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TMI Blog2015 (10) TMI 1511X X X X Extracts X X X X X X X X Extracts X X X X ..... by Bombay High Court in the case of Godrej & Boyce that working of disallowance u/s 14A read with Rule 8D is mandatory from A.Y.2008-09 onwards. iii) The Learned CIT (A) has erred on facts and in law in deleting the disallowance made amounting to Rs. 1,23,02,586/-, holding that such expenditure is nothing but cost of improvement allowable while comput ing the capi tal gains , ignor ing the f ac t that as per the provisions of Section 55 which defines cost of improvement, the amount paid as interest on compensation paid does not qualify as cost of improvement. iv) The Ld.CIT (A)'s order is contrary in law and on facts and deserves to be set-aside. v) The appellant prays that the order of CIT (A) on the above grounds be set aside and that of the AO restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary." 2. Brief facts of the case are that the assessee has been engaged in a business of real estate development. During the assessment proceedings, the assessee had shown a dividend income of Rs. 5,41,828/- and claimed the same as exempt under section 14A. The Assessing Officer (hereinafter referred to as the AO) found that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isure at Rs. 2.64 crores. The other investment was in liquid mutual fund and the opening balance of 7.50 crores increased to closing balance of 25.05 crores. Thus there was increase in investment during the year at Rs. 17.55 crores in mutual fund. The assesse had explained that for the reasons explained above, the business sale proceeds were required to be deposited in an escrow account. Pending permission of government authorities, such blocked funds were invested in liquid mutual funds. In the facts and circumstances, the interest expenditure was attributable to the business activities and not to the investment activity. Had there been no such investment, the interest expenditure would have remained the same. He therefore held that the interest expenditure was not attributable to investment activity. He further observed from the balance sheet that there was a decrease in borrowed funds on which interest expenditure was incurred. Therefore, the increase in investment during the year could not be related to the borrowed funds. He further observed that as per cash flow statement in the balance sheet, the company was having cash balance which was increased during the year. He therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined that the assessee company had entered into an agreement with the said Tropicana properties Ltd. many years back in 1990's against the mortgages of the company's properties. However, thereafter, the assessee company faced various legal/labour and other problems. This had led to a situation of dispute and there was non-fulfillment of commitment on the part of the assessee to Tropicana properties Ltd. The said party filed a legal suit against the assessee company. Both parties have amicably solved the issue by entering into the consent terms. As per the said terms, the rights of Tropicana properties Ltd. on the assessee company's property were released on payment of entire dues along with interest, which was claimed as cost of improvement. 6. The AO, however, was not satisfied with the above submissions. He observed that the claim was also made in assessment year 2001-02 wherein the same was disallowed right up to ITAT. The AO held that as per provisions of section 55 which defines the terms 'cost of improvement' this amount did not qualify as cost of improvement. The AO held that the interest expenditure incurred to settle the legal dispute with Tropicana properties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tached all the properties of Swan. To settle the matter, Swan and Tropicana filed Consent Terms dated 7th October 1999 whereby Swan had to pay the decretal amount as per the schedule listed therein along with interest @ 21% p.a. Thereafter, on 20th October 1999, Supplemental Consent Terms were filed whereby it was agreed that 70% of the payment of each installment made by Swan would be apportioned towards payment of the principal amount and the balance 30% would be apportioned towards interest. It was therefore explained that the assessee company had made the payment of Rs. 814 lakhs towards relinquishment of their (Tropicana Properties Ltd.) development rights and interest for late payment of Rs. 469.52 lacs. In the assessment year 2000- 01, the assessee company had debited the damages paid for cancellation of the agreement amounting to Rs. 814 lakhs to its Profit & Loss Account and the deduction of the same was allowed while computing the income. The interest on the said damages of Rs. 469.52 lacs was debited by the assessee company to Capital WIP in the year ended 31-3-2000. Further, in the year ended 31-3- 2001, the said amount was debited to the Fixed Assets under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee. The assessee had to pay Rs. 8.14 crores to Tropicana towards relinquishment of their (Tropicana's) development rights and also interest for late payment of Rs. 469.52 lacs. He further observed that in A.Y. 2000-01 the assesse had debited the amount of Rs. 8.14 crores to profit & loss account on account of damages paid for cancellation of agreement. The assessee's such claim was allowed by A.O. while computing the income. However, in A.Y. 2000-01, the amount of interest payable at Rs. 469.52 lacs was not claimed by assessee as expenditure but was debited to capital WIP. In A.Y. 2001-02 the assessee transferred the said interest of Rs. 469.52 lacs from capital WIP to the said land while computing the long term capital gains. In assessment order of A.Y. 2001-02 the A.O. disallowed the assessee's claim holding that the said claim was not revenue expenditure but was capital loss/ expenditure and was not related to A.Y. 2001-02. In appeal order of A.Y. 2001-02, the Ld. CIT(A) held that the transfer of land had not taken place and therefore, the claim was pre-mature and was rejected. On further appeal, the ITAT held that since the claim was not made in the P&L A/c., th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cost of improvement of the said land. He held that the interest expenditure pertaining to compensation paid for the said land for relinquishment of development rights by M/ s. Tropicana Properties Ltd, ultimately resulted in enhancement of value of the property i.e. land and the development rights of the said land became available to the assessee. By incurring such expenses, the assessee could obtain clear title/lien of the land and such land was subsequently sold at a higher price. Thus, the expenditure was nothing but cost of improvement allowable while computing the capital gains. He therefore directed the AO to allow such expenditure under the head capital gains. 9. We have heard the rival contentions. Admittedly, the compensation was paid to M/s. Tropicana for release of its rights over the said land in question. The interest component was part of the settlement. The principal amount of compensation had already been allowed by the AO as revenue expenditure. The interest expenditure paid for the said land for relinquishment of development rights by M/ s. Tropicana Properties Ltd, ultimately resulted in enhancement of value of the property and the development rights of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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