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TMI Blog2024 (12) TMI 1165X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition, since it is the deduction from employees' income and held in trust by the employer. As the issue of payment of employees contribution towards the PF has been settled by the judgment of Hon'ble Supreme Court, the appeal of the assessee on this ground is liable to be dismissed. Disallowance u/s. 40(a)(i) - TDS u/s 195 - commission paid to non-resident agents as no TDS was effected on the commission payment - HELD THAT:- The amounts have been paid to non-resident agents who are not tax payable entities in India for the services rendered abroad. The commission agents who have been paid commission do not have any permanent establishment in India. Hence, no disallowance u/s. 40(a)(i) of the Act, is attracted as the entities were not situated in India. Decided in favour of assessee. Disallowance u/s. 36(1)(iii) on account of Capital Work In Progress (CWIP) - as submitted the assessee has sufficient own funds which can be utilized as capital work in progress and for capital advances - HELD THAT:- From the detailed examination of the borrowings of the assessee and payment of interest since no loan amount has been raised and utilized for the purpose of Capital Work in Prog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly appreciating the facts and they further erred in grossly ignoring various submissions, explanations. and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 10. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s. 234A/B/C/D of the Act. 11. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in initiating penalty proceedings u/s. 270A of the Act. 12. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. Disallowance u/s. 14A of the Act. 3. The AO made the disallowance u/s. 14A of the Act, of Rs. 1,56,00,000/- being 1% of the average of the investment. The Ld.CIT(A), confirmed the addition based on the judgement of Hon ble S.C in the case of the Max Opp Investments Ltd. Vs. CIT 91 taxmann.com 154(SC)[2018]. For the case of ready reference, the adjudication of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant. Further, the appellant has contended that the investments were made from company's own funds and for the purposes of business expediency. However, the appellant has not shown when these investments were made and at the time of investment whether appellant had enough surplus non-interest-bearing fund to invest in the shares of the associate companies. Therefore, this argument of the appellant is not acceptable. 5.2. The Hon'ble Karnataka High Court, in a recent decision, in the case of M/s United Breweries Ltd. vs. DCIT, Central Circle-2(3), upheld the view of the Tribunal in dismissing the assessee's appeals (ITA No.419/2009, dated 31/05/2016) and holding that section 14A is applicable even where motive in acquiring shares is to obtain controlling interest in companies. Further, Hon'ble Supreme Court in the case of Max opp Investments Ltd vs. Commissioner of Income-tax (Civil appeal nos. 104- 109 of 2016) [91 taxmann.com 154 (SC) (2018)] while deciding the issue that whether section 14A would be applicable in case where the shares are not held with the intention of earning dividend, but for retaining control over the subsidiaries (often referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning appeals of Max opp Investment Limited as well as similar cases where shares were p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sive and erroneous, it is seen that the Ld AO has correctly invoked the provisions of Rule 8D(2) (ii) of the Act. As regards the monthly average value of the opening and closing of the value of investment, I find the information in this respect was furnished to the Ld.AO by the appellant only. 5.6 In view of the facts and circumstances of the case and the discussion above, I uphold the addition made by the AO u/s. 14A of the Act amounting to Rs. 1,56,10,238/-. Grounds of the appellant are dismissed. 4. The provisions of Rule 8D of Income-tax Rules reads as under: (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred,in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction. 6. As the issue of payment of employees contribution towards the PF has been settled by the judgment of Hon'ble Supreme Court, the appeal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly following the above decision of Co-ordinate Bench of the Tribunal in assessee s own case, the appeal of the assessee on this ground is allowed. Disallowance u/s. 36(i)(iii) of the Act 11. The AO made disallowance of Rs. 35,18,000/- u/s. 36(1)(iii) of the Act on account of Capital Work In Progress (CWIP). The Ld.Counsel before us submitted the assessee has sufficient own funds which can be utilized as capital work in progress and for capital advances. The details are as under: The company had substantial owned funds at its disposal as demonstrated below. Particulars Balances as on 31.03.2018 Balances as on 31.03.2017 Share Capital 30,24,39,510 27,84,3,510 Reserve and Surplus 4,40,73,58,880/- 2,39,22,86,283/- Share Warrants 39,93,00,001 1,27,05,00,001 Total owned funds 5,10,90,98,391 394,12,25,794 Advances for capital goods 4,31,05,100 11,73,64,087 CWIP 32,12,84,510 36,03,38,642 Total of capital advance and CWIP 36,43,8,610 47,77,02,729 Ratio of interest free funs to capital advance and CWIP 14.02 times 8,25 times As can be seen in the above table, the assessee had sufficient interest free funds available for investment in capital advances and CWIP. Further, considering the credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either as representing the profit he might have made if he had had the use of his money, or conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. ii. Concept of borrowed - Provisions of Section 36(1) (iii) concern capital borrowed and not other debts or liability. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources and a loan is one of such sources. The legislature has, under this clause, permitted as an allowance interest paid on capital borrowed for the purposes of the business; and the capital, in this context, means money and not any other asset purchased on credit [Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52(SC)]. iii. The phrase for the purpose of business The expression for the purpose of business occurs in Section 36(1) (iii) and also in Section 37(1). A similar expression with different wording also occurs in Section 57(iii) which reads as for the purpose of making or earning income . This issue came up for consideration before the Supreme Court and the Hon'ble Supreme Court while givin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been borrowed by the assessee ii. It must have been borrowed for the purpose of business. iii. The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. The above mentioned three conditions have been established legally Madhav Prasad Jatia Vs. CIT by Supreme Court judgment in the case of, (1979) 118 ITR 200 (SC). The proviso to Section 36(1)(iii) was inserted by Finance Act, 2003 w.e.f. 01.04.2004 relating to A.Y. 2004-05 and subsequent years. This was inserted to disallow interest on moneys borrowed for acquiring a capital asset till the date on which the asset was brought to use even if it is for extension of existing business. Following facts are important for consideration. This proviso is to operate prospectively as held by Hon'ble Supreme Court in the case of Deputy Commissioner of Income Tax. Vs. Core Health Care Ltd. (SC) 298 ITR 194. An expenditure may either relate to a new units on expansion of existing business or it may relate to a totally new business apart from existing business. In the latter case, pre-commencement expenditure of new business would be required to be capitalized. They cannot be charged to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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