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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 ..... ts. CIT(A) relied on the decision of the coordinate bench of the Hon ble Tribunal in the case of Morgan Stanely Security Pvt Ltd [ 2014 (1) TMI 1412 - ITAT MUMBAI] and observed that the net interest debited to profit and loss account should be considered for the purpose of computation under Rule 8D(2)(ii) of I T Rules and the A.O is directed accordingly and partly allowed this ground of appeal. Disallowance u/s 14A r.w.r 8D(2)(iii) being the third limb where the A.O has made the addition based on the average value of investment @ 0.5% - The main claim of the assessee that if any disallowance is computed it should be restricted to the exempted income and relied on the financial statements, judicial decisions and the assessee own case for the A.Y.2014-15. Further, we find that there is no specific mention in the assessment order, whether the A.O has considered only the investments which yield dividend income for calculation of average value of investments. In the present case the assessee has suo moto made disallowance of Rs.62,65,593/- and further the assessee prayed that the disallowance u/sec14A r.w.r 8D(2) of the I T rules should be restricted to exempt income. We rely on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... And Shri Avinash Gupta.AR For the Respondent/Appellant : Shri. Mehul Jain. Sr.DR ORDER PER PAVAN KUMAR GADALE JM: These are the Cross appeals filed by the revenue and the assessee for the A.Y 2013-14 2015-16 against the separate orders of the Commissioner Of Income tax CIT(A)-49 Mumbai passed u/sec143(3) and U/sec250 of the Act. Since the issues involved in these appeals are identical and interlinked hence are clubbed, heard and consolidated order is passed. For the sake of convenience, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income. (iii)The A.O. has denied the setoff of the brought forwarded long term capital losses against the capital gains of Rs. 11,11,89,976/- and finally assessed the total income of Rs.162,40,40,432/- and passed u/s 143(3) of the Act on 29.12.2017. 3. Aggrieved by the order, the assessee has filed an appeal with the CIT(A). In the appellate proceedings the CIT(A) considered the grounds of appeal, findings of the A.O, and submissions of the assessee. Whereas in respect of capitalization of interest, the A.O has made addition 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 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assesee s own funds are more than the investments which are capable of generating the exempt income and disallowance u/s 14A of the Act is not warranted. Further, if any disallowance has to worked out it should restricted to exempt income and only dividend/exempted income yielding investments should be considered for average value of investments in computing disallowance under Rule8D(2)(iii) of the I T Rules. Further the Ld. AR submitted that there is no satisfaction recorded by the A,O in respect of disallowance made u/s 14A of the Act. The 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961 r/w Rule 8D of the Rules of the expenditure incurred by the assessee for earning exempt income. The Tribunal by the judgment which is impugned in this appeal held that the assessee had not earned any exempt income during the year under consideration. The Tribunal, therefore, followed the decision of Delhi High Court in case of CIT Vs. Holcim India (Pvt.) Ltd. (2014) 272 CTR 282. In such decision, the Delhi High Court ruled that when there is no exempt income earned by the assessee, no disallowance under Section 14A of the Act can be made. It is pointed out to us that 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8/-, though assessee made suomoto disallowance of ₹.54,01,967/- which is the entire exempt income earned by the assessee and claimed as deduction. 10. On appeal the Ld.CIT(A) restricted the disallowance only to the exempt income observing as under: - The submissions of the learned counsel have been carefully considered. It is the contention of the learned counsel that the investments made have been made out of own funds and that the own funds of the assessee are much more than the investments made. Further the investments have been made in the subsidiaries for strategic purpose and hence have 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 coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional High Court in the case of Lokhandwala Constructions Ind Ltd 260 ITR 579 the same were rendered before the proviso to Sec 36(1)(iii) has been inserted vide Finance Act 2003. 3. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 14,06,26,48/- made by the A.O u/s 14A r.w.r 8D and limiting the disallowance made by the AO to the extent of exempt income of the assessee as claimed not to the expenditure as per rule. 11. The Ld. DR submitted on ground of appeal no 1 2 that the CIT(A) has erred in deleting the addition u/s 36(1)(iii) of the Act though the A.O has treated the interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bai in the case of M/s. Wall Street Construction Limited [102 TTJ 505] wherein it has been 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 corresponding income offered to tax, Assessing Officer denied the claim of the assessee. On appeal the Ld.CIT(A) following the decision of the Hon'ble Jurisdictional High Court in the case of CIT v.Lokandwala Construction Industries Ltd., [260 ITR 579] and various other decisions of the Coordinate Benches allowed the claim for deduction of interest. Against this order the revenue is in appeal before us. 3. Ld. DR vehemently supported the order of the Assessing Officer and also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court. The Hon'ble ITAT Mumbai in the case of M/S Ashish Builders Private Ltd vs. ACIT ITA number 310/M/2012 held as under: 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 With regard to the interest expenditure,...........The interest cost on the corresponding capital borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest expenditure relating to the borrowed capital is allowable u/s 36(l)(iii) of the Act. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction itself, the work on a project may not be underway at all for the whole or a part of the year, or say as its optimum or normative level, on account of various business exigencies. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corola reality Ltd merged with Kolte Patil Developers Ltd) also held as under: Further, we find the Mumbai Bench of the Tribunal in the case of M/s Ashish Builders Pvt. Ltd. (supra) has decided an identical issue in favour of the assessee. Relevant Paragraphs are being reproduced hereunder for better appreciation of the issue: 6. Ground No. 1 of the appeal relates to the addition of some of the expenses to the WIP account i.e. interest on unsecured loan/fixed deposit (sic-car loan), advertisement expenses, brokerage expenses and loan processing fees. AO considered the above expenses as relatable to the WIP account and recomputed the WIP account at Rs.5,33,28,399/-. /Assessee contends that the above said expenditure is fully allowable in the year under consideration. In 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in-trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being reckonedas a part of the cost of production/construction, and thus of the inventory or the project cost a sat the year-end. The deducibility of the said cost u/s 36(l)(iii) is thus netherin doubt nor 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income. Accordingly, this part of the ground No. 1 is allowed in favour of the assessee. 14. From the above, it is evident that any amount of the interest paid in respect of capital borrowed for the business purposes constitutes an allowable deduction. The said clause (Hi) of section 36(1) of the Act supports the assessee's claim in the present case. This view is upheld in the case of CIT vs Lokhandwala Construction Industries Ltd. (supra) as well as the decision of the Tribunal in the case of M/s. Ashish Builders Pvt. Ltd. (supra) irrespective of the method of accounting of recognizing the income followed by the assessee. The present case involves the payment of interest of Rs.8,19,23,638/-, the interest paid to debenture holders, Financial institutions, Unsecured loan etc. It is not the case of the Revenue 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 allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest paid on loans obtained for stock in trade is an allowable deduction u/s. 36(1)(iii) of the Act. We also find that in the proceedings before the settlement commission the assessee claimed interest expenses and as per the order dated 28.07.2014 of the settlement commission and during verification proceedings u/s. 245D(3) of I.T. Act, the assessee informed the Assessing Officer that interest of ₹.124.02 crores as claimed in the computation of income on ground of interest expenses retained in inventory is deductible under provisions of section 36(1)(iii) of the Act. It was further informed that the said amount of interest paid was in respect of capital borrowed for the purpose of business or profession. It was further submitted that the construction and development having commenced, the business is in operation, therefore, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the calculation of interest disallowance the net interest should be taken in place of the gross income. The Hon ble ITAT, Mumbai in the case of Morgan Stanley Securities Pvt Ltd Vs. CIT ITA No. 5072/Mum/2005 held that the net interest debited to the prof it and loss account should be considered for the purpose of Rule 8D(2)(ii). This plea of the assessee is acceptable and the AO is directed to recomputed the disallowance u/s 14A r.w.r 8D by computing the net interest debited which is Rs. 14,06,26,480/- for the purpose of computation of interest disallowance. These grounds of appeal are partly allowed. 15. We find in the present case the CIT(A) has considered the fact of calculation of disallowance under rule 8D(2)(ii) and issued the directions to the A.O. Whereas, the Ld.DR submitted that the action of the CIT(A) in granting the relief overlooking 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 reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition was not sustained and relied on the judicial decisions. At this juncture, we considered it appropriate to refer to the observations of the CIT(A) on the issue at Page 20 Para 6 as under: 6.0 The Second, third and fourth grounds of appeal are against the addition of Rs. 1,05,73,789/- u/s 14A r.w.r 8D of the Rules. 6.1. It is seen from the assessment order that the assessee has made investment of Rs.31.56 Crores in the preference shares of the fellow subsidiary companies. The assessee has not made disallowance. To the query as to why disallowance u/s. 14A r.w. Rule 8D be not made, the assessee explained that the entire investment was made in the preceding years and it had not incurred any expenses for the purpose of making any investment. Further, all the investments have been made from the assessee's own funds. The AO did not find the assessee's explanation acceptable 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 fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial questions of law in the contact of the present facts. 6.3. In view of the binding judgment of the jurisdictional High Court, it is held that no disallowance can be made u/s 14A when there is no exempt income earned as in the interest case. Therefore, the addition made by the AO of Rs. 1,05,73,789/- u/s 14A is directed to be deleted. This ground of appeal is allowed. 19. The Ld. DR submitted that as per CBDT Circular, the disallowance u/s 14A r.w.r 8D of the Act has to be worked out even though there is no exempt income. We find Hon ble High Court of Delhi in the case of Cheminvest Ltd(Supra) has considered the CBDT Circular and observed that Sec. 14A of the Act will not be applied if no exempt income is received or receivable during the previous year. We find the CIT(A) has dealt on the judicial decisions and facts and finally directed the A.O to delete the addition as there is no exempt income earned/ received. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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