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TMI Blog2022 (6) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... onvenience, we shall take up the assessee appeal in ITA No. 131/Mum/2019 for the A.Y 2015-16 as lead case and the facts narrated therein. The assessee has raised the following grounds of appeal: "1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in upholding disallowance of Rs. 1,68,56,525/- u/s 14A of the Act being 0.5% of average value of investment. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the appellant's own funds was greater than investment capable of generating exempt income and hence no additional disallowance u/s 14A is warranted in the case of the appellant. " 2. The Brief facts of the case are that the assessee company is engaged in the business of Land development and constructions of real estates. The assessee has filed the return of income electronically on 30.08.2015 for the A.Y 2015-16 disclosing a total income of Rs.63,89,62,7282/-. Subsequently the assesee has filed revised return of income on 21.03.2017 with a total income of Rs. 64,35,71,675/- And the case was selected for scrutiny under CASS and notice u/s 143(2) and 142(1) of the Act are issued. In compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition to the work in progress and the assessee has filed the elaborate submissions in the appellate proceedings referred at Para 7.2 of the order on the factual aspects of the business operations, provisions of the law and the judicial decisions. Whereas the CIT(A) has considered the submissions on the interest capitalization and observed that this is a recurring issue and was decided in favour of the assessee for the A.Y 2014-15 referred at page 11 Para 7.3 of the order and directed the A.O. to delete the addition and allowed the ground of appeal. 3. (i) In respect of revised grounds of appeal no.3 & 4, where the A.O has made a disallowance u/s 14A r.w.r 8D(2) of Rs. 20,47,49,126/- the CIT(A) has dealt on the observations of the A.O at Para 8.1 on the provisions of Sec. 14A r.w.r 8D(2) of I T Rules, finance Act2001, judicial decisions on the applicability of law. In the appellate proceedings, the assessee has filed the submissions referred at Page 21 Para 8.2 of the order where the assessee mentioned that the dividend income earned was Rs.4.88 crores from small time investments in mutual funds and claimed exempted U/sec 10(34) of the Act. Further, the assessee's own funds are hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AR supported the submissions with the paper book, judicial decisions and prayed for allowing the assessee appeal. 5. Contra, the Ld. DR submitted on the applicability of Rule 8D(2)(iii) and the facts of expenditure incurred and emphasizes on the A.O. calculations and supported the order of the CIT(A) on the disputed issue.. 6. We heard the rival submissions and perused the material on record. The sole crux of the disputed issue is with respect to disallowance u/s 14A r.w.r 8D(2)(iii) of I T Rules being the third limb where the A.O has made the addition based on the average value of investment @ 0.5%. On perusal of the facts, the A.O has not considered information relating to investments disclosed in the audited balance sheet. We find that the assessee has made su moto disallowance of Rs.62,65,592/- in respect of the exempted income and the A.O has applied separate factors and recomputed the disallowance. Whereas the CIT(A) in respect of disallowance under Rule 8D(2)(ii) has directed the A.O to recompute the disallowance considering the net interest component. The assessee has challenged the calculation of 0.5% of the average investments. We found that the A.O has discussed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this Court in Income Tax Appeal No.693 of 2015 in case 2 of 4 Uday S. Jagtap 1619-16-ITXA-34=.doc of Principal CIT Vs. M/s. Rivian International (P) Ltd., by order dated 21.11.217, following the judgment of Delhi High Court in case of Holcim India (P) Ltd. (supra), has adopted the same principle making following observations :- "3. We have given careful consideration to the submissions. On facts, it appears from the impugned judgment that the assessee had made investment in shares of closely held companies which did not declare any dividend. On fact, there is no dispute that the assessee has not earned any exempt income during the year under consideration. After consideration of Section 14A, the Delhi High Court followed decisions of certain other High Courts. Section 14A of the said Act provides that for the purpose of computing the total income, 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 said Act. In other words, Section 14A provides that if there is an income which does not form a part of the total income under the said Act, the expenditure which is incurred f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be excluded for disallowance under section 14 A. The learned counsel further relied upon the judgment of Hon'ble Chennai High Court in the case of Shiva Industries Holdings Ltd vs. ACIT 11 Taxmann.com 404 and also that of the jurisdictional ITAT in the case of Daga Global Chemical Private Ltd vs. ACIT ITA number 5592/MUM/2012 wherein it has been held that the disallowance should be restricted to and should not exceed the exempt income. Further, the jurisdictional ITAT in the case of Sandeep Bharat Singh Kothari vs. ACIT ITA number 8706/MUM/2011 followed the coordinate bench in the case of Daga Global Chemical Private Ltd and held that the disallowance under section 14A read with rule 8D cannot exceed the exempt income. While the disallowance made by the AO in accordance with Rule 8D is agreed to in principle, following the decision of the jurisdictional ITAT in the case of Daga Global Chemical Private Ltd, the AO is directed to restrict the disallowance to the exempt income earned i.e. Rs.54,01,967/-. This ground of appeal is ALLOWED." 11. We have heard rival contentions and perused the orders of the Assessing Off icer and Ld.CIT(A). We find that Ld.CIT(A) restricted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st as a capital expenditure and the decisions relied by the CIT(A) are prior to the proviso inserted in Finance Act 2003. In respect of 3rd ground of Appeal, the Ld. DR submitted that the CIT(A) erred in deleting the addition made under sec14A r.w.r 8D(2)(ii) and to consider the net interest expenditure. Contra, the Ld.AR submitted that the CIT(A) has considered the valid information in the financial statements and granted the relief and relied on the judicial decisions and supported the order of the CIT(A) on these two disputed issues. 12. We heard the rival submissions and perused the material available on record. We find the grievance of the revenue that the CIT(A) erred in deleting the addition u/sec36(1)(iii) of the Act relying on the decision of Hon'ble High Court of Bombay. We find the Coordinate Bench of the Hon'ble Tribunal in the assessee's group case M/s. Palava Dwellers Pvt Ltd & Lodha Developers Ltd ITA No. 2147/Mum/2018 & 2348/Mum/2018 for the A.Y 2014-15 has dealt on the same issue in the revenue appeal, were the similar grounds of appeal are raised and observed at page 2 Para 3 as under: 1. In sofar as Ground Nos. 1 and 2 are concerned, briefly stated the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so the decision of the Special Bench in the case of M/s. Wall Street Construction Limited (supra). 4. We have heard the rival submissions, perused the orders of the authorities below and case laws relied on. This aspect of the matter has been elaborately considered by the Ld.CIT(A) with reference to the averments of the Assessing Officer and considering the submissions of the assessee and also the decision of Hon'ble Jurisdictional High Court in the case of CIT v.Lokandwala Construction Industries Ltd., (supra) and various other decision and allowed the claim of the assessee observing as under: - "The submissions of the learned counsel have been carefully considered. According to the learned counsel the interest claimed by the assessee is a period cost and has to be allowed under section 36 (1) (iii) of the Act. The assessee has relied upon the judgment of the apex court in the case of the Taparia tools Ltd vs. DCIT (2015) 272 ITR 605 wherein the Supreme Court held that the only aspect which needed examination was as to whether the provisions of section 36 (1) (iii) read with section 43 (2) of the act was satisfied or not. Once these are satisfied there is no question of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: "3.2 With regard to the interest expenditure,...........The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures I terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k in trade and the assessee was entitled to deduction under section 36(l)(iii) of the Act in respect of the interest on the loan obtained for execution of said project." Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dying and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the interest expenditure relating to the borrowed capital is allowable u/s 36(l)(iii) of the Act. The relevant lines from the para 4 reads as under; "that, while adjudicating the claim for deduction under section 36(l)(iii) of the Act the nature of expense 0- whether the expenditure was on capital account or revenue account - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of capital was the relevant for the purpose of adjudicating the claim of deduction under section 36(l)(iii) of the Act. (referring to the judgment in the case of Calico) It was laid down that where an assessee claims deduction of interest paid on the capital borrowed all that the assessee was to show that the capital which was borrowed was used for business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. As such, what in our view would prevail is the method of accounting being regularly followed by the assessee, i.e. on a year basis. The same also has the sanction of law inasmuch as sec. 145 clearly provides for determination of the business income on the basis of the method of accounting being regularly followed, with the mandate of sec 36(l)(iii) being also satisfied, and toward which the assessee relies on the decision in the case of CIT vs Lokhandwala Construction Inds. Ltd(supra). The same also clarifies that the interest cost is to allowed u/s 36(l)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. The issue, though, we may clarify, is not as to whether the borrowed capital stands utilized toward trading operations or on capital account; the Instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, assessee relied on various ITA No. 80/PUN/2016 M/s Kolte Patil Developers Ltd., decisions. This issue is relevant for AYs/appeals under consideration. We shall take up expenditure-account wise adjudication in the following paragraphs: "A) Interest on unsecured loans and fixed deposits: It is the claim of the assessee that the entire interest expenditure is allowable as it is a time related fixed finance cost on the borrowed capital. The claim of the assessee should be allowed In full in view of the various decisions on this issue. To start with, we perused the order of the Tribunal in the case of Rohan Estates Pvt. Ltd. (supra) which is one of the sister concerns of the assessee. We perused the para 3.2 of the said order of the Tribunal and find it Is a self explanatory and the decision of the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favor of the assessee relying on binding jurisdictional High Court judgment in the case of M/s Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: "3.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in dispute. Further, it may also be in place to state that section 36(l)(iii) stands since amended by Finance Act, 2003 w.e.f. 01/04/2004, by way of insertion of a proviso thereto, so that any interest cost on capital account is to be necessarily capitalized. Accordingly, it is only the interest cost computing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(l)). The said decision may, thus, in the given facts and circumstances of the case as, well as the amended law, not be of much assistance." We have also perused the said binding High Court judgment in the case of M/s Lokhandwala Construction inds. Ltd. (supra) and find the same is relevant for the following conclusion - "construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(l)(iii) of the Act in respect of the interest on the loan obtained for execution of said project/' Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dying and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue that the interest claim of Rs.3,00,57,566/- and related capital borrowed was not utilized by the assessee for business purposes of the assessee." However, the case of Wall Street construction is one where the assessee was following project completion method and therefore the ITAT held that the interest cost shall be debited to work in progress and allowed to be claimed as deduction only in the year in which the corresponding income is offered to tax. In the instant case, the assessee is following percentage completion method (POCM) of therefore the judgment of Wall Street construction is not applicable to this case. The assessee is following percentage completion and offers a part of the revenue every year depending upon the percentage of completion. The funds have been borrowed for the purpose of construction and have gone into the projects of the assessee which are stock in trade and not capital asset of the assessee. Therefore, the amendment brought in the Act with effect from 2003 by way of introducing the proviso to section 36 (1) (iii) also does not affect the facts of the case of the assessee. In view of the binding judgment of the jurisdictional High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest is allowable u/s. 36(1)(iii) of the Act. It was alsofurther brought to the notice of the Assessing Officer that in the case of CIT v. Lokandwala constructions Industries Ltd., [131 Taxman 810] the assessee's claim for deduction of interest, although the revenue was recognized only on project completion basis in subsequent year, was allowed in the year in which the claim of interest was made. Thus, it was contended that the interest expenditure incurred during the year is claimed and allowable as expenses even though the same has been inventorised in the Books of Accounts. These contentions were accepted by the revenue and no objection has been raised by the Assessing Officer and the settlement commission has accepted these contentions of the assessee. This fact was also taken note by the Ld. CIT(A) in allowing the claim of the assessee. Therefore, since the revenue could not controvert the findings of the Ld.CIT(A) that the project constructed by the assessee for which the loans have been taken is not a stock in trade and also the other findings of the Ld.CIT(A), we do not find any valid reason to interfere with the findings of the Ld.CIT(A) and accordingly we sustain the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king the facts of interest component is not acceptable. We considering the overall facts and findings of the appellate authority, find that the CIT(A) has rejected the assessee plea of own funds more than investments and considered the alternative submissions and relied on the judicial decision and issued directions to the A.O. to recompute the disallowance u/sec14A r.w.r8D(2) considering the net interest claimed. The Ld.DR could not controvert on the observations of the CIT(A) with any new cogent material evidence or information to take a different view. Accordingly, we are not inclined to interfere in the decision of the CIT(A) on this disputed issue and uphold the same and dismiss the ground of appeal of the revenue. And the appeal filed by the revenue is dismissed. ITA 2336/Mum/2019, A.Y 2013-14 16. The revenue has raised the following grounds of appeal: "1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 84,31,93,343/- made by the AO u/s 36(1)(iii) and capitalized the same inventory. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able for the reason that there were huge borrowed funds and the assessee failed to prove the nexus that borrowed money has been used exclusively for business. He, therefore, proceeded to make a disallowance u/s. 14A r.w. Rule 8D. 6.2 During the course of appellate proceedings, it has further being submitted by the assessee that it had not earned any exempt income during the year. The computation of income filed by the assessee along with the financials have been perused and it is seen that the assessee has not earned any exempt income. 6.3 It has been held by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. 378 ITR 33, wherein the Hon'ble High court held categorically that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. More recently the jurisdictional High Court in the case of PCIT 8 vs Zee News Ltd. ITA Nos. 785 & 789 of 2015 vide its order dated 05.02.2018 held as under: "We find that the impugned order of the Tribunal has recorded a finding of fact that in the subject Assessment year no income in the form of dividend or otherwise was claimed as exempt income by the Respondent - assessee. The im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived. The Ld. DR could not controvert the observations of the CIT(A) with any new cogent material or information. Accordingly, we do not find any merits in the submissions of the revenue and uphold the decision of the CIT(A) on the disputed issue. Accordingly, the ground of appeal raised of the revenue is dismissed. In the result the appeal filed by the revenue is dismissed. ITA 2387/Mum/2019, A.Y 2013-14 20. The assessee has raised the following grounds of appeal: "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance of 50% of the payments/reimbursements to Lodha Developers UK Ltd amounting to Rs. 43,89,154/- by merely stating that agreement and bills provided by the appellant are not sufficient evidence of providing the services." 2. The appellant craves leave to add, amend, alter or delete the said ground of appeal. 21. At the time of hearing, the Ld. AR submitted that the assessee company is engaged in the real estate constructions and the assessee has made some payments to Lodha Developers UK Ltd towards the selling and marketing services but the assessee could not substantiate fully with the details of claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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