2019 (4) TMI 1373 - AT - Income Tax

Allowability of interest - interest paid to Tata Realty Infrastructure Limited - advance received for purchase of land - partly refunded with interest - interest liability clause in MOU between party is not clear - HELD THAT - Payment of interest in case of non-performance or part performance of a contract was very much flowing from the MoU. Not only that, we find that it is not in dispute that assessee has paid interest to TRIL on which TDS has duly been deducted. It is also not a case of the department that TRIL has not treated the interest as its interest income or has not offered it for tax. If the interest has been paid during the regular course of business and under commercial expediency in terms of a contract and other party has also acknowledged the receipt of such a payment as interest, then revenue cannot judge the transaction so as to disallow payment of interest as a non-business expenditure or can hold that it is not for business purpose. The expenditure has to be allowed if it has been incurred wholly and exclusively in the course of business as long as there is a reasonable nexus between the expenditure and business. Apart from that, here the transaction is between two unrelated parties who have entered into a business transaction and have renegotiated the terms and conditions of the contract when the performance by one of the parties was not as per the terms agreed and non-performance entailed payment of interest which has actually been paid which fact is not in dispute. Thus, there could be no question of disallowance. Income from sale of shares - business income OR capital gain - HELD THAT - What has to be seen is, firstly, the objective of acquiring the shares, that is, whether it has been treated as investment or to enjoy income there from or to make profit by buying and selling shares in short run; secondly, the period of which shares have been held, that is, whether the shares are held for more than three years; thirdly, whether there is frequency of transactions in a particular share; and lastly, the treatment and classification given in the books of accounts has to be given significance. If we apply the said guidelines, then all the factors indicate that intention was never to trade in shares. Here the revenue s stand that there was trading of under lying assets of the subsidiary companies, cannot be upheld in law as shareholder does not have right to assets of the company but only share in profit. The company alone can with the approval of board of directors sell its assets. Thus, we do not find any reason as to why sale of shares is treated as trading in land so as to be taxed as business income in the hands of the assessee. Hence, in view of our discussion made above, we hold that income from sale of shares cannot be taxed as business income but has to taxed as capital gain. Disallowance interest u/s 36(1)(iii) - recharacterizing the share application money as interest free advance - HELD THAT - If AO is making notional disallowance of the interest paid for capital borrowed for the business purpose, then he has to prove the nexus, that the borrowed capital has been used for interest free advance or loan and that to be for non-business purpose. If such nexus is not proved then AO cannot proceed to make disallowance on the interest paid u/s 36(1)(iii). Assessee company has more than ₹ 9281.87 crores of accumulated reserves and during the year itself its reserves have increased by ₹ 1379 crores and amount of share application money advance was only ₹ 245.34 crores. Thus, in such circumstances, presumption is always in the favour of the assessee that these are advances out of surplus funds only and such presumption has been laid down by the Hon ble Jurisdictional High Court in the case of CIT vs. Max India Ltd. (P H) High Court, 2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT . Thus, under the facts and circumstances of this case, we hold that no disallowance can be made. TP adjustment - disallowance of interest - characterizing the share application money to associate enterprises as interest free advance - HELD THAT - If any money has been advanced for acquisition of shares which is a capital asset, same cannot be treated as capital financing unless the parties have intended or agreed to convert the same. Such an intention has to be gathered from any agreement or arrangement or understanding. If parties have treated it to be share application money for subscription of shares, then onus is upon the AO to prove it contrary that it is an international transaction. Here AO has drawn presumption on the ground that there was delay in allotment of shares, hence it is an international transaction of capital financing. Such a presumption cannot change the character of transaction. TPO/ AO cannot disregard any apparent transaction and substitute it by recharacterizing the said transaction without any material or exceptional circumstances that the assessee has tried to conceal the real transaction. Investment made in shares or applying for the shares cannot be given different colour so as to expand the scope of transfer pricing adjustment by recharacterizing it as interest free loan. Thus, we are unable to uphold the contention of the department that share application money pending allotment should be recharacterized as loan till the period it is allotted after a reasonable time. Accordingly, the adjustment made by the TPO is directed to be deleted. Treatment of rental income from properties - business income OR income from house property - HELD THAT - Here the entire rental income has been earned from letting out the properties owned by the assessee, hence when income has been earned from simply letting out the property then it has to be taxed under the head income from house property . Hon ble Supreme Court in the case of Raj Dadarkar vs ACIT 2017 (5) TMI 586 - SUPREME COURT OF INDIA , after considering the earlier judgements held that wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, if the conditions of provisions of Section 22 of the Act are satisfied. Moreover, it has also been pointed out by the Ld. Counsel that all throughout in the earlier years assessee has been showing rental income under the head income from house property which has been accepted by the revenue under the scrutiny proceedings in various years. The details of earlier assessment accepting the rental income as income from house property has been given in the chart enclosed. Thus, under these facts and circumstances, we hold that rental income cannot be treated as business income and consequently, benefit of standard deduction of 30% has to be allowed. Disallowance of prior period expenditure - HELD THAT - As pointed out by the liability has been crystallised during the relevant assessment year and it was never claimed in preceding assessment year. He also drew our attention to the relevant bills of the additional paper book V to show that most of the bills related to consultancy charges and travelling expenses of the Directors which was submitted and received by the assessee during the year and therefore, based on these bills assessee has claimed expenditure. Accordingly, when bills have been received during the year then we do not find any reason as to why such expenditure is to be disallowed and hence same is deleted. Disallowance u/s 14A - HELD THAT - A O without examining the accounts and nature of expenditure debited and recording his satisfaction has mechanically proceeded to make disallowance u/s 8D for sum of ₹ 12,37,07,018/-. Now in view of the judgment of Hon ble Jurisdictional High Court in the case of Joint Investment (P) Ltd. vs CIT, 2015 (3) TMI 155 - DELHI HIGH COURT and Cheminvest vs. CIT, 2015 (9) TMI 238 - DELHI HIGH COURT , it has been well settled that disallowance u/s 14A cannot exceed the exempt income, therefore, no disallowance could have been made more than the exempt income. Since assessee has already disallowed more than the exempt income, therefore, no further disallowance can be made and same is directed to be deleted. In the result this issue is allowed in favour of the assessee.

Summary

Issues Involved:
1. Deletion of addition of ?7,24,88,104/- on account of interest paid to Tata Realty Infrastructure Limited (TRIL).
2. Treatment of capital gain as business income.
3. Disallowance of ?23,71,65,830/- by characterizing share application money as interest-free advance.
4. Recharacterizing share application money as loan and disallowance of notional interest of ?10,19,55,814/-.
5. Disallowance of ?1,32,17,15,364/- of interest on interest-free loan advanced to sister concerns.
6. Addition of ?3,92,03,610/- on account of treatment of income from house property as business income.
7. Disallowance of expenditure of ?5,27,339/-.
8. Disallowance of ?12,37,07,018/- u/s 14A.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?7,24,88,104/- on Account of Interest Paid to TRIL:
The assessee claimed interest payment of ?7,24,88,104/- to TRIL, which was disallowed by the AO on the grounds that the MOU did not contain any clause enabling such payment. The DRP, following the CIT(A)’s order for the assessment year 2009-10, directed the deletion of the disallowance. The Tribunal upheld this decision, noting that the interest payment was made as per the MOU and for commercial expediency. The interest was acknowledged by TRIL as income, and TDS was deducted. Therefore, the disallowance was based on suspicion and surmises, and the Tribunal found no reason for such disallowance.

2. Treatment of Capital Gain as Business Income:
The AO treated the capital gains from the sale of shares of wholly owned subsidiaries as business income, arguing that the transactions were carried out in an organized manner with a profit motive. The Tribunal, however, noted that the shares were held as investments and not as stock-in-trade. The shares were shown as investments in the balance sheets, and the intention was to treat them as such. The Tribunal held that the income from the sale of shares should be treated as capital gains and not business income, following the guidelines issued by the CBDT and relevant case laws.

3. Disallowance of ?23,71,65,830/- by Characterizing Share Application Money as Interest-Free Advance:
The AO recharacterized the share application money as interest-free loans and disallowed interest on the borrowed funds. The Tribunal noted that the share application money was pending allotment of shares and could not be treated as loans. The AO failed to prove any nexus between the borrowed funds and the share application money. The Tribunal also noted that the assessee had sufficient surplus funds, and therefore, no disallowance could be made. The Tribunal allowed the assessee's ground and deleted the disallowance.

4. Recharacterizing Share Application Money as Loan and Disallowance of Notional Interest of ?10,19,55,814/-:
The TPO recharacterized the share application money as loans and proposed a disallowance of notional interest. The Tribunal held that such recharacterization was not permissible unless there was an intention or agreement to convert the share application money into loans. The Tribunal noted that the transaction was on capital account and could not be treated as capital financing. The Tribunal directed the deletion of the adjustment made by the TPO.

5. Disallowance of ?1,32,17,15,364/- of Interest on Interest-Free Loan Advanced to Sister Concerns:
The AO disallowed interest on the grounds that the advances to sister concerns were made out of borrowed funds. The Tribunal noted that the advances were made for business purposes and commercial expediency. The Tribunal also noted that the assessee had sufficient surplus funds, and therefore, no disallowance could be made. The Tribunal deleted the disallowance, following the judgment of the Hon’ble Supreme Court in the case of SA Builders Ltd. vs CIT(A).

6. Addition of ?3,92,03,610/- on Account of Treatment of Income from House Property as Business Income:
The AO treated the rental income as business income and disallowed the standard deduction claimed by the assessee. The Tribunal noted that the rental income was earned from letting out properties owned by the assessee and should be treated as income from house property. The Tribunal allowed the standard deduction of 30% and held that the rental income could not be treated as business income.

7. Disallowance of Expenditure of ?5,27,339/-:
The AO disallowed the prior period expenditure claimed by the assessee. The Tribunal noted that the liability for the expenditure had crystallized during the relevant assessment year, and the bills were received during the year. The Tribunal deleted the disallowance, noting that the expenditure was genuine and incurred during the relevant year.

8. Disallowance of ?12,37,07,018/- u/s 14A:
The AO made a disallowance u/s 14A, which exceeded the exempt income earned by the assessee. The Tribunal noted that the disallowance u/s 14A could not exceed the exempt income, following the judgments of the Hon’ble Jurisdictional High Court. The Tribunal deleted the disallowance, noting that the assessee had already disallowed more than the exempt income.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, providing relief on various grounds related to disallowances and recharacterizations made by the AO. The Tribunal upheld the principles of commercial expediency, proper classification of income, and sufficiency of surplus funds in its detailed analysis.