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TMI Blog2023 (9) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 14A of the Act. Accordingly, the AO is directed to delete the same. As a result, grounds no.5 and 6, raised by the assessee are allowed. Allowance of interest expenditure u/s 57(iii) - interest expenditure claimed under the aforesaid section is not wholly and exclusively expended for the purpose of earning the interest income - DRP after duly noting the chronology of events, i.e. borrowing of interest-bearing funds by the assessee and thereafter advancing the same as interest-bearing loan to the sister concern, in its directions came to the conclusion that the interest expenditure claimed by the assessee is directly related to the interest income earned during the year under consideration. It is undisputed that the assessee utilised the interest-bearing borrowed funds for advancing the loans to the sister concern. It is pertinent to note that the violation of RBI guidelines on the usage of ECB funds for other purposes has no relevance in the allowance of deduction u/s 57(iii) - Therefore, we find no infirmity in the impugned final assessment order passed in conformity with the aforesaid directions of the DRP, whereby the interest expenditure was directed to be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,055/- u/s 92CA (3) to the Income of the current assessment year without acknowledging the fact that the adjustments proposed by the learned TPO is under capital account and not under revenue account. Ground No. 5: On the facts and circumstances of the case and in law, the learned AO under the directions issued by Hon'ble DRP, erred in making disallowance of Rs. 300,000/- u/s 14A of the Act. Ground No. 6: Without prejudice to Ground no 5 that disallowance u/s 14A is not at all warranted on the facts of the case, the learned AO under the directions issued by Hon'ble DRP, erred in ignoring the settled legal proposition that the computation of disallowance u/s 14A as per Rule 8D is compulsory u/s 14A (2) if the A.O. is not satisfied with the claim of the assessee. Ground No. 7: On the facts and circumstances of the case and in law, the learned AO erred in initiating penalty proceedings u/s 271(1)(c) of the Act. Ground No. 8: The above grounds are without prejudice to each other. Further, the Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and submit such statements, documents and papers as may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee before arriving at any disallowance under section 14A of the Act. The learned DRP, vide its directions issued under section 144C(5) of the Act directed the AO to disallow an amount of Rs. 3 lakh under section 14A of the Act. Accordingly, the AO passed the impugned final assessment order, inter-alia, making an addition of Rs. 3,00,000, under section 14A of the Act in conformity with the directions of the learned DRP. Being aggrieved, the assessee is in appeal before us. 6. We have considered the submissions of both sides and perused the material available on record. At the outset, it is pertinent note the provisions of section 14A(2) of the Act, which reads as under:- (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (emphasis supplied) 7. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling, would become applicable. (emphasis supplied) 8. As evident from the record, in the present case, no satisfaction as required under section 14A(2) was recorded by the AO, and the disallowance under section 14A of the Act was made only pursuant to the directions issued by the learned DRP. Thus the jurisdictional pre-condition as laid down in provisions of section 14A(2) of the Act was not fulfilled in the present case. Further, the disallowance of Rs. 3 lakh computed by the learned DRP was not by applying the mandatory computation provisions of Rule 8D of the Income Tax Rules, 1962 ( the Rules ), and the same was directed merely as a reasonable disallowance under section 14A(1) of the Act. Therefore, in view of the above, we do not find any basis for upholding the disallowance made under section 14A of the Act. Accordingly, the AO is directed to delete the same. As a result, grounds no.5 and 6, raised by the assessee are allowed. 9. Ground no.7, pertains to the initiation of penalty proceedings, which is premature in nature and therefore is dismissed. 10. In the result, the appeal by the assessee is partly allowed. IT(TP)A no.7081/Mum./2014 Revenue s App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion period of such real estate project was long, the assessee chose not to keep the unutilised funds idle and give the same as a loan to other companies till the time the funds are needed for the project. Accordingly, during the year under consideration, the assessee earned interest income amounting to Rs. 6.83, crore on such deployment and reduced its project cost by the same amount for accounting purposes. The assessee further submitted that since the interest earned by the assessee is Revenue receipt, the assessee offered the same to tax under the head income from other sources under section 56 and consequently claimed deduction of interest expenditure under section 57 of the Act. The AO, vide draft assessment order, did not agree with the submissions of the assessee and held that interest earned by the assessee has no connection with the assessee s business and has no direct link with the assets (WIP) meant for the project of the assessee. Accordingly, the AO, vide draft assessment order proposed to tax the interest of Rs. 6,82,51,252, earned by the assessee under the head income from other sources and disallowed the deduction claimed under section 57(iii) of the Act. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) .. (ii) . (iia) . (iii ) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. 16. Therefore, under section 57(iii) of the Act, any expenditure which is not in the nature of capital expenditure and has been expended wholly and exclusively for the purpose of earning income chargeable under the head income from other sources is allowable as a deduction. In the present case, there is no dispute regarding the nature of the expenditure and the Revenue has only disputed that the interest expenditure claimed under the aforesaid section is not wholly and exclusively expended for the purpose of earning the interest income. We find that the learned DRP after duly noting the chronology of events, i.e. borrowing of interest-bearing funds by the assessee and thereafter advancing the same as interest-bearing loan to the sister concern, in para 4.5 of its directions came to the conclusion that the interest expenditure claimed by the assessee is directly related to the interest income earned during the year under consideration. It is undisputed that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out acknowledging the fact that the adjustments proposed by the learned TPO is under capital account and not under revenue account. Ground No. 5: On the facts and circumstances of the case and in law, the learned Assessing officer erred in not following the clear directions of Hon'ble DRP-I, Mumbai given in its order dt. 31.10.2014 and thereby erred in not allowing the entire deductions of Rs. 69,942,651/- u/s 57(iii) against the Income of Rs. 42,307,499/- under the head Income from Other Sources . In other words, the learned Assessing officer erred in restricting the deductions u's 57(iii) to Rs. 42,307,499/- instead of total expenditure incurred amounting to Rs. 69,942,651/- which was clearly allowed as deduction u/s 57(iii) by the Hon'ble DRP - I, Mumbai given in its order dt. 31.10.2014. Ground No. 6: On the facts and circumstances of the case and in law, the learned AO erred in making and the Hon'ble DRP further erred in confirming disallowance of Rs. 184,268/- u/s 14A read with Rule 8D. Ground No. 7: Without prejudice to Ground No.3, the AO, erred in considering investments, the income of which are taxable, also in the calc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the amount advanced as loan has not been used for the purpose of the project, the interest expenditure of borrowed funds is directly linked to the amount advanced on which interest income taxable under the head income from other sources has been earned, cannot be considered under the head business or profession or for capitalization as project cost at all. Although, the AO has not discussed anything on this aspect in the assessment order, the amount capitalised Rs. 6,99,42,651/- by the assessee under the project cost in schedule 4, cannot be allowed. The AO is directed to reduce the inventory valuation in the books accordingly. 22. We find that while passing the final assessment order, the AO directed the assessee to reduce the inventory amount in schedule 4 of books of accounts from Rs. 4,23,07,499, to Rs. 6,99,42,651, as per the directions of the learned DRP, however did not recompute the income under the head income from other sources and computed the total income of the assessee at Rs. 1,11,70,860. The relevant findings of the AO vide final assessment order are reproduced as under:- 8. Subject to the above remarks, the total income of the assessee is computed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue s Appeal A.Y. 2010 11 27. In its appeal, the Revenue has raised the following grounds: 1. Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in allowing the interest expenditure of Rs. 6,99,42,651/- under section 57(iii) of the Income Tax Act against the interest income on loan advanced to its sister concern, without appreciating the fact that the interest expenditure was to be capitalized as per the Income Tax Act and also in the view of the Circular No.2/2007-08 dated 02.07.2007 of RBI that the usage of ECB funds is not permitted for the purpose otherwise than the purpose for which it has been raised or brought in India? 2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of Assessing Officer be restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may necessary 28. The only dispute raised by the Revenue, in its appeal, is against the allowance of interest expenditure under section 57(iii) of the Act. Since a similar issue has already been adjudicated in Revenue s appeal for the assessment year 2009-10, our findings/concl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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