IN INCOME TAX APPELLATE TRIBUNAL BENCH, CHENNAI BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ITA No.554/Mds/2016 Assessment Year : 2011-12 M/s T V Sundram Iyengar & Sons Private Limited Joint Commissioner of (Formerly known as TV Sundram v. Income Tax, Iyengar & Sons Ltd.), Range I, 7-B, West Veli Street, Madurai. Madurai 625 001. PAN : AABCT 0159 K (Appellant) (Respondent) Appellant by : Shri S.A. Balasubramanyan, Advocate Respondent by : Shri Shiva Srinivas, JCIT Date of Hearing : 28.07.2016 Date of Pronouncement : 15.09.2016 ORDER PER N.R.S. GANESAN, JUDICIAL MEMBER: This appeal of assessee is directed against order of Commissioner of Income Tax (Appeals) 1, Madurai, dated 30.12.2015 and pertains to assessment year 2011-12. 2 I.T.A. No.554/Mds/16 2. first issue arises for consideration is expenditure incurred by assessee on higher education of relatives of Directors. 3. Shri S.A. Balasubramanyan, Ld.counsel for assessee, submitted that when identical issue came before this Tribunal in assessee's own case for assessment year 2010- 11, this Tribunal after referring to judgment of Madras High Court in K. Subramaniam Bros v. CIT (250 ITR 306), found that it is liability of parents to educate their children, therefore, there was no business expenditure for company. Tribunal further found that there was no business purpose in incurring expenditure on education of grandchildren /children of Directors. In view of above decision of this Tribunal in assessee's own case, this issue is covered against assessee. 4. We have heard Shri Shiva Srinivas, Ld. Departmental Representative also. Ld. D.R. submitted that in view of judgment of Madras High Court in K. Subramaniam Bros (supra), Tribunal in earlier assessment year decided matter 3 I.T.A. No.554/Mds/16 against assessee. Therefore, according to Ld. D.R., same order may be followed. 5. We have considered submissions on either side and perused relevant material available on record. As rightly submitted by Ld.counsel for assessee and Ld. D.R., assessee incurred expenditure on education of grandchildren and children of Directors of assessee-company. This Tribunal is of considered opinion that it is responsibility of each parent to give best possible education to their children. For giving education to children, no business purpose would be served to assessee-company. similar view was taken by Madras High Court in K. Subramaniam Bros (supra). This judgment of Madras High Court was followed by this Tribunal in assessee's own case for assessment year 2010-11. In view of above, this Tribunal do not find any reason to interfere with order of lower authority and accordingly same is confirmed. 6. next ground of appeal is with regard to disallowance of interest paid by assessee on borrowings to extent of 3%. 4 I.T.A. No.554/Mds/16 7. Shri S.A. Balasubramanyan, Ld.counsel for assessee, submitted that assessee accepted deposits from public and paid interest at rate of 9% on fixed deposits and in respect of cumulative deposits, assessee has paid 9.7% to 10.20%. assessee-company, in fact, paid interest to extent of `2026.15 lakhs during year under consideration. assessee has paid, out of interest free funds, to extent of `1500 lakhs to its subsidiary company M/s TVS Srichakra Ltd. rate of interest charged by assessee is 7% per annum. There was difference of 3%. According to Ld. counsel, assessee borrowed funds at rate of 10% and advanced same to sister concern at 7%. Assessing Officer has taken difference of 3% as income of assessee. 8. According to Ld. counsel for assessee, there was regular transaction between assessee-company and M/s TVS Srichakra Ltd., who is one of supplier of goods to assessee. In course of its business activity, assessee has advanced `1500 lakhs and also charged interest at rate of 7%. Assessing Officer simply rejected claim of assessee on ground that no evidence was produced by assessee. 5 I.T.A. No.554/Mds/16 voluminous document produced by assessee to prove business transaction was not considered by CIT(Appeals). Ld.counsel further submitted that self-generated funds were available to assessee more than deposits received from public and borrowed funds, therefore, there is no question of any disallowance of interest. 9. On contrary, Shri Shiva Srinivas, Ld. Departmental Representative, submitted that assessee has borrowed loan for purpose of business and paid interest to extent of `2026.15 lakhs during year under consideration. Assessing Officer found that assessee has advanced `1500 lakhs to M/s TVS Srichakra Ltd., Madurai and charged interest at rate of 7%. Assessing Officer found that assessee paid interest at rate of 10% on borrowed funds, however, charged interest at rate of 7% on money advanced to M/s TVS Srichakra Ltd. assessee claimed before Assessing Officer that for ensuring uninterrupted supply of goods, assessee advanced money at rate of 7%. However, no material is available on record nature of goods supplied by M/s TVS Srichakra Ltd. Therefore, 6 I.T.A. No.554/Mds/16 according to Ld. D.R., CIT(Appeals) has rightly confirmed order of Assessing Officer. 10. We have considered rival submissions on either side and perused relevant material available on record. From material available on record, it appears that assessee has borrowed funds from bank and other financial institutions and paid interest at rate of 10%. assessee has also received deposits from public. assessee has advanced sum of `15 Crores to M/s TVS Srichakra Ltd. and charged interest at rate of 7%. Even though assessee claims that advance was paid to ensure uninterrupted supply of goods, no material is available on record to suggest nature of goods supplied by M/s TVS Srichakra Ltd. At best, we may say that it is advance paid by assessee for purchasing goods from M/s TVS Srichakra Ltd. However, it is for assessee to produce necessary material indicating nature of goods said to be purchased from M/s TVS Srichakra Ltd. assessee has not produced any details with regard to so-called material purchased from M/s TVS Srichakra Ltd. This Tribunal is of considered opinion that unless assessee produces details of material supplied by M/s TVS 7 I.T.A. No.554/Mds/16 Srichakra Ltd., claim cannot be allowed. Therefore, in interest of justice, one more opportunity needs to be given to assessee to produce necessary material with regard to goods supplied by M/s TVS Srichakra Ltd. Giving one opportunity to produce necessary material would not prejudice interests of Revenue. Accordingly, orders of authorities below are set aside and issue of disallowance of interest to extent of `41,68,767/- is remitted back to file of Assessing Officer. Assessing Officer shall re-examine matter in light of details of goods that were supplied by M/s TVS Srichakra Ltd. and thereafter decide same, in accordance with law, after giving reasonable opportunity to assessee. 11. next ground of appeal is with regard to disallowance made by Assessing Officer under Section 14A of Income-tax Act, 1961 (in short 'the Act'). 12. Shri S.A. Balasubramanyan, Ld.counsel for assessee, submitted that Assessing Officer disallowed expenditure said to be incurred in earning dividend income to extent of `3889.35 lakhs. According to Ld. counsel, assessee made investment to extent of `7750.61 lakhs during 8 I.T.A. No.554/Mds/16 year under consideration and acquired dividend income of `3889.35 lakhs. According to Ld. counsel, no expenditure was incurred. Since no expenditure was incurred, according to Ld. counsel, there cannot be any disallowance. Moreover, Ld.counsel submitted that assessee invested its own funds in shares and acquired dividend income. Therefore, according to Ld. counsel, there cannot be any disallowance. 13. On contrary, Shri Shiva Srinivas, Ld. Departmental Representative, submitted that assessee admittedly borrowed funds for purpose of business. Therefore, expenditure incurred by assessee cannot be attributed to any particular income. Moreover, during year under consideration, assessee has invested sum of `7750.61 lakhs in shares. Therefore, disallowance has to be computed by applying Rule 8D(2)(ii) & (iii) of Income-tax Rules, 1962. Assessing Officer has applied Rule 8D for making disallowance. Therefore, according to Ld. D.R., CIT(Appeals) has rightly confirmed order of Assessing Officer. 14. We have considered rival submissions on either side and perused relevant material available on record. Admittedly, 9 I.T.A. No.554/Mds/16 assessee borrowed funds for purpose of business and also diverted substantial amount in form of advance to M/s TVS Srichakra Ltd. assessee now claims that investment was made out of its own funds and no expenditure was incurred. fact remains that expenditure incurred by assessee for payment of interest on borrowed funds cannot be attributed to any particular income. When assessee borrowed substantial amount and paid interest, it cannot be said that no expenditure was incurred for earning exempted income. Even assuming for argument sake that assessee invested its own funds in shares, third limb of Rule 8D(2) would coming into operation. Therefore, 0.5% of average investment made during year under consideration, which resulted income and which does not form part of total income, has to be taken into consideration. In view of above, this Tribunal is of considered opinion that Assessing Officer has rightly computed disallowance by applying provisions of Rule 8D(2). Therefore, this Tribunal do not find any reason to interfere with order of lower authority and accordingly same is confirmed. 10 I.T.A. No.554/Mds/16 15. In result, appeal filed by assessee is partly allowed for statistical purposes. Order pronounced on 15th September, 2016 at Chennai. sd/- sd/- (D.S. Sunder Singh) (N.R.S. Ganesan) Accountant Member Judicial Member Chennai, th Dated, 15 September, 2016. Kri. Copy to: 1. Appellant 2. Respondent 3. CIT(A)-1, Madurai 4. Principal CIT-1, Madurai 5. DR 6. GF. M/s T V Sundram Iyengar & Sons Private Limited (Formerly known as TV Sundram Iyengar & Sons Ltd.) v. Joint Commissioner of Income-tax, Range I, Madurai