AI Drafter 
TaxTMI 
TaxTMI 
2018 (5) TMI 1010
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....s Tribunal in the case of Chem Investment Ltd. Vs. ITO reported in 121 ITD 318 (for AY 2012-13) and against the action of Ld. CIT (A) in deleting the disallowance of Rs. 75,24,948/- made by the AO deleted by applying Rule 8D of the Rules. Since facts and law are similar, we take up the lead case of AY 2009-10. 3. Briefly stated the facts are that during the course of assessment proceedings, the AO noted that the assessee had shown investment in the Balance Sheet at the beginning and at the close of the year at Rs. 954 lacs and Rs. 959.56 lacs respectively. The funds were invested in equities of subsidiary and associate companies. According to the AO, any expenditure relatable to the investments irrespective of whether exempt income was earned or not, was liable for disallowance u/s. 14A of the Act read with Rule 8D of the Rules. For that proposition, he relied on the decision of the Special bench of the Tribunal in the case of Chem Investment Ltd. (supra). Thereafter, the AO worked out the disallowance under Rule 8D(2)(ii) and 8D(2)(iii) of the Rules at Rs. 53,78,818/- and Rs. 4,78,391/- respectively thus, aggregating to Rs. 58,57,209/-. Aggrieved, the assessee preferred an appe....
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....e that in both the appeals preferred by the revenue, the assessee did not earn any exempt income during the AY 2009-10 and 2012-13, therefore, Ld. CIT(A) was justified in deleting the disallowance as made by the AO in the assessment order by invoking sec. 14A of the Act read with Rule 8D of the Rules. Hence, ground no. 1 raised by the revenue for AY 2009-10 stands dismissed and the sole ground raised by the revenue in AY 2012-13 also stands dismissed. 5. Coming to ground no. 2 raised by the revenue for AY 2009-10 relates to the disallowance of interest of Rs. 81,15,597/- made by the AO with reference to the interest free loans granted to subsidiaries and group associate companies. 6. Brief facts of the case are that in the P&L Account, the assessee had debited interest of Rs. 1095.72 lacs on the borrowed capital. The AO noted that the assessee had advanced Rs. 1265.30 lacs against property/project/space etc. and corresponding amount for the preceding year was Rs. 1621.89 lacs. On being asked as to why proportionate interest should not either be disallowed or capitalized, the assessee submitted that these advances were granted to its subsidiaries for project execution and also....
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....assessee had to promote special purpose companies for undertaking real estate and IT infrastructure projects. For that purpose there was necessity of granting interest free advances to group /associates companies. The A/R for the assessee illustrated the need and necessity of undertaking different real estate and infrastructure projects through companies jointly promoted by the assessee in which assessee had deep economic interest. From the submissions made I find force in the A/R's explanations that interest free advances were granted for furthering assessee's economic, commercial and business interest and therefore no part of the interest was disallowable e.g. the assessee granted Rs. 100 lacs as interest free advance to DPSC Ltd under a joint venture development agreement for execution of Real Estate development project at Salt1ake. Interest free advance was similarly granted to assessee's subsidiary M/s. Kolkata Knowledge City Pvt. Ltd. which was undertaking development of a real estate project at Diamond Harbour, West Bengal. The assessee similarly advanced Rs. 100 lacs to WEBEL, a Govt. of West Bengal Undertaking for undertaking development of IT project in Salt L....
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....he aforesaid action of Ld. CIT(A) the revenue in appeal before us. 7. We have heard rival submissions and perused the details of advances granted by the assessee and other material available on record. We note that the assessee is primarily engaged in the business of developing civil infrastructure in different formats. The assessee is also engaged in developing, operating and maintaining Information Technology Parks (IT Parks) and other infrastructure projects. In view of the restrictions placed by the State laws with regard to holding of land and land use; and since the assessee undertakes development of real estate infrastructure projects through various SPVs which are established by the assessee either as subsidiary or with its JV partners for furtherance of its business objectives, detailed statement of project wise advance as filed before the lower authorities were furnished before us from which it is apparent that the advances were granted in furtherance of assessee's principal business of developing real estate projects. The Hon'ble Supreme Court in the case of S. A. Builders Vs CIT 288 ITR 1 (SC) had an occasion to consider the issue of allowability of interest on borro....
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....iew to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton' s case [1925] 10 TC 155 (HL) has been approved by this court in several decisions, e.g., Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601, etc. 25. In our opinion, the High Court as well as the Tribunal and other Income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 26. The expression " commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of co....
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....usiness. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. [1994] 208 ITR 989 (Bom) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 34. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 also does not appear to be correct. 35. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the....
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....ntities, therefore, we hold that the advances granted by the assessee in the course of its business was due to commercial expediency, therefore, the funds advanced by assessee to SPVs and JVs were in fact used for the business purposes of the assessee and, therefore, the condition prescribed for allowing deduction u/s. 36(1)(iii) were fulfilled by the assessee. We, therefore, are not inclined to interfere with the order of the Ld. CIT(A) against deleting the interest paid, so we uphold the same and, therefore, ground no. 2 of the revenue's appeal is dismissed. 9. Ground no. 3 of the revenue is against the order of the Ld. CIT(A) in deleting the disallowance of expenses on account of legal and professional fees relating to long term lease for Rs. 6,01,800/-. The facts leading to the disallowance are that the assessee had incurred legal and professional expenses to the tune of Rs. 50,13,152/-. During the assessment proceedings, the assessee had filed breakup of the legal and professional fees paid along with the copies of the bills from which the AO noted that the legal fees to the tune of Rs. 12,05,300/- was incurred in connection with long term capital leases and, therefore, he ....
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....g regard to these facts and considering the inability of the department to point out the specific items of legal expenses totaling Rs. 6,01,800/-, we are inclined to uphold the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. 11. Ground no. 4 of the revenue is against the action of the Ld. CIT(A) in deleting disallowance of prior period expenditure of Rs. 1,07,70,503/-. Briefly stated the facts are that the assessee had debited Public Issue Expenses of Rs. 1,20,55,794/- in its P&L Account. From the details of the expenses, the AO found that the expenditure of Rs. 1,07,70,503/- was incurred in the earlier financial year and was shown as an asset in the Balance Sheet. The AO required the assessee to explain as to why this prior period expenditure should not be disallowed. The assessee explained that the expenses of Rs. 1,07,70,503/- were incurred in earlier year for proposed Public Issue of its shares and accordingly, expenses incurred were accumulated in accounts for purpose of amortization in later years. In the relevant year, however, the company had decided to abandon the plan for public issue and not proceeded further. Accordingly, the expenses to the....
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....ether such expenditure could be allowed in the relevant assessment year is however yet to be resolved. 8. The CIT(A) in his order had found as follows: "The company claimed as allowable the expenditure on this abandoned project. While it was found to be unviable, the expenditure on it was for the purpose of business. It was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business. But since that stage is not reached-no asset having come into existence-the capital-work-in-progress had to be written off as such." 9. There was no challenge to such finding on facts before the learned Tribunal or even before us. 10. The decision in Delhi Tourism & TDC Ltd. (supra) is distinguishable on facts in as much as in that case the Delhi High Court had held that the electricity charges for power consumed was a known expenditure and the assessee, on the basis of average, could make a provision for that expenditure in every year of assessment even if no bill was received in a particular year of assessment. 11. Following the judgment in the....