TMI Blog2017 (12) TMI 1398X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such tax free income disallowance u/s. 14A r.w. Rule 8D(2)(iii) can be made. However, it is made cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Appeals) 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 appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Appeals) in deleting the addition of ₹ 2,18,39,912/-. The ld. AR submitted that the assessee is engaged in the business of real estate development. The assessee is eligible to claim expenditure on account of salaries, wages, bonus and other operating 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommensurate with the income disclosed from business and therefore, the expenditure could not be said to be wholly and exclusively incurred for the purpose of business, has not brought out any infringement of the conditions laid down in sec.37(1). A perusal of the assessment 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the expenditure has been made for non-business purpose, no disallowance is warranted. Accordingly, grounds raised by the Revenue in appeal are rejected and appeal of the Revenue is dismissed. 6. The assessee has assailed the order of Commissioner of Income Tax (Appeals) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers Pvt. Ltd. and on the amounts advanced to them, the appellant had not any interest and therefore, the disallowance of interest was required to be made. 4.2] The learned CIT(A) further erred in holding that the amounts advanced by the appellant company to the above two concerns were not a business advances and therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 02-02-2017 has held that share application money pending allotment does not constitute part of investment for the purpose of computing disallowance u/s. 14A. 8.2 The second contention of ld. AR is that the assessee in the return of income has made suo-moto disallowance u/s. 14A to the tune of ₹ 7,16,67,703/-. The Assessing Officer enhanced disallowance 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kumar Housing Corporation Ltd. and Kumar Sinew Developers Pvt. Ltd. are for non business purposes. The Commissioner of Income Tax (Appeals) in para 4.3.15 of the impugned order has computed total interest disallowance at ₹ 5,34,01,201/-. In respect of amounts advanced to the above two concerns, the ld. AR submitted that after reducing interest disallowance made by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate Bench of the Tribunal in assessment year 2009-10 (supra) vide order dated 02-02-2017 held that the share application money pending allotment does not form part of investment for the purpose of computing disallowance u/s. 14A. The relevant extract of the findings of Tribunal in this regard are as under : not form part of investment for the purpose of computing disallowance 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investee company inure to the allottee. No rights, not even inchoate, in the share capital of the issuing company arise on the payment of the share application money, irrespective of the time period for which it may outstand. The same may at best yield interest income (for which a special procedure though has to be followed by the company concerned), which is in any case taxable, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m own funds. It 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 such tax free income disallowance u/s. 14A r.w. Rule 8D(2)(iii) can be made. However, it is made clear that for computing 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown any liability in its books and considering the fact that the assessee has claimed tax credit on such interest income, therefore, we find no infirmity in the order of the CIT(A) on this issue. Accordingly, the grounds raised by the assessee on this issue are dismissed. Thus, in view of statement made by ld. AR and the decision of Co-ordinate Bench, ground No. 3 raised in the appeal by assessee is dismissed. 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 Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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