TMI Blog2015 (1) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be correct. Thus it would be fair and reasonable to make such apportionment of indirect expenses in the ratio of 4:1 in the case of turnover of projects involving construction and sale of commercial and residential buildings, and projects involving only sale of lands. It means that the turnover of sale of land should be taken only to the extent of 25% while making the apportionment of indirect cost to different projects and based on such apportionment, the profit of different projects eligible for deduction under S.80IB has to be worked out. Accordingly, we direct the AO to recompute the deduction allowable to the assessee under S.80IB - Decided partly in favour of assessee. Addition on account of interest income - assessee had completed FCCB issue - Held that:- there being no nexus between the interest income received by the assessee on bank deposits and the expenses incurred in connection with FCCB issue, the netting of interest income against such expenditure as done by the assessee is not permissible and the learned counsel for the assessee has also not been able to establish before us any such nexus. We therefore find no justifiable reason to interfere with the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned order of the learned CIT(A) confirming the said disallowance. - Decided against assessee. Adoption of sale consideration - addition was made u/s. 69 - Held that:- The learned CIT(A) restricted the addition of ₹ 72,67,000 made by the Assessing Officer under S.69 to ₹ 60 lakhs, but without dealing with the argument of the assessee that extra consideration allegedly received by the assessee on sale of land could not be added under S.69. Moreover, the consideration received by the assessee against the sale of land, as stated in the relevant agreement, was ₹ 16,87,500 and not ₹ 56 lakhs as taken by the learned CIT(A), while sustaining the addition to the extent of ₹ 60 lakhs and relying on this sale consideration mentioned in the relevant sale deed, the Revenue has raised an issue in its appeal that the learned CIT(A) should have enhanced the income of the assessee on this issue. The learned counsel for the assessee has also raised the plea that the amount of addition made by the Assessing Officer and sustained by the learned CIT(A) is based on the statement of Shri G.Nageswra Reddy recorded during the course of survey, but the copy of the said st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der S.14A. - Decided in fvaour of revenue for statistical purposes. - ITA No. 1415/Hyd/10, 260/Hyd/11, 321/Hyd/2011, 368/Hyd/2013, 260/Hyd/2013 - - - Dated:- 20-1-2015 - Shri P. M. Jagtap And Smt. Asha Vijayaraghavan,JJ. For the Petitioner : Shri Mohd. Afzal For the Respondent : Shri Bandi Ramakrishna DR ORDER Per Bench: Out of these five appeals, two appeals, being ITA Nos.260 and 321/Hyd/2011, are cross-appeals for assessment year 2007-08, while the appeal for assessment year 2006-07, being ITA No.1415/Hyd/2010, is the appeal filed by the assessee, and the remaining two appeals being ITA Nos.368 and 260/Hyd/2013 are appeals filed by the Revenue for the assessment years 2008-09 and 2009-10. Since some of the issues involved in these appeals are common, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. 2. First, we shall take up the appeal of the assessee for assessment year 2006-07, being ITA No.1415/Hyd/2010, which is directed against the order of the learned Commissioner of Incometax( Appeals) V, Hyderabad dated 3.9.2010. Ground No.1 raised by the assessee in this appeal is gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred by the assessee before the learned CIT(A) challenging inter-alia the disallowance made by the Assessing Officer on account of its claim for deduction under S.80IB(10) to the extent of ₹ 59,40,280. Before the learned CIT(A), it was submitted on behalf of the assessee that indirect expenses related to the general administrative, marketing and finance, were incurred by the construction Division as a whole and such expenditure not being incurred in relation to any particular project and the same being related to general administration, marketing and finance of the construction Division, the same was rightly apportioned in the ratio of sales even to the projects where there was no construction activity and there was only sale of land. This stand of the assessee was not found acceptable by the learned CIT(A) and he confirmed the disallowance made by the Assessing Officer on account of deduction under S.80IB for the following reasons given in paragraph 6.2 and 6.3 of his impugned order- 6.2. I have considered the arguments of the appellant as well as the facts of the case carefully. It is the duty of the appellant to keep proper accounts from which all relevant financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer on the basis of sales but excluding the sale of land, can be said to be correct. In our opinion, it would be fair and reasonable to make such apportionment of indirect expenses in the ratio of 4:1 in the case of turnover of projects involving construction and sale of commercial and residential buildings, and projects involving only sale of lands. It means that the turnover of sale of land should be taken only to the extent of 25% while making the apportionment of indirect cost to different projects and based on such apportionment, the profit of different projects eligible for deduction under S.80IB has to be worked out. Accordingly, we direct the Assessing Officer to recompute the deduction allowable to the assessee under S.80IB and allow partly ground No.2 of the assessee s appeal. 9. The issue involved in ground No.3 of the assessee s appeal orf 2006-07 relates to the addition of ₹ 14,39,614 made by the Assessing Officer and confirmed by the learned CIT(A) on account of interest income. 10. During the year under consideration, the assessee had completed FCCB issue and the expenditure incurred in connection with the said issue was capitalized by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d No.2 of the assessee s appeal relates to the assessee s claim for apportionment of managerial commission of ₹ 5.45-crores between the construction and hospitality Divisions. 16. In the return of income filed for assessment year 2007- 08 on 31.10.2007, total income was declared by the assessee at ₹ 37,83,65,390, after claiming deduction of ₹ 53,43,94,191 under S.80IA. While computing the profit of the Construction Division eligible for deduction under S.80IA, the expenditure on managerial commission amounting to ₹ 5.45 crores was allocated by the assessee at ₹ 2.93 crores to Hospitality Division and ₹ 2.51 crores to Construction Division. In this regard, it was noted by the Assessing Officer that the sales of the Hospitality Division was only ₹ 12.6 cores, whereas sales of Construction Division was ₹ 188.92 crores. He also noted that the Direct Cost of hospitality Division was only ₹ 7.60 crores, whereas it was ₹ 85.30 crores in the case of Construction Division. Keeping in view these facts and figures, the assessee was required by the Assessing Officer to justify the allocation of managerial commission to the extent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have considered carefully the arguments of the appellant and all the facts of the case. I do not find any justification whatsoever in the arguments of the appellant regarding the apportionment of commission. By its very nature, the managerial commission is not a fixed payment. It is invariably an allocation in the form a variable productivity linked payment based on a certain percentage. The appellant has not disclosed the exact percentage or the methodology for calculating the managerial commission. However, it is clear that the excessive allocation towards the Hospitality Division which otherwise is showing an operating loss is solely for purpose of increasing the profits of the construction division so that the claim of deduction under section 80IB(10) of the Act is maximized. It is also worth highlighting that the sales of the Hospitality Division are ₹ 12.6 Crores while those of the Construction Division are ₹ 188.2 Crores. In other words, the turnover of the Construction Division is 1493% more when compared to Hospitality Division. All other expenses, for example, the direct cost, etc. are also in the similar ratios. However, when it comes to a huge cost like th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have heard the rival submissions and also perused the relevant material on record. As rightly submitted by the Learned Departmental Representative, the basis of allocation of managerial commission of ₹ 2.93 crores out of total of ₹ 5.45 Crores to the Hospitality Division in spite of lower turnover and loss shown by the said Division has not explained by the assessee before the authorities below and even at the time of hearing before us, the learned counsel for the assessee has not been able to explain any such basis satisfactorily. As rightly observed by the learned CIT(A) in his impugned order, managerial commission is generally paid on the basis of performance of the company as reflected in the profitability and since the Hospitality Division had suffered a loss for the year under consideration, there was no justification on the part of the assessee to allocate more managerial commission to the Hospitality Division and less to the Construction Division, which was performing better and earning good profits. As rightly submitted by the learned Departmental Representative, this was done apparently by the assessee to show more profit in Construction Division, in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company had envisaged a very large housing and commercial project at Maheswram, which required a huge lay out. It was also submitted that Lehman Brothers had agreed to participate in the said project, and in order to ensure that Lehman Brothers get share only in the profits and losses of the development activity of the property, the lands were purchased by the assessee company in the names of its subsidiaries instead of purchasing the same in its own name. It was contended that the benefit from the property development in any case was to be enjoyed by the assessee company and the commercial expediency was very much there in giving the advances to the subsidiary companies. Reliance in support of this contention was placed by the assessee on the decision of the Hon'ble Supreme Court in the case of SA Builders Ltd. V/s. CIT (288 ITR 1), wherein it was held that the expression commercial expediency is one of wide import and includes such expenditure which assessee incurs as a prudent business-man for the purpose of business. These submissions made by the assessee were not found acceptable by the Assessing Officer. He held that since the ownership of land purchased by the subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT(A) that the claim of the assessee for such commercial expediency is not substantiated by the documentary evidence and it is thus a case of diversion of interest bearing borrowed funds by the assessee to give interest free advances to its subsidiaries, other than for business purposes, as rightly held by the Assessing Officer. The interest attributable to such advances thus was rightly disallowed by the Assessing Officer, and we find no infirmity in the impugned order of the learned CIT(A) confirming the said disallowance. Grounds No.5 and 6 of the assessee s appeal are accordingly dismissed. 27. Grounds no.7 to 9 of the assessee s appeal and grounds No.1 and 2 of the Revenue s appeal involve a common issue relating to the addition of ₹ 72,62,000 made by the Assessing Officer, which has been sustained by the learned CIT(A) to the extent of ₹ 60 lakhs. The said grounds read as under- Grounds in assessee s appeal: 7. Learned CIT(A) ought to have deleted the entire addition of ₹ 72,67,000 instead of reducing the disallowance to the extent of factual inaccuracy of ₹ 12,67,000/-. 8. The learned CIT(A) ought to have appreciated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer under S.69 was challenged by the assessee in an appeal filed before the learned CIT(A) and the following submissions were made on behalf of the assessee in support of its case on this issue: 2.1 Assessee purchased land at Bogaram village for ₹ 43,33,000/- and also sold the land for ₹ 56,00,000/-. It appears that a surevy u/s.133A was conducted at the premises of an AOP named M/s.Sai Krupa Enclave. During the survey, a statement was stated to have been recorded from one Sri G.Nageswara Reddy, a member of the AOP. The Assessing Officer mentioned that the said Sri Nageswara Reddy deposed that he had paid an amount of ₹ 1.16 crores for purchase of these lands from the assessee. The A.O mentioned that accordingly, there was a difference of ₹ 72,67,000 (1,16,OO,000 - 43,33,000) between the value admitted by the assessee and the value admitted by the purchaser. This amount was added as unexplained investment in the assessment of the assessee. 2.2 The Assessing Officer has added a sum of ₹ 72,67,OOO/- which was alleged to have been paid to the assessee company. In this case. the assessee entered into a registered agreement of sale c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the Assessing Officer is concerned. The appellant is correct in pointing out that it had shown the sale of land at ₹ 56 lakhs. On the other hand, the Assessing Officer has shown the unexplained part of the sale of land as ₹ 72,67,000/- (1,16,00,000 - 43,33,000).This figure should be 1,16,00,000 - 56,00,000 i.e. ₹ 60,00,000. On this factual issue, I agree with the appellant because the Assessing Officer has himself stated that ₹ 56 lakhs has been disclosed by the appellant as sale price. Accordingly, the unaccounted part is only ₹ 60 lakhs. The appellant gets relief accordingly. The learned CIT(A) thus restricted the addition of ₹ 72,67,000 made by the Assessing Officer on this issue to ₹ 60 lakhs. 31. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. Keeping in view the contradictions in the facts relevant to this issue as narrated by the Assessing Officer in his order, as stated by the assessee in the submissions made before the CIT(A) as well as before us and as mentioned in the grounds raised in the Revenue s appeal, we have directed the learned counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on this issue. The learned counsel for the assessee has also raised the plea that the amount of addition made by the Assessing Officer and sustained by the learned CIT(A) is based on the statement of Shri G.Nageswra Reddy recorded during the course of survey, but the copy of the said statement was never made available to the assessee before using the same as evidence against the assessee to make the impugned addition. Keeping in view the factual contradictions mentioned above and having regard to the submissions made by both the sides, we consider it fair and proper and in the in the interests of justice to set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh, after verifying the facts and figures from the relevant agreements and after giving the assessee proper and sufficient opportunity of being heard. 32. Revenue s appeal for assessment year 2007-08 involving this solitary issue as well as grounds No.7 to 9 of the assessee s appeal are thus treated as allowed for statistical purposes. 33. In the result, out of the corss appeals for assessment year 2007-08, Revenue s a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt projects eligible for deduction under S.80IB based on such apportionment. Accordingly, grounds No.3 and 4 of the Revenue s appeal are treated as partly allowed. 38. In the result, Revenue s appeal for assessment year 2008-09 is treated as partly allowed. Revenue s Appeal for assessment year 2009-10. 39. Grounds no.1 and 4 of the Revenue s appeal for A.Y. 2009-10 are general in nature seeking no specific adjudication. In ground no.2, the Revenue has challenged the action of the learned CIT(A) in considering certain evidences filed before him for the first time to give relief to the assessee by way of accepting its claim of returned income of ₹ 84,36,877 as against ₹ 7,21,04,185 adopted by the Assessing Officer, without giving any opportunity to the Assessing Officer to examine the said evidences, which is in violation of Rule 46A of the Income-tax Rules, 1962. 40. In the return of income filed for the year under consideration, the total income of ₹ 84,36,887 was declared by the assessee. In the computation of total income filed alongwith the return, the total income for the year under consideration, however, was shown by the assessee at ₹ 7,21, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the assessee at the time of hearing before us. He has also fairly agreed that this issue deserves to be restored to the file of the Assessing Officer for giving him an opportunity to verify and examine the claim of the assessee for hedging loss of ₹ 4.86 crores. Accordingly, the impugned order of the learned CIT(A) on this issue is set aside and the matter is restored to the file of the Assessing Officer for deciding the same afresh in accordance with law, after giving the assessee a proper and sufficient opportunity of being heard. Ground No.2 accordingly is allowed for statistical purposes. 43. In ground no.3, the Revenue has challenged the action of the learned CIT(A) in deleting the disallowance of ₹ 2,42,49,117 made by the Assessing Officer under S.14A read with Rule 8D of the Income-tax Rules, 1962. 44. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has made substantial investments in acquiring shares of several companies. He also noticed that the assessee has borrowed huge funds from different banks, on which interest paid amounting to ₹ 17,49,53,504 was claimed as deduction. Although no di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsome Textiles Industries Ltd. (319 ITR 204 (PH), held that section 14A of the Act, cannot apply when the tax payer did not make any claim for exemption in its return of income. e) The Apex Court in CIT vs. Walfort Share and Stock Brokers P Ltd. (326 ITR 1) (SC) held that disallowance under section 14A can be made when there is a proximate cause between the expenditure claimed and tee tax exempt income. f) Section 14A of the Act states that for the purpose of computing the total income under this Chapter and expenditure incurred in relation to income which does not form part of the total income under this Act . Clearly, there should be income and such income should not form part of the total income under the Act. If either of these conditions is absent, then section 14(1) will have no applicability. g) None of the investments of the tax payer generated any dividend income during the subject financial year. Hence, there is no income, which is claimed as not forming pat of eh total income and consequently, no disallowance under sec 14A can be made on the taxpayer for the relevant assessment year. h) We also submit before your goodself that the share capital and reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order of learned CIT(A), as contained in paragraph 5.2 extracted above, that the relief has been allowed by the learned CIT(A) by deleting the disallowance made by the Assessing Officer under S.14A on appreciation of the facts of the case. It is worthwhile to note here that as per the provisions of S.14A, no deduction shall be allowed, for the purpose of computing the total income under Chapter IV, in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income. The basic question thus is whether the assessee in the facts and circumstances of the case can be said to have incurred any interest expenditure in relation to the investment made in the shares of the companies, which is capable of earning exempt dividend income. In this regard, the learned CIT(A) has noted in the impugned order that the assesse, at the relevant time, had its own funds in the form of capital and reserves to the extent of ₹ 603.72 crores, which were more than the investment made in the shares of other companies. He also found from the facts and figures furnished by the assessee that no part of the funds borrowed by the assessee had any link or ..... 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