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TaxTMI 
2015 (11) TMI 864
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....payment of Rs. 1,46,49,245/- needs to be included while calculating the disallowance u/s. 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962. When: * The Finance arrangement for investment in Joint Venture with M/s. Parmeka Pvt. Ltd for Development of Commercial Complex known as Marathone Futurex situated in Lower Parel, Mumbai was as under: 81,500 11% Redeemable Cumulative Preference Shares of Rs. 100/- each at a premium of Rs. 13,400/- per share aggregating to Rs. 110,02,50,000/- Implying that amount payable by way of face value of Preference Shares was Rs. 81,50,000/- and Amount payable by way of Premium was Rs. 109,21,00,000. * In Return, Your Appellant is entitled to : Dividend by way of 11% on Face Value Of Preference Shares of Rs. 81,50,000/- An amount equal to 15% per annum, internal rate of return on Premium amount of Rs. 1,09,21,00,0001- other wise than by way of dividend. * The dividend is always payable on face value of the shares (ignoring the Share Premium) and accordingly, the divided at 11% on preference shares of Rs. 81,50,000/was exempt income u/s....
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....sallowance on account of interest & other Expenses comes to Rs. 3,14,02,200/-, when actually, the total interest paid amounted to Rs. 2,31,96,641/-." The revenue has taken following grounds in its appeal :- 1. (i) "On the facts and in the circumstances" of the case and in law, the Ld. CIT(A) erred in directing the AO to treat interest income as business income' instead of income from other sources as held by the AO." 1 (ii) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the assessee was only involved in the construction business and not in the financing and lending activities and hence interest income was to be taxed under the head' income from other sources' as held by Hon'ble Bombay High Court in the case reported in 274 ITR 21 ". 2 "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow interest expenditure of Rs. 2,31,96,641/- either as business expenditure u/s 36(1)(iii) or u/s 57(iii) of I.T. Act and not to carry it to the WIP without appreciating that:- (a) Interest paid on borrowed funds for in....
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....the same to closing work-in-progress. The AO also disallowed interest paid on borrowings against the interest income. By the impugned order the CIT(A) allowed all the above three grounds of the assessee in its favour. However, the CIT(A) confirmed AO's action of disallowance u/s.14A. Against the order of CIT(A) both assessee and revenue are in appeal before us. 5. Rival contentions have been considered and record perused. From the record we found that the assessee is engaged in the business of real estate and financing. Following are the group companies whose main object is development of real estate. i. Marathon Realty Pvt. Ltd. (MRPL) is the flagship of the Marathon Group. ii. Chhaganlal Khimji & Co Pvt. Ltd. (CKCL) is a subsidiary of MRPL. iii. Parmeka Pvt. Ltd . (PPL) is a 100% subsidiary of MRPL. Iv Marathon Nextgen Realty Ltd. (MNRL) is a listed company. The PPL is engaged in the construction of a state of the art commercial Complex along with MRPL at Lower Parel known as' Marathon Futurex. PPL needed to augment its capital base therefore, decided to issue Preference Shares to a group concern which would share-in its profitability. MNRL had the requi....
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....t of Rs. 11.63 crores borrowing cost (i.e: basically interest paid on the a sum of Rs. 10,89,78,43/- was apportioned and it was taken to stock-in-trade by the appellant. 2.4 During the year the appellant had borrowed Rs. 110.02 crores from M/s Marathon Nextgen Realty Ltd.(MNRPL). The borrowed funds were in turn invested with M/s.Parmeka Pvt. Ltd. (PPL) a Joint Venture Company in which appellant is one of the Joint Venture partner. CKCL would receive a tax free dividend of 1,1 % on the face value of the Preference Shares and a Return of 15% on the premium paid. On the borrowal made for the investment in preferential shares Rs. 81.50 lakhs and on the ba1ance premium Rs. 109.21 crores appellant needs to pay interest @11 % to MNRPL. The Joint Venture Company is constructing a commercial complex by name Marathone Future X situated at Lower Parel, Mumbai. 2.5 The break-up of interest received available in the submission is reproduced hereunder for the sake of convenience. Sl.No. Name of the Party Outstanding as on 31st March 2010 Interest earned during the Financial Year 2009-10 1 Chetan R Shah 0 38,86,010 2 Sonal M Shah (603814) 91,1....
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....ity and there is no room for any doubt. Alternatively it can be treated as part of activity in construction business. The AO ,did not controvert this claim of the appellant. The table above shows that, the appellant did, not receive any interest from PPL for the investment made. Mere non receipt of interest income 'during the year cannot lead to the conclusion that the appellant is not into finance activity. In, my view both construction as well as lending constitute the business activity hence, the claim of the appellant that the interest income earned is from business is in order. In view of the above discussion I am convinced that the claim of the appellant, that the interest earned is business income and accordingly the treatment given by the AO that it is interest from other sources has no merits. This ground of appeal is allowed." 8. With regard to disallowance of interest expenditure against interest income, the CIT(A) held as under :- 2.8 The AO after treating the entire income as Other Sources did not allow the interest expenditure amounting to Rs. 2,31,96,641/-. The break-up of the interest paid available in the submission is reproduced hereunder for the s....
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....rest expenditure needs to be allowed u/s.36(1)(iii) of the I.T.Act. as-business expenditure in view the clear finding given by me in para 2.6 and 2.7 that .the appellant is carrying on the construction activity/money lending activity. When M/s.PPL is in the need of funds and appellant being one of the JV partner, there is legally no bar in routing such funds through the appellant company, when it goes to pay the interest for the borrowals made and at the same time it is also going to receive interest on the investment made. 2.13 Alternatively the interest expenditure needs to be allowed u/s 57 (iii) as it was laid out wholly and exclusively for the purpose of earning the interest income. In support of it's contention that the interest should be an allowable deduction the appellant had relied on the decision of Hon'ble Supreme Court 11, the case of Rajendra Prasad Moody reported in 115 ITR 519 for the proposition that "earning of interest income is not necessary in order to qualify the interest expenditure for deduction". The head note and the relevant portion of the finding of the Hon'ble Supreme Court is as under- Income from other sources-Deductions-....
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.... on the judgment of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilisers Ltd reported in 227 ITR 172 which is not applicable to the facts of this case. Hence I direct the AO to allow the interest paid as deduction u/s 57(iii) of the I,T Act as an alternate remedy. 2.14 According to the AO, M/s.PPL cannot claim the interest expenses as revenue expenditure since the project undertaken was not completed during the year and more over it was not for earning of interest. No income was also offered by the appellant from this project during the year and hence, the AO was under the impression that the entire finance cost needs to go to WIP and shall form part of the balance sheet instead of P&L account. 2.15 I have carefully considered the' 'submission of the appellant and the impugned assessment order. In view of my finding that the interest expenditure incurred Rs. 2,31,96,641/- needs to be allowed either as business expenditure u/s.36(1)(iii) or u/s.57(iii), it is not correct on the part of the AO to carry into the WIP. As mentioned above out of Rs. 11.63 crores interest paid ,on the loans taken a sum of Rs. 10,89,78,431/- was apportione....
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....ellant and the impugned assessment order. As discussed above in para 2.1 while giving the background towards investment of Rs. 110 crores into the preferential shares of M/s PPL, the appellant had bifurcated the same it into two portions. A sum of Rs. 81.50 lakhs was towards face value of 81,500, 11% redeemable preference shares and another portion was towards premium of Rs. 13,400/- per share. As far as the investment in face values of shares is concerned, it earns dividend income at 11% as per the MOU. According to me the entire payment of Rs. 110 made inclusive of the premium paid, was towards the investment made in the preference shares. Premium paid is part and parcel of the investment in shares. Hence, I am of the view that the entire investment of Rs. 110 crores is made towards the share capital and hence the entire interest payment Rs. 1,46,49,245/- needs to be included while calculating the disallowance u/s.14A. To this extent, I am in agreement with the AO and accordingly, uphold his action. 3.4 The grievance of the appellant in ground of appeal No.5 was that while computing the disallowance as per Ä" in the formula in Rule 8D, interest expenditure considere....
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....d equipment; (e) cost of unconsumed or uninstalled material delivered at site; and (f) payments made to sub-contractors in advance of work performed: Thus, according to the directions issued by the Institute, the administrative and selling expenditure needs to be debited to the P&L account and not to the closing stock of WIP, In view of this I am not in agreement with the finding of the AO and accordingly the appellant gets relief. This ground of appeal is allowed." 14. The disallowance made u/s.14A by reducing closing stock of work in progress decided by the CIT(A) in assessee's favour after observing as under :- "4.1 In page No.15 of the assessment order, the AO had left a note below the table containing the working of disallowance u/s.14A to the effect that Rs. 3,27,70,258/- is reduced from closing WIP of Rs. 104.49 crores to arrive. at the closing WIP as Rs. 1 01.21 crores. 4.2 I find the AO had attempted to reduce the 14A disallowance from the WIP. In view of my finding in para 2.15 that the interest expenditure incurred Rs. 2,31,96,641/-. needs to be allowed either as business expenditure u/s 36(1)(iii) or u/s 57(iii) and in....
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....ich is a short term capital gain as income from other sources and finally computed Rs. 3,65,62,742/- under this head. The above submission makes it clear that the AO had by mistake taken the short term capital gain on sale of units of UTI also to the total income, hence, the sum Rs. 6,25,714/- has been taxed twice. The submission of the appellant, hence is acceptable. Thus the AO had committed a mistake by adding the income twice accordingly, he is directed to reduce Rs. 6,25,714/- from the total income. This ground of appeal is allowed. 7. In the result, appeal is Partly Allowed." 16. As per the findings given hereinabove the CIT(A) has correctly held that interest expenditure was incurred for the purpose of business, therefore, same is deductible u/s.36(1)(iiii) of the Act or u/s.57 of the Act. A clear finding has been recorded by CIT(A) that interest expenditure have direct nexus with the generation of income, therefore, as an alternate, the same is also allowable u/s.57 of the Act. The CIT(A) has dealt in great details AO's observation to the effect that unless interest income is earned, the interest paid cannot be allowed and held that the decision relied on by....
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....hich is liable to be taxed, therefore, there is no justification for disallowance of interest attributable to such funds utilized for payments of premium on the preference shares. 18. During the year the assessee company has received interest income Rs. 3,59,27,028/- as against which total interest paid is Rs. 2,31,96,641/- and therefore, there is a net interest received by the assessee company is Rs. 1,27,20,363/-. Accordingly as per clause (iii) of Rule 8D(2) no disallowance to be made. The Mumbai Bench of the Tribunal in the case of Morgan Stanley India Securities Pvt. Ltd. Vs. ACIT, ITA No.5072/Mum/2005, dated 13-4-2011 and the Ahmedabad Tribunal in the case of ITO Vs. Karnavati Petrochem Pvt. Ltd., ITA No.2228/Ahd/2012, dated 5-7-2013, held that for the purpose of Section 14A r.w.r. 8D interest expenditure has to be netted against interest income and only the difference, if any, can be considered for disallowance. 19. Ld. AR has taken a ground that since the assessee was not in receipt of any exempt income during the year, therefore, no disallowance is warranted u/s.14A. For this purpose, reliance was placed on the decision of Hon'ble High Court in the case of M/s Sh....
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....le Allahabad High Court, the Revenue raised the following question of law:- "Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in upholding the decision of CIT(A) in deleting the disallowance of Rs. 2,03,752/- u/s.14A ignoring the fact that there is difference of opinion of various courts on the view taken by the ITAT that in the absence of tax free income, no disallowance u/s.14A is permissible." b) The High Court while answering the said question held as under:- "As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, 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. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any....
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.... "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assesse did not make any claim for exemption. In such a situation section 14A could have no application." 5. We do not find any question of law arising, Tax appeal is therefore dismissed." d) The Hon'ble Bombay High Court in the case of CIT Vs. Delite Enterprises (supra) held as under :- "The Revenue is in appeal on the following questions:- "Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the Assessee Company on borrowed funds amounting to Rs. 241.10 lakhs overlooking the fact that the borrowed funds wer....
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....ion 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. 9. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee before AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B.V. reported ....