2018 (2) TMI 2043 - AT - Income Tax

Appellant wins real estate interest deduction dispute; awaits Supreme Court decision on deemed dividend.

M/s. Apurva Developers Pvt. Ltd. Versus ITO-9 (1) (1), Mumbai

M/s. Apurva Developers Pvt. Ltd. Versus ITO-9 (1) (1), Mumbai - TMI Issues Involved:1. Disallowance of interest on secured loans and its deduction from capital work-in-progress.2. Treatment of unsecured loans as deemed dividend under section 2(22)(e) of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Interest on Secured Loans and its Deduction from Capital Work-in-Progress:The appellant, a private limited company engaged in real estate development, filed its return of income for AY 2005-06. The Assessing Officer (AO) observed that the appellant had capitalized bank interest of Rs. 56,79,022/- as Work-In-Progress (WIP). Upon further examination, the AO found that the appellant had borrowed interest-bearing funds amounting to Rs. 13,79,80,794/- and had given interest-free loans and advances totaling Rs. 8,14,77,341/- to its sister concerns and other related parties. The AO disallowed a proportionate amount of interest of Rs. 33,53,450/-, allowing only the balance amount of Rs. 26,25,572/- to be capitalized.The appellant contested this disallowance before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's decision. The appellant argued that the AO had not properly examined the nexus between the inflow and outflow of liquidity and that the interest expense should be assessed based on commercial expediency. The Tribunal found merit in the appellant's argument and set aside the order of the CIT(A), directing the AO to re-examine the nexus and pass a de novo order after giving the appellant a reasonable opportunity to present relevant documents and evidence. Thus, this ground of appeal was allowed for statistical purposes.2. Treatment of Unsecured Loans as Deemed Dividend under Section 2(22)(e):The AO, upon verifying the shareholding pattern, found that a significant shareholder held substantial shares in both the appellant company and the lending companies. Based on CBDT Circular No. 495 and an ITAT order, the AO added Rs. 11,25,669/- as deemed dividend under section 2(22)(e) of the Income Tax Act. The CIT(A) restricted this addition to the accumulated reserve of Rs. 10,60,296/-.The appellant argued that loans or advances should be taxed as 'deemed dividend' only in the hands of a registered shareholder of the lending entity, relying on the decisions in CIT v. Ankitech (P.) Ltd. and CIT v. G.T.Z. Securities Ltd. The Tribunal, referencing a recent Supreme Court judgment in National Travel Services v. CIT, directed the AO to await the Supreme Court's final decision on the matter and follow it accordingly.For AY 2008-09, a similar issue arose where the AO disallowed interest of Rs. 43,62,479/- debited to the P&L account. The CIT(A) upheld this disallowance. The Tribunal, finding that the AO had not properly examined the nexus between inflow and outflow of liquidity, set aside the CIT(A)'s order and directed a de novo examination by the AO.Regarding the treatment of unsecured loans as deemed dividend for AY 2008-09, the AO added Rs. 63,29,188/- as deemed dividend under section 2(22)(e), which the CIT(A) restricted to Rs. 62,51,154/-. The appellant's reliance on the Ankitech case was noted, and the Tribunal's decision for AY 2005-06 was applied mutatis mutandis for AY 2008-09.Conclusion:The appeals for AY 2005-06 and AY 2008-09 were partly allowed, with directions for re-examination of the nexus between inflow and outflow of liquidity and awaiting the Supreme Court's decision on the deemed dividend issue.