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TMI Blog2017 (12) TMI 1398X X X X Extracts X X X X X X X X Extracts X X X X ..... A r.w.r. 8D has included the amount of share application money against which shares are yet to be allotted - Held that:- Co-ordinate Bench of Tribunal in assessee s own case for assessment year 2009-10 has held that share application money pending allotment does not constitute part of investment for the purpose of computing disallowance u/s. 14A. Interest received on deposits belonging to the society - Held that:- In assessment year 2009-10 [2017 (2) TMI 1293 - ITAT PUNE] the assessee demonstrated before the Tribunal that own funds of the assessee were much more than the amount advanced. The Tribunal decided the issue in favour of the assessee holding no disallowance of interest is warranted. Share application money pending allotment does not constitute part of investment for the purpose of making disallowance u/s. 14A Disallowance u/s. 14A in respect of share of profits earned from partnership firms - Held that:- t is a trite law that no disallowance is to be made where investments are made for strategic purpose and no tax free income has been earned from such investments. In the instant case, the assessee has received income exempt from tax u/s. 10(2A) of the Act. Therefore, on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) by raising following grounds : "01. The order of the learned Commissioner of Income-Tax (Appeals)-1, Pune contrary to law and to the facts and circumstances of the case. 02. The learned Commissioner of Income-Tax (Appeals) grossly erred in deleting the addition on account of expenses not related to the business of the assessee of ₹ 2,18,39,912/ - instead of confirming the same. 03. The learned Commissioner of Income-Tax (Appeals) grossly erred in appreciating the decision of Supreme Court in the case of Supreme Court in the case of Lashmiratan Cotton Mills Co Ltd Vs. CIT (1969) 73 ITR 634 (SC) wherein it was held that in order to claim that an expenditure falls under section 37(1) the onus is on the assessee to prove the nexus of that expenditure to its business what the assessee has failed to dispose off. 04. For the facts and such other reasons as may be urged at the time of hearing, the order of the Ld. Commissioner of Income-Tax (Appeals)-I, Pune may be vacated and that of the Assessing Officer be restored. 05. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating expenses against his business income. The ld. AR reiterating submissions made before Commissioner of Income Tax (Appeals) contended that the Assessing Officer has failed to consider the fact that while earning income of ₹ 57.6 lakhs the assessee has incurred expenditure in respect of its ongoing real estate projects. 4.1 The ld. AR further submitted that salary and wages and interest expenditure are the time cost and they are not directly variable and directly unrelated to the income of the assessee. The ld. AR controverting the submissions made by ld. DR submitted that sometimes even after heavy expenditure the business may incur loss, therefore, the observations of the ld. DR that no prudent businessman would incur expenditure of ₹ 35.60 crores to earn profit of ₹ 57.60 lakhs is not tenable and thus liable to be rejected. The ld. AR pointed that the assessee being a builder and developer undertakes the development of residential and commercial properties. The activities carried out for the projects are continuous. The assessee is consistently following a particular method of recognizing profits, as per accounting policy. The Revenue has not rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order indicates that the Assessing Officer has not questioned the genuineness of the expenditure incurred by the appellant. It is not the case of the Assessing Officer that the expenditure was not incurred in the course of the business activities of the appellant. Apparently, the Assessing Officer also does not seem to have even verified nature of the expenditure claimed before drawing the inference that it was not incurred for the purpose of business being carried on by the appellant or that the expenses claimed actually belonged to any other group concern which appellant chose to claim in order to set off the same against its income. The only reason adduced by the Assessing Officer for making the disallowance is that the expenditure incurred is not commensurate with business income declared by the appellant. But, the adequacy of the corresponding income generated cannot be the sole criterion for deciding the admissibility of expenditure or otherwise. Perusal of the relevant schedules of the salary & wages expenses and operating expenses which have been subjected to disallowance by the Assessing Officer clearly shows that they are in the nature of recurring administrative e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) by raising following grounds : "On facts and in law, 1] The learned CIT(A) erred in confirming the disallowance of 14A amounting to ₹ 2,19,04,784/- made by the learned A.O. without appreciating that the disallowance made by the learned A.O. was not justified at all. 1.1] The learned CIT(A) erred in holding that the share application money amounting to ₹ 35,65,22,930/- paid by the appellant company was to be considered as part of tax free investments for determining the disallowance u/s. 14A r.w.r. 8D. 1.2] Without prejudice, the appellant company submits that if at all, the share application money paid by the appellant company is to be considered as part of the tax free investments, in that case, only the amount in respect of which shares are finally allotted to the appellant company should be considered and those amounts which are ultimately refunded back to the appellant company should not be considered as part of tax free investments. 1.3] Without prejudice, the appellant company further submits that the share application money which is paid out of interest bearing funds should only be considered for the purposes of making the disallowance u/s. 14A and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the disallowance of interest was warranted. 4.3] The learned CIT(A) failed to appreciate that the amounts advanced to the above two sister concerns were business advances and not loans and hence, there was no question of charging any interest on the amounts advanced and accordingly, the disallowance of interest was not warranted at all. 4.4] The learned CIT(A) further erred in not appreciating that the assessee company had sufficient interest free funds available with it for advancing the amounts to the sister concerns and in the absence of any nexus that the interest bearing funds were utilized for advancing the funds to the sister concerns, the disallowance of interest was not justified. 5] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal." 7. The assessee has raised additional grounds to supplement ground Nos. 1 and 2 raised in grounds of appeal. The additional grounds raised by the assessee are as under : 7. The assessee has raised additional grounds to supplement ground Nos. 1 and 2 raised in grounds of appeal. The additional grounds raised by the assessee are as under : "1] The assessee submits that the disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ₹ 9.35 crores. The ld. AR submitted that the assessee made voluntary disallowance in respect of investments in group concerns from which no tax free income was earned during the year. Though, the assessee made voluntary disallowance u/s. 14A, in fact no disallowance u/s. 14A was warranted in respect of strategic investment in sister concerns. The ld. AR in support of his submissions placed reliance on the decision of Co-ordinate Bench of Tribunal in assessee‟s own case for assessment year 2009-10 (supra). The ld. AR pointed that the Co-ordinate Bench of the Tribunal in assessee‟s appeal for assessment year 2008-09 (supra) taking a similar view has deleted disallowance u/s. 14A. 8.3 In respect of ground No. 3 relating to addition of ₹ 10,13,878/- on account of interest received on deposits belonging to the society, the ld. AR fairly admitted that the issue has been decided against the assessee by Tribunal in assessee‟s appeal for assessment year 2009-10 (supra). 8.4 In respect of ground No. 4 relating to disallowance of interest expenditure u/s. 36(1)(iii), the ld. AR submitted that the Assessing Officer has made disallowance of interest ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer, the Commissioner of Income Tax (Appeals) enhanced the income of the assessee by ₹ 1,99,39,084/-. The Commissioner of Income Tax (Appeals) has worked disallowance on daily basis. The maximum amount outstanding in respect of amounts advanced to the aforesaid two concerns is to the tune of ₹ 108.82 crores. The ld. AR submitted that the assessee has its own interest free funds available in excess of peak amount advanced. The ld. AR referred to the balance sheet of the assessee company at page 13 of the paper book. The ld. AR contended that since the assessee has own funds much more than the amount advanced, no disallowance of interest is warranted. To further buttress his submissions the ld. AR submitted that in assessment year 2009-10 the assessee demonstrated before the Tribunal that own funds of the assessee were much more than the amount advanced. The Tribunal decided the issue in favour of the assessee holding no disallowance of interest is warranted. 9. On the other hand ld. DR vehemently defended the findings of Commissioner of Income Tax (Appeals) with respect to confirming of disallowance made u/s. 14A and disallowance of interest u/s. 36(1)(iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance u/s. 14A. The relevant extract of the findings of Tribunal in this regard are as under : "30. So far as inclusion of share application money is concerned, it is an admitted fact that no shares are allotted as on 31-03-2009. We find merit in the submission of the Ld. Counsel for the assessee that the question of earning any exempt income simply does not arise on such share application money pending allotment. We find the Mumbai Bench of the Tribunal in the case of Rainy Investments Pvt. Ltd. (supra) has held that share application money cannot be regarded as an investment in shares or an asset yielding tax free income and neither is it capable of yielding any tax free income. The relevant observation of the Tribunal from Para 4 reads as under : "4. We have heard the parties, and perused the material on record. Section 14A r/w r. 8D is mandatory in its application where the assessee earns income which is claimed tax- exempt, as dividend income in the instant case. In fact, there is no doubt with regard to this; the assesse itself conceding to the same before us and, besides, being engaged in the business of making investments and earning dividend income as an integral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so that there is no scope for application of sec. 14A thereon." 31. We find the Kolkata Bench of the Tribunal in the case of LGW Ltd. (supra) has observed as under : "6. We have heard the submissions of the ld. DR, who relied on the order of AO. The ld. Counsel for the assessee brought to our notice the decision of ITAT, Chennai Bench in the case of MSA Securities Services Pvt. Ltd. vs ACIT in ITA Nos.1523- 1524/Mds/2012 dated 17.10.2012 and in the case of Rainy Investments P.Ltd vs ACIT in ITA No.5491/Mum/2011 dated 16.01.2013. The Honourable benches have taken the view that the share application money gets converted into shares only on allotment by the company. Till such time the share application money is converted into shares, the applicant does not have any rights of a shareholder/member. The share applicant see was not entitled to any dividend. Therefore share application money cannot be considered as investment which is likely to earn tax free dividend income. Hence, there can be no disallowance u/s 14A of the Act. 7. We have given a careful consideration to the rival submissions. We are of the view that order of CIT(A) on this issue has to be upheld. As rightly con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing disallowance only those investments on which exempt income has been earned shall be taken into consideration and the amount of disallowance in any case should not exceed the amount of exempt income. Thus, ground No. 2 raised in the appeal is partly allowed in the aforesaid terms. 12. In additional grounds of appeal the assessee has sought deletion of suo-moto disallowance u/s. 14A made by the assessee. The assessee has given list of group companies/partnership firms (at page 83 of the paper book) wherein the assessee has made strategic investments. Undisputedly, the assessee has not received any income in the form of dividend from investments made in group concerns. However, the assessee has received tax free income in the form of share in profits from partnership firms. The assessee has made suo moto disallowance of ₹ 7,16,67,703/-. The ld. AR pointed that in assessee‟s own case for assessment year 2009-10 (supra), the Tribunal has held that the investments on which no tax free income has been earned should be excluded while computing disallowance u/s. 14A. As stated earlier there is no dispute as regards the principle that no disallowance is to be made u/s. 14A w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issed. 14. In ground No. 4 the assessee has assailed confirming of disallowance of interest expenditure u/s. 36(1)(iii). The stand of the assessee is that own funds of the assessee are much more than the funds advanced to the sister concerns. The ld. AR referred to the Balance sheet at page 13 of the paper book. The ld. AR pointed that peak amount advanced by the assessee to two group concerns Kumar Housing Corporation Ltd. and Kumar Sinew Developers Pvt. Ltd. is ₹ 108.82 crores. As against this the assessee has own interest free funds including share capital and reserves of ₹ 217.93 crores. We find that in assessment year 2009-10 the Co-ordinate Bench of the Tribunal by placing reliance on the decision of Hon‟ble Bombay High Court in the case of Commissioner of Income Tax Vs. Reliance Utilities & Power Ltd. reported as 313 ITR 340 and the decision of Pune Bench of the Tribunal in the case of Trinity India Ltd. Vs. DCIT in ITA No. 666/PN/2012 decided on 28-08-2013 deleted the additions. The ld. DR has failed to controvert the findings of Co-ordinate Bench in assessee‟s own case in immediately preceding assessment years on the same set of facts. We find no r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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