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2017 (8) TMI 953 - AT - Income TaxAddition for interest earned from the fixed deposit of share application money before commencement of business - Held that - The undisputed facts of the case are that the funds were raised by way of share application money by the assessee and when the same were not required immediately in the construction activity, the money was put into the Corporation Bank and Kotak Mahindra Bank in short term deposits which yielded an interest of ₹ 34,40,144/- and ₹ 59,67,424/- respectively. The said interest of ₹ 94,07,568/- was reduced from the capital work in progress as on 31.3.2009 and thus capitalized on the ground that the interest was received out of own money and not out of the borrowed funds. Whereas in the case of the assessee the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd 1997 (7) TMI 4 - SUPREME Court the facts were distinguishable and therefore not applicable to the present case. - Decided in favour of assessee. Disallowance u/s 14A - Held that - We find that there is question of disallowance by application of provisions of section 14A r.w.r 8D as the assessee has not claimed any expenditure as the entire expenditure has been capitalized under the head work in progress. We are in agreement with the conclusion drawn by the ld.CIT(A) that the assessee has neither claimed any exempt income as the same was reduced from the capital work in progress and all the expenses were capitalized in the capital work in progress thereby not claiming any expenses out of taxable income and accordingly uphold the same by dismissing the ground taken by the revenue.
Issues Involved:
1. Deletion of addition for interest earned from fixed deposits of share application money before the commencement of business. 2. Deletion of disallowance under Section 14A of the Income Tax Act. Detailed Analysis: Issue 1: Deletion of Addition for Interest Earned from Fixed Deposits of Share Application Money The revenue challenged the order of the CIT(A) that deleted the addition of interest earned from fixed deposits made from share application money. The Assessing Officer (AO) had treated this interest as "income from other sources" based on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. The CIT(A), however, relied on the Chennai High Court decision in VGR Foundation, which followed the Supreme Court decision in Bokaro Steel and Karnataka Power Corporation. Facts of the Case: - The assessee, a private limited company engaged in hotel construction and hospitality services, filed a return declaring an income of ?4,39,504/- for the assessment year 2009-10. - The assessee earned interest of ?94,07,568/- from fixed deposits made from share application money received for hotel construction. - The interest was adjusted against the capital work in progress, and the AO issued a show-cause notice to tax this interest under "income from other sources." CIT(A)'s Findings: - The CIT(A) observed that the share application money was not borrowed funds but the company's own funds. - The CIT(A) distinguished the facts from the Tuticorin Alkali Chemicals case and found them more aligned with the decisions in Bokaro Steel and Karnataka Power Corporation. - The CIT(A) concluded that interest from fixed deposits made from share application money is not taxable as income from other sources and allowed the interest to be reduced from capital work in progress. Tribunal's Decision: - The Tribunal upheld the CIT(A)'s decision, agreeing that the interest earned from share application money, being the company's own funds, should not be taxed as income from other sources. - The Tribunal dismissed the grounds of appeal raised by the revenue, affirming that the CIT(A)'s decision was reasonable and legally correct. Issue 2: Deletion of Disallowance under Section 14A of the Income Tax Act The revenue also contested the deletion of disallowance of ?7,14,404/- made by the AO under Section 14A of the Income Tax Act. Facts of the Case: - The assessee received exempt income in the form of dividends amounting to ?87,81,275/-, which was reduced from the capital work in progress. - The AO applied the provisions of Section 14A read with Rule 8D(2)(iii) and disallowed ?7,14,404/-, adding it to the total income of the assessee. CIT(A)'s Findings: - The CIT(A) noted that the assessee had capitalized all expenses related to the hotel project and had not claimed any expenditure during the year. - Since the assessee did not claim any expenditure or exempt income, the CIT(A) held that no disallowance under Section 14A was warranted. Tribunal's Decision: - The Tribunal agreed with the CIT(A) that since the assessee had not claimed any expenditure and had capitalized all expenses, the provisions of Section 14A read with Rule 8D were not applicable. - The Tribunal upheld the CIT(A)'s deletion of the disallowance and dismissed the grounds of appeal raised by the revenue. Conclusion: The appeal by the revenue was dismissed in its entirety. The Tribunal upheld the CIT(A)'s decisions on both issues, confirming that the interest earned from fixed deposits made from share application money is not taxable as income from other sources and that no disallowance under Section 14A is warranted when the assessee has not claimed any expenditure.
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