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TMI Blog2016 (5) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 14A has to be made, is binding on the Revenue authority, we find has no merit. The Hon'ble Supreme Court in the case of Commissioner of Central Excise, Bolpur Vs. M/s Ratan Melting & Wire Industries [2005 (2) TMI 138 - SUPREME COURT OF INDIA ], has categorically held that decision of the High Court / Supreme Court would overrule Circulars issued by the Boards. - Decided in favour of assessee. Addition made on account of disallowance under section 40(a)(ia) - Held that:- We do not find any infirmity in the order of the Ld. CIT(A) deleting the disallowance by holding that the impugned payment was not liable to tax deduction at source in view of section 194A(3) and thus could not be a subject matter of disallowance under section 40(a)(ia) of the Act. Undeniably the impugned payment of ₹ 64,37,342/- made by the assessee to scheduled banks for opening letters of credit was in the nature of interest as per the provisions of section 2(28A) of the Act but since the amount had been paid to scheduled banks no tax was required to be deducted at source on the same in view of the provisions of section 194A (3)(iii) which categorically exclude interest paid to banks from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he had no objection to the same. In view of the same we condone the delay and proceed to adjudicate the appeal filed. 7. The assessee has raised the following ground of appeal: 1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the disallowance of proportionate interest of ₹ 33,92,141/- on alleged interest free advance to its 100% fully owned subsidiary M/s Vardhman Life Sciences Private Limited which is arbitrary and unjustified. 8. The only issue in the present appeal is regarding the upholding of disallowance of proportionate interest of ₹ 33,92,141/- under section 36(1)(iii) of the Act. 9. Brief facts relating to the issue are that the assesse company had given interest free advance of ₹ 7,35,45,100/- to its associate concern M/s Vardhman Life Sciences Private Limited which was a fully owned subsidiary of the assessee company. During assessment proceedings the AO questioned the assessee regarding disallowance of interest relating to the aforementioned advance under section 36(1)(iii)of the Income Tax Act, to which the assessee stated that the same had been advanced for business purposes. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1.1 The Assessing Officer was not satisfied with the explanation of the appellant and disallowed interest @ 12% on this advance. The disallowance worked out to ₹ 33,92,141/-. 3.2 During the course of appellate proceedings, the Ld. Counsel for the appellant has filed a written submission, which is summarized below: (i) There was no nexus of funds borrowed and amounts advanced. (ii) The purpose of acquiring 100% stake in M/s Vardhman Life Sciences (P) Ltd. was for procurement of main raw materials. (iii) Currently the appellant is importing raw material from China, thereby incurring huge import cost and irregular supply of the raw material. (iv) The advance was made for business purpose. (v) Judgment of Hon'ble Punjab Haryana High Court in the case of M/s Abhishek Industries Ltd. (286 ITR 1) is not applicable, since advance was made to 100% subsidiary, who was to manufacture the products, which were raw materials for the appellant. 3.3 I have considered the submission of the Ld. Counsel. The interest free advance was given by the appellant to its associate concern - M/s Vardhman Life Sciences (P) Ltd. which was 100% fully o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not been disputed by the Ld. CIT(A), it therefore cannot be stated that the advance had not made for the purpose of the business of the assessee. Ld. AR relied upon the decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. Vs. CIT(Ludhiana) in Civil Appeal No. 514 of 2008 dt. 05/11/2015 and the Jurisdictional High Court in the case of Bright Enterprises(P) Ltd Vs. CIT, Jalandhar in ITA No. 224 of 2013 dt. 24/07/2015 in this regard. 12. Ld. DR on the other hand relied upon the order of the Ld. CIT(A) and stated that the subsidiary company had not started functioning / manufacturing in the impugned year and therefore the advance could not be said to have been given for procuring raw material and in fact the advance had been given for starting the business of the subsidiary and hence Ld. DR stated that advance could not be said to have been given for the business purpose of the assessee. Ld. DR relied upon the following case laws in support of its contention: Orbit Resorts (P) Ltd. (2011)14 Taxman 174, ITAT, Chd. C.R. Auluck Sons (P) Ltd. Vs. CIT(2014) 49 Taxman.com 21 P H 13. We have heard the contention of both the parties and perused the docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 20. In this connection we may refer to s. 36(1)(iii) of the IT Act, 1961 (hereinafter referred to as the 'Act') which states that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed as a deduction in computing the income-tax under s. 28 of the Act. 21. In Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : AIR 1979 SC 1291, this Court held that the expression for the purpose of business occurring under the provision is wider in scope than the expression for the purpose of earning income, profits or gains , and this has been the consistent view of this Court. 23. In our opinion, the decisions relating to s. 37 of the Act will also be applicable to s. 36(1)(iii) because in s. 37 also the expression used is for the purpose of business . It has been consistently held in decisions relating to s. 37 that the expression for the purpose of business includes ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ediency and not from the point of view whether the amount was advanced for earning profits. 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. This view has been reiterated by the Apex Court in Hero Cycles (Supra) and by the jurisdictional High Court in Bright Enterprises (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ardhman Life Science (P) Ltd., was for the purpose of business. We therefore hold that no disallowance under section 36(1)(iii) us warranted in this case. The case laws relied upon by the Ld. DR, we find, are of distinguishable, since in both the cases there was a clear finding of fact that the advance was not given for business purpose. Ld. AR has alternatively pleaded before us that company had enough interest free funds in the form of reserves amounting to ₹ 27.94 Crores to make the impugned advance of ₹ 7,35,45,100/- and thus it should be presumed that the advance had been made out of the interest free funds. No disallowance thus, was warranted under section 36(1)(iii) of the Act of ₹ 7,35,45,100/- . The Ld. AR relied upon the decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. Vs. CIT(Ludhiana) in Civil Appeal No. 514 of 2008 dt. 05/11/2015 and the Jurisdictional High Court in the case of Bright Enterprises(P) Ltd Vs. CIT, Jalandhar in ITA No. 224 of 2013 dt. 24/07/2015 in this regard. We find merit in this contention of the Ld. AR also since the details of the balance sheet of the assessee placed before us reveals that the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income Tax(Appeals) and the Income-tax Appellate Tribunal. Respectfully following the same we hold that in any case the assessee had enough interest free funds to make impugned advances and therefore it was to be presumed that the advances had been made out of interest free funds and no disallowance under section 36(1)(iii) was therefore warranted in this case. In view of the above we set aside the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 2008. Ld. CIT(A) agreed with the contention of the assessee and directed the AO to verify whether any exempt income had been earned during the year and if no such income was earned no disallowance under section 14A was to be made. 20. Before us the Ld. DR argued that in view of the CBDT Circular No. 5/2014 wherein it has been clarified by the Board that disallowance of expenditure under section 14A read with Rule 8D has to be made even if no exempt income has been earned in a particular year, the Ld. CIT(A) had erred in deleting the disallowance made in the case of the assessee. Ld. DR stated that the decision of the Apex Court in the case of CIT vs. Walfort Share and Stock Pvt. Ltd. (2010) 326 ITR 1 SC, supported this view. 21. Ld. AR on the other hand relied upon the order of the Ld. CIT(A) and further stated that the Hon'ble Apex Court in the case of Commissioner of Central Excise Vs. M/s Ratan Melting Wire Industries in Civil Appeal No. 4022 of 1999 has categorically held that when the Supreme Court or the High Court declares the law on question raising for consideration it would not be appropriate for courts to direct that Circulars should be given effect to and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Executive. Looked at from another angel, a circular which is contrary to the statutory provisions has really no existence in law. In view of the above, we reject the contention of the Ld. DR in this regard. Further the reliance placed by the Ld. DR on the decision of the Apex Court in Walfort Share Stock Pvt. Ltd. (supra), we find is misplaced. The Hon'ble Apex Court, had in that case laid down the basic principles governing section 14A stating that expenses allowed can only be in respect of earning taxable income. The issue before the court in that case was not the application of Section 14A in the absence of earning any exempt income. Therefore the decision rendered in that case cannot be interpreted otherwise. This specific issue was dealt with by the Jurisdictional High Court in the case of Lakhani Marketing(supra) and which has rightly applied by the Ld. CIT(A) in the present case. 24. Ground No. 1 raised by the Revenue is therefore dismissed. 25. In Ground No. 2 the Revenue has agitated against the deletion of addition made on account of disallowance under section 40(a)(ia)amounting to ₹ 64,37,342/-. 26. Brief facts relating to the issue are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Undeniably the impugned payment of ₹ 64,37,342/- made by the assessee to scheduled banks for opening letters of credit was in the nature of interest as per the provisions of section 2(28A) of the Act but since the amount had been paid to scheduled banks no tax was required to be deducted at source on the same in view of the provisions of section 194A (3)(iii) which categorically exclude interest paid to banks from the perview of tax deduction at source Section 194A(3)(iii) state as follows: Section 194A. 3. The provisions of sub-section (1)shall not apply - (iii) to such income credited or paid to - (a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank), or (b) any financial corporation established by or under a Central, State or Provincial Act, or (c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or (d) the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or (e) any c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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