TaxTMI 
TaxTMI 
2017 (12) TMI 1398
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.... Income-Tax (Appeals) grossly erred in appreciating the decision of Supreme Court in the case of Supreme Court in the case of Lashmiratan Cotton Mills Co Ltd Vs. CIT (1969) 73 ITR 634 (SC) wherein it was held that in order to claim that an expenditure falls under section 37(1) the onus is on the assessee to prove the nexus of that expenditure to its business what the assessee has failed to dispose off. 04. For the facts and such other reasons as may be urged at the time of hearing, the order of the Ld. Commissioner of Income-Tax (Appeals)-I, Pune may be vacated and that of the Assessing Officer be restored. 05. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon'ble Tribunal." 3. Shri Ajay Modi representing the Department submitted that the assessee has incurred expenditure to the tune of Rs. 2,18,39,912/- un-related to the business. The expenditure incurred by the assessee under various heads inter alia include : i. Salaries wages and bonus Rs.3,07,85,760/- ii. Operating and other expenses Rs.3,16,38,764/- iii. Financial expenses Rs.29,36,57,269/- Total Rs.35....
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.... and directly unrelated to the income of the assessee. The ld. AR controverting the submissions made by ld. DR submitted that sometimes even after heavy expenditure the business may incur loss, therefore, the observations of the ld. DR that no prudent businessman would incur expenditure of Rs. 35.60 crores to earn profit of Rs. 57.60 lakhs is not tenable and thus liable to be rejected. The ld. AR pointed that the assessee being a builder and developer undertakes the development of residential and commercial properties. The activities carried out for the projects are continuous. The assessee is consistently following a particular method of recognizing profits, as per accounting policy. The Revenue has not rejected the method followed by assessee in recognizing profits either in the past or in the subsequent assessment years. Therefore, the expenditure claimed by the assessee cannot be disallowed merely for the reason that the assessee has earned meager profits in the assessment year under appeal. ld. DR that no prudent businessman would incur expenditure of Rs. 35.60 crores to earn profit of Rs. 57.60 lakhs is not tenable and thus liable to be rejected. The ld. AR pointed that the ....
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....y the appellant or that the expenses claimed actually belonged to any other group concern which appellant chose to claim in order to set off the same against its income. The only reason adduced by the Assessing Officer for making the disallowance is that the expenditure incurred is not commensurate with business income declared by the appellant. But, the adequacy of the corresponding income generated cannot be the sole criterion for deciding the admissibility of expenditure or otherwise. Perusal of the relevant schedules of the salary & wages expenses and operating expenses which have been subjected to disallowance by the Assessing Officer clearly shows that they are in the nature of recurring administrative expenses and personnel expenses. There is considerable force in the argument of the appellant that the appellant is on-going concern and its business is a continuous one and the expenditure on account of salary and wages being time cost, cannot be directly adjudged in terms of quantum of income generated in a particular year. Apart from this, the expenditure in relation to income which is exempt from tax stood already considered by the disallowance made under the provisions of ....
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....the disallowance u/s. 14A r.w.r. 8D. 1.2] Without prejudice, the appellant company submits that if at all, the share application money paid by the appellant company is to be considered as part of the tax free investments, in that case, only the amount in respect of which shares are finally allotted to the appellant company should be considered and those amounts which are ultimately refunded back to the appellant company should not be considered as part of tax free investments. 1.3] Without prejudice, the appellant company further submits that the share application money which is paid out of interest bearing funds should only be considered for the purposes of making the disallowance u/s. 14A and not the entire share application money paid by the appellant company. 2] The learned CIT(A) further erred in holding that the learned A.O. was justified in making disallowance u/s. 14A in respect of the share of profit earned by the appellant company from partnership firms without appreciating that the provisions of Section 14A were not applicable to the share of profit earned from partnership firms. 2.1] The learned CIT(A) erred in holding that the learned A.O. was justified in not ....
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....s to the sister concerns and in the absence of any nexus that the interest bearing funds were utilized for advancing the funds to the sister concerns, the disallowance of interest was not justified. 5] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal." 7. The assessee has raised additional grounds to supplement ground Nos. 1 and 2 raised in grounds of appeal. The additional grounds raised by the assessee are as under : 7. The assessee has raised additional grounds to supplement ground Nos. 1 and 2 raised in grounds of appeal. The additional grounds raised by the assessee are as under : "1] The assessee submits that the disallowance offered by it of interest expenditure of Rs. 6,58,31,444/- u/s. 14A r.w.r. 8D in the return of income is not warranted and the same should be deleted while computing the total income of the assessee. 2] The assessee submits that the disallowance offered by it on account of indirect expenditure of Rs. 58,36,259/- u/s. 14A r.w.r. 8D in the return of income is not warranted and the same should be deleted while computing the total income of the assessed. 3] The assessee submits that the investments on whi....
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....d that the Co-ordinate Bench of the Tribunal in assessee‟s appeal for assessment year 2008-09 (supra) taking a similar view has deleted disallowance u/s. 14A. 8.3 In respect of ground No. 3 relating to addition of Rs. 10,13,878/- on account of interest received on deposits belonging to the society, the ld. AR fairly admitted that the issue has been decided against the assessee by Tribunal in assessee‟s appeal for assessment year 2009-10 (supra). 8.4 In respect of ground No. 4 relating to disallowance of interest expenditure u/s. 36(1)(iii), the ld. AR submitted that the Assessing Officer has made disallowance of interest Rs. 3,34,62,116/-. This disallowance was made by Assessing Officer in respect of interest paid by the assessee to its sister concerns. In first appeal the Commissioner of Income Tax (Appeals) held that advances given to two concerns viz. Kumar Housing Corporation Ltd. and Kumar Sinew Developers Pvt. Ltd. are for non business purposes. The Commissioner of Income Tax (Appeals) in para 4.3.15 of the impugned order has computed total interest disallowance at Rs. 5,34,01,201/-. In respect of amounts advanced to the above two concerns, the ld. AR submitted ....
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....e assessee has own funds much more than the amount advanced, no disallowance of interest is warranted. To further buttress his submissions the ld. AR submitted that in assessment year 2009-10 the assessee demonstrated before the Tribunal that own funds of the assessee were much more than the amount advanced. The Tribunal decided the issue in favour of the assessee holding no disallowance of interest is warranted. 9. On the other hand ld. DR vehemently defended the findings of Commissioner of Income Tax (Appeals) with respect to confirming of disallowance made u/s. 14A and disallowance of interest u/s. 36(1)(iii). The ld. DR submitted that the assessee has made suo-motu disallowance u/s. 14A. Now, the assessee cannot change its stance and seek reversal of the disallowance made voluntarily. The ld. DR prayed for dismissing the appeal of assessee and confirming the findings of Commissioner of Income Tax (Appeals). 9. On the other hand ld. DR vehemently defended the findings of Commissioner of Income Tax (Appeals) with respect to confirming of disallowance made u/s. 14A and disallowance of interest u/s. 36(1)(iii). The ld. DR submitted that the assessee has made suo-motu disallowance....
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....t in shares or an asset yielding tax free income and neither is it capable of yielding any tax free income. The relevant observation of the Tribunal from Para 4 reads as under : "4. We have heard the parties, and perused the material on record. Section 14A r/w r. 8D is mandatory in its application where the assessee earns income which is claimed tax- exempt, as dividend income in the instant case. In fact, there is no doubt with regard to this; the assesse itself conceding to the same before us and, besides, being engaged in the business of making investments and earning dividend income as an integral part thereof. The only option, therefore, if it considers the application of the provision as operating to its detriment, is to forfeit its right to exemption from tax in its respect. Qua merits, we find much force in the assessee's argument that 'share application money', to the extent it is actually so, so that it only represents amount/s paid by way of application for allotment of shares, the same cannot be regarded as an investment in shares, or an asset (or asset class) yielding tax-free income, and neither is it capable of yielding any tax-free income. The same....
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....the share application money gets converted into shares only on allotment by the company. Till such time the share application money is converted into shares, the applicant does not have any rights of a shareholder/member. The share applicant see was not entitled to any dividend. Therefore share application money cannot be considered as investment which is likely to earn tax free dividend income. Hence, there can be no disallowance u/s 14A of the Act. 7. We have given a careful consideration to the rival submissions. We are of the view that order of CIT(A) on this issue has to be upheld. As rightly contended by the ld. counsel for the assessee, share application money is only in the nature of an offer to buy shares made by the assessee. It is only after the offer is accepted by the company resulting in a concluded contract, the Assessee becomes the shareholder in a company. Till this time the Assessee becomes a shareholder, the assessee cannot have any rights to claim any dividend that may be declared by the company. In such circumstances we are of the view that while working out the average value of the investments u/r 8D(2)(iii) of the Rules the share application money should n....
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....s not received any income in the form of dividend from investments made in group concerns. However, the assessee has received tax free income in the form of share in profits from partnership firms. The assessee has made suo moto disallowance of Rs. 7,16,67,703/-. The ld. AR pointed that in assessee‟s own case for assessment year 2009-10 (supra), the Tribunal has held that the investments on which no tax free income has been earned should be excluded while computing disallowance u/s. 14A. As stated earlier there is no dispute as regards the principle that no disallowance is to be made u/s. 14A where no tax free income has been earned from strategic investments. It is also a well settled principle that no disallowance can be made u/s. 14A where own interest free funds are much more than the investments. However, in the present case as we have pointed earlier, the assessee has earned tax free income from partnership firms. It is no one‟s case that investment has been made by utilizing borrowed funds. Therefore, provisions of Rule 8D(2)(ii) are not attracted. However, the provisions of Rule 8D(2)(iii) would apply in respect of tax free income earned from partnership firms. ....