2018 (5) TMI 1010 - AT - Income Tax

Disallowance u/s. 14A with the aid of Rule 8D(2)(ii) and 8D(2)(iii) - Held 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, CIT(A) was justified in deleting the disallowance as made by the AO in the assessment order by invoking sec. 14A 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. Disallowance of interest made by the AO with reference to the interest free loans granted to subsidiaries and group associate companies - Held that - There was business connection between assessee and the companies to whom advances were made for undertaking projects in the field of real estate and civil infrastructure. Since the assessee was an active participant in the projects undertaken by the SPVs and JVs and had deep economic interest in these entities, 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. Disallowance of expenses on account of legal and professional fees relating to long term lease - Held that - The specific instance of long term leases executed during the year and the corresponding legal and professional expenses incurred which aggregated to ₹ 6,03,500/- (the same which was already disallowed suo moto by the assessee in the computation of income). Having regard to these facts and considering the inability of the department to point out the specific items of legal expenses totaling ₹ 6,01,800/-, we are inclined to uphold the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. Disallowance of prior period expenditure - Held that - Since in the present case the decision to abandon the public issue of shares was taken during the year, the loss got crystallized in the relevant year and, therefore, rightly allowed by the Ld. CIT(A). Therefore, no infirmity in the order of the Ld. CIT(A) in deleting the disallowance made by the AO, therefore, we uphold the order of the Ld. CIT(A) on this ground and thus both the appeals of the revenue stand dismissed.

Summary

Issues Involved:
1. Deletion of disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.
2. Disallowance of interest on borrowed capital with reference to interest-free loans granted to subsidiaries and group associate companies.
3. Disallowance of expenses on account of legal and professional fees related to long-term leases.
4. Disallowance of prior period expenditure.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962:
The revenue appealed against the CIT(A)'s deletion of disallowance of ?58,27,209/- for AY 2009-10 and ?75,24,948/- for AY 2012-13 made under Section 14A read with Rule 8D. The Assessing Officer (AO) had disallowed these amounts, asserting that any expenditure related to investments was liable for disallowance, irrespective of whether exempt income was earned. The CIT(A) noted that the AO did not provide evidence that borrowed funds were used for investments and highlighted that the assessee had sufficient own funds. The Tribunal upheld the CIT(A)'s decision, citing the Hon’ble Delhi High Court's ruling that disallowance under Section 14A is not warranted if no exempt income is earned during the relevant year. Hence, the revenue's appeal on this ground was dismissed.

2. Disallowance of Interest on Borrowed Capital with Reference to Interest-Free Loans Granted to Subsidiaries and Group Associate Companies:
The AO disallowed ?81,15,597/- as interest on borrowed capital, asserting that interest-free advances to subsidiaries and associates should be capitalized. The CIT(A) deleted the disallowance, stating that the advances were for business expediency and not out of borrowed funds. The Tribunal upheld this view, referencing the Supreme Court's decision in S. A. Builders Ltd., which allows interest on borrowed funds if the advances are for commercial expediency. The Tribunal noted that the advances were for the assessee's business purposes and, therefore, allowable under Section 36(1)(iii). Thus, the revenue's appeal on this ground was dismissed.

3. Disallowance of Expenses on Account of Legal and Professional Fees Related to Long-Term Leases:
The AO disallowed ?6,01,800/- of legal and professional fees, considering them related to long-term leases. The CIT(A) deleted the disallowance, finding no basis for the AO's conclusion and noting that the assessee had already disallowed ?6,03,500/- related to long-term leases. The Tribunal upheld the CIT(A)'s decision, as the revenue could not provide specific evidence to support the AO's disallowance. Therefore, the revenue's appeal on this ground was dismissed.

4. Disallowance of Prior Period Expenditure:
The AO disallowed ?1,07,70,503/- as prior period expenditure related to a proposed public issue of shares that was later abandoned. The CIT(A) allowed the expenditure, stating that it became a sunk cost when the public issue was abandoned, and thus deductible in the year the decision was made. The Tribunal upheld this decision, citing the Calcutta High Court's rulings in similar cases, which allow such expenditures in the year they are crystallized. Therefore, the revenue's appeal on this ground was dismissed.

Conclusion:
The Tribunal dismissed all grounds of appeal raised by the revenue, upholding the CIT(A)'s decisions on all issues. The order was pronounced in the open court on 14th May, 2018.