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TMI Blog2013 (9) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... y on behalf of the assessee - Since this is not a commission payment, therefore, there is no question of deducting tax at source under Section 194H of the Act. Since the payment is not subject to tax deducted at source, therefore, provisions of Section 40(a)(ia) of the Act is not applicable - Following decision of M/s. Pee Cee Cosma Sope Limited vs. JCIT [2013 (8) TMI 380 - ITAT AGRA.] - Decided in favour of assessee. Disallowance u/s 36(1)(iii)/14A - interest expenditure - Use of interest bearing borrowed funds in the investment of shares - Held that:- The deduction contemplated by the section is in relation to the expenditure which could properly be regarded as necessary for the purpose of the business or profession. Expenditure incurred on account of commercial expediency for the purpose of business would be allowable under this provision. The expenditure to be allowed must have a nexus with the business of the Assessee. If the expenditure incurred is ostensibly incurred for the business, but if in reality is not for the purpose of business then such expenditure is not allowable - assessee has right to replace his own capital with borrowed funds which were already used for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenses incurred are always more than the expenses reimbursed to them by the assessee company, there is no element of income in the hands of consignee agents and hence on this ground also tax at source is not required to be deducted. 4. Because the addition is also wrong and illegal considering the amendment made in section 40(a)(ia) of the Act by the Finance Act, 2011. The amendment in section 40(a)(ia) of the Act is remedial and clarificatory in nature has be treaded as amended with retrospective effect. 5. Because without prejudice to the grounds taken as mentioned above, the Ld. CIT(A) while confirming the addition of Rs.21,33,377/- has erred in ignoring the legal position that section 40(a)(ia) of the Act is applicable only in the case where the amount is payable on the last day of previous year. Since all the payments as reimbursement of expenses has been made time to time during the year and no amount is payable on the last day of previous year, section 40(a)(ia) of the Act on this legal position is not applicable to the facts of the assessee's case. 6. Because considering the facts of the case and the legal position the addition made, as objected in the grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that on identical set of facts the issue has already been decided by I.T.A.T., Agra Bench in ITA Nos.54/Agra/2013 and 55/Agra/2013 in the case of M/s. Pee Cee Cosma Sope Limited vs. JCIT (supra). The relevant finding of the I.T.A.T. is reproduced as under :- (Paragraph nos.5 6) "5. We have heard the learned Representatives of the parties and records perused. The issue under consideration whether the impugned expenditures are in nature of commission or reimbursement of expenditures. To understand nature of transaction first of all we have to see dictionary meaning of "Commission". The related meaning as per different dictionaries are as under :- i) As per THE LAW LEXICON Commission Agent : One who sales or buys goods for another and receives by way of remuneration a commission or percentage upon the amount involved in each transaction. ii) As per OXFORD DICTIONARY Payment to an agent for selling goods or services. iii) By FARLEX DICTIONARY A fee paid based on a percentage of the sale made by an employee or agent, as distinguished from regular payments of wages or salary. iv) As per WEBSTER'S DICTIONARY The fee given an agent or sales person for his or her ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consignee agents sent the monthly details of sales on "Sale Patti. On the sale patti the consignee agent deducts their commission on sales and the expenses at the fixed cost rate structure as per Agreement. The assessee company by way of credit note amount for their expenses as pr Sale Patti, though the expenses incurred by the, are much more than the expenses accounted for by the assessee company. Copies of their Ledger Account of expenses incurred by them on behalf of Assessee Company have been filed and are put on record. It is also to note that that the expenses incurred by the consignee agents on behalf of the assessee company are from the sale amount collected by them as there always remain outstanding balance. Considering the facts of the case following points are not in dispute :- i) Consignee agents are making sales on behalf of assessee company on commission basis. ii) Consignee agent incurs expenses on sales on behalf of the assessee company. iii) Consignee agent maintains day to day details of expenses incurred by them for and behalf of the assessee company. iv) Monthly Sale Patti is sent by consignee agents along with ledger account of expenses incurred. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es incurred by them on behalf of assessee company are enclosed (Page No. 30 to 50) in support of the submission that the expenses incur by them are much more than the expenses reimbursed to them by way of credit note. 1.7. It is important to mention here that the expenses incurred by the consignee agents on behalf of the assessee company are from the sale amount collected by them as there always remain outstanding balance. 1.8. That the Assessing Officer has treated the reimbursement of expenses as commission paid only on the ground that the expenses are reimbursed at fixed rate and therefore it is not in the nature of reimbursement of expenses but it was part and parcel of commission on which tax at source has not been deducted and consequently made addition u/s 40a(ia) of the Act." 5.3 The concerned parties have also furnished the sale Patti along with claim of the expenses on sale of consignment goods the claim of expenses given detail the expenses pertaining to the monthly selling expenses loading and unloading dealing with expenses. These expenses have been adjusted and accounted for in the account of respective parties. After considering these arguments, we notice that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the assessee is allowed. 10. Now we take up ITA No.152/Agra/2013 filed by the Revenue. The brief facts of the case are that the during the assessment proceedings, the A.O. noticed that the assessee has paid interest of Rs.44,43,291/- on loans raised by it. The A.O. further noticed that the assessee has made investment of Rs.5,31,40,782/- in purchase of shares. The A.O. was of the view that the investment to the above extent made prior to 31.03.2008 and continued upto the end of the previous year i.e. 31.03.2009 was not made for the purpose of earning income which forms part of total income subjected to tax. The A.O. further noticed that the assessee has also made investment for purchase of immovable property and given loan of which details has been given at page no. 6 of his order. The A.O. was of the view that the assessee has diverted the loan bearing fund to non-business purposes on account of making investment in shares for earning tax free income. The A.O. disallowed the interest under section 36(1)(iii) read with section 14A of the Act and Rule 8D of the I.T.A.T. Rules. The A.O. disallowed the interest as per Rule 8D as under :- (Page no.8 ) "The amount of disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that own capital and reserve has already been invested in fixed assets/loans, advances, stock in trade and trade debtors etc. as stated in the grounds of appeal. Ld. Departmental Representative submitted that when the owncapital has already been exhausted in investment and the investment made in shares was out of the borrowed fund on which the assessee is not entitled forinterest under section 36(1)(iii) read with section 14A of the Act. 15. We have heard the ld. Representatives of the parties and records perused. We notice that the issue is squarely covered by the order of I.T.A.T., Agra Benchin assessee's own case for A.Y. 2006-07 in ITA No.236/Agra/2011 vide order dated 20.04.2012. The relevant finding of the I.T.A.T. is reproduced as below:- (Para nos.6 to 8) "6. We have heard the ld. Representatives of the parties and records perused. The Assessing Officer made out the case that section 14A of the Act read with rule 8D of which the effect is retrospective and applicable to Assessment Year 2006-07, the year under consideration. The Assessing Officer disallowed the amount calculated under Rule 8D of IT Rules. The CIT(A) did not agree with the view that Section 14A read w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of funds i.e. borrowed as well as own funds, for non-business purpose. In all such cases where mixed funds are used for business and other than business purposes in such circumstances the I.T.A.T., Mumbai Bench in the case of ACIT vs. H.P. Shah Co. ITA No.3694/M/2006 order dated 15.01.2009 held that there is no presumptions that money used for other purposes came out of borrowed funds. It can be said that interest free funds given on investment if are out of own funds, i.e. own capital and reserves is sufficient to cover such interest free investment. In that circumstances, it is presumed that the investment in interest free funds were out of own capital and reserves and under such circumstances, the Revenue cannot disallow interest claim of the assessee under section 36(1)(iii) of the Act. The Allahabad High Court in the case of CIT vs. Prem Heavy Engineering Works Pvt. Ltd., 285 ITR 554 (Alld.) wherein it has been held that if the assessee had adequate interest free funds by way of proprietary capital or by way of interest free deposits from customers, there is inference that borrowed funds are not diverted for non-business purposes. The Apex Court in the case of Munjal Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofession". The deduction contemplated by the section is in relation to the expenditure which could properly be regarded as necessary for the purpose of the business or profession. Expenditure incurred on account of commercial expediency for the purpose of business would be allowable under this provision. The expenditure to be allowed must have a nexus with the business of the Assessee. If the expenditure incurred is ostensibly incurred for the business, but if in reality is not for the purpose of business then such expenditure is not allowable. 4.1 Section 36(1) (iii) of the Act refers to "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession". The capital borrowed should be for the purposes of the business or profession. It is implicit in this provision that the capital so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of the income from the business. The interest payable on the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be accepted. The legislative language of sec. 36(1)(iii) of the Act is very as clear expression "borrowed for the purpose of the business" is used. The amount borrowed must continue to be used for the purposes of the business and the fact that it was used for some point of time, but later diverted would not entitle the assessee to claim the interest paid on the borrowing as a deduction under sec.36(1)(iii) even after such diversion. In cases where diversion occurs immediately after the borrowing and the borrowed amounts are not invested in the business at all, but diverted for other purposes, then there should not be any cloud of doubt that interest paid on such borrowed amounts is not allowable deduction. The factum of deferment, in cases where such diversion of funds from the business is clearly established from the facts on record, does not entitle the assessee to claim the benefit of deduction in respect of interest paid on the amounts borrowed but not presently used in its business. The time at which the diversion takes place is not the only relevant criterion but it is the fact of the diversion which is material and once it has been shown that there has been diversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 1,77,984 for his personal expenses. The Income-tax Officer disallowed a sum of Rs. 13,500 on prorata, representing the interest element relating to Rs. 1,77,984, since he was of view that amount of Rs. 1,77,984 withdrew was made in the name of the business but used for his personal purposes. According to him, money was withdrawn from the books of account to meet the personal expenditure of the assessee and, as this sum of money was not actually used for the business, the interest paid thereon could not be allowed as permissible deduction. 4.5 The relevant finding of the Court is reproduced below:- "We do not think that we can give effect to this argument. Indisputably, these amounts were borrowed only for the purpose of business of the family. The assessee drew out from time to time various sums of money aggregating to Rs. 1,77,984/- from the business. It is not a case where any particular sum purporting to be borrowed on behalf of the business was spent for household expenses. This is a case where the loans were taken for carrying on the business but the family used to withdraw some amounts from the business whenever occasions arose. The family was surely entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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