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TMI Blog2017 (1) TMI 1758X X X X Extracts X X X X X X X X Extracts X X X X ..... ed company or any other party was advanced as a measure of commercial expediency. If so, interest was deductible - no disallowance of interest could have been made by AO. We therefore set aside the order of AO and thus, the ground of assessee is allowed. Disallowing expenditure u/s 14A Rule 8D - there is no tax free income claimed in the return filed to appreciate various case laws brought to their notice during the assessment proceedings - HELD THAT:- Presumption of investments to be out of interest free funds is established and therefore no disallowance on account of interest could be made by invoking the provisions of Sec.14A r/w Rule 8D of IT Rules 1962. As far as the disallowance of other expenses under Rule 8D is concerned, it is assessee s submission that the investments on which the disallowance u/s 14A has been made has not yielded any tax free income The aforesaid submission of the assessee has not been controverted by the Revenue. We find that ld. CIT(A) has relied upon CBDT Circular No.5/2014 dated 11.02.2014 to hold that even when assessee has not earned any tax free income, provisions of Sec.14A are applicable. At the same time we find that the Hon ble Delhi Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had borrowed fund of about ₹ 3.74 crores and had incurred interest cost of ₹ 50,31,483/-. Assessee was therefore asked to explain as to why interest expense at 12% be not disallowed to which assessee inter-alia submitted that the loans and advance was given as it was a major shareholder and for the business needs of that company. It was also submitted that the amounts was advanced out of business exigency and was a conscious business decision and the amount advanced would help the company to yield the benefits in the future. The submissions of the assessee were not found acceptable to the AO. AO was of the view that assessee had made huge interest free advances even before it became major shareholder of Sentosa Resort Pvt. Ltd and since assessee had not received any dividend income in the current, present or succeeding year from Sentosa Resort Pvt. Ltd, the benefit expected to be derived by the assessee out of investments were far-fetched and did not warrant the burdening of huge interests. He thereafter disallowed proportionate amount of interest by calculating the interest disallowance at 20% and accordingly made total disallowance of ₹ 24,41,962/-. Aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount, he submitted that the aforesaid observation is incorrect and in support of which he pointed to the certificates of the Company Secretary which were placed at Pages 66 to 73, wherein it is certified that the assessee is a major shareholder of Sentosa Resorts P Ltd in the years 2008 to 2015. He further submitted that ld. CIT(A) s observation that the reply of the assessee was general in nature is also factually incorrect because the assessee had furnished all the required details before the authorities. Ld A.R. further relying on the decision of Apex Court in the case of S A Builders vs CIT (2007) 288 ITR 1 (SC) submitted that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. He further submitted that H ble Apex Court has held that if the amount is advanced to a subsidiary or associated company or any other party as a measure of commercial expediency the interest expenses was allowable. He therefore submitted that in the present case no disallowance of interest was called for. Ld DR on the other hand supported the order of AO and Ld CIT(A). 7. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Before us, Revenue has not placed any material on record to demonstrate that the amount that was advanced by Assessee to Sentosa Resorts Pvt Ltd was for sentimental or personal reasons and was not on the ground of commercial expediency. In such a situation, we are of the view that the ratio of the decision in the case of S.A. Builders (supra) is squarely applicable to the present facts. We therefore relying on the aforesaid decision of the Hon ble Apex Court, are of the view that in the present case, no disallowance of interest could have been made by AO. We therefore set aside the order of AO and thus, the ground of assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to, certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e. gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net Income. Expenses Incurred can be allowed only to the extent they are relatable to the earning of taxable income Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and It therefore follows that the expenses which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed: We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessees. Sec.14A(2) provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as sec.14A is concerned. In that provision, it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee, he shall compute the quantum in accordance with the method that may be prescribed. For this matter Rule 8D has already been prescribed. Sub-sec.(3) further provides that even in a case where an assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided under sub-sec.(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was fully justified in disallowing the expenditure u/s 14A read with Rule 8D. He thus, supported the order of AO and ld. CIT(A). 11. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance u/s 14A. Before us, it is ld.A.R. submission that no disallowance is called for in the present case on account of two reasons namely, the interest free funds available are more than the investments made and therefore the presumption is that interest free funds have been used for making investments and secondly Assessee has not earned any tax free income from the investments from which disallowance is made and therefore also no disallowance is called for. As far as first reason of Ld AR is concerned, it is seen that the interest free funds in the form of Share Capital and Reserves are to the extent of ₹ 93.49 lakhs as against the Investments of ₹ 47.67 lakhs meaning thereby that the interest free funds are much more than the investments. We find that Hon ble Bombay High Court in the case of ld. CIT(A) Vs. Reliance Utilities and Powers reported in (2009) 313 ITR 340 (Bom) has held that if there are funds a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court be of a different state and for this proposition we rely on the decision of Hon ble Bombay High Court in the case of CIT Vs. Godavari Devi Saraf (1978) 113 ITR 589 (Bom). As far as the binding nature of CBDT Circular is concerned, it is a settled law that an assessee is entitled to ignore a Circular if its terms are beyond the provisions of the Act and it is only a benevolent Circular which is binding and that too on Revenue. Further, the Tribunal is not bound to take judicial notice of the Circulars issued by the Board. In this connection, we would also like to reproduce the observations of the Co-ordinate Bench of the Tribunal in the case of ITO Vs. Dilip Shirodkar reported in (2005) 93 ITD 0041. 9 .As for learned Departmental Representative's reliance on the CBDT communication, we hardly need to state that law is trite that a circular, even under s. 119, cannot be thrust upon the assessee. The assessee can derive advantage from a circular but it does not bind the assessee in any way nor can it impose any taxability on the assessee. The assessee is entitled to ignore a circular if its terms are beyond the provisions of the Act. It is only a benevolent circular ..... X X X X Extracts X X X X X X X X Extracts X X X X
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