IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI · PDF fileMalad (W) Mumbai-400064 Vs. ACIT-29...

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E” MUMBAI

BEFORE SHRI D.T. GARASIA (JUDICIAL MEMBER) AND

SHRI N.K. PRADHAN (ACCOUNTANT MEMBER)

ITA No. 1361/MUM/2013 Assessment Year: 2009-10

& ITA No. 3248/MUM/2013

Assessment Year: 2010-11 &


Shoppers Stop Ltd. Eueka Towers, B-Wing, 9th floor, Mindspace, Link Road, Malad (W) Mumbai-400064

Vs.

ACIT-29 Aayakar Bhavan Mumbai.

PAN No. AABCS4383A Appellant Respondent

Assessee by : Ms. Aarti Sathe, AR Revenue by : Mr. T.A. Khan, DR

Date of Hearing : 11/10/2017 Date of pronouncement : 27/12/2017

ORDER

PER N.K. PRADHAN, A.M.

The captioned appeals filed by the assessee are directed against

the order of the Commissioner of Income Tax (Appeals)-40, Mumbai

and arise out of the assessment order u/s 143(3) of the Income Tax Act

1961, (the ‘Act’). As common issues are involved we are proceeding to

dispose them off by this consolidated order for the sake of

convenience.

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Shopper Stop Ltd. ITA No. 1361 & 3248/Mum/2013 & 6155/Mum/2014

2

2. Two issues are involved in these appeals. One is the disallowance

made by the Assessing Officer (AO) u/s 14A r.w. Rule 8D of the Income

Tax Rules, 1962. The other one is the disallowance u/s 36(1)(iii)/

addition on account of notional income u/s 5 of the Act.

2.1 We begin with the first issue.


3. The AO observed that it had debited Rs.25,60,30,000/- in its

profit & loss account as ‘interest payment and finance charges’ against

borrowed money claimed to be utilized for the purpose of business. At

the same time, the investments as stated in the balance sheet were

valued at Rs.97,44,50,000/- as on 31.03.2009 as compared to the

investments as on 01.04.2008 at Rs.80,72,10,000/-.

The AO worked out the disallowance u/s 14A r.w. Rule 8D and

made a disallowance of Rs.3,69,33,354/-.

4. Aggrieved by the order of the AO, the assessee filed an appeal

before the Ld. CIT(A). The assessee submitted before him that the

company had sufficient interest-free funds available and hence no part

of interest could be attributed to investment in shares. Also it was

stated before the Ld. CIT(A) that “the assessee has not received any

dividend or exempt income from these investments in any of the years

including the current assessment year. The same is evident from the

profit & loss account of the assessee”.

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Reliance was placed by the assessee on the decision of the

Hon’ble Bombay High Court in Delite Enterprises in ITA No. 110 of 209

dated 26.12.2009.

However, the Ld. CIT(A) was not convinced with the above

submission of the assessee and confirmed the disallowance of

Rs.3,69,33,354/- by following the order of his predecessor-in-office for

the AY 2008-09.


5. The AO observed that it had debited Rs.22,44,35,000/- in its

profit & loss account as ‘interest payment and finance charges’ against

borrowed money claimed to be utilized for the purpose of business. At

the same time, the investments as stated in the balance sheet were

valued at Rs.119,67,45,000/- as on 31.03.2010 as compared to the

investments as on 01 04 2009 at Rs.97,44,50,000/-.



6. During the course of appellate proceedings, the assessee filed

submission before the Ld. CIT(A) similar to AY 2009-10 mentioned at

para 4 above. The Ld. CIT(A) confirmed the disallowance of

Rs.3,79,86,618/- on the same basis as for AY 2009-10.


7. The AO observed that assessee-company had debited

Rs.14,53,77,000/- in its profit & loss account as ‘interest payment and

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finance charges’ against borrowed money claimed to be utilized for the

purpose of business. At the same time, the investments as stated in the

balance sheet were valued at Rs.237,19,34,000/- as on 31.03.2011 as

compared to the investments as on 01.04.2010 at Rs.119,67,45,000/-.



8. During the course of appellate proceedings, the assessee filed

submission before the Ld. CIT(A) as made for AY 2009-10 and AY

2010-11 as mentioned above. The Ld. CIT(A) confirmed the

disallowance of Rs.3,53,14,668/- on the same basis as for the AY 2009-

10 and AY 2010-11.

9. Before us, the Ld. counsel of the assessee submits that the

investments have been made from time to time out of the assessee’s

own surplus funds. So no disallowance u/s 14A is called for. Reliance is

placed by her on the decision in Reliance Utilities & Power Ltd. 313 ITR

340 (Bom). She files the following details:

Rs. in Crores

Name of the Company in which strategic Investments are made:-

Status AY 2009-10 AY 2010-11 AY 2011-12

Nuance Group (India) Pvt. Ltd. Joint Venture 5.35 11.81 - Hypercity Retail (India) Ltd. Subsidiary 11.40 9.50 113.61 Timezone Entertainment Pvt. Ltd.

Joint Venture - 0.92 3.91

Total Investments 16.75 22.23 117.52 Share Capital and Reverses & Surplus (Opening Balance)

296.70 244.83 308.89

The Ld. counsel further submits that the assessee-company has

not received any dividend or exempt income from these investments in

any of the aforementioned assessment years. Therefore, no

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disallowance u/s 14A r.w. Rule 8D is called for. Reliance is placed by

her on the decision in Delite Enterprises (supra).

10. Per contra the Ld. DR supports the order passed by the Ld.

CIT(A). It is submitted by him that the assessee could not directly link

the investment appearing the balance sheet and made during the year

to the sources of funds said to be generated from the business

operation. Also it is stated by him that the assessee could not file fund

flow statement before the AO and the investment was made out of a

single bank account on which the assessee had availed cash

credit/overdraft facilities.

11. We have heard the rival submissions and perused the relevant

materials on record. The reasons for our decision are given below.

We find that in the AY 2009-10, the share capital and reserves

and surplus (opening balance) is Rs.296.70 crores. This is much more

than the investment mentioned by the AO at para 3 hereinbefore.

In the AY 2010-11, the share capital and reserves and surplus

(opening balance) is Rs.244.83 crores. This is much more than the

investment mentioned by the AO at para 5 above.

In the AY 2011-12, the share capital and reserves and surplus

(opening balance) is Rs.308.89 crores. This is much more than the

investment mentioned by the AO at para 7 above.

In HDFC Bank Ltd. vs. DCIT [2016] 67 taxmann.com 42 (Bom), the

Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC

Bank Ltd. [2014] 366 ITR 505 (Bom) and Reliance Utilities & Power

Ltd. (supra) held as under :

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fileopen.aspx?id=101010000000116898&source=link

fileopen.aspx?id=101010000000018874&source=link


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“15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra)

that this Court took a view that the presumption which has been laid down

in Reliance Utilities & Power Ltd. (supra) with regard to investment in tax

free securities coming out of assessee's own funds in case the same are in

excess of the investments made in the securities (notwithstanding the fact

that the assessee concerned may also have taken some funds on interest)

applies, when applying Section 14A of the Act. Thus, the decision of this

Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has

settled the issue by holding that the test of presumption as held by this

Court in Reliance Utilities and Power Ltd. (supra) while considering Section

36(1)(iii) of the Act would apply while considering the application of

Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank

Ltd. (supra) on the above issue has also been accepted by the Revenue in as

much as even though they have filed an appeal to the Supreme Court

against that order on the other issue therein viz. broken period interest, no

appeal has been preferred by the Revenue on the issue of invoking the

principles laid down in Reliance Utilities & Power Ltd. (supra) in its

application to Section 14A of the Act.”

11.1 We further find that the assessee had submitted before the Ld.

CIT(A) that it had not received any dividend or exempt income from

the investments made in the above assessment years. We refer here to

page 18 of the appellate order dated 07.12.2012, page 10 of the

appellate order dated 12.03.2013 and page 6 of the appellate order

dated 07.08.2014 passed by the Ld. CIT(A). That the assessee did not

receive any dividend or exempt income from the investments is

evident from the profit and loss account filed by it for the above

assessment years.

The issue whether disallowance u/s 14A r.w. Rule 8D can be

made in a case when there is no exempt income is no longer res

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integra. In the case of CIT v. Shivam Motors (P) Ltd. (2015) 55

taxmann.com 262 (All), it has been held that in absence of any tax free

income earned by the assessee, disallowance u/s 14A could not be

made. In a similar vein, it has been held in Cheminvest Ltd. v. CIT

(2015) 61 taxmann.com 118 (Del) that section 14A will not apply if no

exempt income is received or receivable during the relevant previous

year.

11.2 The basis on which the Ld. CIT(A) confirmed the disallowance

made by the AO u/s 14A r.w. Rule 8D is the order of his predecessor-

in-office for the AY 2008-09. We find that the ITAT ‘E’ Bench Mumbai

for the said assessment year (ITA No 2189/Mum/2012) has allowed

the appeal filed by the assessee on the above issue with the following

reasons:

“We find that assessee had not claimed any deduction in respect of exempt

income nor has it claimed any expenditure against the income which does

not form part of the total income. Thus, both the basic ingredients for

making a disallowance u/a 14A are missing. Secondly, the fund flow

statement made available to the FAA, during the appellate proceedings,

clearly show that it had sufficient own funds to make investments (Pg-1 of

the PB). The FAA has admitted that funds available to the assessee were

more than the investments made during the year under consideration.

Therefore, in our opinion there was no jurisdiction for making disallowance

as per the provisions of section 14A r.w.r. 8D of the Rules. Considering all

these factors we are of the opinion that the FAA was not justified in

upholding the order of the AO. Hence, reversing his order we decide the

effect ground of appeal in favour of the assessee.”

12. In view of the reasons delineated at para 11 above, we delete the

disallowance of Rs.3,69,33,354/- (AY 2009-10), Rs.3,79,86,618/-

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(2010-11) and Rs.3,53,14,668/- (AY 2011-12) made by the AO u/s 14A

r.w. Rule 8D.

13. Now we turn to the second issue which arises in the AY 2009-10

and AY 2010-11.


14. During the course of assessment proceedings, the AO found that

the assessee-company had advanced loan of Rs 24 87 crores to its

subsidiary M/s Gateway Multichannel Retail (India) Ltd. and had

charged interest on the same up to December 2008 only, since the

Board of Directors of the subsidiary decided in January 2009 to

discontinue the catalogue retailing operations. The AO observed that

the assessee had paid interest @ 13 5% on the loans taken; that in the

assessee’s case there was no commercial expediency for not

charging/providing interest on the outstanding inter-corporate

deposit. Therefore he worked out the proportionate disallowance and

made an addition of Rs.83,91,532/- u/s 36(1) (iii) of the Act.

15. Aggrieved by the order of the AO the assessee filed an appeal

before the Ld. CIT(A). The Ld. CIT(A) has held that though the ratio of

the judgment of the Hon’ble Bombay High Court in Reliance Utilities

Ltd. (supra) is applicable to the case of the assessee, still the accrued

interest income has to be taxed during the year. Accordingly, he

directed the AO to work out the income on account of interest accrued

for the balance three months and tax the same.


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16. During the assessment proceedings, the AO observed that the

assessee-company had advanced loan to its subsidiary M/s Gateway

Multichannel Retail (India) Ltd. but had not offered any interest

income on the same during the year. In response to a query raised by

the AO, the assessee submitted that the Board of Directors of the

subsidiary company had, in January 2009, decided to discontinue its

catalogue retailing operations and in view of the same, the assessee

had to discontinue the interest accrual from 01.01 2009 onwards. It

also submitted that there was no question of charging interest on loan

to the subsidiary, where it was impossible to get back any portion of

the principal amount of loan and that no prudent businessman would

charge interest when the borrower was insolvent or the loan had

become sticky on non-performing asset. The assessee also contended

that borrowed funds had not been utilized for advancing the loan. It

was further contended by the assessee before the AO that hypothetical

income, even if accrued as per mercantile system of accounting, could

not be brought to tax and that since the loan to the subsidiary had

become irrecoverable, any accrual of interest post 01.01.2009 could

not be considered as real income.

However, the AO was not convinced with the above explanation

of the assessee because the subsidiary company had refunded part of

the loan amounting to Rs.1,87,71,100/- to the assessee during the year

and the balance amount receivable from the subsidiary as on

31.03.2010 was Rs.22,96,10,000/-. The AO held that there was no

business expediency in not charging interest on the loan advanced to

the subsidiary company. He worked out the interest receivable @

13.5% (rate at which the assessee had received interest in earlier year)

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and thus made an addition of Rs.3,22,04,906/- to the income shown by

the assessee.

17. Aggrieved by the order of the AO, the assessee filed an appeal

before the Ld. CIT(A). We find that the Ld. CIT(A) has followed his

order for the AY 2009-10 and confirmed the above addition made by

the AO.

18. Before us, the Ld. counsel of the assessee submits that the AO’s

assumption that the funds were advanced to Gateway out of borrowed

funds is incorrect. The assessee had advanced Rs. 9 crore in the AY

2009-10. It had shareholder’s fund of Rs.297 crores as on March 2008

and Rs.245 crores as on March 2009. The assessee had also earned

cash profit of Rs.24 crores in the AY 2009-10. In the same way, the Ld.

counsel presented the data for the AY 2010-11.

Thus it is stated that the assessee had sufficient funds, both

accumulated reserves and cash profit generated during the year to

fund the loan to Gateway. Relying on the decision in Reliance Utilities &

Power Ltd (supra), the Ld. counsel submits that no disallowance u/s

36(1)(iii) should have been made by the AO in the above two

assessment years.

19. Per contra, the Ld. DR supports the order passed by the Ld.

CIT(A).

20. We have heard the rival submissions and perused the relevant

materials on record. We find that in the AY 2009-10, the assessee-

company had not charged interest on inter-corporate deposit of

Rs.24,86,38,000/- given to its subsidiary for a period of three months.

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We also find that the share capital and reserves and surplus (opening

balance) in AY 2009-10 was Rs.296.70 crores.

In the AY 2010-11, the AO found that the subsidiary company

had refunded part of the loan amounting to Rs.1,87,71,100/- and the

balance amount receivable from the subsidiary as on 31.03.2010 was

Rs.22,96,10,100/-. However, we find that the share capital and

reserves and surplus (opening balance) in AY 2010-11 was Rs.244.83

crores.

We observe that as per section 36(1)(iii), the amount of interest

paid in respect of capital borrowed for the purpose of business or

profession is allowed as deduction. As per the Hon’ble Supreme Court

in case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC), for

claiming deductions under this sub clause, the basic requirements are:

(A) The money i.e. (capi al) must have been borrowed by the assessee;

(B) It must have been borrowed by the assessee for his business,

profession or vocation; and

(C) the assessee must have paid interest on the amount and claimed it as

an allowance.

20.1 In the case of Reliance Utilities & Power Ltd. (supra), the Hon’ble

Bombay High Court held:

“10. If there be interest-free funds available to an assessee sufficient to

meet its investments and at the same time the assessee had raised a loan it

can be presumed that the investments were from the interest-free funds

available. In our opinion the Supreme Court in East India Pharmaceutical

Works Ltd. (supra) had the occasion to consider the decision of the Calcutta

High Court in Woolcombers of India Ltd. (supra) where a similar issue had

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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 overdraft 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 funds

available both interest-free and overdraft and/or loans taken, then a

presumption would arise that investments would be out of the interest-free

fund generated or available with the company, if the interest-free funds

were sufficient to meet the investments. In this case this presumption is

established considering the finding of fact both by the CIT(A) and Tribunal.”

20.2 In Excel Industries Ltd. 358 ITR 295 (SC), it has been held that to

recognize income, it has to pass through three tests, namely, (a)

whether the income accrued to the assessee is real or hypothetical; (b)

whether there is a corresponding liability of the other party to pay the

amount; and (c) probability or improbability of realization to be

considered from a realistic and practical point of view.

We observe that Gateway has neither provided for interest in its

books of accounts nor paid any interest till date. The other condition of

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improbability of realization is also applicable here. We hold that the

addition cannot be made even u/s 5 of the Act.

20.3 Respectfully following the above decisions, we delete the

addition of Rs.83,91,532/- made by the AO in AY 2009-10 and

Rs.3,22,04,906/- in AY 2010-11.

21. In the result, appeals filed by the assessee are allowed.

Order pronounced in the open Court on 27/12/2017.

Sd/- Sd/-

(D.T. GARASIA) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 27/12/2017 Rahul Sharma, Sr. P.S.

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.

BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai

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IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI · PDF fileMalad (W) Mumbai-400064 Vs. ACIT-29...

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