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TMI Blog2018 (12) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been made on account of the availability of sufficient own funds and on account of the advances having been made for business purpose ,no disallowance of interest pertaining to funds utilized for making the same was warranted - decided in favour of assessee. Disallowance u/s 14A - CIT(A) deleted the disallowance made on finding that no exempt income had been earned by the assessee from the impugned investments made - Held that:- Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. The is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. - decided in favour of assessee. - I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Abhishek Industries Ltd., reported in 286 ITR 1 and of the Apex court in the case of S.A. Builders, reported in 288 ITR 1, the disallowance of interest was warranted . 4. During appellate proceedings the assessee contended that it had sufficient own funds for making the investment and, therefore, no disallowance u/s.36(1)(iii) of the Act warranted. Reliance was placed on a number of decisions of the Hon'ble Jurisdictional High Court in this regard and also on decisions of the ITAT Chandigarh Bench. The Ld. CIT (Appeals) on appreciating the contention of the assessee deleted the disallowance made following the decision of the Hon'ble Jurisdictional in the case of CIT Vs. Max India Ltd. in ITA No.210/Chd/2013 and CIT vs. Stock Kapsons Associates, 381 ITR 204 (P H). The relevant findings of the CIT(A) at para 5.2 of the order is as under: 5.2 I have gone through the facts of the case and written submission filed by the appellant. It is noted from the balance sheet from A.Y.2013-14 A.Y.2014-15 respectively that appellant's share capital, free reserves and interest free current liabilities far exceeded the advance of ₹ 3.55 Crores given to the sister con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the Hon'ble Apex Court also in the aforementioned appeal before it. Our attention was drawn to para 42 of the order of the Hon'ble Apex Court in this regard as under: 40. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words: ...Admittedly the assessee had paid total interest of ₹ 2.92 crores out of which interest paid on term loan raised for specific purpose totals to ₹ 1.70 crores and balance interest paid by the assessee is ₹ 1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at ₹ 10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) ₹ 5,00,000/-. Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed... - Taking note of the aforesaid finding of fact, the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was pointed out that even the question before the Hon ble Court was not relating to the correctness of the presumption theory and therefore, also the disallowance u/s 14A was not dealt with by the Hon'ble Supreme Court in this context. It was contended therefore, that the decision rendered in the case of Avon Cycles Ltd. (supra) had to be read in the restricted sense, of meaning that where the fact situation revealed the limited fact of mixed funds available with the assessee, disallowance u/s 14A was warranted. The Ld. counsel for assessee thereafter contended that in fact the Hon'ble Apex Court, in the case of Hero Cycles Pvt. Ltd. Vs. CIT, 379 ITR 347(SC), had upheld the presumption theory of utilization of own interest free funds for making non business advances where sufficiency of such funds is adequately demonstrated. It was pointed out that the Hon ble Supreme Court in the said case ,on the issue of disallowance of interest u/s 36(1)(iii) on advances made to directors had held that where the assessee had sufficient surpluses it could have utilized those funds for giving advances to its directors. 8. The Ld. counsel for assessee stated that it is clearly eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed as under: It is well-settled that the ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein. The ratio of the decision has to be distinguished from propositions assumed by the Court to be correct for the purpose of disposing of the particular case, because it is the ratio and not the propositions which are relevant and binding. It is, therefore, not proper to regard every word, clause or sentence occurring in a judgment of the Court as containing a full exposition of the law. Judgments of the Courts should not be construed as statutes. They must be read as a whole and observations made therein should be considered in the light of the facts and circumstances of that case and the questions before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered. In the case of CIT vs Sun Engineering Works Pvt. Ltd. 198 ITR 297(SC), the Hon ble Supreme Court observed that Judgements must be read as a whole and observations in judgements should be considered in the context in which they are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was attributable to the dividend income had to be disallowed and could not be treated as business expenditure. The Hon'ble Apex Court reaffirmed the theory of apportionment of expenditure between taxable and non taxable income laid down by it in the case of CIT Vs. Walfort Share Stock Brokers Pvt. Ltd., 326 ITR 1. After holding so, the Hon'ble Apex Court dealt with the appeal filed in the case of Avon Cycles Ltd. (supra) and taking note that the fact in that case was that the funds utilized by the assessee were mixed funds, the Hon'ble Apex Court held that the principle of apportionment was to be applied and, therefore, dismissed the appeal of the assessee. The same is evident from a bare reading in the case of Maxopp Investment Ltd. (supra) and more specifically para 42 of the said order wherein the case of Avon Cycles Ltd. (supra) has been dealt with and which is reproduced again hereunder: 41. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext of the limited fact of mixed funds available with assessee and no further. The proposition laid down cannot be stretched even logically to address the fact situation where sufficient own interest free funds are available with assessee, which fact was not there before the Hon ble Apex court in the case of Avon Cycles (supra), and to negate the presumption that the own funds were used for making the investment, which was neither the question raised before the apex court and therefore not addressed by it also. 13. Going further from here we find that the presumption theoory was upheld by the Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. (supra) wherein on the issue of disallowance of expenditure u/s.36(1)(iii) of the Act on interest free advance made to Directors, the Hon'ble Apex Court held that in view of the findings of fact that the assessee had sufficient credit balance in its bank account for making the impugned advances and had sufficient own interest free funds, the assessee company could in any case utilize those funds for giving advances to its Directors. The findings of the Hon'ble Apex Court at para 16 of this order to this effect are as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue, therefore, is dismissed. 17. The Ld. counsel for assessee had also raised the contention before us that the advance made was for business purpose. In this regard, the Ld. counsel for assessee contended that the advance was made to Shivaks Impex Ltd. which was a step down subsidiary of the assessee company. The Ld. counsel for assessee stated that the assessee had invested in a wholly owned subsidiary which in turn was the holding company of Shivaks Impex Ltd. and which made Shivaks Impex Ltd. a step down subsidiary of the assessee company, meaning thereby that the assessee had a indirect interest and control over the Shivaks Impex Ltd.. The Ld. counsel for assessee further stated that the advances made to Shivaks Impex Ltd., who was in the same line of business as was the assessee, was utilized for the purpose purchasing raw material.In this regard our attention was drawn to the copy of bank account of Shivaks Impex Ltd. reflecting the deposit of advance made by the assessee of ₹ 3.55 crores in the same and the utilization of the same for the purpose of releasing a letter of credit issued in the regular course of its business. The Ld. counsel for assessee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act, amounting to ₹ 18,44,482/-. 21. Ground of appeal No.1 raised by the Revenue is therefore dismissed. 22. Ground No.2 raised by the Revenue reads as under: 1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing the appeal of the assessee and deleting the disallowance of ₹ 25,43,299/- u/s 14A which is not correct because the assessee had made investments, to the tune of ₹ 5,23,00,000/- and on the other side, assessee has shown outstanding secured loan from Banks on which the assessee has claimed interest expenses of ₹ 1,13,06,258/-. 23. The above ground relates to disallowance made of expenses relating to exempt income earned by the assessee as per the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. 24. Briefly stated the impugned disallowance was made by the Assessing Officer in relation to the investments made by the assessee in the shares of sister concern M/s. KVS International Pvt. Ltd. of ₹ 5,23,00,000/-. The Assessing Officer relying upon various judgments made a disallowance of ₹ 25,43,299/- u/s.14A of the Act. 25. Ld. CIT(A) dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs Ltd., Vs. ACIT, passed in ITA No.115/Mds/2015, dated 06.01.2016. 7. It is, in this background, that the Tribunal remanded the matter to the Assessing Officer, so as to reach a conclusion as to whether investments had been actually made, in sister concerns of the Assessee, out of interest free funds, albeit, for strategic purposes. 8. According to us, this exercise, in the given facts which emerge from the record, was clearly unnecessary, as the CIT(A) had returned the finding of fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the present appeal. 9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. 9.1. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. 10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained in the following part of the judgment: 4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year. 7. Per contra, Sri T. Ravi kumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far. (emphasis is ours) 13. Mr. Senthil Kumar, seeks to distinguish the judgment in M/s. Redington (India) Limited case based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case. 14. According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D. 14.1. Mr. Ravi kumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarificatory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules. 15. However, it is, our view, as indicated above, independent of the reasoning given in M/s. Redington (India) Limited case that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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