IN INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR BEFORE: SHRI BHAGCHAND, AM AND SHRI KUL BHARAT, JM ITA No. 202/JP/2016 Assessment Year : 2006-07. Deputy Commissioner of Income-tax, cuke M/s. Vijay Solvex Limited, Central Circle, Vs. Bhagwati Sadan, Alwar. Swami Dayanand Marg, Alwar. PAN No. AAACV 6864 Appellant Respondent Revenue by: Shri Raghuvir Singh Dagur (Addl. CIT ) (Adjournment application rejected) Assessee by : Shri P.C. Parwal (C.A) Date of Hearing : 07.09.2016. Date of Pronouncement : 23/09/2016. ORDER PER SHRI KUL BHARAT, JM. This appeal filed by revenue is directed against order of ld. CIT (Appeals), Alwar dated 03.12.2015 pertaining to assessment year 2006-07. revenue has raised following grounds of appeal :- 1. Whether on facts and in circumstances of case CIT (A) was right in deleting addition of Rs. 89,64,336/- without appreciating facts that investment in shares of other company is not part of business of assessee and there is no profit to business of assessee from such investment. 2. Whether on facts and in circumstances of case CIT (A) was right in deleting addition of Rs. 89,64,336/- without appreciating facts that as per provisions of section 14A r.w. general principles of section 37(1) of I.T. Act, expenditure expended wholly or exclusively for purpose of business or profession shall be allowed in computing income chargeable under head profits and gains of business or profession. 2 ITA No. 202/JP/2016 M/s. Vijay Solves Limited 2. Briefly stated facts of case are that this is second round of litigation. In earlier round of litigation in ITA No. 557/JP/2011 on issue of disallowance made under section 14A read with Rule 8D, Tribunal directed AO vide para 37 & 38 of its order to consider issue afresh in light of observations given by Tribunal. In pursuance to above direction, AO passed impugned order dated 28th March, 2013 thereby AO made disallowance of Rs. 89,64,336/- by invoking provisions of section 14A. assessee aggrieved by this order, preferred appeal before ld. CIT (A), who after considering submissions allowed appeal and directed Assessing Officer to delete disallowance of Rs. 89,64,336/-. 3. Now revenue is in appeal before us. Both these grounds are inter-related, therefore, they are taken up together. 4. ld. D/R vehemently argued that ld. CIT (A) was not justified in deleting disallowance. He strongly supported order of AO. 4.1. On contrary, ld. Counsel for assessee has reiterated submissions as made in written brief. ld. Counsel submitted that Hon ble Tribunal had given finding that facts of assessee s case are similar to that of M/s. Deepak Vegpro Pvt. Ltd. In that case Hon ble Tribunal observed that interest free funds available with assessee are much more than investment in shares which is not controverted by ld. D/R by bringing any positive material on record. Therefore, no disallowance under section 14A is possible. He further submitted that matter was set aside to AO with direction that AO is free to examine issue afresh, if in his mind investment made in shares are not out of 3 ITA No. 202/JP/2016 M/s. Vijay Solves Limited interest free funds/reserves available with assessee. ld. Counsel submitted that in set aside assessment proceedings, AO has not given any finding that investment in shares is made from borrowed funds and not out of interest free funds available with it. He observed that if assessee would not have made above investment in shares, it would have saved amount of interest paid on loans. Further, as per section 14A read with section 37(1), expenses attributable to current year taxable income are allowable and therefore he again disallowed interest expenses of Rs. 1,06,76,964/- by applying interest @ 13.5% on investment in shares of Rs. 7,90,88,623/-. Thus, from order of AO it is evident that he has not followed direction of Hon ble ITAT and, therefore, disallowance of interest made by him be directed to be deleted. 4.2. ld. Counsel further submitted that interest expenses of Rs. 2,48,02,877/- is incurred on working capital limits taken from bank and others against hypothecation of stock and debtors and term loan taken against Plant & Machinery. total working capital loan outstanding as on 31.03.2006 is Rs. 2384.84 lacs against which investment in stock & debtors is Rs. 5459.51 lacs. Similarly, outstanding term loan is Rs. 145.93 lacs whereas investment in Plant & Machinery is of 1852.90 lacs under WDV as on 31.03.2006 for purpose of business. This is not disputed by AO. He further submitted that investment in shares was made out of interest free funds in earlier years. In earlier years no such disallowance was made. From Balance Sheet, it is evident that assessee company is having share capital and surplus of Rs. 3960.49 whereas investment in shares is only Rs. 829.10 lacs. This apart, profit for year at Rs. 2.46 crores is more than investment of Rs. 2.19 crores made during year. This fact is 4 ITA No. 202/JP/2016 M/s. Vijay Solves Limited not controverted by AO. ld. Counsel further submitted that similar issue came before Hon ble ITAT for assessment year 2006-07 in case of M/s. Vijay Industries in ITA No. 673/JP/2015 wherein disallowance of interest made was set aside, but again AO made disallowance which is confirmed by ld. CIT (A) but considering fact that assessee has sufficient reserve and surplus to make investment in shares and in absence of direct nexus between interest bearing funds and investment in shares, disallowance made by lower authorities was deleted by placing reliance on judgment of Hon ble Bombay High Court in case of CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340 (Bombay). 4.3. We have heard rival contentions and perused material available on record. AO in assessment has again disallowed interest on following grounds :- 1. business of assessee company is crushing and extracting of oil from oil seeds, refining of oil, production of vegetable oil, manufacturing of bone china crockery, insulators and generation of electricity to earn profit from such activities. Investment in share is not part of business of assessee, and there is no profit to business of assessee from such investment. Therefore, amount of capital of assessee company remained invested in shares is not reasonable. 2. If assessee company would not have made above investment in shares it would have saved amount of interest paid on loan. Hence investment made by assessee company was not reasonable and it was detoriating to interest of company, therefore, it is not allowable. 3. As per provisions of section 14A r.w. general principal of section 37(1) expenses which can attributable to current years taxable income are only allowable and therefore, interest as well as other established cost upto proportionate extent to funds diverted is required to be disallowed. 5 ITA No. 202/JP/2016 M/s. Vijay Solves Limited However, ld. CIT (A) has given finding of fact in para 4.5 to 4.16 of his order as under :- 4.5. I have perused assessment order as well as remand report of AO, submissions made including judicial citations and cross reply of appellant and find that disallowance of Rs. 89,64,336/- has been made by AO on account of interest and other expenses claimed by appellant. AO has made disallowance of interest @ 13.5% of funds, which have been diverted for making investments in shares. disallowance was made on ground that appellant has claimed interest expenses of Rs. 2,48,02,877/- and on other hand have made investments of funds in non interest earning investments of Rs. 7,90,88,623/-. It was held by AO that interest expenses to extent of 13.5% on non interest bearing investments may be disallowed u/s 14A of IT Act. 4.6. Hon ble ITAT had vide order dated 20.01.2012 in ITA No. 557/JP/2011 and ITA No. 676/JP/2011, in para 37 of order on page 46, reproduced finding given by ITAT in another case on similar facts therefore in our considered view no disallowance u/s 14A is possible. However, AO is free to examine this issue fresh, if in his mind investment made in shares was not out of interest free funds/reserves available with assessee. In view of these facts and circumstances, we dispose off grounds of assessee and department as above . In para 38 of order, it is stated that therefore we direct AO to consider issue fresh in light of observations given by tribunal in another case. 4.7. AO has accordingly analyzed position of funds and held that disallowance of Rs. 1,06,76,964/- @ 13.5% of funds parked in non interest bearing investments of Rs. 7,90,88,623/- is to be added to income of appellant. It is further stated that Cit (A), Alwar had earlier restricted addition to Rs. 17,12,628/- and given relief of Rs. 89,64,336/- and which has been set aside by ITAT to file of AO for fresh examination. As amount of Rs. 17,12,628/- has remained added to income of appellant, therefore addition made was restricted by enhancing income of appellant by balance amount of Rs. 89,64,336/-. 4.8. appellant has stated that AO has made disallowance on ground that company has incurred expenses in relation to earning of tax free dividend income, which is disallowed u/s 14A of IT Act. It is stated that Income-Tax Appellate Tribunal, Bench-Jaipur, has directed AO to establish availability of interest free funds and then its investment in shares. In other words, to establish nexus between borrowed funds and investment in shares, position of borrowed funds and its investment under various heads is as under 6 ITA No. 202/JP/2016 M/s. Vijay Solves Limited Particulars As on 31.03.2005 As on 31.03.2006 Borrowed funds in form of :- 1772.81 2384.84 Bank Loan-CC 145.00 145.93 Bank Loan Term loan 375.65 401.87 Unsecured loan Total 2293.46 2932.64 Investment in:- Stock in Trade 1712.45 3043.13 Debtors 1906.57 2416.38 Fixed Assets 145.00 145/93 Total 3764.02 5605.44 Thus, it may be seen that there is no nexus between borrowed funds and its investment in shares, hence no amount can be disallowed under provision of section 14A of Income Tax Act, 1961. 4.9. appellant has invested sum of Rupees 218.47 lacs out of profit of Rupees 245.30 earned during year under consideration and therefore there is no question of application of provisions of section 14A of IT Act. company has invested amount of non-interest bearing funds in acquisition of shares. In other words, profits earned by company which have remained in hands of company were invested in shares. For examination of availability of interest free funds analysis of Balance Sheet as on 31.03.2006, has been filed. It is observed that reserve and surplus of Rupees 3640.31 lakh, which are non-interest bearing funds are available with assessee company as source of investment in shares of Rupees 829.10 lakh. assessee company has not incurred any expenses in relation to investment in shares, hence no question arises for disallowing any expenses in relation to such shares of Rupees 829.10 lakh and consequently question of invoking of provision of section 14A of Income Tax Act, 1961 does not arise in case. 4.10. It is stated that under these circumstances, logical conclusion flows, when assessee company is having interest free funds available out of profits of earlier years, current year and other interest free funds etc. are far in excess of interest free investment made, then presumption has to be drawn that such investment in shares were not from borrowed funds, but from such profits and surplus etc. This has been held by honourable Madras High Court in case of Commissioner of Income Tax vs. Hotel Savera (1999) 239 ITR 795 (Mad.). 7 ITA No. 202/JP/2016 M/s. Vijay Solves Limited 4.11. issue of disallowance of interest also came up into consideration of Hon ble Commissioner of Income Tax (appeals), in assessee own case for assessment year 2007-08 and while dealing with said ground of appeal Hon ble Commissioner of Income Tax (Appeals), Alwar has deleted addition of Rupees 27,53,062/- made u/s 14A of IT Act. 4.12. appellant has explained that interest expenses of Rupees 87,29,446/- is incurred on working capital limits & term loan taken from SBBJ against hypothecation of stock, debtors & plant and machinery. total working capital loan outstanding as on 31.3.2006 is Rs. 900.21 lacs against which investment in stock and debtors is Rs. 2057.38 lacs. Similarly, outstanding term loan is Rs. 90.58 lacs whereas investment in plant and machinery is of Rs. 529.38 lacs. Thus, entire loan from SBBJ is utilized for purpose of business. There is no finding either by AO or by ld. CIT (A) that this was not utilized for purpose of business. In earlier year no such disallowance was made. It has been stated that from Balance Sheet it can be noted that assessee company is having share capital and reserve and surplus of Rs. 1190.08 lacs whereas investment in shares is only Rs. 688.45 lacs. Thus interest free funds available with assessee are much more than investment in shares. 4.13. further, it is submitted that year wise break up of application of interest free funds available with company (page number 38), and at end of financial year 2005-06 relevant to assessment year 2006-07, that after investment in shares, there remains cumulative interest free funds with assessee company of Rupees 2176.59 lakh. It is stated by appellant that these workings were given to AO during course of set aside assessment proceedings, and they again remain uncontroverted. 4.14. Having considered detailed submissions made on this issue, I find that question for consideration in this case is as to whether interest bearing funds have been used by company for making investments in shares quoted and unquoted and if yes, whether disallowance of proportionate interest could be made or not. Hon ble ITAT in its order dated 20.01.2012 has categorically set aside this issue for AO to give finding with regard to utilization of funds for making investments in shares. After considering material placed on record in form of audited annual accounts for year ending on 31.03.2005 and on 31.03.2006, it is found that share capital of Rs. 3.14 crores and reserves & surplus to be tune of Rs. 34.02 crores are available as on 31.03.2005 and have increased to Rs. 3.20 crores and to Rs. 36.40 crores respectively as on 31.03.2006. amount of investments in shares was of Rs. 6.10 crores as on 31.03.2005 and of Rs. 8.29 crores as on 31.03.2006. increase in amount of investments of Rs. 2.19 crores in current year under consideration is matched by increase in reserves & surplus of Rs. 2.46 crores. 8 ITA No. 202/JP/2016 M/s. Vijay Solves Limited 2.15. Further, AO has while making disallowance of interest failed to bring any adverse material on record to substantiate contention that interest bearing funds have been diverted for purposes of making investments in shares. I find that this issue has been examined in detail by ld. CIT (A)-II, Jaipur in case of appellant in subsequent year i.e. 2007-08 & after considering availability of total interest free funds and investments in shares, has deleted addition made by AO u/s 14A of IT Act, vide order dated 31.01.2012. 2.16. Thus, following same order, and considering financial details as per audited annual accounts, I find that there is no justification in action of AO in holding that interest bearing funds have been deployed for making investments in shares. Accordingly, I delete disallowance of Rs. 89,64,336/- made by AO under this head. above finding of fact and law is not controverted by revenue by placing any contrary material on record. Therefore, we do not see any reason to interfere in order of ld. CIT (A), same is hereby affirmed. 5. In result, appeal of revenue is dismissed. Order is pronounced in open court on 23/09/2016. Sd/- Sd/- ( BHAGCHAND) ( KUL BHARAT ) Accountant Member Judicial Member Jaipur Dated:- 23/09/2016. Das Copy of order forwarded to: 1. Appellant- DCIT, Central Circle, Alwar. 2. Respondent M/s. Vijay Solvex Ltd., Alwar. 3. CIT(A). 4. CIT, 5. DR, ITAT, Jaipur 6. Guard File (ITA No. 202/JP/2016) By order, Assistant. Registrar 9 ITA No. 202/JP/2016 M/s. Vijay Solves Limited Deputy Commissioner of Income-tax, Central Circle, Alwar v. M/s. Vijay Solvex Limited