TaxTMI 
TaxTMI 
2023 (12) TMI 207
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....ry notices were issued to the assessee. The assessee had specified domestic transactions but no adjustment was suggested by the TPO u/s. 92 of the Act. The AO noted that the company has made non-current investments of Rs. 40,48,46,386 in equity shares and current investments of Rs. 7,41,52,285. The company received dividend income on current investments of Rs. 1,25,63,095 which is exempt income under the Act. Hence the AO applied section 14A and observed that the assessee has not reported any expenditure attributable to investment made to earn such exempt income. In this regard, the assessee was asked to provide note on applicability of section 14A along with computation of disallwonace u/s. 14A r.w. Rule 8D. In response the assessee furnished working of disallowance u/s. 14A @ 0.5% of average investment amounting to Rs. 27,36,547 and submitted that the dividend income was earned on shares & mutual funds claimed as exempt u/s. 10(34) & 10(35) of the Act and these investments were made out of own funds, therefore no disallowance was warranted u/s. 14A. The AO noted that the assessee has made fresh investments during the year and the assessee must have employed manpower either own or....
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.... Rs. 59 Cr and some investments have been sold. The increase in fixed assets includes Rs. 45 Cr of land which was purchased by the Company by taking term loan from Aditya Birla Finance Ltd. and interest of Rs. 2.76 Cr hos been debited in this account towards the term loan which is used for purchase of land. The interest of Rs. 2.76 Cr on this loan is not an allowable revenue expenditure u/s 36(1)(iii) and necessary direction will be given to the AO to capitalize it in cost of the !and. You have debited Rs. 26.18 Cr as interest payable by the Company on IDFC rupee loan u/s 36(1)(iii). AS explained above the 90 Cr out of loan of Rs. 274 Cr has been shown as capitol work in progress. Hence, the proportionate amount of interest amounting to Rs. 8.8 Cr [Rs. 90Cr x Rs. 26.81/Rs. 274Cr] is to be disallowed as capital in nature as the addition is still in capital work in progress stage. Necessary direction will be given to the AO to disallow the above interest Rs. 8.8 Cr u/s 36(1)(iii) of the IT Act as treating it as capital in nature. It is seen from the account that the opening WDV towards fixed assets is Rs. 208 Cr in the fixed asset schedule. You have taken loan of Rs....
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....nd purchase of Rs. 2.76 crore, we would like to inform that the land is already purchased/asset put to use and the interest paid on such loan as per various High Court decisions laws con be claimed as deduction. Hence, we feel the same should not be disallowed. (iii) With regard to your query on disallowance of Interest of Rs. 8.8 crores, please refer to our replies in point 1, and hence we feel the Interest paid should be allowed as a deduction." The assessee has filed further subincision on 12.12.2018 which is as under: 'This is further to the Income Tax scrutiny of one of our clients M/s. Manipal Integrated Services Private Limited and show cause notice received from your office vide letter dated 04-12-2018 We submit herewith additional clarifications further to our letter: submitted on 10-12-201.With regard to your query on how the loan sanctioned from financial institutions are utilized, we submit the following: Amounts in Cr. Loan Sanctioned From Balance as on 31-03-2014 Balance as on 31-03-2015 IDFC-Term Loan 168.00 274.00 Aditya Birla-Unsecured Loan 14.81 13.91 Adityo Birla- Secured Term Loo....
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....and and this land has been purchased as investment. Hence, proportionate amount of interest @ 11.75% is treated as capital in nature. Hence, for 11 months the interest on Rs. 45.04 Cr. works out to Rs. 4.85Cr. [(45.04 x 0.1175) x11/12], which is added to the total income treating the same as incurred for capital asset. You are directed to capitalize the amount of interest of Rs. 4.85 Cr. in the hands of the Company, by adding it to total income. B. The assessee had shown capital work in progress of Rs. 106 Cr. during the year. It is submitted by the assessee that it has used CCD of 100 Cr. which was partly utilized in Phase-i of the Jaipur hostel and after release of 125 Cr. loan from IDFC Rs. 46.32 has been used to replace the CCD which was used in Phase-1 of the hostel project of Jaipur. Thus the assessee has used 6 Cr. from IDFC Lon in the capital work in progress on which 11.75% of interest has been paid. In addition to that the assessee has also invested Rs. 25.78Cr. in Phase-1 of the hostel project which has been capitalized in this year. The assessee has shown Rs. 16 Cr. in capitol work in progress as on 31.03.2014. The 2nd phase of the loan from I....
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....s" that is used for construction. Hence the entire interest should be allowed as revenue expenditure. The loan was borrowed for business purpose and there is no distinction in section 36(1)(iii) between capital borrowed for revenue and capital asset purpose. 7. The CIT(Appeals) observed that the sum of Rs. 45.04 crores sanctioned as loan from IDFC was used for purchase of land in May, 2014. The assessee was in the business of constructing hostel for students. The land was not utilized for business purpose of assessee, therefore interest of Rs. 4.85 crores pertaining to loan used for purchase of land could not have been allowed u/s. 36(1)(iii) of the Act r.w. Explanation to section 43(1). The CIT(Appeals) relied on the decision of the Ahmedabad ITAT in Khyati Chemicals Private Ltd. v. DCIT (2002) 135 taxmann.com 200 (Ahmedabad Trib). 8. Further, the interest of Rs. 2.585 crore paid to IDFC on loan of Rs. 22 crore used for capital work in progress was also confirmed by the CIT(A). 9. Aggrieved from the order of the CIT(Appeals), the assessee is in appeal before the Tribunal. 10. Section 14A Disallowance: The ld. AR reiterated the submissions made before the CIT(Appeals) a....
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....i.e., profit generated from operations for the F.Y. under consideration [See Schedule 4]. [+] Increment of Rs. 15,77,24,389/- stemming from the sale of current investments, i.e., mutual funds sold during the F.Y. under consideration [See Schedule 16]. Against this, the Assessee has only made a fresh investment of Rs. 2,11,03,075/- for the F.Y. under consideration, i.e., equity investment qua purchase of non-cumulative optionally convertible preference shares in its subsidiary concern. [See Schedule 11]. Therefore, Section 14A of the Act is not applicable to the case at hand, considering the settled position of law enumerated in the decision of the Hon'ble jurisdictional Karnataka High Court [H.C.] in the case of CIT & Anr. Vs. Microlabs Ltd., [2017] 79 taxmann.com 365, that has held that when the investments have been made from a common pool of funds, and when the non- interest-bearing of the Assessee are more than the investment made in tax free securities - then Sec.14A is not applicable. ..... ................. ................. This view finds further support in the decision of the Hon'ble Supreme Court [S.C....
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....dgment cited by the learned AR of the assessee. We find that this judgment is squarely applicable in the present case and respectfully following the same, we hold that in the facts of the present case, it is to be presumed that the investment was out of interest free funds available with the assessee and therefore, no disallowance u/s. 14A r. w.r. 8D (ii) can be made out of interest expenditure. 10. This view of us finds support from a judgment of Hon'ble apex court rendered in the case of CIT vs. Reliance industries limited in Civil Appeal No. 10 to 13 of 2019 dated 02.01.2019, copy kept on record. In this case, it was noted by Hon'ble apex court that this is a finding of the tribunal that the interest free funds available to the assessee were sufficient to meet its investment and hence it could be presumed that the investment were made from the interest free funds available with the assessee. It was held by Hon'ble apex court that this is pure question of fact and since Hon'ble High Court in that case has decided the issue in favour of the assessee on the basis of finding of fact recorded by the tribunal, no interference is called for in the judgment of High ....
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....idend income only on current investments and the computation of disallowance submitted by the ld. AR comes to Rs. 7,65,072. However, we note from the order of the AO that during the course of assessment proceedings the assessee itself submitted that dividend is earned on equity shares and mutual funds, but in the computation of disallowance submitted before us, only the average value of investments made in mutual funds has been considered. The disallowance under Rule 8D(2) (iii) should be made on the basis of average value of those investments in which the assessee has yielded exempt income. The Hon'ble High Court in the case of Cargo Motors (P.) Ltd. v. Deputy Commissioner of Income-tax reported in [2022] 145 taxmann.com 641 (Delhi) has settled this issue in favour of the assessee. The relevant part of the judgement is as under:- While section 14A is charging section, rule 8D is method/mechanism to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the assessee. By virtue of the charging section, namely, section 14A, the Assessing Officer has the power only to determine the amount of expenditure incurred in ....
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....e A.Y. under consideration and thus cannot be claimed as a legitimate deduction. [See Para 5 of the Impugned Order in Original]. To elaborate, the disallowance has been bifurcated into two parts by the Revenue, i.e., - a sum of Rs. 4,85,00,000/- claimed by the Assessee as revenue expenditure has been disallowed by the A.O. [and confirmed by the CIT(A)] - on the erroneous basis that the Assessee is in the business of construction of hostels for students, and a fixed asset, i.e., land has been purchased from a loan of 45.04 Crs sanctioned from IDFC Bank. However, the land has not been utilized for business purpose. Therefore, the proportionate amount of interest has been calculated and disallowed. The CIT[A] has apart from Sec.36(1)(iii) also referred to Explanation 8 to Sec.43(1) of the Act, to confirm the disallowance. [ This has been challenged by the Assssee via Ground No. 3] - a sum of Rs. 2,58,50,00/- claimed by the Assessee as revenue expenditure has been disallowed by the A.O. [and confirmed by the CIT(A)] - on the erroneous basis that the Assessee has made a total investment in capital work in progress as on 31.03.2015 from a Phase No.2 Loan of IDF....
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....s occurred in the previous A.Y. 2014-2015, and the Assessee has accepted / acceded to the same and chose not the challenge the same in appeal. Now challenging the proportionate disallowance of interest expenditure qua the purchase of a fixed asset in the F.Y. under consideration via Ground No.3 [i.e., Land purchased, which is duly reflected in Schedule 10.1 of the Audited Accounts, at Pg.22 of the Paper Book] - it is at the outset submitted that the borrowed funds have not been utilized towards the acquisition of the Land in question, and the disallowance has been made by the Ld.A.O. on a presumptive basis, soley on surmises and conjectures. It is further submitted that an advance for the purchase of the concerned fixed asset amounting to Rs. 40,20,00,000/- has been paid in the erstwhile financial year itself, i.e., F.Y. 2013-14 and forms part of the 'Capital Advance' declared in the said Financials. Attention in this respect is brought to Schedule 13 r/w Schedule 36 of the Audited Accounts of F.Y. 2013¬14 at Pgs.85 and 101 of the Paper Book. For the sake of brevity and convenience the tabulation of the advance payments made in F.Y. 2013-2014 ....
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....ions 1,81,99,13,217 30,00,00,000 81,95,285 No addition to this effect has been made in the case of the Assessee, in the erstwhile A.Y. 2014-2015 [F.Y. 2013-2015]. Now, qua the remainder payment made in the A.Y. under consideration, A.Y. 2015-2016 [F.Y. 2014-2015], the same is also through the Assessee's own funds, since it held a sufficient opening cash balance, visible from Schedule 17 of the audited accounts for F.Y. 2014-2015 at Pg.6 of the Paper Book. Therefore, the Assessee has not utilized any borrowed funds towards the acquisition of the fixed asset either in the preceding A.Y. or even in this A.Y. Even otherwise, as per law, the legal presumption that arises is that the investment in the land amounting to Rs. 45.04 Crores has been made out of non-interest bearing funds, available with the Assessee. The stance of the Assessee is supported by the decisions of the Hon'ble Jurisdictional ITAT in the case of RNS Infrastructure Limited Vs. The DCIT, ITA No.1171/Bang/2022, decision dated 17.05.2023 which has held that when the Assessee has funds available that are both interest free and loans taken, then the presumption that would arise....
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....te from the record that the interest paid to IDFC of Rs. 4.85 crores has been capitalized by the AO by observing that the capital asset (land) purchased for which loan was taken, was not put to use in the business of the assessee and the assessee is not in the business of trading of land and this land has been purchased as investment, and therefore it should be capitalized u/s. 36(1)(iii) of the Act. The Addl. CIT in the 144A proceedings gave opportunity to the assessee to explain the utilization of loan from IDFC and treatment of interest paid on such loan. The assessee submitted reply on 10.12.2018 which is incorporated in his order. He observed that a sum of Rs. 45.04 crores was utilized to purchase land from the part of fresh loan taken from IDFC & Aditya Birla Finance Ltd. and others of Rs. 128.35 crores @ 11.75% since in the balance sheet of the company the long term loan has increased to Rs. 406 crores from Rs. 281 crores instead of Rs. 128.35 crores claimed by the assessee. Accordingly the proportionate amount of Rs. 4.85 crores was disallowed. The assessee in the written synopsis submitted that Rs. 40.20 crores were paid in the FY 2013-14 which is clear from Note No.36 pla....