2021 (3) TMI 668 - AT - Income Tax

Addition on account of proportionate interest in respect of investment in shares - assessee has made investment in shares from which tax free dividend income was earned - AO noted that the assessee s total investment in shares is 12% of the borrowed funds, therefore he disallowed proportionate interest @ 12% of the total interest paid and disallowed - HELD THAT - CIT(A) has noted after perusal of the balance sheet of the assessee for AY 2004-05 that the assessee had own funds of ₹ 101.25 crores whereas investment in shares is only to the tune of ₹ 11.35 crores which is only 11% of the own funds and therefore we note that no disallowance based on the reasoning of AO is correct. The Hon ble Bombay High Court in the case of Reliance Utility and Powers Ltd. vs. CIT held that when the assessee possesses mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn. Relying on the ratio of decision of Hon ble Bombay High Court in Reliance Utility and Powers Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT we are of the opinion that in the facts of this case, no proportionate disallowance based on the AO s reasoning cannot be accepted and therefore we confirm the order of Ld. CIT(A) and dismiss the ground No. 3 raised by the Revenue. Addition on account of an advance to subsidiaries from borrowed funds - HELD THAT - As decided in own case 2008 (1) TMI 426 - ITAT CALCUTTA-D from the annual accounts of the sister concern, it is evident that no loan was given to any of the directors or to any firm/company in which such director was interested. In fact, it was reported by the auditors of that the recipient company that it did not advance any sum to any -of its director or any other firm /company in which such director if interested. Having said this and, relying on the decision of S.A. Builders Ltd 2006 (12) TMI 82 - SUPREME COURT we are agree with the AR that the advance in question was towards equity and given from time to time out of pure commercial expediency and to protect its own financial interest. Even otherwise, we note that the advances given by the assessee company from time to time was against the issue of share capital. It has been placed on record that the assessee was actually allotted shares in a subsequent year out of the advances paid. Hence it is not the case that the funding was for a temporary adjustment and hence should not be equated with a normal loan. If that be so, there should not be any question of interest payable on a permanent fund introduced by the assessee company forming part of the capital of the sister concern. In the balance Sheet of the .sister concern also, the amount has been shown as forming part of the shareholders fund. Addition on account of advertisement expenses - HELD THAT - Tribunal in assessee s own case for AY 2002-03 has restricted the disallowance at 2% of the estimate.Respectfully following the Tribunal s decision in assessee s own case we restrict the disallowance at 2% of the advertising expenses thus, revenue s ground no. 3 is partly allowed. Addition on account of staff welfare expenses - HELD THAT - As staff recruitment expenses were incurred only exclusive for the purpose of business and hence allowable expenditure. We note that the expenses on account of employees relation expenses was incurred for efficient functioning of the business which pertains to employees meals on duties, medical expenses, medical insurance, uniform expenses etc. and these expenses are incidental to carrying on the business which is crucial in the hotel industry. Therefore, it satisfies the condition that it was expended wholly and exclusively for the purpose of business and thus allowable u/s 37(1) of the Act. Therefore, we confirm the order of Ld. CIT(A) and this ground of appeal raised by the revenue is dismissed.

Issues Involved:
1. Deletion of addition on account of proportionate interest in respect of investment in shares.
2. Deletion of addition on account of advance to subsidiaries from borrowed funds.
3. Deletion of addition on account of advertisement expenses.
4. Deletion of addition on account of staff welfare expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Proportionate Interest in Respect of Investment in Shares:
The Revenue contested the deletion of an addition amounting to ?90,58,372/- made by the Assessing Officer (AO) on account of proportionate interest concerning investment in shares. The AO noted that the assessee had made an investment in shares amounting to ?11.35 crores, earning tax-free dividend income. The AO disallowed proportionate interest at 12% of the total interest paid, which amounted to ?90,58,372/-. The CIT(A) deleted this addition, and the Tribunal upheld this decision, noting that the assessee had not earned any exempt income and thus no disallowance under Section 14A of the Income Tax Act, 1961 was legally permitted. The Tribunal also observed that the investment in shares was made from the assessee's own funds, which were significantly higher than the investment amount. Citing the Bombay High Court's decision in Reliance Utility and Powers Ltd. vs. CIT, the Tribunal concluded that no proportionate disallowance was warranted.

2. Deletion of Addition on Account of Advance to Subsidiaries from Borrowed Funds:
The Revenue challenged the deletion of an addition amounting to ?1,96,26,473/- related to interest-free advances given to a subsidiary from borrowed funds. The AO disallowed this amount, noting that the assessee had utilized borrowed funds for these advances. The CIT(A) deleted the addition, accepting the assessee's contention that the advances were made from its own funds and were for commercial expediency. The Tribunal upheld this decision, referencing its earlier orders for AY 2002-03 and 2003-04 and the Supreme Court's decision in S.A. Builders vs. CIT, which supported the view that advances made for commercial expediency should not lead to disallowance of interest.

3. Deletion of Addition on Account of Advertisement Expenses:
The Revenue disputed the deletion of an addition amounting to ?8,98,027/- made by the AO, who disallowed 10% of the total advertisement expenses due to incomplete details provided by the assessee. The CIT(A) deleted the addition, and the Tribunal partially upheld this decision, restricting the disallowance to 2% of the advertisement expenses, following its earlier decision for AY 2002-03 and 2003-04.

4. Deletion of Addition on Account of Staff Welfare Expenses:
The Revenue contested the deletion of an addition amounting to ?6,20,487/- related to staff welfare expenses. The AO disallowed this amount, arguing that certain expenses did not relate to staff welfare. The CIT(A) deleted the addition, noting that the expenses were incidental to carrying on the business and were allowable under Section 37(1) of the Act. The Tribunal upheld this decision, confirming that the expenses were indeed for the efficient functioning of the business and were thus allowable.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, specifically modifying the disallowance related to advertisement expenses by restricting it to 2%. The other grounds raised by the Revenue were dismissed, upholding the CIT(A)'s decisions. The order was pronounced in the open court on 15th March 2021.

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