Impact Agencies (P) Ltd., Ludhiana vs Department Of Income Tax

The AC IT, vs M/s Impact Agencies (P) Ltd., Circle V. Ludhiana Ludhiana

PAN No.AAAC I4730N

C.O. No. 10/Chd/2012 (in ITA No. 35/Chd/2012) Assessment Year: 2008-09

M/s Impact Agencies (P) Ltd., vs The AC IT, Circle-V, Ludhiana Ludhiana

PAN No.AAAC I4730N

(Appellant) (Respondent)

Appellant By : Shri Manjit Singh Respondent By : Shri S.R. Chhabra & Shri Amarjit Kamboj

Date of hearing : 24.12.2014 Date of Pronouncement : 12.1.2015

ORDER

PER T.R.SOOD, A.M.

The appeal filed by the Revenue and Cross Objection by the assessee are

directed against the order dated 15.11.2011 of C IT(A)-II, Ludhiana.

2. In this appeal the Revenue has raised the following grounds:-

1.(a) That the Ld. CIT(A)-II, Ludhiana, on facts as well as in law has erred in deleting disallowance of Rs. 28,87,950/- out of total disallowance of Rs. 37,80,968/- made u/s 14-A of the I.T. Act, 1961 read with rule 8D of I.T. Rules.

(b) That the Ld.CIT(A), has failed to appreciate that clause 2(ii) of Rule 8D envisages computation of disallowable the amount on the basis of gross interest paid, as this is the 2

amount, which is not attributable to any particular income or receipt.

2. That the order of the CIT(A)-II, Ludhiana be set aside and that of the A.O. be restored.

and in the Cross objection filed by the assessee following grounds have been

raised:-

1. That the Ld. Commissioner of Income Tax (Appeal)-II, Ludhiana has erred in law and on the facts of the case:-

a) By sustaining part disallowance of Rs. 13,46,704/-, out of total disallowance of Rs. 19,23,864/-, made out of interest expenses paid on account of interest charged @10% on advance made to sister/associate concern against interest paid @15% (average rate) on unsecured loans and thereby allowed only part relief of Rs. 5,77,160/-.

b) By sustaining part disallowance of Rs. 44,463/- out of total disallowance of Rs. 1,33,363/-, out of revenue business expenses charged under the head of Miscellaneous Expenses, only on adhoc basis and thereby allowed only part relief of Rs. 88,900/-

c) By sustaining part disallowance of Rs. 8,93,018/- out of total disallowance of Rs. 37,80,968/- made u/s 14A of the Income Tax Act, 1961 on account of expenditure in relation to the investments made in the shares of other group companies and thereby arbitrarily upheld the application of Rule 8D of the Income Tax Rules, 1962.

3. First we shall take up the Revenue's appeal as well as ground 1 (c ) in the

Cross Objection.

4. The brief facts of the case are that during assessment proceedings

Assessing Officer noticed that assessee had made investment in shares, 3

therefore, he invoked the provisions of section 14A read with Rule 8D and made

disallowance of Rs. 37,80,968/-.

5. On appeal, it was mainl y submitted that assessee has itself made

disallowance in the computation and reference was made to the earlier orders.

It was further submitted that during the year under consideration also the

assessee has itself disallowed a sum of Rs. 3,80,657/-. Thereafter, a reference

was made to the funds position and reliance was also placed on various case

laws.

6. The Ld. CIT(A) after considering these submissions reduced the

disallowance because he observed that in earlier years also the disallowance was

made for lower amount and further Assessing Officer had already disallowed

part of the interest because fund have been diverted to the sister concern.

7. Both the parties were heard.

8. After considering the rival submissions we find force in the submissions

Ld. Counsel for the assessee that if there was no income then disallowance u/s

14A cannot be made in view of the decision of Hon'ble Punjab & Haryana High

Court in the case of CIT vs Lakhani Marketing Incl., Faridabad ITA 970 of

2008 dated 2.4.2014 wherein it is clearl y held that if there is no exempt income

during the year, then no disallowance can be made u/s 14A. However, at the

same time the assessee had himself disallowed a sum of Rs. 3,80,657/-. We set

aide the order of Ld. CIT(A) and remand the matter back to the file of Assessing

Officer to verify if there is any exempt income, then disallowance should be

restricted to the disallowance made by the assessee itself. However, if there is

an exempt income, then disallowance should be made as per Rule 8D read with

section 14A. Thus, appeal of the Revenue is allowed for statistical purposes.

9. In the result, appeal of the Revenue is allowed for statistical purposes. 4

10. C.O. No. 10/Chd/2012

11. Ground No.1 (a) : After hearing both the parties we find that during

assessment proceedings it was noticed that assessee has given advances

amounting to Rs. 72,50,000/- and Rs. 79 lakhs to M/s Impact Projects (P) Ltd.

on which interest @ 10% was charged. It was observed by the Assessing Officer

that assessee had borrowed funds and interest had been paid in the range of 13

to 16.2%. He also referred to the decision of Hon'ble Punjab & Haryana High

Court in the case of C IT vs Abhishek Industries 286 ITR 1 and disallowed

interest @ 5% i.e. difference between the range of interest charged and average

interest paid by the assessee.

12. On appeal, Ld. C IT(A) decided the issue vide para 5 which is as under:-

"5. I have considered the submissions carefully. At the very outset, the Ld. A.R. has submitted that the advances to the sister concerns were made out of cash credit account with the bank on which the company paid interest @ 13.5%. Copy of bank statement for the period 01.04.2007 to 04.04.2007 and 17.03.2008 to 20.03.2008 of the financial year 2007-08 were furnished showing the rate of interest charged by the bank @

13.5% p.a. So if any disallowance was to be made by the A.O., the same should not have exceeded @ 3.5% against 5% made by the A.O. The Ld. A.R. has made this submission as an alternative plea vis-à-vis detailed arguments made in his written submissions reproduced above."

13. Before us Ld. Counsel for the assessee submitted that funds were given to

the sister concern where assessee has substantial business interest, therefore,

the same should be considered as business expediency and no disallowance

should have been made. In this regard he relied on the decision of Hon'ble

Supreme Court in the case of S.A. Builders 288 ITR 1.

14. On the other hand Ld. DR supported the order of C IT(A). 5

15. After considering the rival submissions we find that Hon'ble Supreme

Court in the case of S.A. Builders Ltd. Vs CIT (supra) had made the following

observations:-

"26. The expression "commercial expediency" is 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 business expenditure if it was incurred on grounds of commercial expediency.....

29. In the present case, neither the High Court nor the |Tribunal nor other Authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.......

36. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."

16. From the above it becomes clear that business expediency has to be

examined. Merel y because another concern to whom funds have been given is a

sister concern, does not prove business expediency. In fact in the case of S.A.

Builders Ltd. Vs C IT (supra) the Hon'ble Court has remanded the matter for

examination as commercial expediency. Commercial Expediency connotes

"where a particular thing is done which is commerciall y beneficial to the

assessee" for example if assessee buy goods and gets credit of a longer period 6

than the normal period or gets a discount which is larger than the normal

discount or any other thing. It cannot be said that funds have been given to the

sister concern and, therefore, there is commercial expediency because assessee

and other sister concerns are separate assessees under the Income-tax Act.

Since no commercial expediency has been shown to us, we confirm the order of

Ld. C IT(A) and, therefore, this Cross objection is rejected.

19. Ground No. 1 (b) : After hearing both the parties we find that during

assessment proceedings the Assessing Officer noticed that assessee has incurred

misc. expenses amounting to Rs. 1,56,498/-. The break up of the expenses shows

expenses incurred on Shagun, transport and show room expenses as per the

details found by the Assessing Officer, which is as under:-

1. Shagun expense Rs. 17,000/-

2. Misc expense Rs. 60,268/-

3. Showroom expense Rs. 56,095/-

Total Rs. 1,33,363/-

20. The Assessing Officer was of the view that these expenses are not for

business purposes and disallowed the same.

21. On appeal, complete details of expenses were filed before the CIT(A). The

Ld. CIT(A) after examining these details restricted the disallowance to 1/3 r d of

such expenses and confirmed the disallowance of Rs. 44,463/-.

22. Before us, Ld. Counsel for the assessee submitted that complete details

were filed and the expenses are related to the business onl y. In any assessee

this is an addition hoc disallowance which is not permitted under the law.

23. On the other hand Ld. DR strongl y supported the order of C IT(A).

7 24. After considering the rival submissions we find that disallowance has

been made on adhoc basis which is not permissible under the law. However, at

the same time details of expenses do not mention the details clearl y and

generall y it is mentioned that cash paid and then name of the person had been

mentioned, therefore, element of personal expenses cannot be ruled out.

Considering all these facts, we set aside the order of Ld. C IT(A) and restrict the

disallowance to Rs. 25,000/-.

25. In the result, Cross objection is partl y allowed.

Order pronounced in the Open Court on 12.01.2015

Sd/- Sd/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 12 t h January, 2015 rkk

Copy to: The Appellant, The Respondent, The C IT, The CIT(A), The DR