TaxTMI 
TaxTMI 
2015 (11) TMI 864
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....lculating 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. 10 (34) of the Income Tax Act, 1964 but income receivable @ 15% p. a. by way of internal rate of return on Premium amo....
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....al :- 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 investment in shares of PPL has no nexus with interest income earned during the previous year and on the contrary, there is a direct nexus between funds borrowed and funds invested as the funds borrowed from MNRL specifically to inves....
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....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 required funds and had obtained permission from its shareholders to invest its surplus funds in the form of Inter Corporate Deposits with CKCL with a coupon rate not below the REPO rate. It had during the current assessment year advanced Rs. 120 Crores to CKCL. CKCL in turn subscr....
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....ere 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) 91,15,121 3 Shailaja C Shah 0 75,12,540 4 Matrix Enclaves Projects Development Pvt. ltd. 6,94,10,379 32,33,754 5 Matrix Water Management Pvt. Ltd. 7,49,03,500 33,92,778 6 Marathon Realty Pvt. Ltd. (10,00,000) 86,59,334 7 Parmeka Pvt. Ltd. 25,00,00,000 0 Total Rs. 39,43,13,879 3,57,99,537 2.6 It is the ....
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....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 sake of convenience. Sl.No. Name of the Party Interest 1 Marathon Nextgen Realty Ltd.-towards investment in 11% CRPS of Face Value of Rs. 100/- each (81,500 nos.) totaling to Rs. 81,50,000/- 1,08,518/- Marathon Nextgen Realty Ltd.-towards premium investment in 11% CRPS of Rs. 13,400/- each (81,500 nos.) totaling to Rs. 1,09,21,00,000/- 1,45,40,727 Marathon Nextgen Realty Ltd.-towards loans & Working Capital 67,01,248....
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....eive 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-Expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income-Deduction of such expenditure whether conditional upon making or earning income-dividends-interest paid on monies borrowed for investment in shares - No dividends received -interest whether deductible-income-tax Act,1961, Ss.37(1), 57(iii). The plain natural construction of the language of section 57(iii) of the I.T. Act, 1961, irresistibly leads to the conclusion that to bring a case within th....
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....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 apportioned and it was taken to stock-in-trade by the appellant. The appellant's contention is found to be acceptable and hence the conclusion drawn by the AO cannot be accepted 2.16 In view of the above discussion the appellant gets relief on all the three grounds and these grounds are allowed." 9. It is clear from the findings recorded by the CIT(A) that the assessee company was engaged in the business of construction as well as lending of money, both constitute its main business activity. Both these objects were clear from the Memorandum and Articl....
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....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 considered by the AO Rs. 17,54,95,547 includes the interest disallowed Rs. 2,31,96,641. According to the appellant since the interest was already disallowed, it should not be included in the formula for computation of disallowance u/s.14A. As I have already directed the AO to allow the claim of interest as business expenditure or/deduction u/s.57(iii), the working adopted by the AO Rs. 17,54,95,547 for making the disallowance is in order. 3.5 Strictly going by rule 8D(2)(ii) and (iii), I find the working given by the AO in para 5.3.1 is in order and there is no need to interfere ....
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....r :- "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 light of my finding in para 4.4 that the direct cost should be. taken to the profit and loss account, I feel it is not proper on the part of the AO to reduce the 14A disallowance from the WIP. In view of this, the conclusion drawn by the AO cannot be accepted and the AO is directed to take the WIP at Rs. 104.49 crores this ground of appeal is allowed." 15. With regard to short term capital gain treated by the AO as income from other source, the CIT(A) found that the AO had committed a mistake by adding the income twice. Accordingly, he directed to reduce Rs. 6,25,714/- from the total income. The precise observation of the CIT(A) is as under :- "6.1 Th....
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....eductible 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 the AO in case of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT, 227 ITR 172 are not applicable to the facts of the case, insofar as assessee was already in the business of construction. The CIT(A) has also found that the assessee has already credited interest element of Rs. 10,89,78,431/- to the work-in-progress out of total interest of Rs. 11.63 crores paid on the loans taken, therefore, there is no need to further apportion interest to the work-in-progress. This finding is based on material on record, therefore, do not require our interference. As the assessee had already credited interest of Rs. 10.89 crores to work in progress out of total interest of Rs. 11.63 crores, no further interest is required to be credited to work-in-progress. A....
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....or 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 Shivam Motors Pvt. Ltd., - 2014-TIOL-754-HC-ALL-IT, wherein the Hon'ble High Court held as under:- "10. 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 tax free income, the co....
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.... 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 tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752/- made by the Assessing Officer was in order." c) The Gujarat High Court in the case of CIT Vs. Corrtech Energy Pvt.Ltd.(supra) held as under:- "We have given our thoughtful consideration to the facts and the decision relied upon by the ld AR. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 319 ITR 204 (P&H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no applic....
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....ppeal 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 were used by the Assessee Company to invest in the Capital of another Partnership Firm and since profits derived by the Assessee Company from a Partnership firm were exempt from tax u/s.10(2A) of the Income-tax Act, the interest expense related to such tax free profits is to be disallowed u/s.14A of the Income Tax Act? (B) Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in holding that the Assessing Officer cannot consider notional interest on deposit received by the Assessee Company while arriving at the fair market value u/s.23(1) (a) of the Income-tax Act?" 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise." e) Similar view has been taken by the Hon'be Punjab & Haryana High Co....