IT: Where Assessing Officer had disallowed interest paid on borrowed fund on ground that assessee had diverted interest bearing funds for purpose of investment in shares and loans to sister concern, since sufficient interest free funds were available with assessee, disallowance of interest expenditure was not permissible
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[2013] 33 taxmann.com 14 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax, Ahmedabad - III
v.
R L Kalthia Enggineering & Automobiles (P.) Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 586 OF 2012†
FEBRUARY 5, 2013
Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Interest free loans to sister concerns] - Assessment year 2005-06 - Assessee claimed deduction of interest paid on borrowed funds under section 36(1)(iii) - Assessing Officer disallowed claim of assessee on ground that it had diverted interest bearing funds for purpose of investment in shares and loans to sister concern - Whether since sufficient interest free funds were available with assessee and there was no nexus between borrowed funds and funds lent, disallowance of interest expenditure was not permissible - Held, yes [Paras 5 & 6] [In favour of assessee]
Varun K. Patel for the Appellant.
ORDER
Ms. Sonia Gokani, J. - Following substantial question of law is proposed for our consideration in the present Tax Appeal, which arises from the decision of the Income-tax Appellate Tribunal ("Tribunal" for short) dated 2nd March 2012 :-
"Whether in the facts and circumstances of the case, the learned ITAT has erred in law in confirming the order of CIT(A) deleting the addition of Rs.28,68,776/- on account of interest claimed by the Assessee u/s. 36(1) (iii) of the Act ?"
Heard learned advocate Mr. Varun K. Patel appearing for the Revenue. It emerges from the record that the assessee-company in its return of income filed on 31st October 2005 for the A.Y 2005-06 declared total income as "NIL" after setting off the brought forward losses. In scrutiny assessment, the Assessing Officer had made various additions, one of which was disallowances of Rs. 28,68,776/= on account of interest under Section 36[1](iii) of the Income-tax Act, 1961 {"Act" for short}.
3. Such disallowances were made by the Assessing Officer on the ground that the assessee, on one hand, had borrowed the capital for the purpose of business and such borrowed fund is expected to be used in the business. The interest paid on such borrowings being an expenditure, the same is required to be deducted in computation of income from the business. Noting that the interest payable on the capital borrowed since is a liability till it is repaid, such interest is allowable under proviso to Section 36[1](iii) of the Act. On noticing that there was substantial diversion by the assessee of such interest bearing funds towards interest free loans and advances, and towards non-business investment, the total amount held to be diverted for the purpose of investment in the shares and loans to the sister-concern to the tune of Rs. 1,59,37,432/= calculating interest @ 18% per annum, the amount of Rs. 28,68,776/= was disallowed.
4. Aggrieved by such disallowance of interest amount under Section 36[1](iii) of the Act, challenge was made before the CIT[A] by the assessee-respondent. On noticing that in case of a sister-concern of the respondent-company where similar disallowances were made, that the same had been deleted by the CIT[A] vide order dated 30th November 2007, in the instant case also, the CIT[A] set-aside such disallowances by holding that the assessee-respondent had not diverted interest bearing fund as no nexus was established between the borrowed funds and the funds lent and investment.
5. When challenged before the Tribunal by the revenue, it concurred with the findings of the CIT [A]. It also noticed that the total interest-free funds available with the respondent was to the tune of Rs. 1.74 Crores and the advances and investments made were at Rs. 1.59 Crores. The Tribunal also followed the treatment given to such issue of disallowance of interest in case of sister-concern and not having found any nexus in the instant case between the borrowed funds and the funds lent, as also registering the availability of the huge amount of interest-free funds to the tune of Rs. 1.74 Crores, upheld the decision of the CIT[A] of reversing the decision of the Assessing Officer on this count.
6. It is well established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under Section 36[1](iii) is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly.
SKJ IT : If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A
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[2013] 32 taxmann.com 370 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-I
v.
UTI Bank Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 118 OF 2013
MARCH 22, 2013
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not chargeable to tax [Dividends] - Assessment year 2003-04 - Whether, where assessee had sufficient interest free funds to meet its tax free investments yielding exempt income, it could be presumed that such investments were made from interest free funds and not loaned funds and, thus no disallowance under section 14A being warranted - Held, yes [Para 4] [In favour of assessee]
FACTS
| ■ | The assessee earned interest on tax free bonds and debentures, against which it suo motu disallowed an amount as interest expense under section 14A. The Assessing Officer made further disallowance under section 14A. | |
| ■ | On first appeal, the Commissioner (Appeals) partially deleted the disallowance made by the Assessing Officer, on the basis of decision in the preceding year. | |
| ■ | On cross appeal, the Tribunal observed that the interest free funds available with the assessee were in excess of the tax free investments. Therefore, following the decision in case of CIT v. Reliance Utilities & Power Ltd.[2009] 313 ITR 340/178 Taxman 135 (Bom.), the disallowance made by the Assessing Officer over and above the disallowance made by the assessee itself, was deleted by the Tribunal as the Assessing Officer had not given any finding as to how much administrative expenditure had been incurred to earn the exempt income. | |
| ■ | On further appeal by revenue : |
HELD
| ■ | The Tribunal has committed no error. Basically the entire disallowance was made on the basis of facts emerging on record. The Tribunal also relied on the decision of the Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra). Additionally, it is found that the Assessing Officer had, without giving a finding as to how much administrative expenditure was incurred to earn the exempt income, had made disallowance. That being the fact, no question of law arises. [Para 4] |
CASES REFERRED TO
CIT v. Reliance Utilities & Power Ltd.[2009] 313 ITR 340/178 Taxman 135 (Bom.) (para 4).
Mrs. Mauna M. Bhatt for the Appellant.
ORDER
Akil Kureshi, J. - Tax Appeal is admitted for consideration of following substantial question of law:
"Whether the Income Tax Appellate Tribunal was right in law and in facts in holding that the payment of a sum of Rs. 51.56 crores made by the assessee-bank to the Provident Fund Companies there expanded wholly and fully for the purpose of business or whether sum having been paid voluntarily without any legal liability, the same cannot be treated as the business expenditure allowable under Section 37(1) of the Income Tax Act, 1961?"
2. We may notice that the appellant has also suggested an additional issue in the following manner:
"Whether the Appellate Tribunal has substantially erred in holding that disallowance u/s. 14A required "finding of incurring of expenditure" for disallowance of part of administrative expenditure u/s. 14A, in the face of facts that infrastructure and human resources of Bank were employed for investing activities which earned exempt income, particularly, when the assessee itself disallowed certain part of interest expenditure u/s. 14A?"
3. The issue pertains to disallowance under Section 14A of the Act made by the Assessing Officer which was partially deleted by the CIT(A). Such order of CIT(A) gave rise to cross appeals at the hands of the assessee as well as the revenue. Tribunal confirmed the view of the CIT(A) making following observations:
"33. We have heard the rival contentions and perused the material on record, The undisputed facts are that during the year the assessee has earned interest of Rs. 17.45 crore on tax free bond and debentures as against which the assessee had suo motu disallowed Rs. 5.53 crore being the interest expenses u/s. 14A as against which the AO has worked out the disallowance of Rs. 32.76 crore. After giving the credit of disallowance of Rs. 5.53 crore made by the Assessee, the AO disallowed Rs. 27.23 crore u/s. 14A. As on 31st March, 2003, the interest free funds available with the assessee was to the tune of Rs. 3404 crore (comprising of share capital of Rs. 230 crore Reserves of Rs. 689 crores and interest free demand deposits and Rs. 2485 crores) as against which the tax free investments were to the tune of Rs. 589 crore. Thus the interest free funds were far in excess of the investments. CIT(A) has given a finding that the facts in AY 2003-04 are identical to the facts of the case in AY 2002-03 and accordingly he has followed the decision of CIT(A) for AY 2002-03. These facts have not been controverted by the Ld. D.R. nor have they brought on record any facts to the contrary. Hon'ble Bombay High Court in case ofCIT v. Reliance Utilities & Power Ltd. (supra) has held that if there are interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from interest free funds available. In the present case, since the assessee has suo moto disallowed Rs. 5.53 crore u/s. 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon'ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted. Disallowance u/s. 14A requires finding of incurring of expenditure. In the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision of High Court, we are of the view that no disallowance of administrative expenses can be made. We accordingly direct for the deletion of the addition made by the AO and allow this ground of the assessee."
4. In our opinion the Tribunal has committed no error. Basically the entire disallowance has been made on the basis of facts emerging on record. The Tribunal also relied on the decision of the Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135. Additionally, we find that the Assessing Officer had, without giving a finding as to how much administrative expenditure have been incurred to earn the exempt income, had made disallowance. In the earlier years also, similar position obtained. That being the fact, no question of law arises.
5. In the result, tax appeal is admitted only for above noted question.
P. SEN IT : LTC is exempt from tax only when employee has utilized LTC for travel within India. Nothing in Rule 2B provides assessee a liberty to claim exemption where part of his total ticket package is spent on his overseas travel and part of his journey being within India
Facts
• Assessee received LTC from his employer, the State Bank of India and claimed exemption of LTC.
• AO noticed that leave travel package covered Singapore ad Malaysia also. AO disallowed LTC exemption claim as section 10(5) does not allow exemption for overseas travel. CIT(A) upheld AO's orders. Hence Present appeal to ITAT.
Held
• The provisions of the Act are in relation to LTC for proceeding on leave to any place in India.
• LTC is exempt from tax only when employee has utilized LTC for travel within India.
• Nothing in Rule 2B provides assessee a liberty to claim exemption where part of his total ticket package is spent on his overseas travel and part of his journey being within India.
• In result, assessee's exemption claim under section 10(5) rejected.
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[2013] 33 taxmann.com 169 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'A'
Om Parkash Gupta
v.
Income-tax Officer, Ward - 4(1)
T.R. SOOD, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
IT APPEAL NO. 938 (CHD.) OF 2011
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
APRIL 29, 2013
M.R. Sharma for the Appellant. J.S. Nagar for the Respondent.
ORDER
Ms. Sushma Chowla, Judicial Member - The appeal filed by the assessee is against the order of the Commissioner of Income Tax (Appeals), Chandigarh dated 20.07.2011 against the order passed u/s 143(3) of Income Tax Act, 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:
| "1. | That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals) Chandigarh is bad in law and is beyond all the cannons of law and justice. | |
| 2. | That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals) Chandigarh disallowing the claim of the appellant at Rs. 2,65,914/ - u/s 10(10C) of the Income Tax Act is bad in law and needs to be set aside. | |
| 3. | That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals) Chandigarh disallowing the claim of the appellant at Rs. 1,19,227/- on account of LTC u/s 10(5) of the Income Tax Act is bad in law and needs to be set aside." |
3. The ground No.1 raised by the assessee is general and is dismissed.
4. The issue in ground No.2 raised by the assessee is against the claim of deduction under section 10(10C) of the Act.
5. The brief facts relating to the issue are that the assessee under the VRS Scheme of State Bank of India received sum of Rs. 2,65,914/- on account of ex-gratia payments which was claimed as exempt under section 10(10C) of the Act. The said claim of deduction was rejected both by the Assessing Officer and the CIT (Appeals). The learned A.R. for the assessee pointed out that the issue is covered by the ratio laid down by the Chandigarh Bench of Tribunal in Shri Bikram Jit Passi v. DCIT in ITA No.925/CHD/2011 relating to assessment year 2008-09 - order dated 9.11.2011 wherein similar claim in the hands of another ex-employee of State Bank of India was allowed. We find that the said issue has been adjudicated upon by the Tribunal in the case of Shri Bikram Jit Passi v. DCIT (supra) and following the same we direct the Assessing Officer to allow deduction under section 10(10C) of the Act against ex-gratia payment of Rs. 2,65,914/-. The ground No.2 raised by the assessee is thus allowed.
6. The issue in ground No.3 raised by the assessee is against the claim of deduction under section 10(5) of the Act at Rs. 1,19,227/-. The facts relating to the issue are that during the year under consideration the assessee during his employment with State Bank of India had taken advance of Rs. 1,30,000/ - for availing leave travel concession during the year under consideration. During the assessment proceedings, the Assessing Officer noted that the leave travel package covered Singapore and Malaysia also. The Assessing Officer held that the said amount received by the assessee on account of leave travel concession is not exempt in view of the provisions of section 10(5) of the Act r.w.r. 2B of the Income Tax Rules as the said tour was undertaken for travel overseas. As per the assessee, final destination of the LTC tour was in India and so it was exempt. The assessee before the CIT (Appeals) furnished written submissions which are incorporated under para 2.2 and claimed that Rule 2B of the Rules stipulates that the amount of LTC should not exceed the fair charged by the National Carrier in the shortest tour and it is not stipulated that the journey was to be made via the National Carrier. It was further argued that Rule 2B of the Rules only stipulates that the final destination of the journey shall be in India. The CIT (Appeals) referred to the provisions of section 10(5) of the Act and held as under:
"2.3.1 A plain reading of clause (a) of section 10(5) reveals that exemption is not allowable, if it is for proceeding to any place which is not in India."
7. In respect of the provision of Rule 2B(1)(a)(b) it was observed by the CIT (Appeals) as under:
"2.3.2 Provisions of Rule 2B(1)(a)(b) have again elaborated upon section 10(5) as under:
"(1) The amount exempted under clause (5) of section 10 in respect of the value of travel concession or assistance received by or due to the individual from his employer or former employer for himself and his family in connection with his proceeding,
| (a) | on leave to any place in India; | |
| (b) | to any place in India after retirement from service or after the termination of his service" |
2.3.3 Provisions of section 10(5) read with Rule 2B(1) envisage that amount received by an individual on account of value of travel concession is exempt only if the employee is proceedings on leave to any place in India. Section 10(5) as well as the relevant rule 2B do not stipulate that journey to any place in India would be made via a place outside India The intention of the legislature was certainly nor to grant: exemption for reimbursement of the value of LTC in a case where was performed via a foreign country. In fact, the national carrier i.e. Air India/Indian Airlines had also been offering LTC packages to various destinations in India and allowing passengers to visit the foreign countries at the full fare chargeable to the filial destination in India and it was clearly mentioned on the website (of Air India/Indian Airlines) that the value of LTC was chargeable to income tax.
2.3.4 The contention of the appellant that the Assessing Officer had overlooked the fact that Rule 2B of Income Tax Act, 1962 only stipulated that the amount of LTC shall not exceed the fare charged by the national carrier for the shortest route is not relevant in the present case. Similarly, the contention of the appellant that the rules of the bank permit the appellant to take circuitous route even involving foreign journey is also irrelevant. The Assessing Officer had only held that amount is not exempt u/s 10(5) of Income Tax Act, 1961."
8. The CIT (Appeals) thus held as under:
"2.3.5 In view of the above discussion, it is held that the value of LTC received by the appellant is not exempt u/s 10(5) of the Income Tax Act, 1961. However, as the appellant had received only Rs. 1,19,227/- (rest of the amount was refunded), the amount to be taxed is to be restricted to Rs. 1,19,227/-. Ground of appeal No. 1(a) is partly allowed."
9. The learned A.R. for the assessee drew our attention to the certificate issued by the State Bank of India placed at page 15 of the Paper Book and it was pointed out that the assessee had visited one of the places in India besides visiting foreign country. It was the plea of the learned A.R. for the assessee that the LTC was availed only in respect of part of the journey performed within India.
10. The learned D.R. for the Revenue placed reliance on the orders of the authorities below.
11. We have heard the rival contentions and perused the record. Section 10(5) of the Act postulates exemption in respect of journey concession received by an individual from his employer and provides as under:
"10(5) in the case of an individual, the value of any travel concession or assistance received by, or due to, him,-
| (a) | from his employer for himself and his family, in connection with his proceeding on leave to any place in India ; | |
| (b) | from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement from service or after the termination of his service, |
subject to such conditions as may be prescribed (including conditions as to number of journeys and the amount which shall be exempt per head) having regard to the travel concession or assistance granted to the employees of the Central Government :
Provided that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel.
Explanation.-For the purposes of this clause, "family", in relation to an individual, means-
| (i) | the spouse and children of the individual ; and | |
| (ii) | the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual;" |
12. The said sub-section provides that where an individual had received travel concession or assistance from his employer for proceeding on leave to any place in India, both for himself and his family, then such concession received by the employee is not taxable in the hands of the employee. Similar exemption is allowed to an employee proceeding to any place in India after retirement of service or after the termination of his service. The provisions of the Act are in relation to the travel concession/assistance given for proceeding on leave to any place in India and the said concession is thus exempt only where the employee has utilized the travel concession for travel within India. Further under Rule 2B of the Income Tax Rules the condition for allowing exemption under section 10(5) of the Act are laid down. The conditions are in respect of various modes of transport. However, the basic condition is that the employee is to utilize the travel concession in connection with his proceeding to leave to any place within India, either during the course of employment or even after retirement of service or after termination of service. Reading of section 10(5) of the Act and Rule 2B of the Rules in conjunction lays down the guidelines for claiming exemption in relations to the travel concession received by an employee from his employer or former employer, for proceeding on leave to any place in India. The person is to undertake the journey to any place in India and thereafter return to the place of employment and is entitled to reimbursement of expenditure on such travel between the place of employment and destination in India. Rule 2B of the Rules further lays down the conditions that the amount to be allowed as concession is not to exceed the air economy fair of the National Carrier by the shortest route to the destination in India. The said condition in no way provides that the assessee is at liberty to claim exemption out of his total ticket package spent on his overseas travel and part of the journey being within India. We find no merit in the claim of the assessee in the present case and we are in conformity with the observation of the CIT (Appeals) in this regard, which has been reproduced by us in the paras hereinabove. In view thereof, we reject the claim of the assessee of exemption under section 10(5) of the Act. The ground of appeal No. 3 raised by the assessee is thus dismissed.
13. In the result, the appeal of the assessee is partly allowed.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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