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आयकर अपीलीय अधिकरण “E ” न्यायपीठ मब

ुं ई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL “ E” BENCH, MUMBAI

श्री महावीर स हिं , उपाध्यक्ष एविं श्री जी. मिंजुनाथ लेखा दस्य के मक्ष ।
BEFORE SRI MAHAVIR SINGH, VP AND SRI G MANJUNATHA, AM

Aayakr ApIla saM . / ITA No. 3214/Mum/2014

(inaQa- a rNa baYa- / Assessment Year 2009-10)

Aayakr ApIla saM . / ITA No. 3215/Mum/2014

(inaQa- a rNa baYa- / Assessment Year 2010 -11)
Tata Sky Limited The Asst. Commissioner of
Unit 301, to 305, 3 r d Floor, Income Tax, Circle 7(3),
W indsor, Off C.S.T. Road, Vs. [now Assistant
Kalina, Santacruz (East), Commissioner of Income –
Mumbai-400 098 tax, Range 16(1)] Mumbai
(ApIlaaqaI- / Appellant) .. (p`%yaqaaI- / Respondent)
स्थायी ले खा िं . / PAN No. AAGCS9294M

Aayakr ApIla saM . / ITA No. 3971/Mum/2014

(inaQa- a rNa baYa- / Assessment Year 2009 -10)

Aayakr ApIla saM . / ITA No. 3972/Mum/2014

(inaQa- a rNa baYa- / Assessment Year 2010-11)

The Dy. Commissioner of M/s Tata Sky Ltd.

Income Tax 7(3) 34d Floor, C -1, W adia
Room No. 615, 6 t h Floor, International Centre,
Vs.
Aayakar Bhavan, M.K. Road, (Bombay Dyeing),
Mumbai-400 020 Pandurang Budhkar Marg,
W orli, Mumbi -400 025
(ApIlaaqaI- / Appellant) .. (p`%yaqaaI- / Respondent)
अपीलाथी की ओर े / Appellant by : Shri J D Mistry, Senior Advocate
प्रत्यथी की ओर े / Respondent by : Shri R Manjunatha Swamy,
CIT-DR

ुनवाई की तारीख / Date of hearing: 29-07-2020

घोषणा की तारीख / Date of pronouncement : 10-09-2020

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
Tata Sky Limited; AYs 09-10 & 10-11

AadoSa / O R D E R

महावीर स हुं , उपाध्यक्ष /

PER MAHAVIR SINGH, VP:

These cross appeals, by the assessee and by revenue, are

arising out of the orders of Commissioner of Income Tax
(Appeals)-13, Mumbai [in short CIT(A)], in appeal Nos. CIT(A)-
13/Rg.7(3)/AP-269/11-12 and 127/12-13 dated 03.03.2014.
The Assessments were framed by the Asst. Commissioner of
Income Tax & Dy. Commissioner of Income Tax, Circle-7(3),
Mumbai (in short ‘ACIT/DCIT/ AO) for the AY 2009-10 and 2010-
11 vide different orders dated 31.12.2011 and 06.02.2013 under
section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the
Act’).

2. The first common issue in these two appeals of assessee

for AYs 2009-10 and 2010-11 in ITA Nos. 3214 &
3215/Mum/2014 is as regards to the order of CIT(A) confirming
the action of the AO in making disallowance of discount and
various other expenses like discount on sale of set-top box and
hardware, discount on sale of recharge coupon vouchers,
disallowance of bonus or credit provided by the assessee to
subscribers, disallowance of sale promotion expenses and
disallowance of channel support expenses for non-deduction of
TDS by invoking the provision of section 40(a)(ia) of the Act.

3. The facts and circumstances of both the years are identical

as admitted by Ld. Senior Counsel for the assessee as well by

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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Ld. CIT-DR. Hence, we will take the facts from AY 2009-10 and
decide the issues raised by the assessee in this year. For this,
assessee has raised the following grounds in AY 2009-10: -

“1. On the facts and in the circumstances

of the case and in law, the Hon’ble
Commissioner of Income-tax (Appeals) -
13. Mumbai [C1T(A)] erred in upholding
the disallowance of discount on sale of Set-
top box & hardware aggregating to Rs.
23.50,51.772 (Rs. 1338,81.648 and Rs.
10,11,70,124 respectively) under Section
40(a)(ia) of the Act.

2. On the facts and in the circumstances

of the case and in law, the Hon'ble 01(A)
erred in upholding the disallowance of
discount on sale of recharge coupon
vouchers of Rs. 38,80,6 I .901 under
Section 40(a)(ia) of the Act.

3. On the facts and in the circumstances

of the case and in law, the Hon’ble CIT(A)
erred in upholding the disallowance of
bonus or credit provided by the Appellant
to subscribers of Rs. 1,54,24,104 under
Section 40(a)(ia) of the Act.

4. On the facts and in the circumstances

of the case and in law, the Hon’ble CIT(A)

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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erred in upholding the disallowance of

sales promotion expenses of Rs.
1,30,37,124 under Section 40(a)(ia) of the
Act.

5. On the facts and in the circumstances

of the case and in law, the Hon'ble CIT(A)
erred in upholding the disallowance of
distribution channel support expenses of
Rs. 10,81,11,728 under Section 40(a)(ia)
of the Act.”

4. Briefly stated facts are that the assessee has given

discount on the sale of Set-top Boxes and Recharge Coupon
Vouchers, which is referred to as a primary discount. As a part
of its sale promotion the assessee also provides additional
discounts like a festival discount, quantity discount, etc. to the
distributors to encourage them to purchase and in turn sell
higher quantities of products. This additional discount is referred
to as a secondary discount. The secondary discounts are
recognized by the Assessee as Sale promotion expense or
distribution channel support expenses. The AO during
assessment of TDS had passed the order under sections 201 and
201(1A) of the Act for AY 2009-10 & AY 2010- 11, wherein the
primary discount and secondary discount were held to be subject
to provisions of section 194H of the Act. However, the Mumbai
Tribunal has held that the primary discount and secondary
discount provided by the assessee is not in the nature of
commission and not subject to TDS under section 194H of the

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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Act. In this regard, the Ld. Counsel for the assessee SH JD

Mistry stated that the Tribunal has relied on the decisions of the
Hon’ble Bombay High Court in the case of Piramal Healthcare Ltd
(230 Taxman 505), Qatar Airways Ltd (332 ITR 253) and
Intervet India (P.) Ltd (49 taxmann.com 14/3M ITR 238). Ld.
Counsel filed a chart before us in regard to the issues decided by
the Tribunal, which reads as under: -

Summary chart for AY 2009-10

Ground Grounds of appeal Reference in the order of the Mumbai Tribunal
No. in the Appellant’s own case under section 201
of the Act.
1 Disallowance of discount on sale of The Mumbai Tribunal at para 34 (page 23)
Set-top box & hardware aggregating has specifically mentioned about the
to Rs. 23,50,5 1,772 (Rs. Appellant giving discount on the sale of
13,38,81,648 and Rs. 10111,70,124 Set-top box and recharge coupon vouchers.
respectively) under section 40(a)(ia) The Tribunal at para 39 (page 30) has held
of the Act that such discount is not in the nature of
2 Disallowance of discount on the sale commission
of recharge coupon vouchers of Rs
38,80,61,901 under Section 40(a)(ia)
of the Act.
3 Disallowance of bonus or credit Please refer to clarification mentioned in
provided by the Appellant to point B below
subscribers of Rs. 1,54,24,104 under
Section 40(a)(ia) of the Act
4 Disallowance of sales promotion The Mumbai Tribunal at para 34 (page 23)
expenses of Rs. 1,30,37,124 under also mentioned about the additional
Section 40(a)(ia) of the Act. discount, i.e., festival/seasonal discounts to
5. Disallowance of distribution channel the distributors.
support expenses of Rs. 10,81,11,728 The Tribunal at para 39 (page 30) has held
under Section 40(a)(ia) of the Act that such discount is not in the nature of the
commission

In view of the above, Ld Counsel argued that the order under

Section 201 of the Act for AY 2009-10 was for the period
01.01.2009 to 31.03.2010, whereas, the appeal under
consideration for AY 2009-10, the discount amount for the

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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entire year was subject to disallowance under Section 40(a)(ia)

of the Act. Therefore, even the same set of discounts are the
subject matter of litigation under both the appeals, the amount
of discount will not match on account of the difference in the
period under litigation for AY 2009-10.

5. Similarly, in regards to discount/bonus directly provided by

the assessee to its subscribers (i.e. end customers), the issue is
covered. The facts are explained by giving example, if a
subscriber directly goes to the website of the assessee (i.e.
distributors/retailers are not involved) and takes the subscription
of say 6 months on payment of subscription fees of 5 months.
The subscription fee of one month is given as discount/bonus by
the assessee to the subscribers. In the books of accounts of the
assessee, the subscription fees of 6 months are treated as the
revenue of the assessee to comply with the other laws and
regulations and one-month free subscription is treated as
Discount/Bonus provided to the subscribers. During AY 2009-10,
the Assessee has provided discount/bonus amounting to Rs.
1,54,24,104/- directly to the subscribers, which is the subject
matter of disallowance by the Assessing Officer. By any stretch
of the imagination, the said discount cannot be regarded as
'commission' subject to provisions of section 194H of the Act. To
that extent, this ground of the assessee is on much stronger
footing than the discount given to the distributors, stated by the
learned Counsel for the assessee. Accordingly, it was argued
that disallowance of discount given to the customers under
section 40(a)(ia) of the Act is unwarranted. However, the AO as

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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well as CIT(A) has inadvertently considered that the

discount/bonus given directly to its subscribers as the discount
given to the distributors. However, even in such case, having
regard to the decision of the Mumbai Tribunal in the Assessee's
own case, the discount given to the customers cannot be subject
to deduction of tax at source under section 194H of the Act and
accordingly, disallowance of discount given to the customers
under section 40(a)(ia) of the Act is unwarranted.

6. The learned Counsel for the assessee stated that the issue
is squarely covered by Tribunal’s decision in ITA No. 6923 to
6926/Mum/2012 in assessee’s own case for AYs 2009-10 to
2012-13 order dated 12.10.2018, wherein, while adjudicating
the appeal under section 201(1) and 201(1A) of the Act,
whether the assessee is liable for TDS, he stated that the
Tribunal vide Para 39 has categorically held that the assessee
should not be visited with the liability to deduct TDS under
section 201(1) and 201(1A) of the Act. For this he referred to
Para 39 and 40 of Tribunal’s order as under: -

“39. A cohesive reading of the above case

laws particularly that of the Hon'ble
Bombay High Court in the case of Piramal
Healthcare Ltd. (supra), Qatar Airways
(supra) and Intervet India (P.) Ltd. (supra)
would show that the ld. Counsel of the
assessee’s plea that the assessee should
not be visited with the liability to deduct
TDS for non-deduction of tax at source

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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u/s. 194H on the difference between the

discounted price at which it is sold to the
distributors and the MRP upto which they
are permitted to sell, is cogent and is
sustainable view. As noted hereinabove
the Hon’ble Jurisdictional High Court in the
case of Piramal Healthcare Ltd. (supra)
and Qatar Airways (supra) has found that
the difference between MRP and the price
at which item is sold to the distributor
cannot be held to be commission or
brokerage. Similarly in the case of Intervet
India (P.) Ltd. (supra), the Hon'ble
Bombay High Court has held that when the
assessee had introduced sales promotion
scheme for distributors to boost sale of its
product when it passed on incentives to
distributors/dealers/stockists through sale
credit notes and claimed it, then since the
relationship between assessee and
distributors/stockists was that of principal
to principal and infact distributors were
customers of assessee to whom sales were
effected either directly or through
consignment agent, it cannot be treated as
commission payment under section 194H.
Thus it follows on similar facts it has been
held that the distributors are customers of

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the assessee to whom sales are affected.

The discounts and credit notes credited
cannot be considered to be commission
payment u/s. 194H. Similarly we note that
on similar facts, the Hon’ble Karnataka
High Court in the case of Bharti Airtel Ltd.
(supra) which has been duly followed by
the ITAT Mumbai in Business Channels Ltd.
(supra) has decided the same issue in
favour of the assessee. Though we are
aware that the ld. CIT(A) has referred to
the decisions in favour of the Revenue on
similar issue of Hon’ble Delhi High Court,
but however as held by the Hon’ble Apex
Court in the case of CIT v. Vegetable
Products Ltd. [1973] 88 ITR 192 (SC) if
two views are possible, one in favour of
the assessee should be adopted. Moreover,
as we have already found that the ratios of
decision of Hon'ble jurisdictional High
Court as mentioned hereinabove are also
in favour of the assessee. Hence, there is
no question of taking a contrary view
following the other high courts. The
remarks of the ld. CIT(A) on the
jurisdictional High Court decision are
totally uncalled for, neither permissible nor
sustainable.

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40. Hence, in the background of the

aforesaid discussion and precedent, we
hold that the assessee was not liable to
deduct the tax at source on the impugned
amounts in this case.”

7. When the same was confronted to the learned CIT DR, he

could not controvert the above except filing of following case
laws: -

“1. CIT vs. Idea Cellular Ltd. (2020) 189

Taxman 118 (Delhi)

2. Idea Cellular Ltd. vs. ACIT (2014) 51

taxmann.com 50 (Hyderabad-Trib.)

3. Tata Teleservices Ltd. vs. DCIT

(2013) 29 taxmann.com 261 (Bangalore –
Trib.)

4. Bharti Cellular Ltd. vs. ACIT (2011)

12 taxmann.com 30 (Calcutta).”

He also filed written note dated 14.03.2018. He submitted that

the issue is covered in favour of Revenue and against assessee
by the case laws of ITAT, Hon’ble High Courts and Supreme
Court to support and strengthen the Department's case which
are directly on the point. He referred to the following two issues
first: -

The first issue regarding-

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
Tata Sky Limited; AYs 09-10 & 10-11

(1) Disallowance on discount of sale of

STBs U/s. 40(a)(ia) - Rs.38,86,45,630/-

(2) Disallowance on discount of sale of

RCVs U/s. 40(a)(ia) - Rs.46,27,2 1,974/-

He stated that the assessee is engaged in the business of

providing Direct to Home Services (DTH). A Set Top Box (STB)
at the premises of the subscribers receives television signals
through broadcasters which are uplinked to the satellite. The
assessee classified DTH in two parts; the Hardware (which are
ultimately sold to the subscribers, assessee does not retain any
ownership rights therein) and the Tata Sky Hardware (which are
sold without any consideration and assessee retain ownership
rights at all times). The main source of income of assessee
arises from subscription charges collected from subscribers on
Recharge Coupon Vouchers (RCV) and sale of STB. The assessee
claims Discount on sale of STB at Rs.38,86,45,630/- & Discount
on sale of RCV of Rs.46,27,21,974/-. The AO contended that the
very nature of discount given by assessee to its distributors is
commission instead of discount and disallowed the amounts
under section 40(a)(ia) of the Act as no TDS was deducted by
the assessee. The CIT(A) upheld the decision of the AO. Similar
arguments were made in respect of other disallowances by Ld
CIT-DR.

8. We have heard both parties and perused materials on

record. After considering the facts in entirety and hearing both
the sides, we are of the view that this issue is squarely covered

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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by Tribunal’s decision in assessee’s own case, wherein Tribunal

has categorically observed that the assessee was not required to
deduct TDS on the amounts of discount on sale of Set-top box
and hardware, discount on sale of recharge coupon and
vouchers, bonus or credit provided by assessee to subscribers,
sales promotion expenses and distribution channel support
expenses. Further, the transaction between the company and
distributor is on principal to principal basis and all the risk, loss,
damages are transferred to distributor on delivery. Further,
distributors are free to sale at any price below maximum retail
price. In this regard, the assesse has filed the sample copy of
invoices for sale of Set Top Box (STB) and other recharge
coupons to prove that it is a sale but not services to come within
the ambit of the definition of commission as defined under
section 194H of the Act. Therefore, we are of the considered
view that the assessee is not required to deduct TDS on discount
allowed on sale of Set Top Box and hardware, recharge coupons
vouchers and disallowance of bonus or credit provided to
subscribers including sales promotion expenses. Hence, by
following the decision of ITAT in assessee’s own case in the
proceeding under section 201(1) and 201(1A) in ITA No. 6923 to
6926/Mum/2012 direct the Assessing Officer to delete the
addition towards disallowances under section 40(a)(ia) of the Act
on discount of sale of STB & hardware, recharge coupon
vouchers & disallowance of bonus or credit provided to
subscribers, sales promotion expenses and distribution channel
support expenses for failure to deduct TDS u/s 194H of the IT
Act, 1961. This issue of assessee’s appeal is allowed.

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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9. Similar is the facts in respect of this ground for AY 2010-11

in ITA No. 3215/Mum/2014 hence, in that year also the
disallowance is deleted on this account.

10. The next issue in ITA No. 3214/Mum/2014 for AY 2009-10

of assessee’s appeal is against the order of CIT(A) confirming
the action of the AO in making disallowance of year end
provisions was made by assessee in respect of expenses. For
this assessee has raised the following ground No. 6: -

“6. On the facts and in the circumstances

of the case and in law, the Hon’ble CIT(A)
erred in upholding the disallowance of the
year end provisions of ₹ 56,97,54,762/-
made by the Appellant in its financial
statements under section 40(a)(ia) of the
Act.”

11. During the relevant AY 2009-10, the assessee made ad-

hoc year-end provision of expenses of Rs.56,97,54,762/- in the
absence of receipt of the invoices. Since, the assessee had not
deducted tax in AY 2009-10 on such year-end provision, the AO
has disallowed the same under section 40(a)(ia) of the Act. Now,
before us, the learned Counsel argument having regard to the
Gujarat High Court's decision in the case of PCIT vs. Sanghi
Infrastructure Ltd. (2018) 257 Taxman 371(Guj.)(HC) in ITA No.
404 of 2018, Ahmedabad Tribunal's decision in the case of
Sanghi Infrastructure Ltd. vs. DCIT in ITA No. 2576/Ahd/2012
for Assessment Year 2009-10 vide order dated 30.09.2016 and

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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Mumbai Tribunal's decision in the case of Mahindra & Mahindra

Limited vs. DCIT in ITA No.8597/Mum/2010 for Assessment Year
2006-07 vide order dated 06.06.2012 and Aditya Birla Nuvo Ltd.
Vs. DCIT in ITA No. 8427/Mum/2010 for Assessment Year 2006-
07 vide order dated 17.09.2014. He argued that there is no
obligation on the assessee to deduct tax on the year-end
provisions and accordingly, the same should not be disallowed
under section 40(a)(ia) of Act for AY 2009-10.

12. The Learned Counsel further stated that in response to

above ground, the Bench expressed that AO may be requested
to verify whether TDS is deducted in the subsequent years
pursuant to bills received and payments made. In this
connection, he pointed out that this exercise has been carried
out by the AO, who has verified the same and allowed full
amount in AY 2010-11. See paras 5.4.2 & 5.4.3 on page 16 of
the assessment order for AY 2010-11 reproduced herein below:

"5.4.2. The assessee submitted that in the

Assessment Order for A Y2009-10, the
provision for expenses and subscriber
management charges (which are in nature
of year-end provision) aggregating to Ks.
56,9 7 54, 762 were disallowed under
Section 40(a) (i)/(ia) of the Act for non-
deduction of tax at source on the same.
During the A Y 20 10-11, the said provision
has been reversed and/ or appropriate tax
has been deducted and deposited on such

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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expenses. Thus, the assessee claimed that

such expenses are to be allowed in FY
2010-11. In this connection, the assessee
was asked to provide the details of tax
deducted and paid on such amount. 5.4.3)
The assessee submitted the details of TDS
vide letter dated 04.02.2013. The
submission of the assessee is considered
and verified The assessee is allowed the
deduction of the expense ofRs.56.97,54,
762/-."

It is therefore argued that the verification in the present case

has already been carried out. However, considering the judicial
precedents of the Gujarat High Court and the Mumbai Tribunal,
the deduction for year-end provision ought to be allowed in AY
2009-10, and consequently, deduction of the same cannot be
granted in the subsequent assessment year (i.e. AY 2010-11).

13. The learned DR on the other hand strongly supported the

order of the CIT(A) and submitted that as per the provision of
chapter XVII-B of the Act, TDS is required to be deducted either
at the time of payment or at the time of credit including even a
credit in the suspense account is subject to TDS. Therefore,
there is no merit in the argument of the assessee is that TDS is
not applicable on year end provisions.

14. We have heard both the parties, perused the materials

available on record and gone through the orders of the lower

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authorities below including case laws relied upon by the learned

counsel for the assessee. The facts borne out from record
indicate that the assessee made year-end provisions in respect
of sale promotion, legal and professional fees, interest and
programming costs as under: -

S NO Particulars Section of
applicability of
TDS
1. Provision for sales 194H 1,97,48,132
promotion
2. Provision for legal & 194J 2,74,55,451
Professional
3. Provisions for 194A 61,77,862
Interest
4. Provisions for 194J 51,58,47,558
programming cost
Total 56,92,29,003

15. Further, these provisions were debited to the profit and

loss account and not added back to the computation of total
income by the assessee. Once, the assessee has claimed these
expenses by debiting into profit and loss account, it needs to
deduct TDS on such expenditure, even if not credited to
respective parties account. Since, the assessee has not deducted
TDS, the expenses claimed are liable to be disallowed under
section 40(a)(ia) of the Act, because as per the provisions of
chapter XVII-B of the Act, TDS needs to be deducted either at
the time of payment or at the time of credit to the party
account. Further, even in a case where credit into the suspense
account is subject to TDS under the provisions of the Act.
Therefore, we are of the considered view that there is no merit
in the argument of the assessee that TDS provisions are not

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applicable when year-end provisions are made without crediting

to respective parties account. To this extent, we are fully
subscribed to the findings recorded by the learned AO as well as
learned CIT(A). As regards to the claim of the assessee that in
subsequent Financial Year year-end provisions have been either
reversed or paid subject to deduction of TDS, does not alter the
legal position in so far as disallowance of expenses under section
40(a)(ia) of the Act for non-deduction of Tax at source. The law
is very clear as per which TDS is required to be deducted when
credit or payment whichever is earlier. As regards various case
laws referred by the assessee, we find that all those cases are
contrary to the provisions of chapter XVII-B r.w.s.40(a)(ia) of
the Act, and hence are not followed. Therefore, considering facts
and circumstances of the case, we are of the considered view
that there is no error in findings recorded by the lower
authorities in disallowing year-end provisions for non-deduction
of TDS under respective provisions of the Act. Accordingly, we
reject the ground taken by the assessee.

16. Similar is the facts in respect of this ground for AY 2010-

11 in ITA No. 3215/Mum/2014 hence, the ground taken by
assessee challenging disallowance of year end provisions u/s
40(a)(ia) of the Act for non-deduction of TDS is rejected.

17. The next common issue in these two appeals of assessee

for AYs 2009-10 & 2010-11, is as regards disallowance of
interest expenses. The issue is exactly identical in both the
years. Hence, we take following ground for Assessment Year
2009-10 and decide the issue for both the years: -

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
Tata Sky Limited; AYs 09-10 & 10-11

“Disallowance of interest expense under

section 36(1)(iii)

7. On the facts and in the circumstances

of the case and in law, the Hon'ble CIT(A)
erred in upholding the disallowance of
interest expense of ₹1,99,51,000/- under
section 36(1)(iii) of the Act.”

18. Briefly stated, facts are that during the AY 2009-10 and AY
2010-11, the Assessee had Capital Work-in-progress ('WIP') of
Rs.51.87 crores and Rs. 55.09 crores respectively, which
consisted of:

Nature of Expenses AY 2009-10 AY 2010-11

(Rs. in (Rs.in
crores) crores)
Viewing cards 50.13 40.44
Other stand by equipments 1.74 14.65
otal 51.87 55.09

The AO observed that the assessee had not allocated any

interest expenditure against the capital WIP. Hence, AO held
that part of interest was allocable to such capital WIP and
accordingly, he has disallowed proportionate interest
expenditure under Section 36(1)(iii) of the Act.

19. The learned AR submitted that the learned CIT(A) has

erred in confirming disallowance of interest expenses u/s

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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36(1)(iii) of the Act without appreciating the fact that for

interest expenses to be disallowed it is necessary that capital
borrowed should be for acquisition of asset. The AR further
submitted that in this case the assessee has not borrowed any
specific loans against capital work in progress and it has utilized
its own funds being share capital of Rs. 517.92 crores and
Rs.276.87 crores respectively raised during assessment years
2009-10 and 2010-11. In this connection, the assessee stated
that the share capital received by it was more than the amount
of investment into Capital WIP. Hence, it was argued that no
interest bearing funds have been utilized for the purpose of
making an investment in Capital WIP. The decision of the
Bombay High Court in the case of Reliance Utilities & Power
Limited (313 ITR 340) also proceeds on the footing that the cash
flow of the relevant year should be considered vis-ã-vis
investment made in that year. In response to the said ground,
the Bench had requested for a reason for receipt of share
capital. In this connection, Ld Counsel for the assessee argued
that there is no requirement set out in law to specify the reason
for the issue of share capital. Nevertheless, the assessee wishes
to point out that it had obtained the license to provide the DTH
services from the Central Government of India in 2006. It was
explained that the DTH industry is capital intensive and the
assessee being in its initial years of operations required
significant amount of long term equity funds for its business
operations. Accordingly, the assessee has raised share capital of
Rs. 517.92 crores in AY 2009-10 & Rs. 276.87 crores in AY

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
Tata Sky Limited; AYs 09-10 & 10-11

2010-11, which were utilized for the purpose of its DTH

business.

20. We have heard both the parties, perused the materials

available on record and gone through orders of the authorities
below along with case laws cited by the learned counsel for the
assessee. The facts borne out from record indicate that during
the AY 2009-10 and AY 2010-11, the Assessee had Capital
Work-in-progress ('WIP') of Rs.51.87 crores and Rs. 55.09
crores respectively. Further, assessee has paid huge interest
expenditure on various loans. The AO has disallowed
proportionate interest expenses debited to the profit and loss
account by invoking proviso to section 36(1)(iii) of the Act and
held that interest paid on loan availed for purchase of capital
asset needs to be capitalized till such period the assessee put
the asset to use. There is no doubt with regard to legal position,
because interest paid on borrowed capital shall be capitalized to
work in progress till such time the capital asset is put to use.
But, what is to be seen is whether the assessee has borrowed
any fund for acquisition of capital asset or not. In case, no
borrowed fund is used for acquisition of asset then question of
capitalization of interest does not arise. In this case, on perusal
of facts available on record it is very clear that the assessee has
not borrowed specific loan for acquiring capital asset. In fact, the
assessment order is silent on this aspect. However, the AO has
disallowed proportionate interest paid on other loans including
loans borrowed for working capital purpose on the ground that
the assessee has used interest bearing funds for acquisition of

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
Tata Sky Limited; AYs 09-10 & 10-11

capital asset, without bringing on record any evidence to prove

that loan funds have been used for acquisition of capital work in
progress. But, fact remains that the assessee has categorically
demonstrated with evidences that capital work in progress has
been acquired out of its own funds being share capital raised for
two assessment years. It is settled position of law that if own
funds are used for acquisition of capital assets, then the
question of disallowance of interest does not arise. Further, if
there are funds available, both interest free and interest bearing,
then a presumption can be made that the investments were
made out of interest free funds available with the company, if
the interest free funds are sufficient to meet the investment as
held by the Hon’ble Bombay High Court in the case of Reliance
Utilities and Power (313 ITR 340). In this case, on perusal of
facts we find that the assessee has filed necessary evidences to
prove availability of own funds which is sufficient to cover
investment in capital work in progress. Therefore, we are of
considered view that the AO was erred in disallowing
proportionate interest expenses u/s 36(1)(iii) of the Act. Hence,
we direct the AO to delete disallowances of interest for both
assessment years.

21. The only common issue in these two appeals of Revenue in

ITA Nos. 3971 & 3972/Mum/2014 for AYs 2009-10 and 2010-11
respectively, is as regards to the order of CIT(A) deleting the
disallowance under section 14A of the Act amounting to
₹90,67,986/-. For this, Revenue has raised exactly identical
grounds in both Assessment Years the i.e. AYs 2009-10 and

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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2010-11, hence, we will take the grounds from Assessment Year

2009-10 and will decide the issue. For this, assessee has raised
the following grounds: -

“(i) the learned CIT(A) has erred on facts

and in law in deleting the disallowance
under section 14A of the Act of
₹90,67,986/- made by the Assessing
Officer without properly appreciating the
factual and legal matrix of the case as
clearly brought out by the Assessing
Officer.

(ii) The learned CIT(A) has erred on the

facts and in law in not appreciating the fact
that even through during the year no tax
free income was earned, investment has
been made by the assessee in assets
which can yield tax free income and hence
the disallowance was correctly made by
the Assessing Officer.”

22. Briefly stated, the facts are that during the year under
consideration the assessee has invested in various investments
which, yield exempt income. Further, the assessee has not made
suo moto disallowance of expenditure incurred in relation to
exempt income u/s 14A of the IT Act, 1961. The AO has
disallowed interest expenses and other expenses by invoking
Rule 8D(2)(ii)and (iii) on the ground that although the assessee

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
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has debited huge interest expenses and other administrative

expenses, but failed to disallow expenses relatable to exempt
income, by following the decision of ITAT Delhi Special Bench in
the case of Champ Investment Ltd. (378 ITR 33). It is the case
of the assessee that during the year under consideration it has
not earned any exempt income and hence, the question of
disallowance of expenses u/s 14A of the Act does not arise.

23. We have heard both the parties, perused the material

available on record and gone through the orders of the
authorities below. We find that this issue is squarely covered in
favour of the assessee by the decision of Hon’ble Bombay High
Court in the case of Ballarpur Industries Ltd. in ITA No. 51 of
2016, wherein it was held that when there is no exempt income
then no disallowance of expenses u/s 14A of the IT Act, 1961
can be made. The Hon’ble Delhi High Court in the case of
Cheminvest Ltd. (378 ITR 33supra) has held that if there is no
exempt income then no disallowance of expenditure u/s 14A of
the Act can be made. The ITAT Delhi Special Bench in the case
of ACIT vs. Vireet Investments (P.) Ltd. [2017] 58 ITR(T) 313
(Delhi - Trib.) (SB) has reiterated similar principles of law.
Therefore, we are of the considered view that once, there is no
exempt income earned for the year, then disallowance
contemplated u/s 14A of the Act cannot be pressed into. In this
case, the Revenue has not disputed the fact that the assessee
has not earned exempt income for the year under consideration.
Since, there is no exempt income for the year, the disallowance
of expenditure contemplated u/s 14A of the Act cannot be made.

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ITA Nos. 3214, 3215,3971 & 3972/Mum/2014
Tata Sky Limited; AYs 09-10 & 10-11

The CIT(A) after considering relevant facts has rightly deleted

the addition made by the AO towards disallowance of expenses
u/s 14A of the Act. There is no error in the findings of the
learned CIT(A). Hence, we are inclined to uphold the findings of
the learned CIT(A) and dismissed appeal filed by the Revenue
for both the AYs.

24. In the result, the appeals of the assessee for the Asst. year
2009-10 and 2010-11 are partly allowed and the appeals filed by
the Revenue is dismissed.

Order pronounced in the open court on 10.09.2020.

Sd/- Sd/-
(जी. मंजनु ाथ /G MANJUNATHA) (महावीर स ह
िं /MAHAVIR SINGH)
(लेखा दस्य / ACCOUNTANT MEMBER) (उपाध्यक्ष/ VICE PRESIDENT)

मुिंबई, ददनािंक/ Mumbai, Dated:10.09.2020

दीप रकार, व.निजी धिव / Sudip Sarkar, Sr.PS

आदे श की प्रनिसलपप अग्रेपिि/Copy of the Order forwarded to :

1. अपीलाथी / The Appellant
2. प्रत्यथी / The Respondent.
3. आयकर आयक्
ु त(अपील) / The CIT(A)
4. आयकर आयुक्त / CIT
5. ववभागीय प्रतततनधि, आयकर अपीलीय अधिकरण, मिंब
ु ई / DR, ITAT,
Mumbai
6. गार्ड फाईल / Guard file.

आदे शाि ार/ BY ORDER,

त्यावपत प्रतत //True Copy//

उप/ हायक पुंजीकार (Asstt. Registrar)

आयकर अपीलीय अधिकरण, मुिंबई / ITAT, Mumbai

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