TMI Blog2015 (7) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... has been invested in mutual funds which yield tax exempt income. In this factual matrix, we hold that the learned CIT (Appeals) was justified in deleting the disallowance under section 14A r.w. Rule 8D(2)(ii) In the present case, the assessee, in so far it relates to common expenses [falling within the ambit of Rule 8D(2)(iii) of the Rules], has taken a stand that no expenses whatsoever was incurred by the assessee. The AO has only dealt with the expenditure in the form of interest. With regard to other indirect common expenses, he has only made an observation that the assessee does not maintain separate accounts to enable identification of expenditure relating to exempt income. It is thus clear that as far as indirect expenses are concerned, neither the assessee has given any basis for his claim that no expenses were incurred for earning the exempt income, nor has the AO arrived at an objective satisfaction regarding the claim of the assessee that no indirect expenses were incurred to earn the tax-free income is not correct. In the circumstances, we are of the view that it would be just and appropriate that the order of the CIT(A) should be set aside and the issue with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly following the decision of the co-ordinate bench to which one of us i.e. Judicial Member is the signatory, we do not see any reason to interfere with the order of the CIT(A) as there appears to be no material on record to justify the Assessing Officer’s conclusion that deposits and advances have flown from out of the bank overdraft facility, we are of the considered view that the learned CIT (Appeals) has rightly deleted the disallowance of interest - Decided in favour of assessee. Disallowance of fine and penalty paid by the assessee on account of project Brigade Gateway - Held that: - This issue is decided against the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Mamta Enterprises (2003 (10) TMI 26 - KARNATAKA High Court) which has been followed by the CIT(A) in rejecting the assessee’s ground of appeal.- Decided against assessee. As in respect of disallowance of fine and penalty, the AO should be directed to allow the deduction u/s 80IB(10) of the Act as it results in increase in the business profit. Estimating annual value of the building let out to Brigade Foundation for running its school at ₹ 15,00,000/- and consequent addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve and surplus was ₹ 913.14 crores and therefore out of the total assets of ₹ 1.680.13 crores, reserve and surplus and advances from customers itself were to the tune of ₹ 1037.68 crores and the balance was either share capital or secured loans taken from banks against specific project. It was, therefore, submitted that investments in the shares and Mutual Funds were out of its own funds and not out of any borrowed funds. The AO, however, was not convinced with the assessee s contentions and held that the provisions of rule 8D are applicable to the assessee and therefore the proportionate indirect interest on investments has to be disallowed under rule 8D(2)(ii) of the Act and also 0.5% of the average amount of tax exempt investment is to be made under rule 8D(2)(iii). Accordingly, he brought it to tax. 3. Aggrieved, assessee preferred an appeal before the CIT(A) who deleted the addition under rule 8D(2)(ii), while he confirmed the disallowance made under rule 8D(2)(iii) against which the revenue is in appeal before us and against the confirmation of the addition under rule 8D(2)(ii), the assessee is in appeal before us. 4. The learned counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said bank loans being invested in mutual funds does not arise. The assessee contends that the investment made in mutual funds is out of the proceeds of the public issue of shares and not out of loans borrowed by the assessee company and there are no expenses incurred by it to earn dividend income and therefore no disallowance is called for under section 14A r.w. rule 8D. In support of the proposition that disallowance under section 14A r.w. Rule 8D necessitates the establishment of expenses being incurred for earning exempt income and in the absence of such connection between expenditure incurred and exempt income earned, no disallowance can be made, the assessee placed reliance on the following decisions : i) CIT V Hero Cycles (2010) 323 ITR 518 (P H) ii) CIT V Walfort Share and Stock Brockers P. Ltd. (2010) 326 ITR 1 (SC). iii) Godrej Boyce Mfg. Co. Ltd. V DCIT (2010) 328 ITR 81 (Bom) 8.1.2 The Assessing Officer did not accept the above arguments put forth by the assessee and proceeded to make a disallowance under section 14A r.w. Rule 8D. Direct expenditure pertaining to exempt income was taken at NIL. Interest paid on Over draft amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re normally estimated as per accounting principles as it cannot be quantified directly. The learned CIT (Appeals) held that, in this regard, there is no discretion available with the Assessing Officer and the provisions of section 14A(3) of the Act will apply even in a case where the assessee claims that no expenditure has been incurred in relation to exempt income. In this view of the matter, the learned CIT (Appeals) confirmed the disallowance ofRs.1,09,99,and 962 made under rule 8 D (2)(iii). 8.2 The learned Departmental Representative relied and placed support on the order of the Assessing Officer on this issue and the grounds raised by revenue in this appeal. 8.3 The learned Authorized Representative relied on the findings of the learned CIT (Appeals) on this issue and submitted that revenue has not brought any material on record to controvert the findings of the learned CIT (Appeals). The learned Authorized Representative also relied on the decisions of the coordinate bench of this Tribunal in the case of M/s.Bharatiya Reserve Bank Note Mudran Pvt. Ltd. V DCIT in ITA No.650/Bang/2011 dt.7.12.2012 and M.P. No.43 51/Bang/2013 dt.31.5.2013 in the same case, in supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act has to be confined only to the interest expenditure debited in the profit and loss account. The claim of the Assessee before the AO was that no interest expenditure was incurred for making investments in units of mutual funds. The funds for making investment in units of mutual funds have its origin in the cash credit/overdraft Account of the Assessee. The Bank statement for the period ending 31.3.2008 shows that the outflow from the bank account for the investment in question was on 31.3.2008. Therefore during the previous year till the last day of the previous year all the funds had been used by the Assessee for the purpose of business and not used for making investment which can yield tax free income. The above being the factual position it cannot be said that the AO arrived at a satisfaction that the assessee has incurred expenditure by way of interest during the previous year and that the said interest expenditure is not directly attributable to any particular income or receipt contemplated by Rule 8D(2)(ii) of the Rules. We therefore hold that as far as the present Assessment year is concerned, no disallowance can be made under Section 14A of the Act read with Rule 8D(2)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record while adjudicating the revenue s grounds No.7 to 13 in respect of the disallowance under Rule 8D(2)(ii). It is seen that the Assessing Officer has not considered the assessee's claim that no expenditure has been incurred to earn tax exempt income and therefore the Assessing Officer has not arrived at an objective satisfaction that the claim of the assessee is not correct. The coordinate bench of this Tribunal in the assessee's own case for Assessment Year 2008-09 vide order in ITA No.1279/Bang/2010 dt.12.1.2012 set aside the issue of disallowance under Rule 8D to the file of the Assessing Officer holding at para 10 thereof as under : 10. In the present case, it is noticed that the Assessing Officer had not established the nexus between the expenditure incurred and income earned. He considered the entire amount of expenditure by way of interest as well as of expenses incurred towards IPO as the expenses related to the earning of dividend income. The learned CIT (Appeals) also confirmed the action of the Assessing Officer without bringing any material on record, which could have established the nexus between the expenditure incurred and the dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The plea of the assessee that applying the Rule 8D blindly by the AO will lead to absurd results, in our view, is without any basis because while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. 19. With regard to decisions relied upon by either of the parties before us viz., the decision in the case of Hero Cycles Ltd. (supra), Walfort Share Stock Brokers (supra), we are of the view that those decisions would not be relevant to the present case which relates to A.Y. 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given by the Tribunal. 6. The second issue considered by the AO is the assessee s claim of deduction u/s 80IB(10) of the Act. He observed that the assessee has claimed deduction with respect of 17 projects during the year, out of which the assessee-company has claimed deduction u/s 80IB(10) on 4 projects on proportionate basis. He observed that in these projects, the assessee-company has constructed some of the flats of the dimension of more than 1500 sq.ft. and therefore it claimed deduction on proportionate basis. The AO was of the opinion that 4 projects were conceived with substantial number of flats measuring more than 1500 sq.ft. and therefore deduction u/s 80IB(10) is not allowable with regard to these projects. He accordingly, disallowed the deduction for all the 4 projects and brought it to tax. 7. Aggrieved, assessee preferred an appeal before the CIT(A) who allowed the same by following the decisions of this Tribunal as well as the Hon ble High Court in the assessee s own case for earlier assessment years. Aggrieved by the relief given by the CIT(A), the revenue is in appeal before us. 8. The learned counsel for the assessee submitted that this issue has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order in ITA No.763 c/w 25/2009 dt.29.2.2012. It was further submitted that Revenue s appeal against the decision of the co-ordinate bench of this Tribunal for Assessment Year 2006-07 was also dismissed by the Hon'ble Karnataka High court vide order in ITA No.61/2012 dt.5.10.2012. 7.4.3 The learned Authorized Representative further submitted that Revenue s Special Leave Petition ( SLP ) against the aforesaid decision of the Hon'ble Karnataka High Court in ITA No.25/2009 for Assessment Year 2004-05 was dismissed by the Hon'ble Apex Court vide order dt.6.5.2013. It is submitted that in view of the above facts and the decisions / orders of the co-ordinate bench of this Tribunal (supra), the Hon'ble Karnataka High Court and the Hon'ble Apex Court (supra) in the assessee's own case, the assessee is entitled for being allowed deduction u/s.80-IB(10) of the Act in respect of residential units having built up area of less than 1,500 sq. ft. in Bangalore Gateway and Brigade Metropolis housing projects. 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited. In the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uilt up area of 1500 sq. ;ft. Clause ( c ) refers to area of residential area . The use of words residential unit means that deduction should be computed unit-wise. Therefore, if a particular unit satisfies the condition of 80-IB, the assessee is entitled for deduction. So considered, it is only in respect of those units which have not fulfilled the stipulated conditions, deduction should be denied. The law prescribes maximum permissible area with reference to each residential unit .. 5.2 .. Further, profits from the units will have to be arrived based on the method of accounting employed. Accounting principles would mandate recognition of profits from each unit separately. It is with reference to such profits that the deduction u/s.80-IB would be allowed. The manner of accounting for profits would also support a conclusion that the deduction u/s.80-IB is to be computed qua each residential unit. The above decision of the co-ordinate bench of this Tribunal was followed and proportionate deduction u/s.80-IB(10) of the Act was allowed by the other co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2006-07 and 2008-09. 7.5.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is entitled for deduction under section 80-IB(10) of the Act in respect of residential units having built up area of 1500 sq. ft. or less in Brigade Gateway and Brigade Metropolis housing projects. We, therefore, dismiss grounds No.2 to 6 raised by revenue in this appeal. Since the issue before us is similar to the issue in the earlier assessment year and the CIT(A) has also followed the Tribunal s order for earlier assessment year, we do not see any reason to interfere with the order of the CIT(A). 10. The other ground of appeal is against the CIT(A) deleting the disallowance made by the AO u/s 36(1)(iii) of the Act holding that advances to the subsidiary were in the normal course of business for business purposes. It is the grievance of the revenue that the CIT(A) has deleted the same without appreciating that the funds from the overdraft account were utilized to make interest free advances to the assessee s subsidiary and also for acquiring lands and property and also has erroneously relied upon the decision of this Tribunal in the assessee s own case though it has not been accepted and further appeal is filed. 11. From the grounds of appeal rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement and all these funds were utilized solely for the purpose of business. It was submitted that this interest debited to the profit and loss account during the period under consideration pertains to revenues earned as reflected therein. The learned CIT (Appeals) after considering the arguments put forth and the facts and material on record, held that since the submissions are special purpose vehicles ( SPV ) Companies and the assessee is involved in real estate business, advances to these subsidiaries are in the natural course of business. The learned CIT (Appeals) also held that the advances to Joint Venture companies are in the normal course of business of real estate wherein land and buildings are held stock-in-trade and not as capital assets and hence the entire advances and deposits cannot be treated as nonbusiness or capital advances. The learned CIT (Appeals) also observed that the assessee has got sufficient interest free funds for making these advances and even if interest bearing funds are utilized for making these advances, which are for the purpose of business, the interest expenditure is allowable under section 36(1)(iii) of the Act. In this view of the matter, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee advanced interest free loan to its sister concern amounting to ₹ 5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee firm out of its own funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The opening balance as on 1.4.1994 was ₹ 1.91 Crores whereas the loan given to the sister concern was a small amount of ₹ 5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of ₹ 5 lacs. 10.5.2 In Reliance Utilities Power Ltd. (2009) 313 ITR 340 (Bom) at para 10 thereof, it was held as under : 10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in woolcombers of India Ltd. (supra) where a similar issue had arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 288 ITR 1. That being the position the substantial question of law referred to above is answered in favour of the assessee and against the Revenue and consequently the appeal fails and is dismissed. 10.5.4 In view of the above and considering the fact that there appears to be no material on record to justify the Assessing Officer s conclusion that deposits and advances have flown from out of the bank overdraft facility, we are of the considered view that the learned CIT (Appeals) has rightly deleted the disallowance of interest amounting to ₹ 76,66,638. 10.6 The second reason of the Assessing Officer that the advances and deposits were made for non-business purposes and are capital advances are also not borne out by the material on record. The advances and deposits were made for Joint Development Projects, for acquiring lands, properties, etc. Admittedly, the assessee is engaged in the business of real estate with land and buildings as stock-in-trade and in the factual matrix of the case on hand, the learned CIT (Appeals) was right in holding that the deposits and advances were made in the normal course of the assessee's business. It is also seen that the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth. Since the issue is covered against the assessee, this ground of appeal is rejected. 16. Ground of appeal No.4 is an alternative ground that in respect of disallowance of fine and penalty, the AO should be directed to allow the deduction u/s 80IB(10) of the Act as it results in increase in the business profit. In the light of our decision on alternative ground of appeal No.2 above, this ground of appeal is allowed and the AO is directed to give deduction u/s 80IB(10) of the Act on this ground. 17. Ground of appeal No.5 is against confirmation of the action of the AO in estimating annual value of the building let out to Brigade Foundation for running its school at ₹ 15,00,000/- and consequent addition of ₹ 10,50,000/- under the head income from house property . 18. Brief facts relating to this issue are that the assessee had constructed school property at Mahadevapura and during the previous year relevant to the assessment year under consideration, it had incurred total cost of ₹ 53,16,18,100/- as shown in the balance sheet. On inquiry by the AO, he observed that the said building was not sold to Brigade Foundation but that the completed portion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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