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TMI Blog2019 (11) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(iii) of the Act when the assessee has interest free funds more than the investments and when assessee paid interest on borrowals utilized for investments. Assessee is having sufficient interest free funds much more than the investments made by the assessee in capital work in progress and also in providing long term loans and advances to various parties. In the circumstances, the presumption is that the assessee has made investments from out of its interest free funds only and therefore there cannot be any proportionate disallowance u/s. 36(1)(iii) - we direct the Assessing Officer to delete the disallowance made u/s. 36(1)(iii) Disallowance made u/s. 14A r.w. Rule 8D - HELD THAT:- Hon'ble Supreme Court in the case of PCIT v. State Bank of Patiala ( 2018 (11) TMI 1565 - SC ORDER ) the Special Leave Petition filed against the decision of the Hon'ble Punjab and Haryana High Court in the case of PCIT v. State Bank of Patiala [ 2018 (4) TMI 23 - PUNJAB HARYANA HIGH COURT] has been dismissed by upholding the order of the Hon'ble High Court in holding that amount of disallowance u/s. 14A of the Act shall be restricted to amount of exempt income only and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8D(ii) relying upon the decision in the case of Reliance utilities and HDFC Bank even though the assessee could not submit the fund flow to establish as to how the investments have been made from its own surplus funds because the assessee has also made investments in various assets out of its available funds. 3. On the facts and circumstances of the case and in law, the Id CITfA) erred in directing the AO to not to add the disallowance u/s 14A of the IT Act to the book profit of the assessee within the provision of section 115JB of the IT Act when this issue is squarely covered in favour of revenue by the decision of 'F' bench of ITAT, Mumbai in the case of Viraj Profiles Ltd. (2016) 156 ITD 72, Mumbai 2. At the time of hearing, Ld. Counsel for the assessee submitted that tax effect on the issues in the present appeal of the Revenue is ₹ 12,02,990/- which is below ₹ 50 Lacs and in view of the CBDT Circular No. 17/2019 dated 08.08.2019 in F.No.279/Misc.142/2007-ITJ (Pt), the appeal of the Revenue is not maintainable. A statement showing the calculation of tax on the issue in Revenue s appeal was furnished. 3. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed u/s. 36(1)(iii) of the Act. It was also contended that both interest free funds as well as the borrowings on which interest was paid were available with assessee in its common pool and since the advances were given from out of common pool no part of interest is liable for disallowance. However, not convinced with the submissions of the assessee the Assessing Officer referring to various case laws disallowed proportionate interest on capital work in progress and long term loans and advances amounting to ₹ 103.15 Crores and worked out the disallowance of interest u/s. 36(1)(iii) of the Act at ₹ 4,64,90,714/. On appeal the Ld.CIT(A) sustained the disallowance. 7. Before us Ld. Counsel for the assessee submits that assessee has made advances from out of common pool of funds where both interest free funds as well as borrowals were in common pool of funds. Ld. Counsel for the assessee referring to Profit and Loss Account and balance sheet of the assessee company submitted that assessee was having ₹ 804.95 Crores towards share capital, reserves and surplus and money received against share warrant as against which the assessee has made investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber s case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft 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 fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 14A r.w. Rule 8D of the Act. It is the submission of the Ld. Counsel for the assessee that the assessee has shown income from dividend of ₹ 96,952/- and from sale of investment of ₹ 33,350/- aggregating to ₹ 1,30,302/-. Ld. Counsel for the assessee relying on the decision of the Hon'ble Supreme Court in the case of PCIT v. State Bank of Patiala [99 Taxmann.com 286] submits that the disallowance u/s. 14A of the Act cannot exceed exempt income. 14. Ld. DR vehemently supported the orders of the authorities below. 15. We observe that in the decision of the Hon'ble Supreme Court in the case of PCIT v. State Bank of Patiala (supra) the Special Leave Petition filed against the decision of the Hon'ble Punjab and Haryana High Court in the case of PCIT v. State Bank of Patiala has been dismissed by upholding the order of the Hon'ble High Court in holding that amount of disallowance u/s. 14A of the Act shall be restricted to amount of exempt income only and not a higher figure. We respectfully following the said decision direct the Assessing Officer to restrict the disallowance u/s. 14A r.w. Rule 8D of I.T. Rules only to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture, was actually paid or payable and to allow the same if it is found to have been actually paid, before 31st of March i.e. the end of the relevant accounting year. For giving such a direction, the CIT (A) followed the decision of the Special Bench of the ITAT, Visakhapatnam in the case of Merilyn Shipping Tran sport vs. ACIT in ITA No.477/Viz/2008. The AO, while passing the consequential order, has verified the details and has allowed relief to the extent of ₹ 5,01,61,399/-. In the grounds of appeal, the assessee s argument is that the CIT (A) ought to have deleted the disallowance by himself, instead of directing the AO to verify the claim of the assessee. Further, in the additional ground of appeal No.10, the assessee is claiming that if the assessee has not been treated as an assessee in default u/s 201(1), no disallowance u/s 40a(ia) can be made. 9. We find that the Hon'ble Supreme Court in the case of Palam Gas Service vs. CIT reported in (2017) 81 Taxmann.com 43 (S.C) has held that irrespective of the amount being paid, the same is disallowable u/s 40a(ia) if no TDS has been made. Therefore, the decision of the CIT (A) on this point has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance made u/s. 40(a)(ia) of the Act. 20. At the time of hearing Ground No.4 of the grounds of cross objection is not pressed by the Ld. Counsel for the assessee and thus the same is dismissed as not pressed. 21. Coming to the Ground No.5 of the grounds of cross objection i.e. disallowance of interest on Service Tax and VAT, Ld. Counsel for the assessee submits that the said amounts are not penal in nature and hence allowable as business expenditure. Reliance was placed on the following decisions: - (i) BSR Co. v. ACIT in ITA.No. 1485/Mum/2011 dated 03.08.2018. (ii) ACIT v. Ezeego One Travel Tours Ltd in ITA.No. 689/Mum/2018 dated 14.02.2019. 22. Ld. DR vehemently supported the orders of the authorities below. 23. We have heard the rival submissions, perused the orders of the authorities below. Assessing Officer while completing the assessment disallowed interest on Service Tax and VAT treating them as penal in nature. It is the contention of the assessee that the said amounts are not penal in nature but only compensatory in nature and therefore the same is an allowable deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made payment of interest for the delay in payment of service tax which in our considered view it is not an expenditure incurred for the purpose of any offence or prohibited by law. Thus, respectfully following the said decision we direct the Assessing Officer to delete the disallowance made towards interest for delay in payment of service tax. Ground No. 3 is allowed. 24. Respectfully following the above said decision, we hold that interest paid on Service Tax and VAT is not penal in nature and therefore is allowable as deduction. Thus, following the said decision we direct the Assessing Officer to delete the disallowance of interest on Service Tax and VAT and recompute the income of the assessee. 25. The last ground is in relation to disallowance u/s. 14A r.w. Rule 8D of I.T. Rules while computing the book profits u/s. 115JB of the Act. At the time of hearing Ground No.6 of the grounds of cross objection is not pressed by the Ld. Counsel for the assessee and thus the same is dismissed as not pressed. 26. In the result, appeal of the Revenue is dismissed and cross objection of the assessee is partly allowed as indicated above. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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