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TMI Blog2015 (11) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case the entire income is found to be taxable, no disallowance can be made under section 14A of the Act.' Moreover, the AO has not established the nexus between invested funds and the interest bearing funds. Also nterest bearing funds have not been utilized for investment for purchase of shares. - Decided in favour of assessee interest expenditure incurred for the purpose of business - whether same is deductible u/s.36(1)(iiii) or u/s.57 of the Act? - Held that:- As per the findings given hereinabove the CIT(A) has correctly held that interest expenditure was incurred for the purpose of business, therefore, same is deductible u/s.36(1)(iiii) of the Act or u/s.57 of the Act. A clear finding has been recorded by CIT(A) that interest expenditure have direct nexus with the generation of income, therefore, as an alternate, the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td for Development of Commercial Complex known as Marathone Futurex situated in Lower Parel, Mumbai was as under: 81,500 11% Redeemable Cumulative Preference Shares of ₹ 100/- each at a premium of ₹ 13,400/- per share aggregating to ₹ 110,02,50,000/- Implying that amount payable by way of face value of Preference Shares was ₹ 81,50,000/- and Amount payable by way of Premium was ₹ 109,21,00,000. In Return, Your Appellant is entitled to : Dividend by way of 11% on Face Value Of Preference Shares of ₹ 81,50,000/- An amount equal to 15% per annum, internal rate of return on Premium amount of ₹ 1,09,21,00,0001- other wise than by way of dividend. The dividend is always payable on face value of the shares (ignoring the Share Premium) and accordingly, the divided at 11% on preference shares of ₹ 81,50,000/was exempt income u/s. 10 (34) of the Income Tax Act, 1964 but income receivable @ 15% p. a. by way of internal rate of return on Premium amount of ₹ 109,21,00,000/- is a taxable income. This is in terms of the provisions of Rule 8D (2) (ii) of the IT Rules Accordingly, out of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 3,14,02,200/-, when actually, the total interest paid amounted to ₹ 2,31,96,641/-. The revenue has taken following grounds in its appeal :- 1. (i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to treat interest income as business income' instead of income from other sources as held by the AO. 1 (ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the assessee was only involved in the construction business and not in the financing and lending activities and hence interest income was to be taxed under the head' income from other sources' as held by Hon'ble Bombay High Court in the case reported in 274 ITR 21 . 2 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow interest expenditure of ₹ 2,31,96,641/- either as business expenditure u/s 36(1)(iii) or u/s 57(iii) of I.T. Act and not to carry it to the WIP without appreciating that:- (a) Interest paid on borrowed funds for investment in shares of PPL has no nexus with interest income earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest paid on borrowings against the interest income. By the impugned order the CIT(A) allowed all the above three grounds of the assessee in its favour. However, the CIT(A) confirmed AO's action of disallowance u/s.14A. Against the order of CIT(A) both assessee and revenue are in appeal before us. 5. Rival contentions have been considered and record perused. From the record we found that the assessee is engaged in the business of real estate and financing. Following are the group companies whose main object is development of real estate. i. Marathon Realty Pvt. Ltd. (MRPL) is the flagship of the Marathon Group. ii. Chhaganlal Khimji Co Pvt. Ltd. (CKCL) is a subsidiary of MRPL. iii. Parmeka Pvt. Ltd . (PPL) is a 100% subsidiary of MRPL. Iv Marathon Nextgen Realty Ltd. (MNRL) is a listed company. The PPL is engaged in the construction of a state of the art commercial Complex along with MRPL at Lower Parel known as' Marathon Futurex. PPL needed to augment its capital base therefore, decided to issue Preference Shares to a group concern which would share-in its profitability. MNRL had the required funds and had obtained permission from its shareholders to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -trade during this year which include the cost of borrowing. Out of ₹ 11.63 crores borrowing cost (i.e: basically interest paid on the a sum of ₹ 10,89,78,43/- was apportioned and it was taken to stock-in-trade by the appellant. 2.4 During the year the appellant had borrowed ₹ 110.02 crores from M/s Marathon Nextgen Realty Ltd.(MNRPL). The borrowed funds were in turn invested with M/s.Parmeka Pvt. Ltd. (PPL) a Joint Venture Company in which appellant is one of the Joint Venture partner. CKCL would receive a tax free dividend of 1,1 % on the face value of the Preference Shares and a Return of 15% on the premium paid. On the borrowal made for the investment in preferential shares ₹ 81.50 lakhs and on the ba1ance premium ₹ 109.21 crores appellant needs to pay interest @11 % to MNRPL. The Joint Venture Company is constructing a commercial complex by name Marathone Future X situated at Lower Parel, Mumbai. 2.5 The break-up of interest received available in the submission is reproduced hereunder for the sake of convenience. Sl.No. Name of the Party Outstanding as on 31st March 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces. 2.7 I find the advances received from the customers, borrowed funds and surplus business funds only were lent to the group concerns which have earned the interest income and hence it constitute the business activity of the appellant. The appellant is in to business of real estate and it requires fund for making investment and to carry on the construction activity. As mentioned above funds borrowed from MNRPL was in turn invested in PPL which is engaged in construction of a commercial complex by name Marathone Future X. Appellant being one of the JV partner the borrowal is utilized only in the construction activity and there is no room for any doubt. Alternatively it can be treated as part of activity in construction business. The AO ,did not controvert this claim of the appellant. The table above shows that, the appellant did, not receive any interest from PPL for the investment made. Mere non receipt of interest income 'during the year cannot lead to the conclusion that the appellant is not into finance activity. In, my view both construction as well as lending constitute the business activity hence, the claim of the appellant that the interest income earned is fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks and MNRPL would' have earned the interest directly from M/s.PPL and the cost of interest would have booked only by M/s.PPL. 2.11 The crux of the finding of the AO is that income from JV would be admitted in future and hence, expenses cannot be allowed in the current year. When no income is generated then no expenditure is allowable either u/s.57 or u/s.36(1)(iii). Allowing of expenditure should have nexus to generation of income. The AO had discussed about the matching concept and since no income was offered during the current year, he was of the view that no expenditure can be allowed. Further according to the AO, the interest expenditure forms the part of construction expenditure and hence, it has to be taken to the closing stock and in view of this, appellant is not eligible for deduction u/s.57(iii). 2.12 The above finding of the AO cannot be accepted. The entire interest expenditure needs to be allowed u/s.36(1)(iii) of the I.T.Act. as-business expenditure in view the clear finding given by me in para 2.6 and 2.7 that .the appellant is carrying on the construction activity/money lending activity. When M/s.PPL is in the need of funds and appellant being one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources . Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) and Hughes v. Bank of New Zialand [1938].6 ITR 636 (HL) relied on Appa Rao [1962] 46 ITR 511 (Mad), Mohamed Ghouse v. CIT [1963] 49 ITR '127 (Mad), Ormerods (India) P. Ltd. v. CIT [1959] 36 ITR 329 (Bom), Chhail Behari Lal v. CIT [1960] 39 ITR 696 (All), CIT v. Dr. Fida Hussain G. Abbasi [1969]71ITR 314 (MP), M.N. Ramaswamy Iyer v. CIT [1969] 71 ITR 218 (Ker) and CIT v. Gopal Ch. Patnaik [1978J 111 ITR 86 (Orissa) approved. Maharajadhiraj Sir Kameshwar Singh v. CIT [1957] 32 ITR 377 (Pat) and Madanlal Sohanlal v. CIT [1963J 47 ITR 1 (Cal) overruled I am fully in agreement with this contention of the appellant and accordingly, the conclusion drawn by the AO that unless interest Income is earned, the interest paid cannot be allowed is not accepted. The AO had place reliance on the judgment of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals Fertilisers Ltd reported in 227 ITR 172 which is not applicable to the facts of this case. Hence I direct the AO to allow the interest paid as deduction u/s 57(iii) of the I,T Act as an alternate remedy. 2.14 According to the AO, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earned from the shares are exempt therefore, provisions of Sec.14A applies to the facts of the assessee's case. Further, the AO was of the view that the assessee has used the borrowed funds towards making investment in the preference shares and the Interest expenditure on the borrowing needs to be disallowed u/s.14A. The assessee had worked out the disallowance of ₹ 1,28,893/- u/s 14A which was not accepted by the AO, as the assessee did not take into consideration the interest paid towards the premium on purchase of 11 % preferential shares. The AO had finally, arrived at ₹ 3,14,02,300/ on account of interest disallowance as well as disallowance on account of the administrative expenses etc. 11. By the impugned order the CIT(A) confirmed the disallowance made u/s.14A after observing as under :- 3.3 I have carefully considered the submission of the appellant and the impugned assessment order. As discussed above in para 2.1 while giving the background towards investment of ₹ 110 crores into the preferential shares of M/s PPL, the appellant had bifurcated the same it into two portions. A sum of ₹ 81.50 lakhs was towards face value of 81,500, 11% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d did not allow the same as expenses to be debited in the P L account. 13. By the impugned order the CIT(A) deleted the disallowance after observing as under :- 4.4 have carefully considered the submission of the appellant and the impugned assessment order. As per the submission made, 'AS-7 is no more applicable to the real estate transactions and builders doing development activity falls into AS-9. According to the guidance note issued by the Institute on accounting for real estate transactions, particularly clause 2.4, the following cost should not be included under the construction cost and development cost. 2.4 The following costs should not be considered part of construction costs and development costs If they are material : (a) General administration costs; (b) Selling costs; (c) research and development costs; (d) depreciation of idle plant and equipment; (e) cost of unconsumed or uninstalled material delivered at site; and (f) payments made to sub-contractors in advance of work performed: Thus, according to the directions issued by the Institute, the administrative and selling expenditure needs to be debited to the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of UTI 6,35,714/- 2 Interest on Loans and Advances (which was offered to Tax by Your appellant as income from business 3,59,17,004/- 3 Interest on income Tax Refund 10,024/- Total 3,65,62,742/- However, if you Honour goes through the computation part of the Assessment Order on page no.18, your honour would find that the assessing officer has also taxed capital gain of ₹ 6,35,714/- separately. In view of the above your appellant submits that the income from capital gain has been taxed twice. Once under the head Capital Gain and the other under the head income from other sources. Your Appellant therefore submits that the Computation of Assessed Income may please be revised accordingly. 6.3 I have carefully considered the submission of the appellant and the impugned assessment order. The break up of the income from other sources in the above table shows that the AO took the sum ₹ 6,25,714/- which is a short term capital gain as income from other sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he investment in the preference shares as per the joint venture agreement except that the amount borrowed for making investment in the shares from Marathon Nextgen Realty Pvt. Ltd. to the extent of face value of preference shares of ₹ 81,50,000/- on which dividend is going to receive is direct expenditure as per clause (i) of Rule 8D(2) and that comes to ₹ 1,08,518/-. Other than that no direct or indirect expenditure were incurred for investment in the preference shares. Therefore, the balance interest paid of ₹ 1,45,40,727/- on the money borrowed for premium paid on the preference shares is not covered by the provisions of Section 14A, as the assessee company is going to get internal rate of return on this amount @15% which will be taxable income and hence investment amounting to ₹ 10,09,21,00,000/- to the extent of premium of ₹ 13,400/- paid for 81,500/- preference shares should not be considered as Tax Free investment and hence it should not be considered for the purpose of disallowance u/s.14A of the Act. In the instant case the assessee was in receipt of 15% by way of internal rate of return on premium on preference shares of ₹ 109.21 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nergy (P) Ltd., 45 taxmann.com 116 - 372 ITR 97 , wherein it was held that where the assessee did not make any claim for exemption of any income from payment of tax, disallowance under Section 14A could not be made. 21. Further reliance was place on the decision of Hon'ble Punjab Haryana High Court in the case of Lakhani Marketing Inc., 272 CTR 265 , wherein it was held that no disallowance u/s.14A can be made when the assessee is not in receipt of any exempt income. Ld. AR also placed reliance on the decision of coordinate bench of Chennai Tribunal in the case of Mr. M. Baskaran, ITA No.1717/Mds/2013, dated 31-7-2014, wherein the issue with regard to disallowance u/s.14A has been detail in great detail and it was held that no disallowance can be made u/s.14A when there is no exempt income. 22. On the other hand, ld. DR relied on the orders of the authorities below. 23. From the record we found that during the year under consideration the assessee company was not in receipt of any exempt income, therefore, as per the proposition of law laid down in the following cases, no disallowance u/s.14A is warranted :- a) In the case of M/s. Shivam Motors P.Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in its cross objection are allowed. 4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 80 of the Income Tax Rules, since this case arose after the assessment year 20092010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that subsection (1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 (Punj Har) in which also the Court had observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny merit in the appeals. 8. The primary issue that arises for consideration in these appeals is whether the CIT(A) as well as the Tribunal were right in allowing deduction of interest liability out of other income and the claim of the revenue to disallow the same under section 14A of the Act was justified. 9. The CIT(A) vide order dated 24.6.2004 annexure A.II recorded as under:- 7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to ₹ 46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly. 10. Vide order dated 16.5.2008, Annexure A.III, the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under:- We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act, it is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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