A) was fully justified in deleting the addition made by the A.O. by following the earlier order of the ITAT. We do not see any merit in this ground of the departmental appeal. Accordingly, Revenue’s appeal on this ground is dismissed.
18. The next issue vide ground no.(iii) relates to the deletion of disallowances of interest made by the A.O. under section 36(1) (iii) of the Act.
19. The facts related to this issue in brief are that the A.O. made various disallowance of interest of Rs. 40,22,065/- under section 36(1) (iii) of the Act by observing in para 6.1 of the assessment order dt. 03/03/2015 which read as under:
“During the course of the Assessment Proceedings the details regarding the Debtors as standing in the Balance Sheet of the Assessee as on 31.3.2012 were called for. Copy of accounts of the main Debtors were also examined. Out of the said debit accounts it was seen that Debtor by the name of M/s Hero Exports was having a debit balance ofRs. 17661526/- as on 31.03.2012 and debit balance as on 31.3.2011 was Rs.37554527/-. In the case of M/s. Hero Motors Ltd. debit balance of 21749442/- was outstanding as on 31.03.2012 and Rs. 32737306/- as on 31.3.2011. Copy of Accounts of the same is placed on record. Thus both the opening and closing balance in both the accounts are debit.”
The detailed analysis of both the accounts, the show causes issued to the assessee on the issue, the replies of the assessee to the same and the findings and conclusions about both the debit accounts have been given in para 6.2 to 6.14. The AO has reproduced assessee’s reply dated 27.2.2015 in para 6.3 & 6.8 which for the sake of brevity and repetition are not being reproduced here.
20. Being aggrieved the assessee carried the matter to the Ld. CIT (A) and furnished the written submissions which had been incorporated in paras 7.1 of the impugned order.
20.1 The Ld. CIT(A) after considering the submission of the assessee, deleted the disallowances made by the A.O. under section 36(1)(iii) of the Act by following the earlier order of the ITAT in ITA Nos. 758/Chd/2014 for the A.Y. 2010-11 dt. 03/04/2017. The relevant findings given by the Ld. CIT (A) in para 7.2 of the impugned order read as under:
7.2 I have considered the observations of the Assessing Officer as made by him in para 6 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2010-11 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A.Y. 2010-11 as well as by the order of the Honourable ITAT, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. I have also deleted identical addition made by the Assessing Officer in A. Y. 2011-12 vide my order in appeal. No. 347/IT/CIT(A)-2/Ldh/2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the Assessment Years 2010-11 and 2011-12 and there is no material difference in the facts, the ratio of the decisions of the learned CIT(A)-2, Ludhiana and Honorable ITAT, Chandigarh for the A.Y. 2010-11 and my own decision in the case of the assessee company for the A.Y. 2011-12 is squarely applicable to the case of the assessee company for the year under consideration. So, respectfully following the orders of the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 (supra) and my own decision in the case of the assessee company for the A.Y. 2011-12, the addition of Rs.40,22,065/- in this case on account of disallowance of interest by invoking provisions of section 36(1)(iii) of the Act on the ground that the assessee company has debit balance with sister concerns namely M/s Hero Exports and M/s Hero Motors Limited which has been treated as interest free loan/advance allegedly out of borrowed funds for non-business purposes is directed to be deleted on the basis of same reasoning and logic as adopted by the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A. Y. 2010-11 and by me in A. Y. 2011-12 while deleting the identical addition in Assessment Years 2010-11 and 2011-12. In the result, the ground No. 4 of appeal taken by the assessee company is allowed.
21. Now the Department is in appeal.
22. The Ld. CIT DR strongly supported the order of the A.O. and reiterated the observations made in the assessment order dt. 03.03.2015.
23. In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that the issue under consideration had already been decided by this Bench of the ITAT in assessee’s own case in the assessment year 2010-11 in ITA Nos. 720 & 758/Chd/2014 wherein on a similar issue, the appeal of the Department was dismissed vide order dt. 03/04/2017, the relevant findings are given in the aforesaid order vide paras 18, 19, 24, 42 and 43 which read as under:
18. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. We have also gone through the order of the I.T.A.T., Chandigarh Bench in assessee’s own case for assessment year 2009-10. On perusing the same, we find identical issue has been dealt with by the I.T.A.T. wherein as per the facts of the said case a loan of Rs.10 crores had been given to M/s Hero Motors Ltd. @ 6%, whereas to other persons loan was granted @ 12% to 15%. The Assessing Officer in the said case noted that the average rate of interest payment made by the assessee on loans raised by it was 7.75% and, therefore, the excess interest payment @ 1.75% on the loans paid as against interest recovered from M/s Hero Motors Ltd., was disallowed. The I.T.A.T. in the said case had held that the assessee had amply demonstrated that it was a cash rich company having own huge funds and in such a scenario it could be safely presumed that the loans were given out of own funds. The I.T.A.T. had further held that the rate of interest at which the loan was given by the assessee being a business decision of the assessee could not be challenged by the Revenue and followed the decision of the Hon’ble Delhi High Court in the case of CIT v. M/s Dalmia Cement Ltd. (2002) 254 ITR 377. The I.T.A.T. also observed that the Hon’ble Supreme Court in assessee’s own case had held that no notional addition on account of lesser rate of interest charged could be made. The relevant findings of the I.T.A.T. at para 16 of the order are as follow:
“16. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that the assessee has given loan of Rs.10 crores to M/s Hero Motors Ltd. @ 6%. It has amply been demonstrated before us that the company is a cash rich company and has huge own funds which goes to the tune of around 652 crores, while the total loans and advances given by it are at around 116 crores. In this scenario, it can safely be presumed that the assessee had given loans out of its own funds. However, in the said case, the assessee had not given interest free loans, rather the case of the Assessing Off icer is that the interest charged is at a lesser rate. It has been held in the case of CIT v. Dalmia Cement Ltd. (2002) 254 ITR 377 (Del) that the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. It was further held that no businessman can be compelled to maximise its profits. And that the Income Tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would work. The authorities must look at the matter from their own view point but that of a prudent businessman. Even the Hon’ble Supreme Court in assessee’s own case as referred hereinabove had held that applying the said ratio to the facts of the case that no such notional addition on account of lesser rate of interest charged can be made by the assessee. In view of this, the Assessing Officer is directed to delete the addition made by him. The ground No.8 is allowed.”
19. The facts in the present case, we find, are identical to that in assessment year 2009-10. In the impugned year the loan given is Rs.50 crores,Rs.10 Crore being advanced in the preceding year, while the profit of the assessee for the impugned year is Rs.342.98 crores. Clearly the assessee had enough and sufficient own funds to give the impugned loan and following the decision of the I.T.A.T. in assessee’s case for assessment year 2009- 10 it can be safely presumed that the loan had been given out of the own funds of the assessee and, therefore, called for no disallowance to be made on account of interest. Further has held by the I.T.A.T. in assessment year 2009- 10, the Assessing Officer cannot sit in the arm chair of the assessee and decide the rate of interest at which the loan ought to have been given and moreover the Hon’ble Supreme Court has also deleted the addition made on account of notional interest earned in assessee’s case. In view of the same, the disallowance made amounting to Rs.55,57,069/- on account of differential interest charged from M/s Hero Motors Ltd. is thereby deleted. The ground of appeal No.8 raised by the assessee is, therefore, allowed in above terms.
23. Before us, Ld. counsel for the assessee contended that identical issue had been dealt with by the I.T.A.T., Chandigarh Bench in assessee’s case for assessment year 2009-10 in ITA No.314/Chd/2013 dated 16.2.2016 wherein the disallowance made had been deleted on account of the fact that the assessee had enough own funds for the purpose of investing in the capital work-in-progress. The I.T.A.T. following the decision of the I.T.A.T., Chandigarh Bench in the case of DCIT v. Samrat Forgings Ltd. in ITA No.975/Chd/2011 dated 24.5.2012 had deleted the disallowance made. The relevant findings of the I.T.A.T. at para 22-23 of the order are as under:
“22. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. On perusal of the order of the I.T.A.T., Chandigarh Bench in the case of Samart Forgings Ltd. (supra), we see that similar issue has been decided by the I.T.A.T. at page 9 of the said or, which reads as under :
9. The provisions of the main section and the proviso are in relation to the amount of interest payable on capital borrowed. The first juncture thus to be seen is whether the assessee had borrowed any capital for the purposes of investment in capital asset for extension of existing business or profession. In the facts of the present case, there is no finding by the Assessing Officer in respect of the borrowals made by the assessee for the purposes of investment in capital work-in-progress. The Assessing Officer noted that the assessee had shown capital work-inprogress in its Balance Sheet and consequently computed disallowance in view of the provisions of proviso to section 36(1)(iii) of the Act. The CIT(Appeals) has given the finding that no loan had been raised by the assessee company for the purchase of furnace or for the construction of building. The said finding of the CIT(Appeals) has not been controverted by the learned D.R. for the Revenue. Further, the CIT(Appeals) has also noted that the total investment made by the assessee during the year on capital work-in-progress was Rs. 42.46 lacs spent on furnace and Rs. 33.23 lacs on the building as against the net profit of the assessee for the year at Rs. 1.97 crores. In view of the above said facts and circumstances, we find no merit in the disallowance made by the Assessing Officer. Upholding the order of the CIT(Appeals), we dismiss Ground No. 1 raised by the Revenue.
23. Since no distinguishing facts were brought to our notice during the course of hearing, respectfully following the order of the Coordinate Bench, we allow this ground of appeal.
24. The facts in the present case are identical to that in the preceding year. The investments made in capital work-in-progress in the impugned year amounted to Rs.6,06,85,936/-. The profits earned by the assessee during the impugned year amounted to Rs.342.98 crores. Thus the assessee had sufficient funds for the purpose of making investment in the capital work-in-progress and the decision rendered in assessee’s case for assessment year 2009-10 will, therefore, squarely apply in the present case also following which we hold that no disallowance of interest on account of investment made in capital work-in progress is warranted and disallowance made to the extent of Rs.2,78,564/- is, therefore, directed to be deleted.
Ground No.9 of assessee’s appeal is, therefore, allowed in the above terms.
42. We have heard both the parties. We have gone through the order of the I.T.A.T. in ITA No.493/Chd/2013. At paras 35 and 36 of the said order, the I.T.A.T. has affirmed the findings of the Ld. CIT (Appeals) and held that since the assessee was making consistent sale and purchase from these two concerns, any debit balance remaining in the accounts of these concerns cannot be presumed to be in the nature of loans and advances and, therefore, deleted the disallowance made u/s 36(1)(iii) of the Act. The relevant findings of the I.T.A.T. are as follows:
“35. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. On perusal of the order of the learned CIT (Appeals), we see that he has given his f inding at page 19 of his order, which reads as under :
“The issue which needs consideration is that given the aforesaid facts and circumstances of the case whether any interest needs to be disallowed out of the interest expenditure on the ground that the funds were diverted for non-business purposes. It has been decided by the Hon’ble Punjab and Haryana High Court in the case of M/s Abhishek Industries Ltd. that where the funds of the appellant had been diverted for non-business purposes then the proportionate interest needs to be disallowed. However the case of M/s Abhishek Industries Ltd. is applicable only where any amount was advanced as loan. In this regard reference may be made to the case of M/s Power Drugs Ltd. v. Additional CIT, Range-III, Chandigarh in ITA No.313/Chd/2011. In this order, the Hon’ble I.T.A.T., Chandigarh observed as under :-
On hearing the rival contentions of the parties, we find that it is an admitted position that the amount was advanced for acquisition of new asset which was claimed to be for the furtherance of the business activity of the assessee before us. Admittedly, the amount was not advanced as a loan and we find no merit in the orders of authorities below in applying the ratio laid down by the Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries (supra). ”
This observation of the Hon’ble IT AT was also noted by the Hon’ble Punjab and Haryana High Court in the case of Power Drugs Ltd. v. CIT (2011) 62 DTR(P&H) 276.
Keeping in view the aforesaid decisions of the Hon’ble ITAT and Hon’ble Jurisdictional High Court, it is held that the case of M/s Abhishek Industries Ltd. is not applicable where any amount was not advanced as loan. In the instant case, the undisputed fact is that no amount of debit balance is on account of any loan given by the appellant to M/s Hero Exports Ltd. or to M/s Hero Motors Ltd. This fact had been stated by the appellant during the course of assessment proceedings. The same was not controverted by the AO. The AO merely held that in view of the fact that the three companies are group concerns and in view of the fact that huge amounts were outstanding from both M/s Hero Exports Ltd. and M/s Hero Motors Ltd. the same is in the nature of interest free advance. This observation of the AO is not based on proper appreciation of facts as discussed in the findings above. The total sales to M/s Hero Exports Ltd. were of the amount of Rs.68.55 Crores out of which the appellant had received more than Rs.42.00 Crores. Thus about 2/3rd of the payments on account of sales made to M/s Hero Exports Ltd. were actually received by the appellant during the year.
Keeping in view the aforesaid factual and legal position, I hold that the AO was not justified in disallowing the proportionate interest expenditure on debit balance outstanding in the names of group companies. These grounds of appeal are accordingly allowed.”
36. We do not find any infirmity in the order of the learned CIT (Appeals) as it is an undisputed f act that the assessee was making constant sale and purchases from these two concerns and amounts of money coming and going were on account of regular business of the assessee. During the course of business if some amount remains at the debit of the other company, the Assessing Officer cannot just presume it to be in the nature of loans and advances. Here also, the observations of the Delhi High Court in the case of Dalmia Cement Ltd. (supra) is pertinent, whereby it was held that it is not the prerogative of the Department to dictate the terms of the business and Revenue cannot impose its view on the businessman when to give any money and when to receive it back. The transactions are going on with the sister concerns on regular business. Steps are being made and even if some amount remains at the debit, the Assessing Officer cannot consider the same as loan and cannot make addition under section 36(1)(iii) of the Act on the same.”
43. Since the facts of the present case are identical to that in assessment year 2009-10 and no distinguishing facts were brought to out notice, the decision of the I.T.A.T. in assessment year 2009-10 squarely applies to the present case also following which we confirm the order of the Ld. CIT (Appeals) in deleting disallowance made u/s 36(1)(iii) of the Act of Rs.2,09,66,994/-.
23 .1 It is noticed that the ITAT in AY 2011-12 in Hero Cycles Ltd. ( supra) in assessee’s own case on similar facts followed the aforesaid order for AY 2010-11. So respectfully following the aforesaid referred order in assessee’s own case for the preceding assessment year i.e; 2010-11 in ITA No. 720 &758/Chd/2014 dt. 03/04/2017, we do not see any valid ground to interfere with the decision given by the Ld. CIT (A). Accordingly, Revenue’s appeal on this ground is dismissed.
24. Now we will deal with the Appeal filed by the assessee in ITA No.473/Chd/2018.
25. The grounds raised in this appeal of assessee read as under:
| 1. | That the learned CIT(A)-2 while deleting the disallowance made u/s 14A/Rule 8D by the AO has erred in not deleting the disallowance suo-moto wrongly made by the appellant amounting to Rs. 3,97,31,691/- ignoring the followings:- |
| (i) | That the investments were made out of own funds. |
| (ii) | That there was decrease in the investments as compared to last year. |
| (iii) | That for making disallowance u/s 14A / Rule 8D if any, only the investment yielding the exempt income were to be considered, (iv) That the AO failed to record any satisfaction in respect of disallowance to be made. |
| 2. | That the Ld. CIT(A)-2 has erred in confirming the net disallowance of interest u/s 36(1)(iii) amounting to Rs. 8,39,55,267/- on advances made to M/s Munjal Hospitality Pvt. Ltd & M/s Hero Exports Pvt. Ltd ignoring the following. |
| (i) | That advance to Munjal Hospitality Pvt. Ltd, is subsidiary company was for commercial expediency. |
| (ii) | That advance to Hero Exports Pvt. Ltd was an old one and no disallowance was made in the past. |
| (iii) | That the advances were out of own funds. |
| 3. | That the learned CIT(A)-2 has erred in not deleting the suo-moto disallowance of interest amounting to Rs. 22,86,36,462/- wrongly made by the appellant ignoring the facts that legally no disallowance was called for as the advance had been made to the subsidiary company namely Munjal Hospitality Pvt. Ltd in the interest of business and for commercial expediency. |
26. In ground no.1 the grievance of the assessee relates that CIT(A)-2 while deleting the disallowance made by the AO u/s 14A/Rule 8D has erred in not deleting the disallowance wrongly made suo-moto by the appellant amounting to Rs. 3,97,31,691/- in the computation of income.
26.1 The Ld. AR submitted that during assessment proceedings the assessee raised the issue of suo-moto disallowance before the assessing officer vide letter dated 10.2.2015. The AO reproduced this letter in the assessment order at pages 2 to 15 of assessment order. The relevant para of reply letter at pages 2 & 3 of assessment order on the issue reads as under:
“It is submitted that in the return filed, the assessee company has already considered interest expenditure at Rs. 10282974/- in relation to this income under rule 8D and accordingly same has been added back in the statement of taxable income. Since the Hon’ble P & H High Court and jurisdictional ITAT in orders for earlier years has categorically held after going through detailed submissions of assessee company that it has not borrowed any funds for investments purposes, hence no disallowance on account of interest on proportionate basis is called for. In fact assessee has not borrowed any funds for brought forward as well as fresh investments made during the year. Similarly the assessee company has also considered disallowance for indirect expenditure Rs. 29448717/-ie, at the rate of half percent as per rule 8D. However it is contended that in view of findings in earlier years disallowance of indirect expenditure at one-half percent of average investments is not justified. In the light of facts of this case department has made disallowance of Rs. 50000/- up to AY2006-07 which was also confirmed in appeals. In AY 2007-08 disallowance of Rs. 200000/- was confirmed. In this regard, detailed submissions regarding applicability of Section 14A read with Rule 8D to the facts of this case with the relevant details/evidence source of funds available and utilised with the company on the dates of transactions, has already been filed separately at pages 439 to 966.”
The AO considered the assessee’s reply vide para 4.2 to 4.6.1 at pages 16 to 21 and ignoring the assessee’s submissions rather made a further disallowance of Rs. 14,15,10,213/- on his own assumptions and presumptions u/s14A without considering the provisions in right perspective vide para 4.7 of the Assessment order.
26.2 It is further submitted that assessee raised this issue of suo-moto disallowance in the appeal before CIT(A) vide written submissions duly reproduced in the order. The Ld. CIT (A) after due consideration of assessee’s submissions and ITAT orders in the case of the assessee company for the A.Ys. 2008-09, 2009-10, 2010-11 & 2012 decided the appeal in favour of the assessee as under:
“the addition of Rs. 14,15,10,213/- made by the Assessing Officer in this case on account of disallowance of expenses by invoking provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 on the ground that the assessee company had made investment in shares/mutual funds, the income from which in the form of dividend or long term capital gains is exempt from tax under section 10 of the Act is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable IT AT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008-09, 2009-10 and 2010-11 while deleting the identical addition in these years. In the result, the grounds No. 1, 2 and 3(a) to 3(m) of appeal taken by the assessee company are allowed.”
However the Ld. CIT(A) ignored the submissions made by appellant for deletion of suo-moto disallowance by applying the same reasoning and logic as adopted by the Honourable ITAT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008-09, 200910 and 2010-11 and also AY 2011-12.
26.3 In the course of hearing, the Ld. Counsel for the Assessee has furnished the written submissions on the issue of suo-moto disallowance and further calculations to show the excess disallowance made in the return filed which are as under:
“That the CIT(A) has erred in not deleting the suo-moto disallowance wrongly made by the appellant amounting to Rs. 3,97,31,691/- The details of the suo-moto disallowance are filed on page 8 of the paper book which are as under:-
| 8D(2)(ii) | Rs. 1,02,82,974/- |
| 8D(2)(iii) | Rs. 2,94,48.717/- |
| Total | Rs. 3.97,31,691/- |
The issue has been dealt with by the A.O on pages 2 – 23 of the order and the CIT(A) has dealt with this issue on pages 7-43 of the order. The CIT(A) has deleted the disallowances on the basis of availability of own funds and also taking into consideration the suo-moto disallowance made by the assessee. Though the investments made by the appellant have not been taken correctly by the A.O which appear on page 22 of the order in as much as he has considered all the investments irrespective of the fact whether they yielded any exempt income or not. The correct investments for making disallowance under rule 8D(2)(ii) and rule 8D(2)(iii) are those investments which have yielded exempt income.
The Ld. Counsel for the Assessee has filed details of the investments which yielded exempt income and are outstanding in the Balance Sheet as on 31.03.2011 and 31.03.2012
Total investments as per Balance Sheet: –
| As on 31.03.2012 – | Rs. 7,69,98,92,132 |
| As on 31.03.2011- | Rs. 8,70,73,62,564 |
| Investment yielded exempt income and outstanding: | |
| -As on 31.03.2012 | Rs. 1,32,09,28,068 |
| -As on 31.03.2011 | Rs. 2,34,36,86,413 |
| Average of investments yielded exempt income | |
| =(1, 32,09,28,068+2,34,36,86,413)/2 | Rs. 1,83,23,07,240 |
Disallowance @ 0.5% Rs. 91,61,536/- as against Rs. 2,94,48,717/- suo-moto disallowed made by assessee.
The appellant is entitled to the following relief:-
| (i) | Suo-moto disallowance made under rule 8D(2)(ii) | Rs. 1,02,82,974 | |
| (ii) | Suo-moto disallowance made under rule 8D(2)(iii) (Rs. 2,94,48,717-91,61,536) | Rs. 2.02,87,181 | |
| Total Relief (1,02,82,974 + 2,02,87,181) | Rs. 3,05.70,155 | ||
Only those investments are to be considered which have yielded exempt income for making disallowance under rule 8D(2)(ii) and rule 8D(2)(iii) (ACB India Ltd v. ACIT ACB India Ltd. v. Assistant Commissioner of Income-tax 22 (Delhi) Del).
In nutshell the submissions are that no disallowance is called for under rule 8D(2)(ii) because of availability of own funds and the disallowance under rule 8D(2)(iii) would work out to Rs. 91,61,536/-
| (i) | As regards the disallowance made by the assessee suo-moto under rule 8D(2)(ii) of Rs. 1,02,82,974 /-, the same is not sustainable as the assessee’s own funds are much more than the investments. |
| (ii) | As regards the disallowance made by the assessee suo-moto under rule 8D(2)(iii), the same is to be restricted to Rs. 91,61,536/- as against Rs. 2,94,48,717/- and the assessee is entitled to a relief of Rs. 2,02,87,181/—. |
| (iii) | The appellant is thus entitled to a total relief of (Rs. (1,02,82,974 + 2,02,87,181) Rs. 3,05,70,155/-. |
26.4 It is also brought to our notice that on identical facts the Hon’ble ITAT vide para 31 to 34 of the order dated 15.6.2021 in Hero Cycles Ltd. (supra) ITA No. 1493/2017 & CO 4/2018 for AY 2011-12 restored the issue of suo-moto disallowance made under section 14A r.w.r 8D of the Income Tax Rules, 1962 to the file of the AO.
26.5 Subsequently in the set aside proceedings initiated as per directions of the ITAT for AY 2011-12 the AO passed an order u/s 143(3)/254 dated 21.03.2023 the copy of which is placed on record whereby the AO allowed the partial relief by deleting the suo-moto disallowance made u/r 8D(2)(ii) on account of interest in the return filed but confirmed the disallowance made under Rule 8D2(iii) which was wrongly calculated at 0.5% of average of all the investments instead of investments which have yielded exempt income. The para 8 to 10 of the AO’s order are reproduced as under:
“8. The ratio laid down by the ITAT in the assessee’s own case for the A Y 200809 to 2011-12 is totally applicable to the facts of the instant case. Therefore, no disallowance under rule 8D(2)(ii) is called for as per the material on records
9. Further, as regards the disallowance made u/s 14A rw Rule 8D2(iii), the assessee has stated that in view of the various judicial rulings relied upon before hon’ble bench, the same is to be restricted to 0.5% of average of the investments which have yielded exempt income. In this regards, the relevant rule 8D(2)(iii) is reproduced hereunder,
“An amount equal to one half percent of the average of the value of the investments, income from which shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and last day of the previous year.”
10. As per this rule, the average of the value of the investments, which will not form part of the total income is to be taken and not the investments which have actually yielded exempt income as the assessee has done in its submissions filed before the I TAT and during the course of set aside proceedings. The AO, in his order u/s 143(3) as well as in order u/s 154 has correctly computed the disallowance u/s 14 r w Rule 8D(2)(iii) of the Act at Rs. 2,45,56,827/- which is the same as computed by the assessee in its return of income by taking 0.5% of the average of the value of the investments, which will not form part of the total income. Due to the unambiguous provisions of the statute and the facts of the instant case, the assessee gets no relief on this issue.”
27. The Ld. DR strongly supported the assessment order passed by the A.O and reiterated the observations made therein. Further the Ld. DR submitted that in view of Explanation inserted vide Finance Act 2022 in section 14A all investments the income of which is exempt whether accrued or not are to be considered for working average investments.
28. We have heard the rival submissions and material available on record. This ground of appeal of the assessee against the disallowance u/s 14A is common with the ground of appeal of revenue. The appellant is on the issue of suo-moto disallowance mistakenly made in the return by applying rule 8D(2)(ii) & (iii) and the revenue is against the deletion of disallowance of Rs. 14,15,10,213/-by the Ld. CIT(A) made by the AO u/s 14A of the IT Act.
29. The facts of the case are that the assessee filed its return of income whereby it suo-moto considered a disallowance of Rs. 1,02,82,974/- under Rule 8D(2)(ii) and Rs. 2,94,48,717/- under Rule 8D(2)(iii) which the assessee now claims that disallowance of Rs. 1,02,82,974/- under Rule 8D(2)(ii) is not called for which has been mistakenly made in the return filed and the suo-moto disallowance of Rs. 2,94,48,717/- under Rule 8D(2)(iii) was mistakenly made in excess by considering all the investments instead of investments which yielded exempt income. The Ld. AR as per written submission also given calculation for correct disallowance under rule 8D(2)(iii) and submitted that the disallowance to be restricted to investments which have actually yielded exempt income and any excess disallowance mistakenly made in return be deleted.
30. In his rival submissions the Ld. Counsel for the assessee at the very outset stated that as far as the issue of suo-moto disallowance on account of interest u/s 14A read with Rule 8D(2)(ii) is concerned, the ITAT had already deleted the disallowance of interest on the basis of availability of own funds therefore issue is squarely covered in favour of the assessee vide earlier orders of the ITAT in assessee’s own case for the AY 2008-09 to 2011-12, copies of which had already been placed in the paper book.
It is further noticed from the order passed u/s 143(3) r.w.s 254 dated 21.03.2023 placed before us that the AO has already accepted the ratio laid down by the ITAT in the above referred orders in the set aside proceedings for the AY 2011-12 and deleted suo-moto disallowance mistakenly made in return under Rule 8D(2)(ii).
31. The Hon’ble High Court of Delhi in the case of Cargo Motors (P.) Ltd. v. Deputy Commissioner of Income Tax 453 ITR 554 (Delhi) relied by the appellant has held as under:
“While section 14A is charging section, rule 8D is method/mechanism to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the assessee. By virtue of the charging section, namely, section 14A, the Assessing Officer has the power only to determine the amount of expenditure incurred in relation to such income which does not form part of the total income. [Para 13]
Rule 8D(2)(iii) clearly postulates that in calculation of the disallowance amount, ‘an amount equal to one half per cent of the value of the investment, income from which does not or shall not form part of the total income’ should be taken into consideration. Thus, it is not all investment but only that which is expressly spelt out in rule 8D(2)(iii) read with section 14A and rule 8D(i) which is to be reckoned for purpose of calculation of average of half per cent. [Para 14]
Consequently, only those investments are to be considered for computing average value of investments which yielded exempt income during the relevant assessment year. [Para 21]
Keeping in view the mandate of law, the question of law is answered in favour of assessee, as the Tribunal has erred in confirming the disallowance made under rule 8D by not restricting the disallowance to 0.5 per cent of those investment only where “assessee had earned exempt income. [Para 23]”
32. Similar ratio has been laid down in the following cases:
| (i) | Special Bench of ITAT Delhi in the case of ACIT v. Vireet Investment Pvt. Ltd 165 ITD 27 (Delhi – Trib.): |
It is held by the Special Bench of the Tribunal that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.
| (ii) | Sajjan India Ltd v. Additional CIT 21 (Mum) |
Whether only those instruments/securities which yielded exempt income during previous year relevant to impugned assessment year shall be considered for computing disallowance under section 14A read with rule 8D – Held, yes – Whether mandate of Act is to tax real income and tax can only be levied under authority of law and thus, if, after verification disallowance falls below disallowance under section 14A offered by assessee in return of income, revenue cannot charge tax on income which never was income of assessee chargeable to tax – Held, yes [Para 5]
| (iii) | ACB India Ltd. v. Assistant Commissioner of Income-tax 22 (Delhi) (Del) |
For purpose of section 14A, instead of taking into account total investment, investment attributable to dividend was required to be adopted an thereafter disallowance was to be arrived.
33. The Ld. Counsel of assessee also argued that suo-moto disallowance can also be challenged. Hon’ble SC and many other courts held that the object of the income tax proceedings is to determine the taxable income of the assessee and tax payable thereon fairly and as per law only. Following case law & CBDT circular also supports this contention:
| (i) | Anand Concast Ltd v. Dy. CIT [IT Appeal No. 1317 of 2017 A.Y. 2014-15 dated 08-02-2018] (Chd) |
“10. We do not agree with the same. It is well settled, having been decided on a number of occasions by the Hon’ble Supreme Court and many other Courts of our country, that the object of the income tax proceeding is to determine the taxable income of the assessee and tax payable thereon fairly and as per law only. Article 265 of the Constitution of India also provides in express terms that no tax can be collected without the authority of law. Moreover, even the Central Board of Revenue now called as the Central Board of Direct Taxes had issued a circular in 1955, guiding Assessing Officer’s that they should assess the taxable income and compute tax liability of the taxpayers in accordance with law only and should not take undue advantage of the ignorance of the assessees. Therefore any claim of the assessee should be decided on the touchstone of law and not on the basis of claim made by the assessee. The Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT, 82 ITR 363 (SC) has observed that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not the view which the assessee may take. Similarly in the case of CIT v. India Discount Co. Ltd. , 75 ITR 191 (SC), it was observed by the Hon’ble Supreme Court that it is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee wrongly credited it to the profit and loss account. Thus, in our considered view, if the assessee is able to show that the disallowance made by it had been wrongly made, then the assessee has a legal right to resile from its return so long as he is able to demonstrate that the disallowance was not in accordance with law and requisite facts in this regard are placed on record.
| (ii) | CBDT Circular No. 14 of 1955 |
As per the circular the officer of the department must not take advantage of ignorance of an assessee as to his rights and information. It is one of their duties to assist tax payer in every reasonable way, particularly in the matters of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to the assessee.
34. The Hon’ble Delhi High Court in the case of Pr. CIT(Central) v. Era Infrastructure (India) Ltd. 448 ITR 674 (Delhi) has held that amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 14-2022 and cannot be presumed to have retrospective effect.
34.1 The appellant also placed reliance on the judgment of the Hon’ble Jurisdictional Punjab & Haryana High Court in the case of CIT v. Deepak Mittal 361 ITR 131 (Punjab & Haryana) to the effect that in the absence of any satisfaction recorded by the Assessing Officer as to why the calculation made by the assessee is not correct, the disallowance made by him on account of administrative expenses under Rule 8D of the Income Tax Rules is not as per law.
35. We have carefully considered the contentions advanced by Ld. AR and Ld. DR and impugned order passed by the Ld. CIT(A). While deciding ground no. 1 of revenue’s appeal vide para 9 of this order on the issue of disallowance u/s 14A we have followed ITAT orders in assessee’s own case for the Assessment Years 2008-09 to 2011-12 whereby it was held that as the assessee’s own funds are much more than the investments therefore the Ld. CIT (A) rightly deleted the disallowance of Rs. 14,15,10,213/- made by the A.O. by following the earlier orders of the ITAT in assessee’s own case. But the Ld. CIT(A) has not given any directions to delete the suo-moto disallowance of Rs. 1,02,82,974/- made under rule 8D(2)(ii) as per submissions made by appellant before him.
35.1 Since we have upheld the findings of Ld. CIT(A) in the appeal filed by the revenue, by following the same reasoning therefore we hold that in such circumstances suo-moto disallowance of Rs. 1,02,82,974/- made u/s 14A read with rule 8D(2)(ii) in the return filed is also to be deleted. Moreover, the AO has also deleted identical disallowance made suo-moto in return vide order passed in the proceedings restored by the ITAT in AY 2011-12 after due consideration of order passed by the ITAT for the AYs 2008-09 to 2011-12.
36. As regards suo-moto disallowance of Rs. 2,94,48,717/- made under rule 8D(2)(iii) we have considered the contention of Ld. AR and objection of LD. DR. By following judgement of Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd. (supra) we upheld that amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 1-4-2022 and cannot be presumed to have retrospective effect. Therefore objection of Ld. DR is overruled as in this case assessment year involved is 2012-13. As far as the contention of Ld. AR that the suo-moto disallowance under rule 8D(2)(iii) is to be restricted at 0.5 percent only for those investments which have yielded exempt income the assessee has placed reliance on the judgement of Hon’ble Delhi High Court in the case of Cargo Motors P. Ltd.(supra) and other judgements wherein it is held that only those investments are to be considered for computing average value of investments which yielded exempt income during the relevant assessment year. For deletion of excessive disallowance made in return the assessee’s reliance is on ITAT Chandigarh Bench order in the case of Anand Concast Ltd (supra) wherein Coordinate bench has held that if the assessee is able to show that the disallowance made by it had been wrongly made, then the assessee has a legal right to resile from its return so long as he is able to demonstrate that the disallowance was not in accordance with law and requisite facts in this regard are placed on record. Considering this preposition of law and respectfully following the aforesaid Judgement of Hon’ble Delhi High Court in the case of Cargo Motors (P.) Ltd. (supra) the facts of which are identical to the facts of present case we direct that only those investments to be considered for computing average value of investments which yielded exempt income during the assessment year and accordingly AO is directed to check the calculation furnished by the Ld. Counsel for the assessee before the ITAT and delete the excessive disallowance made under rule 8D(2)(iii).
37. In result the ground no.1 of assessee’s appeal is allowed.
38. The next Ground nos. 2 & 3 of assessee’s appeal are on the common issue of disallowance of interest u/s 36(1)(iii) on account of advances made to its sister Concern M/s Munjal Hospitality Pvt. Ltd. and M/s Hero Exports Pvt. Ltd.
39. In the ground no 2 the appellant is in appeal on account of interest expenditure amounting to Rs. 8,39,55,267/- disallowed by the AO and confirmed by the Ld.CIT (A)-2 and whereas in ground no. 3 the grievance of the appellant is that Ld.CIT(A) -2 has not deleted the disallowance of interest expenditure of Rs. 22,86,36,462/- suo-moto made in the return filed on account of advances made to the above referred sister concerns.
40. The facts related to this issue in brief are that the A.O. made disallowance of interest under section 36(1) (iii) of the Act by observing in para 7 of the assessment order which read as under:
7. Disallowance of Interest u/s 36(1)(iii) on account of interest free advances
7.1 During the course of assessment proceedings the details of Loans and Advances given by the assessee was called for. It was seen that the assessee has given Loans and Advances to M/s Hero Exports and M/s Munjal Hospitality P. Ltd. The ledger accounts were also submitted. It was seen that the balance as on 31.03.2012 in the case of Munjal Hospitality Ltd was Rs. 4,35,50,00,000/- and in the case of M/s Hero Exports was Rs. 54,61,00,000/-The perusal of the ledger accounts placed on record shows that in the case of M/s Hero Exports, the opening balance itself is outstanding. Also, most significantly, no interest has been charged by the assessee on the advances,
7.2 The assessee was also issued show cause in this regard on 26.02.2015 to which the assessee submitted its reply dated 27.02.2015 as below:
7.3 “Regarding advance given to M/s Munjal Hospitality Pvt. Ltd (earlier known as Ve Care Consultancy) is a fully owned subsidiary company of the assessee. The statement of account, as per list of loans & advances, has already been filed at Page 438 along with letter dated 18/12/2014. All these amounts have been advanced from the “Main Unit” only of Assessee Company Photocopies of relevant pages of the bank accounts from where the payments to M/s. Munjal Hospitality Pvt. Ltd. were made are enclosed.
No amount either owned or borrowed relating to C.R. Division has been advanced or utilized for these purposes.
The separate balance sheet of both these units has already been filed.
As already explained that the amounts advanced to M/s Munjal Hospitality Pvt. Ltd and to M/s Hero Exports Pvt. Ltd are for the expansion of business activities on which no interest was charged by the company. The advances have been made as a commercial expediency for the business purposes.
The shareholder funds as per the Balance Sheet of Main Unit are much more than the amount advanced to subsidiary company for its business activities.
As confirmed by the Hon’ble Supreme Court in the case of S.A. Builders Lid v Commissioner of Income Tax (Appeals), 288 ITR I where it has been held as under-
“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1) (Hi) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency The expression “commercial expediency” is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency
To consider whether one should allow deduction under section 36(1)(ii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits
Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon’ble Supreme Court as referred above.
In view of the above, it is therefore prayed that the interest relating to advance to these parties may not be disallowed. To this extent the disallowance made in the computation of taxable income may be rectified by reducing the total income.”
7.3 The reply of the assessee is carefully considered and is found to be untenable. The assessee, as mentioned above has granted loans and advances to other parties and charged interest ranging from 12% to 15% on the same. The same is also evident from the reply dated 06.05.2014 submitted by the assessee and the submissions pertaining to loans and advances given. Thus, there can be no rationale for the interest free advances to a sister concern. Had these advances been given to any other party in the open market, it would have fetched interest as high as 15%. Thus there is no business prudence in an interest free advance to sister concern.
7.4 Reliance is placed on the decision on Hon’ble High Court of Punjab & Haryana in the case of CIT v. Abhishek Industries Ltd. where the Hon’ble High Court held that-
“Once it is born out from the record that the assessee had borrowed certain funds on which liability to pay interest is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(ii) of the Act.”
7.5 For the assessee’s argument that interest only from one unit should be considered, it can be said that the theory of mixed funds is an established legal principle based on the recent decisions of the jurisdictional High Court as well as the jurisdictional IT AT. Thus, the total interest expense of the whole unit needs to be considered. Reliance is also placed on the decision dated 26.6.2011 in the case ofACIT v. M/s Kisco Casting, Proprietor Circle, M/s Khanna Iron and Steel Corpn Khanna in IT A No. 32/Chd/2011. In this case the Hon’ble IT AT Chandigarh held as under:
“8. In view of the above ratio laid down by the Hon’ble Punjab & Haryana High Court, the onus is upon the assessee to show in all such cases of mixed funds that the advances were made out of its own funds of share capital or out of mixed funds. Mere claim of having made the advances out of its own funds is not sufficient to discharge the onus and interest relatable to such sums advanced interest free are to be disallowed. The onus is not upon the revenue to show nexus between the borrowers and the advances made by the assessee.
7.6 It has repeatedly been held by various Courts that whenever there is a diversion of funds for non-business purposes and at the same time there are interest bearing borrowing, the interest paid on borrowed funds should not be allowed as an item of expenditure to the extent of the funds diverted. It was held in the case of CIT v. Orissa Cement Ltd. 258 ITR 365 (Del) that the court cannot shut its eyes to reality. Had the advances not been made, borrowings would have been less. Similar was the view held in the case of CIT v. HP Sugar Factory Put. Ltd. (All) 187 ITR 363.
7.7 The assessee has relied on the decision of the Apex Court in the case of SA Builders. The facts in the two cases are completely different. The subsidiary company of the assessee, M/s Munjal Hospitality Ltd. is engaged in Real Estate business while the assessee is engaged in Manufacturing of bicycles. The two are completely unrelated. Moreover if M/s Munjal Hospitality Ltd. was in need of funds, it could have borrowed from the banks or the market. The very intention behind diverting funds from parent company M/s Hero Cycles Ltd. is to reduce the profits and taxability of the parent company
7.8 Thus, based on the arguments above, there can be no rationale in the huge interest free advance to M/s Hero Exports and M/s Munjal Hospitality Ltd. Thus, the interest free advance needs to be disallowed u/s 36(1)(iii) Also, it has been seen that the advances have been given specifically out of loans raised during the year Thus there is a direct nexus and the average rate of 7.5% as calculated above cannot be adopted in this case. As per the Annexure pertaining to borrowed funds in the Annual Report, fresh loans and debentures have been taken at an interest rate of around 1111.25%. Also, unsecured loans from Hero Steels has been taken at a rate of 10.75%. In addition there are unsecured borrowing from various banks during the year. The rate of interest has not been provided by the assessee. From the websites of the banks, it was found that unsecured loans are provided by these banks at rates of over 15%. Hence for the calculation of disallowance of interest, it would be conservative and rational to adopt the rate of interest as 11.25%.
7.8.1 Disallowance of interest on advance to M/s Munjal Hospitality Ltd.
| Date | Amount | No. of Days | Disallowance @ H.25% |
| 9/5/2011 | 925000000.00 | 210 | 59871575.34 |
| 9/27/2011 | 250000000.00 | 187 | 14409246.58 |
| 9127120] 1 | 1150000000.00 | 187 | 66282534.25 |
| 9/27/2011 | 1500000000.00 | 187 | 86455479.45 |
| 9/28/2011 | 240000000.00 | 186 | 13758904.11 |
| 12/1/2011 | 5000000.00 | 122 | 188013.70 |
| 12/7/2011 | 285000000.00 | 116 | 10189726.03 |
| Total | 25,11,55,479.45 |
7.8.2 Disallowance of interest on advance to Hero Exports
| Date | Amount | No. of Days | Disalowance @ 11.25% |
| 01/04/2011 | 546100000.00 | 365 | 6,14,36,250 |
Thus, total disallowance works out to Rs. 31,25,91,729/-.
Less: Disallowance already made by the assessee: Rs. 22,86,36,462/
Disallowance to be made: Rs. 8,39,55,267/-
41. The A.O. made various disallowance of interest under section 14A and Section 36(1) (iii). In para 4 the AO made disallowance of interest u/s 14A at Rs. 141510213/-, in para 6 made disallowance of interest u/s 36(1)(iii) at Rs. 40,22,065/- on account of outstanding debit balances from M/s Hero Exports Pvt. Ltd. and M/s Hero Motors Ltd. and further in para 7 made disallowance of Rs. 8,39,55,267/- on account of advances made to sister concerns. The total disallowance as per para 4, 6 & 7 therefore calculated by AO at Rs. 22,94,87,545/- whereas in the ITR filed the appellant has claimed total interest expenditure only Rs. 15,02,49,895/-. Therefore, the AO in para 8 of the assessment order restricted the total disallowance at Rs. 15,02,49,895/- as claimed by the assessee in the ITR filed. Para 8 of the assessment order reads as under:
8. The total disallowance of interest calculated as per Para 4, 6 and 7 is Rs.22,94,87,545/- (Rs. 14,15,10,213 + Rs.40,22,065 + Rs.8,39,55,267).
However the assessee has claimed interest of only Rs. 15,02,49,895/- as calculated below:-
Interest expense as per P&L A/c Rs.38,91,69,331/-
Less: Interest added back u/s 36(1)(iii) in the computation
Rs.22,86,36,462/-
Less: Interest added back u/s 14A as per Rule 8D(2)(ii)
in annexure IX of Audit Report Rs. 1,02,82,974/-
Total Rs. 15,02,49,895/-
Hence, the total disallowance of interest is restricted to interest expense claimed of Rs. 15,02,49,895/
42. Being aggrieved the assessee carried the matter to the Ld. CIT (A) and furnished the written submissions which have been incorporated in para 8, 8.1 and 8.2 of the impugned order which reads as under:
8. Vide grounds No. 5(a) and 5(b) of appeal, the assessee company had challenged the action of the Assessing Officer in making an addition of Rs.8,39,55,267/- in this case on account of disallowance of interest by invoking provisions of section 36(1) (iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Exports (P) Limited and M/s Munjal Hospitality (P) Limited allegedly out of borrowed funds and that too for non-business purposes. The reasons for making the impugned addition have been given in detail in para 7 of the assessment order. The main reason for making the impugned addition was that the assessee company has given loan/advance to M/s Hero Motors out of borrowed funds and that too for non business purposes.
8.1.1n support of grounds No. 5(a) and 5(b) of appeal, the assessee company through its learned AR has filed written submissions vide letter dated 14.12.2017, the relevant paras of which read as under
Ground No. 5 (a) That the Ld. ACIT has wrongly disallowed the interest / 36(1(1), by holding that there is direct nexus, bring amount advanced to M/s. Hero Exports & M/s. Munjal Hospitality P. Ltd, by wrongly applied the Interest rate @11.25% at Rs. 312591729/-.
(b) That the Ld. ACIT has wrongly failed to consider the assessee’s letter dated 27/2/2015 for allowing the interest disallowed u/s 36(1)(iii) being amount paid to. M/s. Munjal Hospitality P Ltd, a wholly owned subsidiary company.
| 1. | The company has given an advance of Rs. 435.50 Crore on different dates in Sept 2011 & Dec 2011 to its fully owned subsidiary company M/s Munjal Hospitality Private Limited for expansion of its activity in hotel business and a brought forward advance ofRs. 54.61 crores given to another group company M/s Hero Exports Pvt. Limited for the purpose of expansion in real estate activities. Statements of loan accounts are enclosed. |
| 2. | These advances have been given by the main unit of the company only Photocopies of relevant pages of the bank accounts of main unit from where the payments to M/s Munjal Hospitality Pvt. Ltd. were made, was filed with the AO. Photocopy of same is enclosed. The borrowings made by independent unit of company called as CR Division were exclusively for its business purposes and no portion of same utilised to give above advances. |
| 3. | As stated above M/s. Munjal Hospitality Pvt. Ltd (MHPL) is a fully owned subsidiary company of the assessee company and M/s Hero Exports Pvt. Limited is a group company. These advances were made as a commercial expediency for business purposes, as the subsidiary company has purchased the hotel project which was in progress. Different activities were undertaken to carry on this project during the year e.g. appointment of consultants for the hotel project, renewal of license for hotel, visits of interior designers, consultations for selecting the JV partners etc. The assessee company is holding the entire share capital of MHPL. Since the assessee company has given advance to its wholly owned subsidiary company as a commercial expediency for business purposes, hence no interest was charged. Further, in the previous years, no such disallowance was made in the case of M/s Hero Exports. |
| 4. | The amounts advanced to MHPL were partly out of proceeds received on liquidation of investments and partly out of term loans raised by main unit of company for this purposes. A chart showing source of funds utilised for advance to MHPL is enclosed. |
| 5. | The amounts advanced to both above concerns have been given from Main Unit where the total interest was Rs. 23,89,46,685/- but the Ld. AO has calculated the interest at Rs. 31,25,91,729/- for these transactions. He has not established any nexus of amounts borrowed and amount invested in above two concerns and he considered entire interest paid including the interest paid by CR. Division of company for this purposes. |
| 6. | In the computation of taxable income, the company had considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/ |
| 7. | Before the AO vide letter dated 27.2.2005 it was contended that the amounts advanced to M/s. Munjal Hospitality Pvt. Ltd and to M/s. Hero Exports Pvt. Ltd are for the expansion of business activities on which no interest was charged by the company. The advances have been made as a commercial expediency for the business purposes. Hence no portion of interest paid is disallowable. However in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288ITR 1 AO has reproduced this letter at pages 36 & 37 in the Assessment. Order Copy of same is also enclosed. |
| 8. | It is submitted that the assessee company is one of the largest manufacturers of bi-cycles. The company has its main units for manufacturing bicycles, bicycle components and Auto Rims & components at its works at Hero Nagar, G. T Road, Ludhiana and at Village Mangli, Chandigarh Road, Ludhiana, |
The company has also an independent unit called CR. Division for manufacturing CR. Strips situated at Sua Road, Hero Nagar, GT Road, Ludhiana
| 9. | Separate balance sheets of both these units along with relevant annexures were filed before AO. Photocopies of same are enclosed at Pages 7 to 22 |
It is clearly evident from these balance sheets that both Main units as well as CR Division of company have raised loans independently to meet their long term und working capital requirements & accordingly the respective units in their books of accounts enteral! the financial charges separately. No borrowing made by CR Division has been utilised or diverted for advances given to above concerns
| 10. | The AO objected to interest free amounts advanced to wholly owned subsidiary company / sister concern by holding that since assessee itself is charging interest on advances given to other parties there is no rationale for interest free advances to sister concerns. There is no business prudence in an interest free advance to sister concern. In assessment order AO discussed the issue at pages 36 to 40. He placed reliance on P&H High court Judgment in the case of CIT v. Abhishek Industries Limited. He failed to consider this judgment in right perspective wherein jurisdictional high court itself held that only in cases where advances to sister concerns have been given without any business purposes interest is to be disallowed. |
He also placed reliance on certain other judgments without considering assessee’s contention that amounts have been advanced as a commercial expediency for business purposes to the subsidiary
Out of total interest paid by Main Unit at Rs. 23,89,46,685/-, the Ld. AO has also disallowed part of interest expenditure under Rule &D(2) at Rs. 1,02,82,974/- which the Ld. AO had increased to Rs. 14,94,23,439/-.
Thus he worked out total disallowance of interest at Rs. 46,60,37,233/-whereas the total interest paid by company on borrowings from banks/institutions of “Main Unit” is only at Rs.23,89,46,685/- as mentioned in above paras which also includes interest paid by CR Division (an independent unit of company) at Rs. 15,02,22,646/- on the borrowings made by it exclusively for its business purposes except for Rs. 49,42,046/
It clearly indicates that AO has worked out disallowance hypothetically only on his own assumptions & surmises without considering the submission made by the assessee company that no interest is disallowable in given facts & circumstances and apex court decision in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288ITR 1 relied upon before him.
He also failed to consider assessee’s letter dated 27.2.2015 wherein it was contended that interest amounting to Rs.23,89,46,685/has been disallowed in the computation of income under a wrong notion which is fully allowable in view of Supreme Court judgment in the case of S.A. Builders Ltd as relied upon before him, and prayed to reduce total income to that extent. Copy of letter is enclosed at Pages. 244 To 246. Further it was also contended that since all these amounts advanced to the subsidiary/sister company are from the bank accounts of “Main Unit” of Assessee Company. No funds either owned or borrowed relating to CR. Division, an independent unit of company, has been diverted or utilized for the purpose of making these advances. Hence the interest paid by CR Division is exclusively for business purposes.
| 11. | The AO while calculating the disallowance has considered the entire interest debited to the P &L account at Rs.389169331/- for this purpose, in spite of the fact that the interest paid by the other independent unit of the company i.e. CR Division at Rs. 15,02,22,646/is exclusively for business purposes, which includes interest paid to banks Rs. 145388538/- and interest on excise duty Rs. 4831601/ This interest is directly attributable to the business activity of that independent unit as per separate accounts maintained by it. |
This issue has attained already finality in AY 2004-05 where CIT (A) under similar circumstances and facts held that interest paid by the independent unit of company called CR division is not to be included for disallowance u/s 14A. The revenue has not challenged these findings of CIT (A) before Hon’ble ITAT and High Court while contesting disallowance u/s 14A. The same decision also holds good for the purposes of section 36(1)(iii).
| 12. | As confirmed by the Hon’ble Supreme Court in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals),288 ITR 1 (SC) where it has been held as under- |
“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g. a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.
To consider whether one should allow deduction under section 36(1)(11) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits
Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can he compelled to maximize his profits.
13. Reference may also be made to Apex Court judgment in the case of assessee Company reported in , (2015) 379ITR 347.
Relevant extracts from Judgment are reproduced as under
“Insofar as loans to the Sister Concern/Subsidiary Company are concerned, law in this behalf is recapitulated by this Court in the case of ‘S.A. Builders Lid. v. Commissioner of Income Tax (Appeals) and Another [2007 (288) ITR 1 (SC)].”
“Once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.”
Photocopy of judgment is enclosed.
14. In view of the above submissions and judgments of Apex Court, it is therefore prayed that no portion of interest paid relating to advances made to subsidiary company /sister concern, is disallowable.
The assessee company had filed the letter for “correction of amount” disallowed in the Computation of taxable income. Reference may be made to following case law
| (i) | CIT v. Bharat Aluminium Co Limited 303 ITR 256 (Del) |
| (ii) | Orissa Rural Housing Development Corporation Ltd. v. ACTT 343 ITR 316 (ORR) |
| (iii) | M/s Andhra Pradesh Industrial Development Corporation Limited v. Deputy Commissioner of Income Tax, Circle- 1 (1). Hyderabad ITA 548/HYD/2017 dated 7.9.2017 Pages 431 to 438 |
The AO is bound to compute the correct income for assessment, irrespective of incorrect disallowances made by the assessee in computation. Refer CBDT Circular No. 14 (XL 35) dated 11/04/1955 that department must not take advantage of ignorance of assessee to collect more tax than what is legitimately due. Also refer 349ITR 336 (Mum), 157 (Guj), 81ITR 303 (Del).
Therefore it is prayed that disallowance made by the AD may please be deleted and also to allow the amount of interest at Rs. 228636462/-considered as disallowance, under a wrong notion in the computation of taxable income which is incurred for business purposes and accordingly total income may be reduced by Rs. 228636462/-.
8.2 In support of grounds No. 5(a) and 5(b) of appeal, the assessee company through its learned AR has filed further submissions vide letter dated 07.02.2018, the relevant paras of which read as under
In continuation of my Appeal Notes, I am annexed herewith copy of order of Hon’ble Punjab & Haryana High Court in the case of Principle CIT Ludhiana v Holy Faith International P Ltd dated 24/7/2017, in respect of deletion of disallowance of interest expenditure on amount advanced to subsidiary company and held that –
“Commercial expediency in advancing loan does not arise only on account of there being transactions directly between holding company and subsidiary company. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one Group Company to advances amounts to another group company.”
43. The Ld. CIT(A) considered the submissions of the assessee. However, he confirmed the disallowance made by the A.O. under section 36(1)(iii) of the Act. The relevant findings given by the Ld. CIT (A) in para 8.3 of the impugned order read as under:
“8.3 I have considered the observations of the Assessing Officer as made by him in para 6 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 14.12.2017 and 07.02.2018 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including that in the case of M/s S.A. Builders as well as other material placed by him on record. On careful consideration of the rival contentions, I do not find any force in the contentions of the learned AR of the assessee. In fact by disallowing the interest in the computation, the assessee company has itself admitted that the amounts to M/s Munjal Hospitality (P) Limited and M/s Hero Exports (P) Limited have been given out of borrowed funds. The details filed by the assessee company also prove beyond doubt that the loans/advances under reference have been given out of borrowed funds and have direct nexus between the borrowed funds and amount advanced. Moreover, the funds advanced to M/s Munjal Hospitality (P) Limited and M/s Hero Exports (P) Limited has been stated to be utilized for the expansion of business which is still in progress. It means, the new business of the assessee company has not yet been come into existence and as such the interest expenses incurred by the assessee company on the funds advanced for expansion of business cannot be allowed as revenue expenses even otherwise. It is not the case of the assessee company that the funds have been given out of own interest free funds. It has also not been established on record that the borrowed funds of other unit have not been utilized for giving advances under reference. The assessee company has also not filed any documentary evidence to prove its version. The judicial pronouncements relied upon by the learned AR of the assessee company has altogether different facts from the facts of the case of the assessee company and has no application in the case of the assessee company. Under such circumstances, the action of the Assessing Officer in making an addition of Rs.8,39,55,267/- in this case on account of disallowance of interest by invoking provisions of section 36(1)(iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Exports (P) Limited and M/s Munjal Hospitality (P) Limited allegedly out of borrowed funds and that too for non-business purposes cannot be said to be unjustified. Having said so, the addition of Rs.8,39,55,267/- made by the Assessing Officer in this case on account of disallowance of interest by invoking provisions of section 36(1)(iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Exports (P) Limited and M/s Munjal Hospitality (P) Limited allegedly out of borrowed funds and that too for non-business purposes is upheld. In the result, the ground No. 5(a) and 5(b) of appeal taken by the assessee company are dismissed.”
44. The Ld. CIT DR strongly supported the order of the A.O. and reiterated the observations made in the assessment order.
45. In the course of hearing, the Ld. Counsel for the Assessee has furnished the written submissions on ground no. 2 on the issue of disallowance of interest made by AO and on ground no. 3 on the issue of suo-moto disallowance of interest made in the return filed which reads as under:
Ground No. 2
This ground is against the confirmation of disallowance of interest u/s 36(1)(iii) amounting to Rs. 8,39,55,267/- on advances made to Munjal Hospitality Pvt. Ltd. and M/s Hero Exports Ltd.
The A. O has dealt with this issue on pages 36 – 40 of the order and the CIT(A) on pages 63 – 73 of the order.
| 1. | The facts are that M/s Munjal Hospitality Ltd. is a 100% subsidiary of Hero Cycles Ltd. The total capital amounting of Rs. 51,00,000/- is contributed by the directors of Hero Cycles Ltd. M/s Munjal Hospitality is in real estate business and wanted to set up a commercial complex and a hotel in Gurgaon. The assessee company advanced a sum of Rs. 435.50 cr. during the year under consideration. The amount was advanced partly out of own funds, partly out of proceeds received on liquidation of investments and partly out of term loans raised by the main unit of the company. Though the advance was given to the subsidiary company on account of commercial expediency for business purposes and no disallowance was called for but by mistake the appellant disallowed an interest of Rs. 22,86,36,462/-on the said loan. The A.O on page 39 of the order calculated the disallowance of interest at Rs. 25,11,55,479/- ignoring the submissions that no disallowance is called for if the interest free advance is given to a 100% subsidiary for business purposes and that there are host of judgments on this issue. Reliance is placed on the case law already filed before your Honour and further case law which is being filed now. The landmark judgments on this issue are Hero Cycles ltd. v/s CIT (2015) 379 ITR 347 (SC), S A Builders ltd. v/s CIT 288 ITR 1 (SC) (SC)and Munjal Sales Corp v. CIT (2008) 298 ITR 298 (SC). All this case law is directly on the issue of allowability of interest on loans given to a subsidiary company for business purposes. |
| 2. | There is a further disallowance of interest of Rs. 6,14,36,250/- on advance ofRs. 54.61 cr. to Hero Exports on page 39 of AO’s order. It was submitted before the lower authorities that this advance to Hero Exports is an old balance and no disallowance of interest was made in the immediately preceding year when the advance was made. Reliance is placed on the case law at serial no. 22, 23, 24. The Hon’ble P&H High Court in the case of CIT v. Max India Ltd has clearly held that if no disallowance of interest has been made in the past, no disallowance can be made in the succeeding assessment year. |
| 3. | The total disallowance of interest made by the A.O is as under:- |
| (a) Munjal Hospitality Ltd. | 25,11,55,479 |
| (b) Hero Exports Ltd. | 6,14,36,250 |
| Total | 31,25,91,729 |
| Less disallowed by assessee | 22,86,36,462 |
| Further disallowance by AO | 8,39,55,267 |
That since the assessee had claimed an interest of Rs. 15,02,49,895/- so the disallowance was restricted to this amount by the A.O in the computation of income.
Ground No. 3
This ground is against CIT(A)’s order in not deleting the suo-moto disallowance of interest amounting to Rs. 22,86,36,462/- on advance to subsidiary company namely Munjal Hospitality Pvt. Ltd. The appellant can challenge the suo-moto disallowance if wrongly made. Kindly refer to the case law separately filed.
As submitted above M/s Munjal Hospitality Pvt. Ltd. is a 100% subsidiary of M/s Hero Cycles Ltd and the appellant had given an advance of Rs. 435.50 cr. to carry on the business by the subsidiary company for setting up a hotel and a commercial complex. The total amount advanced to the subsidiary company was invested by the subsidiary company in the fixed assets and work in progress for the purposes of carrying on the business. This is apparent in the Balance Sheet of the company (Refer page 6 of PB). No disallowance of the interest can be made if the advance is given to a subsidiary company on account of commercial expediency. Copy of various judgments is being filed in support of assessee’s claim. It is thus humbly prayed that this amount of disallowance made by mistake may kindly be deleted.
46. In the course of hearing, the Ld. Counsel for the Assessee has also furnished host of judgements on the issue of disallowance of interest made by AO and on the issue of suo-moto disallowance of interest made in the return filed. During the last hearing the Ld. AR vide letter dated 21-06-2025 also filed a chart of judgements along with copies thereof relied upon as under:
| Sr. No. | Judgment name | Brief | Pages |
| 1. | Copy of Ld. AO’s order u/s 143(3) r.w.s. 254 pursuant to Hon’ble ITAT order restoring the issue to the file of AO for reworking disallowance u/s I4A in assessee’s own case for A.Y. 2011-12 dated 21.03.2023 | The Ld. AO on page 7 of the order allowed the relief by deleting complete suo-moto disallowance under Rule 8D(2)(ii) and reduced the suo-moto disallowance under Rule 8D(2)(iii) by considering only the investments which have yielded tax free income for purpose of computing disallowance @ 0.5% of average investments. | 1-11 |
| 2. | Pr. CIT v. E City Investments and Holdings Company (P) Ltd 90 (SC) | Interest on borrowed capital (Loan given to sister concern) – Assessment year 2008-09 – During relevant year assessee claimed deduction of interest paid on borrowed funds -Assessing Officer noticed that assessee had also funded its sister concerns without charging interest -He therefore disallowed interest expenditure -Tribunal, however, allowed assessee’s claim by taking a view that assessee’s decision to give loan to its subsidiaries was derived by business exigency -High Court upheld Tribunal’s order -Whether, on facts, SLP filed against order of High Court was to be dismissed | 12-13 |
| 3. | CIT v. Videocon Industries Ltd 239 (Bom)(HC) | Whether since both Commissioner (Appeals) as well as ITAT had come to a factual finding and law was also clear that if an assessee for commercial expediency and in normal course of its business activities takes loan to invest in shares of its subsidiary, in such circumstances, interest paid on those advances utilized would be allowable expenditure under Section 36(1) (Hi) -Held, yes [Para 7][In favour of assessee] | 14-17 |
| 4. | Moonrock Hospitality (P.) Ltd. v. ACIT 78(Delhi – Trib.)/(2022) 94 ITR (Trib) 185 (Del) | Section 36(1) (Hi) of the Income-tax Act, 1961 – interest on borrowed capital (interest free loans to subsidiary) -Assessment year 2016-17 – Whether where assessee company had advanced interest free loan to its subsidiary company for purpose of business, no interest paid on borrowed funds could have been disallowed under section 36(1) (Hi) – Held, yes [Para 14] [In favour of assessee] | 18-2 1 |
| 5. | Kumar Housing Corporation (P) Ltd v. ITO 259 (Pune) | Section 36(1) (ill) of the Income-tax Act, 1961 – interest on borrowed capital (Loans to subsidiaries) -Assessment year 2016-17 – Whether where assessee had advance loan to its wholly owned subsidiary company for purpose of business, interest paid on borrowed funds could not be disallowed under section 36(l)(iii) -Held, yes [Para 20] [In favour of assessee] | 22-28 |
| 6. | Sujan Luxury Hospitality (P) Ltd v. ACIT 197 (Delhi – Trib.) | Whether, therefore, impugned disallowance of interest made by Assessing Officer in respect of loan given by assessee company to associate concern was to be deleted -Held, yes [Para 7.1] [In favour of assessee] | 29-45 |
| 7. | Oriental Enterprise (P) Ltd v. ACIT 65 (Ahmedabad – Trib.) | Section 36(1)(iii) of the Income-tax Act, 1961 – Interest on Borrowed Capital (Interest free loan) Assessment years 2016-17 and 2018-19 – Whether where assessee had successfully demonstrated that it had sufficient interest-free funds to cover loan to subsidiary and loan was advanced for commercial expediency, no disallowance of interest was warranted, therefore, disallowance made under section 36(1)(iii) was to be deleted – Held, yes [Para 14.4][ln favour of assessee] | 46 – 59 |
47. In his arguments the Ld. Counsel for the Assessee vehemently reiterated the submissions made before the authorities below and further submitted that the issue under consideration is squarely covered by number of judgement in favour of the appellant company.
48. We have duly considered the rival contentions and gone through the submissions and record carefully. Since the issue raised in ground no.2 & 3 relates to the advances given to M/s Munjal Hospitality Pvt Ltd. a subsidiary of the Assessee Company and M/s Hero Exports Pvt. Ltd. another sister concern of the assessee company, hence these grounds are heard together. We have also deliberated upon the decisions relied upon by the parties.
49. The facts in brief regarding the advance of Rs. 435.50 crore made to wholly owned subsidiary company and another advance of Rs. 54.61 crore given to M/s Hero Exports Pvt. Ltd. sister concern as per submissions of Ld. AR may be recapitulated because such facts are relevant to decide the issue raised by the appellant as under:-
| (i) | The appellant given an advance of Rs. 435.50 crore to its wholly owned subsidiary company for expansion of its activities to set up a hotel and a commercial complex on which no interest was charged by the company. The appellant’s submissions are that the advance was given as a commercial expediency for the business purposes. |
| (ii) | Regarding another advance of 54.61 crore was made to sister concern M/s Hero Exports Pvt. Ltd. for the real estate business on which also no interest was charged by the company. Ld. AR at the very onset submitted that this advance was given in the earlier year and no disallowance was made in the immediately preceding year when advance was made. His argument was that if no disallowance of interest was made in past, no disallowance can be made in succeeding year. For this he relied on judgement of Hon’ble P&H High Court in the case of CIT v Max India Limited. |
| (iii) | The appellant made advance to MHPL partly out of proceeds received on liquidation of investments and partly out of the term loans raised by the main unit of the company. Appellant filed a chart showing source of funds utilised for advance to MHPL, a copy of which was also filed during the course of hearing. As chart filed summary of funds utilized emerges as under: |
| Out of proceeds received on liquidation of investments | ||
| 09.05.2011 | Rs. 92.50 crore | |
| 12.07.2011 | Rs. 28.50 crore | 121.50 Crore |
| Out of loans raised | 314.00 Crore | |
| Total amount advanced | 435.50 Crore |
| (iv) | The AO vide para 7.8.1 considered the entire amount of Rs. 435.50 crore for calculation of disallowance without establishing any nexus of amounts borrowed and amounts advanced to MHPL and calculated disallowance for advance made to MHPL at Rs. 25.11 crore which far exceeded the amount actually paid for loan raised for advancing the amount to the MHPL. In the ITR filed the appellant suo-moto considered disallowance Rs. 22,86,36,462/-out of the total interest expenditure of Rs. 238949192/- incurred by the main unit of the company. The AO has made the calculations on his assumptions and presumptions without any basis. Even on the amount advanced to M/s Hero Exports Pvt. Ltd. no disallowance for interest was made in the immediately proceedings years. Therefore the further disallowance of Rs. 8,39,55,267/-made in the assessment order is contrary to the facts and is not justified. The appellant has filed a chart in paper book giving the details of interest paid and the disallowance made in the ITR filed. |
| (v) | The Ld. AR argued during the course of hearing that no disallowance of interest expenditure for advances given to wholly owned subsidiary company as a commercial expediency for the business purposes is called for in view of the Hon’ble Supreme Court decision in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288 ITR I where it has been held as under- |
“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency The expression “commercial expediency” is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency
To consider whether one should allow deduction under section 36(1)(ii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits
Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon’ble Supreme Court as referred above.
In view of the above, it is therefore prayed that the interest relating to advance to these parties may not be disallowed. To this extent the disallowance made in the computation of taxable income may be rectified by reducing the total income.”
| (vi) | The appellant has raised another contention that company was having a separate unit named CR Division. This unit was running a steel mill having independent business in cold rolled steel strips with separate set of customers vendors separate bank accounts separate books etc. |
This division made its borrowings exclusively for its business and incurred total interest expenditure of Rs. 15,02,22,456/-. Before the AO the appellant also filed balance sheet of this division. For calculating disallowance of interest the AO has not considered the appellant’s submissions that the amounts advanced to MHPL was given only from the main unit of the appellant company. The interest expenditure incurred by the separate independent division of the company called CR Division which has no correlation with the amounts advanced to MHPL. Appellant also filed relevant pages of bank statements of main units from where payments were made.
| (vii) | Regarding suo-moto disallowance the appellant submitted that while filing return of income the appellant under wrong notion of law made disallowance of Rs. 22,86,36,462/-. In written submissions Ld. AR submitted that no disallowance of the interest can be made if the advance is given to a subsidiary company on account of commercial expediency. He filed host of judgments in support of assessee’s claim and prayed that this amount of disallowance made by mistake may be deleted. |
50. The Hon’ble Supreme Court in the case of S.A. Builders Ltd v. CIT (Appeals),288 ITR 1 (SC) relied by the appellant has held as under:
“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(Hi) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency The expression “commercial expediency” is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency
To consider whether one should allow deduction under section 36(1)(ii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits
Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon’ble Supreme Court as referred above.
In view of the above, it is therefore prayed that the interest relating to advance to these parties may not be disallowed. To this extent the disallowance made in the computation of taxable income may be rectified by reducing the total income.”
51. Similar ratio has been laid down in the following cases relied upon by Ld. AR before us:
| (a) | The Hon’ble Supreme Court in the case of. E City Investments and Holdings Company (P) Ltd (supra)[27-01-2020] dismissed the departments SLP filed against the judgement of Hon’ble Bombay High Court Pr. Commissioner of Income-tax v. E – City Investments & Holdings Co. (P.) Ltd 90 (Bom.). |
The Hon’ble Bombay High Court has confirmed the order of the ITAT wherein it was held that the assessee’s decision to fund its subsidiaries is driven by business exigency. The extract from the HC order are reproduced as under:
2. We notice that a similar issue had come up for our consideration before this Court in the case of the very same assessee in Incometax Appeal No. 213 of 2017 and the appeal was dismissed making following observations:
“2. Respondent-assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee’s return for the assessment year 2008-09. Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee. The Tribunal referred to and relied upon the decision of the Supreme Court in case ofS.A. Builders Ltd. v. CIT 228 ITR 1 (SC) and concluded as under: —
“If the aforesaid ratio laid down by Hon’ble Apex Court is analyzed by keeping the same in juxtaposition with the facts of the present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, we note that advancing loan to the sister concern was for the purposes of “Commercial Expediency”, thus, we find merit in the contention of the Id. Counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
3. We do not find any error in view of the Tribunal. The entire issue is squarely covered in favour of the assessee in case of S.A. Builders Ltd. (supra). The Tribunal correctly held that the assessee’s decision to fund its subsidiaries driven by business exigency.
| (b) | The Hon’ble Delhi ITAT in the case of Moonrock Hospitality (P) Ltd v. ACIT 78 (Delhi – Trib.)/[2022] 94 ITR(T) 185 (Delhi – Trib.)[22-09-2021] held as under: |
“14. I find, the Hon’ble Bombay High Court in the case of Reliance Communications Infrastructure Ltd. (supra) has held that where the assessee, for furthering its business had utilized borrowed funds for making investments in its subsidiary company and for making interest free advances to a related company, no disallowance of interest paid on borrowed funds could be made. I find, the Hon’ble Supreme Court in the case of Hero Cycles (P.) Ltd. (supra) has held that once it is established that there is nexus between expenditure and purpose of business, Revenue cannot justifiably claim to put itself in the arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The various other decisions relied on by the Id. Counsel for the assessee in the case law compilation also supports the case of the assessee to the proposition that where interest free advances made to a wholly owned subsidiary company, no disallowance of interest paid on borrowed fund could be made. Since, in the instant case, admittedly, the assessee has extended funds to its wholly owned subsidiary company for the purpose of business, therefore, in view of the decisions cited supra, I hold that no interest paid on borrowed funds could have been disallowed u/s 36(1)(iii) of the IT Act, 1961. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 10,88,438/-. The grounds raised by the assessee are accordingly allowed.
15. In the result, the appeal filed by the assessee is allowed.”
| (c) | The Hon’ble Pune ITAT in the case of Kumar Housing Corporation (P) Ltd v. ITO 259 (Pune – Trib.) also held as under: |
“20. Since the assessee in the instant case has admittedly advanced the loan to its wholly owned subsidiary company, therefore, in view of the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. (supra) and the decision of Delhi Bench of the Tribunal in the case of Moonrock Hospitality (P) Ltd. (supra) we are of the opinion that no disallowance of interest paid on borrowed funds could have been disallowed. We, therefore, set-aside the order of the CIT(A) and direct the AO to delete the addition. Grounds raised by the assessee are accordingly allowed.
21. In the result, the appeal filed by the assessee is allowed.”
| (d) | The Hon’ble Delhi ITAT in the case of Sujan Luxury Hospitality (P) Ltd v. ACIT 197 (Del – Trib.) held as under: |
“7. We have heard both the parties and perused the materials available on record. The Ld. CIT(A) deviated from its predecessor dated 13.10.2016 order for AY 2012-13 on the ground that FFC had reported profits in the current year. However, the Hon’ble Apex court in the case of S.A. Builders Ltd. v. CIT [2007] 158 288 ITR 1 (SC) (SC) has defined commercial expediency as under:-
“an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency”
7.1. Thus, the Hon’ble Apex Court has given a very wide import to the expression ‘commercial expediency’. In this case, as noted by the Assessing Officer as well as the Ld. CIT(A) that the assessee company had signed a specific agreement with the FFC and had submitted that the profitability of its associate FFC would impact the financial status and the business of the assessee concern. The Ld. CIT(A) took a very narrow view of the expression “commercial expediency” by observing from the financials of the FFC that it had earned profit during the year and therefore, it was out of scope of commercial expediency. We have carefully considered the same but do not agree with it. The transition of FFC from loss making to marginal profit was only during the year and that it would not per-se end the reguirement of ‘commercial expediency’. This is best left to the assessee to judge its reguirement of commercial expediency unless the Assessing Officer makes it out a case that commercial expediency is no longer reguired. The commercial expediency does not mean the support by a holding company to its associate concern only when the associate concern is in a loss. Moreover, the Ld. CIT(A) observed that the loan from the holding company to its subsidiary FFC during the year had increased from Rs.2.60 Crores to 4.18 Crores which prima facie shows that the subsidiary was in need of more funds during the year. Moreover, that in pursuance of the management agreement entered by the assessee with the associate concern, the assessee had earned consultancy and service fee of Rs.77,88,894/-. Therefore, we do not agree with the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance of interest made by the Assessing Officer in respect of the loan given by the assessee company to M/s FFC. Accordingly, ground no. 1 and 1.1 of the assessee are allowed.”
| (e) | The Hon’ble Bombay High Court in the case of Pr. CIT v. Videocon Industries Ltd 239 (Bombay) [14-022024] held as under: |
“In the instant appeal, the revenue contended that the interestbearing loan from Central Bank of India was diverted to a subsidiary as interest-free share application money, and hence the related interest and upfront fee should be disallowed.
The assessee on the other hand explained that the loan was advanced for acquiring share capital in its subsidiary in the telecom sector, which was a commercially sound and strategic business decision. The assessee emphasized that investment in shares was part of its business and cited Supreme Court rulings in S.A. Builders 288ITR 1 (SC), CIT v. Srishti Securities (P.) Ltd. (2010) 321 ITR 498 (Bom), and Reliance Communications Infrastructure Ltd. 219 in support of its claim.
7. Since both the CIT(A) as well as the ITAT had come to a factual finding and the law is also clear that if an assessee for commercial expediency and in the normal course of its business activities takes loan to invest in shares of its subsidiary, the interest paid on these advances utilized is allowable expenditure under Section36(1)(iii) of the Act.”
52. Respectfully following the judgement of Supreme court in the case of S.A. Builders (supra) and other judgements relied upon by the Ld. AR before us, we are of the considered view that the appellant has made advances to its wholly owned subsidiary company and sister concern out of commercial expediency for the purposes of businesses.
52.1 Further, the Ld AR has demonstrated that the assessee had adequate own funds by way of Share Capital and Reserves as per the Balance Sheet amounting to Rs. 990.55 crores as on 31.03.2011 and Rs. 1065.58 crores as on 31.3.2012.
52.2 The appellant’s case is squarely covered by the judgement of the Hon’ble Supreme Court. Therefore, we are not inclined to agree with the findings of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance of interest Rs. 8,39,55,267/-made in the Assessment order in respect of the loans given by the appellant company to M/s Munjal Hospitality Pvt. Ltd. and M/s Hero Exports Pvt. Ltd. We also agree with the argument of Ld. AR that since no disallowance of interest was made for loan given to M/s Hero Exports Pvt. Ltd. in the immediately preceding year when the loan was made, no disallowance can be made in this year in view of the judgement of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Max India Ltd. 398 ITR 209 (Punjab & Haryana). We also hold that the suo-moto disallowance of Rs. 228636462/-made by the appellant mistakenly in the return also deserves to be deleted in view of the detailed discussions made above. Accordingly, ground no.2 and 3 of the assessee are allowed.
53. In the result, appeal of the Department is dismissed and the appeal of the assessee is allowed.