The Principal Commissioner Of ... vs Shreno Limited
2021 Latest Caselaw 7822 Guj

    C/TAXAP/311/2020                                  ORDER DATED: 06/07/2021



           IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

                        R/TAX APPEAL NO. 311 of 2020
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   THE PRINCIPAL COMMISSIONER OF INCOME TAX-2, VADODARA
                          Versus
                      SHRENO LIMITED
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Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
MR B S SOPARKAR(6851) for the Opponent(s) No. 1
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 CORAM:HONOURABLE MS. JUSTICE BELA M. TRIVEDI
       and
       HONOURABLE DR. JUSTICE ASHOKKUMAR C. JOSHI

                                Date : 06/07/2021

                                 ORAL ORDER

(PER : HONOURABLE MS. JUSTICE BELA M. TRIVEDI)

1. At the outset, it may be noted that the present Appeal was disposed of by the Coordinate Bench along with the Tax Appeal No. 302 of 2020 vide the order dated 21.01.2021, however, the Revenue having filed the Review Application being Misc. Civil Application (For Review) No. 1 of 2021 in Tax Appeal No. 311 of 2020 i.e. the present one, the Coordinate Bench vide the order dated 11.06.2021 had clarified that the order dated 21.01.2021 shall be construed to have been passed only in Tax Appeal No. 302 of 2020 and not in Tax Appeal No. 311 of 2020, and directed to notify the present Tax Appeal for admission afresh. Accordingly, the Appeal has been listed before this Court for admission hearing.

2. The present Appeal arises out of the order

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dated 18.12.2019 passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the ITAT') in ITA No. 688/Ahd/2016 for A.Y. 2012-13 in the case of respondent - Shreno Limited. The appellant Revenue has framed the following two substantial question of law in the memorandum of appeal : -

"(a) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in not upholding the entire addition of Rs. 97,57,920/- made by the Assessing Officer under Section 14A of the Income-Tax Act, 1961 r.w. Rule 8D of the Income-Tax Rules, 1962 ?

(b) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in confirming the decision of the CIT(A) deleting the addition made under section 36(1)(iii) of the Income-Tax Act, 1961 towards the interest on borrowings without appreciating that the assessee had failed to controvert the findings of the Assessing Officer and failed to establish the commercial expediency of using interest bearing loans to advance loans to its subsidiary without charging any interest ?"

3. The learned Senior Standing Counsel Mr. Varun K. Patel has fairly drawn the attention of the Court that the question no. (a) is as such covered by the decision of this Court in the case of Principal Commissioner of Income-Tax versus Shreno Ltd. reported in (2018) 409 ITR 401 (Guj.), which was in case of the very respondent - assessee for the A.Y. 2010-11. In the said case, the similar issue as framed as issue No. (a) in the present case has been dealt with by the Court by making following

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observations : -

"10. As is well known, Section 14A of the Act relates to expenditure incurred in relation to income not includable in total income. Sub-section (1) of Section 14A provides that for the purposes of computing total income under Chapter-IV no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. As per sub-

section (2) of Section 14A the Assessing Officer would determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the method as may be prescribed, if having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The method for such purpose has been prescribed under Rule 8D of the Rules. Sub-rule (1) of Rule 8D substantially reiterates what subsection (2) of Section 14A provides. Essentially under sub-rule (1), the Assessing Officer would be authorized to determine the expenditure to be disallowed in relation to earning tax free income in terms of sub-rule (2) where having regard to the accounts of the assessee of the previous year he is not satisfied with the correctness of the claim of expenditure made by the assessee or the claim made by the assessee is that no expenditure has been incurred in relation to income which does not form part of total income.

11. In case of S. A. Builders Ltd., vs. Commissioner of Income Tax (Appeals), reported in (2007) 288 ITR page 1 (SC) the Supreme Court considered an issue where the Revenue desired to disallow an assessee's claim of expenditure of interest on borrowed capital which was

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lent to its sister concern without charging interest. The Supreme Court interpreted the term "for the purpose of the business" used in Section 36 (1)

(iii) of the Act in such context. The Supreme Court approved the decision of the Delhi High Court in case of Commissioner of Income Tax vs. Dalmia Cement (B) Ltd., reported in (2002) 254 ITR 377 (Delhi) and observed that once it is established that there was nexus between the expenditure and the purpose of business which need not necessarily be the business of the assessee itself, the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the rule to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The transfer of borrowed funds to a sister concern has to be seen from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

12. The exposition of law made by the Supreme Court in case of S. A. Builders and observation made therein have been applied by this court on various occasions, particularly in connection with the disallowance to be made under Section 14A of the Act. It has been held that if the assessee can demonstrate availability of surplus interest-free funds for making investment generating tax free income, disallowance under Section 14A of the Act would not be justified.

13. In case of this very assessee such an issue came up for consideration for the assessment year 2008-09. In such case the Tribunal had held that Section 14A read with Rule 8D could be applied only after the Assessing Officer is not satisfied with the claim of the assessee regarding the expenditure. The

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Revenue had approached the High Court against the judgment of the Tribunal. The Court dismissed the appeal by judgment dated 6.9.2017 making following observations:

"5. Learned counsel for the Revenue was unable to point out that these observations on facts by the Tribunal to the effect that the assessee had interest free funds far in excess yield tax exempt income was wrong. That being the position as held by this Court in number of occasions including judgments in case of Deputy Commissioner of Income Tax vs. Vasco Sales & Marketing Corpn. reported in 66 taxmann.com 366 relying upon the judgment of the Supreme Court in case of S.A Builders Limited vs. Commissioner of Income Tax (Appeals), Chandigarh reported in 288 ITR 1, disallowance under section 14A would not be permissible. We do not find that the Tribunal has committed any error."

4. In view of the above, the question No. (a) as framed by the appellant is no more res integra and could not be said to be substantial question of law.

5. So far as the question no. (b) is concerned, the learned Senior Standing Counsel Mr. Patel submits that the ITAT had committed an error of law in confirming the decision of the CIT(A) deleting the addition made under section 36(1)

(iii) of the Income-Tax Act, 1961 towards the interest on borrowings without appreciating that the assessee had failed to controvert the

C/TAXAP/311/2020 ORDER DATED: 06/07/2021

findings of the Assessing Officer and failed to establish the commercial expediency of using interest bearing loans to advance loans to its subsidiary without charging any interest.

6. In this regard, the findings recorded by the CIT(Appeals) in the order dated 31.12.2015 in Appeal No. CAB/(A)-2/74/15-16 are relevant. In para 6.4 and 6.4.1, it has been observed as under : -

"6.4 I have carefully considered the facts on records and submission of the Ld. Authorized Representative. Undisputedly, the appellant has borrowed money from Alembic Ltd. and advanced the same to Quick Flight Ltd. which is a wholly owned subsidiary of the appellant. Upto A.Y. 2011-12, the appellant has been receiving interest on such advances from Quick Flight Ltd. and the same was also offered for taxation. The interest expenditure on the borrowing advanced to Quick Flight Ltd. was also allowed as an expenditure upto A.Y. 2011-12. Thus, on this very ground, the business expediency has been established in the case of appellant in respect of advances given to sister concern. As a matter of fact, due to huge losses incurred in the case of Quick Flight Ltd., the appellant has not charged interest in the year under consideration which in no way will change the purpose of advances given to Quick Flight Ltd. It is also noticed that if the business of subsidiary company is not revived, then the appellant will lose entire investment therein in the form of share capital (Rs.

2 crores) and advances (Rs. 22.78 crores) as on 31.03.2012 also. In view of these facts, the Oa6 of the appellant that the advances given to Quick Flight Ltd. were on account of business expediency and for commercial consideration is found to be

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acceptable.

6.4.1 It is also noticed that under the similar facts and circumstances of the case, the interest expenditure has been held to be an allowable expenditure u/s. 36(1)(iii) of the Act by the Hon'ble Supreme Court in the following cases :

(a) S.A. Builders Ltd. 288 ITR 1 (SC)

(b) Hero Cycles (P) Ltd. vs. CIT, 2015 - TIOL - 280 - SC - IT, order dated 05.11.2015.

In view of the above facts and also the decisions of Hon'ble Supreme Court, thus I hold that the interest expenditure incurred by the appellant on borrowed funds utilized for giving advances to sister concern on account of commercial expediency has to be allowed u/s. 36(1)

(iii) of the Act and accordingly the Assessing Officer is directed to delete the addition. Hence, appellant succeeds in respect of Ground No. 8."

7. The ITAT has confirmed the said findings, and has observed in para 12 of the impugned order as under : -

"12. With the assistance of the ld.

representatives, we have gone through the record carefully. A perusal of the above finding would indicate that the ld. CIT(A) has rightly held that no notional interest income is to be assumed because the assessee has not charged interest on ICDs from subsidiary. The assessee has offered such interest income as business income in earlier years, and therefore, advancement of loan was considered for the purpose of business. To our mind, the ld. CIT(A) has appreciated the controversy in right perspective. It was in the interest of the assessee to revive its subsidiary, otherwise, its share capital as well as advances of Rs. 2278 crores would be in

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jeopardy. Therefore, we do not find any merit in these ground of appeal. They are rejected".

8. In view of the above, concurrent findings recorded by the CIT(Appeals) and by the ITAT, the question no. (b) also does not deserve any further consideration. The said question also being no more res integra, it could not be said that the present appeal involves any question much less substantial question of law. It may be noted that the Appeal under Section 260A could be admitted only on the High Court being satisfied that the case involves a substantial question of law. The Supreme Court in the case of M. Janardhana Rao versus Joint Commissioner of Income Tax reported in (2005) 2 SCC 324, while dealing with the scope of Section 260A of the Income Tax Act, 1961, observed as under : -

"14. Without insisting on the statement of substantial question of law in the memorandum of appeal and formulating the same at the time of admission, the High Court is not empowered to generally decide the appeal under Section 260A without adhering to the procedure prescribed under Section 260A. Further, the High Court must make every effort to distinguish between a question of law and a substantial question of law. In exercise of powers under Section 260A, the findings of fact of the Tribunal cannot be disturbed. It has to be kept in mind that the right of appeal is neither a natural nor an inherent right attached to the litigation. Being a substantive statutory right, it has to be regulated in accordance

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with law in force at the relevant time. The conditions mentioned in Section 260A must be strictly fulfilled before an appeal can be maintained under Section 260A. Such appeal cannot be decided on merely equitable grounds.

15. An appeal under Section 260A can be only in respect of a 'substantial question of law'. The expression 'substantial question of law' has not been defined anywhere in the statute. But it has acquired a definite connotation through various judicial pronouncements. In Sir Chunilal V. Mehta & Sons Ltd. v. Century Spinning & Mfg. Co. Ltd., AIR (1962) SC 1314, this court laid down the following tests to determine whether a substantial question of law is involved. The tests are: (1) whether directly or indirectly it affects substantial rights of the parties, or (2) the question is of general public importance, or (3) whether it is an open question in the sense that issue is not settled by pronouncement of this Court or Privy Council or by the Federal Court, or (4) the issue is not free from difficulty, and (5) it calls for a discussion for alternative view. There is no scope for interference by the High Court with a finding recorded when such finding could be treated to be a finding of fact.

9. In view of the above, the present Tax Appeal being devoid of merits, is dismissed.

(BELA M. TRIVEDI, J)

(A. C. JOSHI,J) AMAR SINGH