Revenue's Appeal Dismissed, CIT (A) Decisions Upheld. Interest Allowed, Capital Gains Confirmed.

The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s decisions. The disallowed interest was allowed, long-term capital gains were confirmed, and additions on the mall sale profit were deleted due to a family arrangement. The order was issued on 25th February 2015.

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Issues Involved:
1. Disallowance of interest paid on borrowed capital.
2. Treatment of long-term capital gains as business income.
3. Additions towards profit on sale of ground floor and other floors of a mall.

Detailed Analysis:

1. Disallowance of Interest Paid on Borrowed Capital:
The primary issue was the disallowance of Rs. 45,01,777 as interest paid on borrowed capital under Section 14A read with Rule 8D. The Assessing Officer (AO) disallowed this interest, citing that the assessee used interest-bearing funds for investments in its sister concern and for loans/advances to family members without charging interest. The AO relied on a previous appellate order for A.Y 2005-06, where similar disallowance was confirmed.

The CIT (A) referenced the Tribunal's decision in ITA No.1705/Hyd/2008 for A.Y 2005-06, which set aside the issue of investment in share application money and deleted the disallowance related to interest-free advances to relatives. Consequently, the CIT (A) allowed the interest disallowed by the AO for the current year.

The Tribunal found no infirmity in the CIT (A)'s order, which followed the Tribunal's earlier decision. Thus, the ground raised by the Revenue was dismissed.

2. Treatment of Long-Term Capital Gains as Business Income:
The AO treated the sale of let-out shops as business income, while the assessee contended it should be treated as long-term capital gains, as the shops were shown as investments in their books and leased out to earn rental income.

The CIT (A) supported the assessee's position, stating that once an asset is treated as an investment and reflected as such in the books over time, this treatment cannot be changed without a valid basis. The CIT (A) directed the AO to delete the addition, emphasizing the principle of consistency as held in Radhaswamy Satsang (193 ITR 321).

The Tribunal upheld the CIT (A)'s order, confirming that the income generated from the sale should be treated as capital gains and not as business income.

3. Additions Towards Profit on Sale of Ground Floor and Other Floors of a Mall:
The AO made additions towards the profit on the sale of the ground floor and other floors of the MPM Mall, treating the transactions as regular sales. The assessee argued these transactions were part of a family settlement agreement and should not be treated as regular sales.

The CIT (A) accepted the assessee's argument, referencing the "deed of family arrangement" and ruling that the rates adopted for family arrangements cannot be compared to prevailing market rates. The CIT (A) directed the AO to adopt the rates admitted by the assessee and delete the additions.

The Tribunal supported the CIT (A)'s decision, relying on the Madras High Court's ruling in CIT vs. KAY ARR Enterprises (299 ITR 348) that family arrangements do not attract capital gains tax. The Tribunal also referenced its own decision in Shri Sachin P. Ambulkar vs. ITO, affirming that family arrangements do not constitute transfers liable to capital gains tax.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT (A)'s decisions on all grounds. The interest disallowed was directed to be allowed, the treatment of long-term capital gains was upheld, and the additions towards profit on the sale of mall floors were deleted based on the family arrangement. The order was pronounced in the open court on 25th February 2015.

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