2015 (4) TMI 796 - AT - Income Tax

Dis-allowance of interest paid on borrowed capital - No expenditure incurred for earning exempted income, dis-allowance under section 14A not stand - Interest free advances given on the principles of business prudence and commercial expediency - Treatment of sale of investments - Capital gain vs Business income - Additions on account of sale of ground floor below market rates - Family arrangement does not liable for capital gain - Held that - Dis-allowance of interest paid on borrowed capital - Following assessee's own case 2011 (10) TMI 573 - ITAT HYDERABAD for the Ay 2005-06, we find no infirmity in the order of CIT(A). The ground raised by the Revenue is dismissed. Treatment of sale of investments - We find that the shops let out by the company were shown as investment in the books and when the investment were sold the same were offered as capital gains. An amount of ₹ 1,34,83,600 was shown under the head investment capitalized . Relying on the decision of Radhaswamy Satsang 1991 (11) TMI 2 - SUPREME Court , wherein it was held that consistency is a virtue to be followed both by the assessee and the Revenue and applying the ratio of the this decision & taking into consideration that the shops have been reflected in the books of accounts from the very beginning, we are of the opinion that the income generated on the sale of the same should be treated as capital gain and not as business income. We confirm the order of the CIT (A) in deleting the addition. Ground Nos. 3 & 4 of appeal of the Revenue are dismissed. Additions on account of sale of ground floor below market rates - According to this agreement, Directors of the assessee company exchanged some properties and in the process the ground floor is to be given to Shri Ahok Kumar Malpani and 2nd, 3rd and 4th floors were to be handed over to Shri Girish Malpani, Shri Manish Malpani and Shri Ashish Malpani respectively. The CIT (A) has held that when an arrangement is made between the family members, being Directors of the company, the rate so adopted for this purpose cannot be compared to prevailing market rate and the difference in rate cannot be adopted for the purpose of capital gains. In fact, the CIT (A) relied on the decision of the Hon ble Madras High Court in the case of KAY ARRT Enterprises 2007 (7) TMI 171 - MADRAS HIGH COURT , the wherein the High Court held that the Tribunal had rightly found that the transfer of shares by way of family arrangement would not attract capital gains tax, as the same was a prudent arrangement to avoid possible litigation among the family members and was made voluntarily and not induced by any fraud or coercion and therefore, could not be doubted. The Tribunal was justified in arriving at the conclusion that the family arrangement among the assessees did not amount to any transfer and hence was not exigible to capital gains tax. - Decided against the revenue.

Summary

Issues Involved:
1. Disallowance of interest paid on borrowed capital.
2. Treatment of long-term capital gains as business income.
3. Additions towards profit on sale of ground floor and other floors of a mall.

Detailed Analysis:

1. Disallowance of Interest Paid on Borrowed Capital:
The primary issue was the disallowance of Rs. 45,01,777 as interest paid on borrowed capital under Section 14A read with Rule 8D. The Assessing Officer (AO) disallowed this amount, reasoning that the assessee had invested Rs. 4 crores in its sister concern and given interest-free loans to family members. The CIT (A) referenced the ITAT's decision in ITA No.1705/Hyd/2008 for the A.Y 2005-06, which allowed the interest deduction on grounds of commercial expediency, as per the Supreme Court's ruling in SA Builders. The ITAT upheld the CIT (A)'s decision, confirming that the interest disallowed for loans to relatives should be allowed, as the investment in the sister concern pertained to an earlier assessment year.

2. Treatment of Long-Term Capital Gains as Business Income:
The AO treated the sale of let-out shops as business income, while the assessee argued it should be treated as long-term capital gains, as the shops were shown as investments in their books. The CIT (A) agreed with the assessee, emphasizing that the treatment of the asset as an investment in the books over several years should not be altered by the AO without a valid basis. The ITAT confirmed the CIT (A)'s decision, citing the Supreme Court's ruling in Radhaswamy Satsang (193 ITR 321), which upheld the principle of consistency in tax treatment.

3. Additions Towards Profit on Sale of Ground Floor and Other Floors of a Mall:
The AO made additions towards profit on the sale of the ground floor and other floors of MPM Mall, treating them as business transactions. The assessee contended that these transactions were part of a family arrangement and should not be subjected to capital gains tax. The CIT (A) accepted this argument, referencing the Madras High Court's decision in CIT vs. KAY ARR Enterprises (299 ITR 348), which held that family arrangements do not attract capital gains tax. The ITAT upheld the CIT (A)'s decision, confirming that the rates adopted for family arrangements cannot be compared to market rates and should not be subjected to capital gains tax.

Conclusion:
The ITAT dismissed the Revenue's appeal, confirming the CIT (A)'s decisions on all grounds. The interest disallowance was allowed based on commercial expediency, the long-term capital gains were not treated as business income, and the additions towards profit on the sale of the mall floors were deleted, recognizing the transactions as part of a family arrangement.