2017 (2) TMI 1293 - AT - Income Tax

Disallowance u/s.14A - Held that - Since in the instant case the assessee has not received any dividend on the investment made in shares of group companies, therefore, the investment made in the group companies should be excluded from the investments for the purpose of computing disallowance u/s.14A r.w. Rule 8D. So far as inclusion of share application money is concerned, it is an admitted fact that no shares are allotted as on 31-03-2009. We find merit in the submission of the assessee that the question of earning any exempt income simply does not arise on such share application money pending allotment. We find the Mumbai Bench of the Tribunal in the case of Rainy Investments Pvt. Ltd. (2013 (2) TMI 602 - ITAT MUMBAI) has held that share application money cannot be regarded as an investment in shares or an asset yielding tax free income and neither is it capable of yielding any tax free income. Thus we hold that share application money pending allotment should be excluded from the investments for the purpose of computing disallowance u/s.14A. Computation of disallowance u/s.14A on account of investment in partnership firms we find the assessee has excluded the same for the purpose of computation of disallowance u/s.14A. We find the Assessing Officer included the investments made in K.K. Erector, Kumar Sons and Kumar Builders on a pro-rata basis which has been upheld by the CIT(A). We find the amounts invested in the above firms is much less than the own capital and free reserves of the assessee company. Since the assessee in the instant case has conclusively proved that its own capital and free reserves are much more than the investment in the partnership firms and since we have already held in the preceding paragraphs that the share application money as well as investment in the group companies on which no dividend has been received has to be excluded from the investments for the purpose of computation of disallowance u/s.14A, therefore, in view of the discussions above no disallowance u/s.14A is called for in the instant case. Accordingly, the grounds raised by the assessee including the additional grounds are allowed. Addition being interest received on deposits belonging to the society - Held that - The assessee could not bring any material before us to show that assessee has infact handed over the money to the society. Since there is no evidence on record that any society has been formed and the assessee has transferred the money to the society or has shown any liability in its books and considering the fact that the assessee has claimed tax credit on such interest income, therefore, we find no infirmity in the order of the CIT(A) on this issue. Accordingly, the grounds raised by the assessee on this issue are dismissed. Proportionate disallowance made on account of diversion of borrowed funds and enhancement of income - Held that - Since in the instant case the assessee has conclusively proved that the own capital and free reserves of the assessee company is much more than the interest free advances given to Sinew Developers Pvt. Ltd. and Riverview Properties Pvt. Ltd. therefore, respectfully following the decision of Coordinate Bench of the Tribunal in the case of Trinity India Ltd. (2013 (8) TMI 948 - ITAT PUNE) we hold that the CIT(A) is not justified in enhancing the income of the assessee by directing the Assessing Officer to disallow proportionate disallowance of interest Interest free advances to two concerns - Held that - CIT(A) has correctly given a categorical finding that the interest free advances to Pune Technopolis Development Pvt. Ltd. and L.K. Developers Pvt. Ltd. are for business expediency and therefore in view of decision of Hon ble Supreme Court in the case of S.A. Builders Ltd. (2006 (12) TMI 82 - SUPREME COURT) no disallowance of interest u/s.36(1)(iii) is called for under the facts and circumstances of the case. Addition on account of society maintenance charges - Held that - Admittedly, the assessee is a Builder and Developer. It is a normal business practice in construction business that the builder is responsible for the maintenance of the buildings of a society till such time the flat owner s society or committee is formed and the maintenance of the society is thereafter handed over to the society or committee even though the flats are sold. In the instant case, there is no finding by the Assessing Officer that the assessee has incurred society maintenance charges even after the formation of the committee and the maintenance of the buildings was handed over to such committee. In absence of the same, we find merit in the findings given by the CIT(A) that the society maintenance expenditure incurred by the assessee is a business expenditure incurred in the normal course of business activity since the society has not been formed and the maintenance of the society is not handed over to the society or committee. In this view of the matter and in view of the detailed reasoning given by the CIT(A) we find no infirmity in her order. Accordingly, the same is upheld and the grounds raised by the Revenue on this issue are dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition of interest received on deposits belonging to the society.
3. Deletion of proportionate disallowance on account of diversion of borrowed funds.
4. Deletion of addition on account of society maintenance charges.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee, a company engaged in the business of Promoters and Builders, filed its return declaring a loss. The Assessing Officer (AO) observed that the assessee had claimed exempt income and disallowed expenses under Section 14A. The AO included investments in share application money and partnership firms, resulting in a disallowance of ?2,94,01,003. The CIT(A) upheld the inclusion of share application money but excluded the share application money received by the assessee. The Tribunal found that no dividend was received from the group companies, thus excluding such investments from disallowance under Section 14A. The Tribunal also excluded share application money pending allotment from disallowance, following decisions from other benches. The Tribunal concluded that no disallowance under Section 14A was warranted as the assessee’s own capital and free reserves were sufficient to cover the investments in partnership firms.

2. Addition of interest received on deposits belonging to the society:
The AO added ?12,24,391 as interest income, which the assessee claimed was received on deposits made on behalf of the society and should not be taxed as its income. The CIT(A) upheld the AO’s addition, noting that the assessee had claimed TDS credit on this interest. The Tribunal found no evidence that the money was handed over to the society or shown as a liability, thus upholding the CIT(A)’s decision.

3. Deletion of proportionate disallowance on account of diversion of borrowed funds:
The AO disallowed ?58,75,491 as interest on loans given to subsidiaries without charging interest. The CIT(A) deleted this disallowance, finding commercial expediency in the advances. However, the CIT(A) directed a disallowance of ?12,95,32,777 for advances to Sinew Developers Pvt. Ltd. and Riverview Properties Pvt. Ltd., which were not justified by commercial expediency. The Tribunal, noting that the assessee’s own capital and free reserves exceeded the interest-free advances, deleted the enhanced disallowance, following the decision in Reliance Utilities and Power Ltd.

4. Deletion of addition on account of society maintenance charges:
The AO disallowed ?2,80,224 for society maintenance charges, arguing that the expenses were not related to any business receipts. The CIT(A) deleted the disallowance, recognizing that maintaining buildings until the formation of a society is a normal business practice for builders. The Tribunal upheld the CIT(A)’s decision, confirming that the expenses were incurred in the normal course of business.

Conclusion:
The Tribunal allowed the assessee’s appeal partly, deleting the disallowances under Section 14A and on account of interest-free advances, while upholding the addition of interest received on society deposits. The Tribunal dismissed the revenue’s appeal, confirming the deletion of society maintenance charges and the proportionate disallowance of interest.