TaxTMI 
TaxTMI 
2015 (7) TMI 532
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....why assessee has not made any disallowance u/s 14A even though the assessee has earned dividend income of Rs. 2,42,26,499/- out of which Rs. 37,64,000/- was by way of dividend on investment in Mutual Funds and Rs. 4,62,500/- was the dividend on investment in shares of M/s.Tandem Allied Services (P) Ltd., which is exempt u/s 10(35) of the Act. Assessee submitted that the funds used for investment are out of advances from customers of the company against project bookings made by them. It was submitted that the total advance received by the company from its customers as on 31/3/2010 was Rs. 124.54 crores and the total amount standing to the credit of reserve and surplus was Rs. 913.14 crores and therefore out of the total assets of Rs. 1.680.13 crores, reserve and surplus and advances from customers itself were to the tune of Rs. 1037.68 crores and the balance was either share capital or secured loans taken from banks against specific project. It was, therefore, submitted that investments in the shares and Mutual Funds were out of its own funds and not out of any borrowed funds. The AO, however, was not convinced with the assessee's contentions and held that the provisions of rule 8D ....
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.... of public issue of shares. It was submitted that till such time that the funds raised by the public issue of shares were utilized for new projects in a phased manner as construction of new projects progresses, these funds were parked by way of investments in mutual funds which have resulted in the earning of dividends to the tune of Rs. 11.55 Crores. It was submitted that the loans availed by the assessee form Banks are in respect of specific projects and no prudent company would borrow from banks at market rates of approx.. 13% and invest the same in liquid funds giving a return of around 5% and therefore the question of the said bank loans being invested in mutual funds does not arise. The assessee contends that the investment made in mutual funds is out of the proceeds of the public issue of shares and not out of loans borrowed by the assessee company and there are no expenses incurred by it to earn dividend income and therefore no disallowance is called for under section 14A r.w. rule 8D. In support of the proposition that disallowance under section 14A r.w. Rule 8D necessitates the establishment of expenses being incurred for earning exempt income and in the absence of such c....
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....d the reserves and surplus amounting to Rs. 882.67 Crores; all these amounts are interest free funds and are sufficient to make the tax free investments. Accordingly, the learned CIT (Appeals) held that the overdraft facility was not used for making tax exempt investments and deleted the disallowance of Rs. 15,27,310 made under rule 8D(2)(ii). 8.1.5 In respect of the disallowance under rule 8D(2)(iii) amounting to Rs. 1,09,99,962, the learned CIT (Appeals) held that the above disallowance is with regard to other indirect expenses which are normally estimated as per accounting principles as it cannot be quantified directly. The learned CIT (Appeals) held that, in this regard, there is no discretion available with the Assessing Officer and the provisions of section 14A(3) of the Act will apply even in a case where the assessee claims that no expenditure has been incurred in relation to exempt income. In this view of the matter, the learned CIT (Appeals) confirmed the disallowance ofRs.1,09,99,and 962 made under rule 8 D (2)(iii). 8.2 The learned Departmental Representative relied and placed support on the order of the Assessing Officer on this issue and the grounds raised by....
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....he reason that funds for making the investments flowed from a common pool of funds i.e., cash credit/overdraft account where the receipts in the course of business are also deposited. The Assessee's plea that it had sufficient interest free funds which were enough to make the investments in question could not be rejected by the AO with certainty. This is made clear by the AO in para 3.4 of his order. 21. The AO has applied the provisions of Rule 8D(2)(ii) of the Rules and therefore the disallowance u/s.14A of the Act has to be confined only to the interest expenditure debited in the profit and loss account. The claim of the Assessee before the AO was that no interest expenditure was incurred for making investments in units of mutual funds. The funds for making investment in units of mutual funds have its origin in the cash credit/overdraft Account of the Assessee. The Bank statement for the period ending 31.3.2008 shows that the outflow from the bank account for the investment in question was on 31.3.2008. Therefore during the previous year till the last day of the previous year all the funds had been used by the Assessee for the purpose of business and not used for making inves....
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....which yield tax exempt income. In this factual matrix, we hold that the learned CIT (Appeals) was justified in deleting the disallowance under section 14A r.w. Rule 8D(2)(ii) amounting to Rs. 15,27,310. Consequently, Ground Nos.7 to 13 raised in revenue's appeal are dismissed. 9.1 Ground No.1 of the assessee's C.O. deals with the disallowance confirmed by the learned CIT (Appeals) under section 14A r.w. rule 8D (2)(iii) amounting to Rs. 1,09,99,962. We have already considered the facts and material on record while adjudicating the revenue's grounds No.7 to 13 in respect of the disallowance under Rule 8D(2)(ii). It is seen that the Assessing Officer has not considered the assessee's claim that no expenditure has been incurred to earn tax exempt income and therefore the Assessing Officer has not arrived at an objective satisfaction that the claim of the assessee is not correct. The coordinate bench of this Tribunal in the assessee's own case for Assessment Year 2008-09 vide order in ITA No.1279/Bang/2010 dt.12.1.2012 set aside the issue of disallowance under Rule 8D to the file of the Assessing Officer holding at para 10 thereof as under : " 10. In the present case,....
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....h a claim and arrive at an objective satisfaction regarding the correctness or otherwise of the claim made by the assessee. If the AO comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. Even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The plea of the assessee that applying the Rule 8D blindly by the AO will lead to absurd results, in our view, is without any basis because while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO....
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....#39;s C.O. is therefore treated as allowed for statistical purposes." Since the facts and circumstances during the relevant assessment year are also similar, respectfully following the decision of the coordinate bench to which one of us i.e. the Judicial Member is the signatory, we confirm the order of the CIT(A) as far as disallowance under rule 8D(2) is concerned and set aside the issue of disallowance u/s rule 8D(2)(iii) to the file of the AO with similar direction as given by the Tribunal. 6. The second issue considered by the AO is the assessee's claim of deduction u/s 80IB(10) of the Act. He observed that the assessee has claimed deduction with respect of 17 projects during the year, out of which the assessee-company has claimed deduction u/s 80IB(10) on 4 projects on proportionate basis. He observed that in these projects, the assessee-company has constructed some of the flats of the dimension of more than 1500 sq.ft. and therefore it claimed deduction on proportionate basis. The AO was of the opinion that 4 projects were conceived with substantial number of flats measuring more than 1500 sq.ft. and therefore deduction u/s 80IB(10) is not allowable with regard to these....
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....the decision of another co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2004-05 in (2008) 119 TTJ 269 (Bangalore) dt.29.8.2008 and Assessment Year 2006-07 in ITA No.1355/Bang/2010 dt.11.10.2011. 7.4.2 It was submitted by the learned Authorized Representative that Revenue's appeal against the decision of the co-ordinate bench of this Tribunal for Assessment Year 2004-05 was dismissed by the Hon'ble Karnataka High Court by order in ITA No.763 c/w 25/2009 dt.29.2.2012. It was further submitted that Revenue's appeal against the decision of the co-ordinate bench of this Tribunal for Assessment Year 2006-07 was also dismissed by the Hon'ble Karnataka High court vide order in ITA No.61/2012 dt.5.10.2012. 7.4.3 The learned Authorized Representative further submitted that Revenue's Special Leave Petition ('SLP') against the aforesaid decision of the Hon'ble Karnataka High Court in ITA No.25/2009 for Assessment Year 2004-05 was dismissed by the Hon'ble Apex Court vide order dt.6.5.2013. It is submitted that in view of the above facts and the decisions / orders of the co-ordinate bench of this Tribunal (supra), the Hon'ble Karnat....
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....08 and 2008-09 relying on its earlier decision for Assessment Year 2004-05 in the assessee's own case in ITA No.198/Bang/2997 dt.29.8.2008. The relevant portion of the order of the co-ordinate bench for Assessment Year 2004-05 (supra) allowing proportionate deduction u/s.80-IB(10) of the Act at para 5.1 and para 5.2 thereof is extracted hereunder : " 5.1 ..... As per clause ( c ) of section 80-IB(10), a residential unit should have a maximum built up area of 1500 sq. ;ft. Clause ( c ) refers to "area" of "residential area". The use of words "residential unit" means that deduction should be computed unit-wise. Therefore, if a particular unit satisfies the condition of 80-IB, the assessee is entitled for deduction. So considered, it is only in respect of those units which have not fulfilled the stipulated conditions, deduction should be denied. The law prescribes maximum permissible area with reference to each residential unit..... 5.2..... Further, profits from the units will have to be arrived based on the method of accounting employed. Accounting principles would mandate recognition of profits from each unit separately. It is with reference to such profits that the deduc....
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....eals against the aforesaid decisions of the Tribunal (supra) have been dismissed by the Hon'ble Karnataka High Court (supra) and Revenue's SLPs by the Hon'ble Apex Court (supra). In this view of the matter, respectfully following the decisions of the co-ordinate benches of this Tribunal, the Hon'ble Karnataka High Court and the Hon'ble Apex Court in the assessee's own case for the earlier assessment years (supra), we hold that the assessee is entitled for deduction under section 80-IB(10) of the Act in respect of residential units having built up area of 1500 sq. ft. or less in 'Brigade Gateway' and 'Brigade Metropolis' housing projects. We, therefore, dismiss grounds No.2 to 6 raised by revenue in this appeal. " Since the issue before us is similar to the issue in the earlier assessment year and the CIT(A) has also followed the Tribunal's order for earlier assessment year, we do not see any reason to interfere with the order of the CIT(A). 10. The other ground of appeal is against the CIT(A) deleting the disallowance made by the AO u/s 36(1)(iii) of the Act holding that advances to the subsidiary were in the normal course of business for business purposes....
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....that the bank overdraft facility is taken solely with a view to meeting the assessee's working capital requirements, cash and fund flow management and all these funds were utilized solely for the purpose of business. It was submitted that this interest debited to the profit and loss account during the period under consideration pertains to revenues earned as reflected therein. The learned CIT (Appeals) after considering the arguments put forth and the facts and material on record, held that since the submissions are special purpose vehicles ('SPV') Companies and the assessee is involved in real estate business, advances to these subsidiaries are in the natural course of business. The learned CIT (Appeals) also held that the advances to Joint Venture companies are in the normal course of business of real estate wherein land and buildings are held stock-in-trade and not as capital assets and hence the entire advances and deposits cannot be treated as nonbusiness or capital advances. The learned CIT (Appeals) also observed that the assessee has got sufficient interest free funds for making these advances and even if interest bearing funds are utilized for making these advances, wh....
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....s to be mentioned during the Assessment Year 1995-96, apart from the loan given in August / September, 1991, the assessee advanced interest free loan to its sister concern amounting to Rs. 5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee firm out of its own funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The opening balance as on 1.4.1994 was Rs. 1.91 Crores whereas the loan given to the sister concern was a small amount of Rs. 5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lacs." 10.5.2 In Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) at para 10 thereof, it was held as under : " 10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of....
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....and of the apex court in the case of S.A. Builders Ltd. V C/Tribunal (Appeals) (2007) 288 ITR 1. That being the position the substantial question of law referred to above is answered in favour of the assessee and against the Revenue and consequently the appeal fails and is dismissed." 10.5.4 In view of the above and considering the fact that there appears to be no material on record to justify the Assessing Officer's conclusion that deposits and advances have flown from out of the bank overdraft facility, we are of the considered view that the learned CIT (Appeals) has rightly deleted the disallowance of interest amounting to Rs. 76,66,638. 10.6 The second reason of the Assessing Officer that the advances and deposits were made for non-business purposes and are capital advances are also not borne out by the material on record. The advances and deposits were made for Joint Development Projects, for acquiring lands, properties, etc. Admittedly, the assessee is engaged in the business of real estate with land and buildings as stock-in-trade and in the factual matrix of the case on hand, the learned CIT (Appeals) was right in holding that the deposits and advances were made in th....
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.....3 of his order, reproduced the relevant portion of the decision at length. Since the issue is covered against the assessee, this ground of appeal is rejected. 16. Ground of appeal No.4 is an alternative ground that in respect of disallowance of fine and penalty, the AO should be directed to allow the deduction u/s 80IB(10) of the Act as it results in increase in the business profit. In the light of our decision on alternative ground of appeal No.2 above, this ground of appeal is allowed and the AO is directed to give deduction u/s 80IB(10) of the Act on this ground. 17. Ground of appeal No.5 is against confirmation of the action of the AO in estimating annual value of the building let out to Brigade Foundation for running its school at Rs. 15,00,000/- and consequent addition of Rs. 10,50,000/- under the head 'income from house property'. 18. Brief facts relating to this issue are that the assessee had constructed school property at Mahadevapura and during the previous year relevant to the assessment year under consideration, it had incurred total cost of Rs. 53,16,18,100/- as shown in the balance sheet. On inquiry by the AO, he observed that the said building was not sold....