TMI Blog2017 (11) TMI 1208X X X X Extracts X X X X X X X X Extracts X X X X ..... to the bank or not. If it is found that no penal interest of ₹ 5,40,00,000/- has been paid to the bank, no disallowance would be warranted and the entire expenditure of interest would be allowable u/s 36(1)(iii) of the Act in view of our aforesaid discussion. If his finding is to the contrary, the Assessing Officer shall be free to decide the allowability as per law, after hearing the assessee. Therefore, for this limited purpose, the matter is remanded back to the file of the Assessing Officer. Since we have held that the interest expenditure is allowable, as a consequence, the expenditure incurred by the assessee in respect of loan processing charges deserves to be allowed Disallowance sustained u/s 14A - Held that:- Factually, the investments during the year which have yielded the exempt income are very much the same, which were held by the assessee in the earlier assessment year. Therefore, once no interest expenditure has been found to be relatable to such investments in the past, then, in the instant year it is inconceivable as to how certain interest expenditure can be attributable to the same. Even otherwise, we find that the interest expenditure debited by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the views of the AO by Confirming the disallowance made of ₹ 1,01,25,000/- in respect of loan processing charges. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in computing disallowance u/s.14A of the Income Tax Act at ₹ 89,57,903/- as against NIL considered by the appellant. The learned CIT(A) has further erred in considering the interest portion already disallowed of ₹ 6,58,14,482/- u/s.36(iii)/37(1) of the Income Tax Act, while considering interest for the purposes of Rule 8D(2)(ii) r.w.s. 14A of the Income Tax Act. The AO has computed the disallowance u/s.14A at ₹ 1,98,62,048/-. 3. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia , engaged in the business of development of infrastructure projects. In an assessment finalised u/s 143(3) of the Act dated 26.3.2013, the total income was determined at ₹ 16,53,00,190/- as against returned income of ₹ 6,64,36,950/- after making certain additions/disallowances. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, the Assessing Officer held that interest expenditure was allowable to the extent of ₹ 8,49,02,373/-, which was the amount recovered from the two entities, as against assessee s claim for deductibility of expenditure of ₹ 15,07,16,855/- representing the interest paid to the bank. As a consequence, an addition of ₹ 6,58,14,482/- was made to the returned income. At this point, we may also notice that the loan processing charges of ₹ 1,01,25,000/- incurred by the assessee for the purpose of obtaining the aforesaid loan from the bank has also been disallowed by the Assessing Officer for the reasons taken by him to disallow a portion of the interest expenditure. Both these aspects were carried in appeal before the CIT(A), who has upheld the same. Before us, said issues have been agitated by the assessee by way of Ground of appeal nos. 1 2 respectively. 5. At the time of hearing, the learned representative for the assessee vehemently pointed out that the partial disallowance of interest expenditure by the lower authorities is unjustified. The learned representative explained that the lower authorities have made a disallowance of ₹ 6,58,14,482/- out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had also earned interest. 6. The learned representative emphasised that the assessee has deployed the interest bearing funds with an objective of commercial expediency and it is pointed out that subsequently, when Mahakaleshwar became a subsidiary on 5.10.2010, the entire loan was transferred by the bank to Mahakaleshwar on 12.9.2011. The learned representative pointed out that the entire factual matrix would show that the loan fund has been utilised for the purpose for which it was sanctioned. With regard to the advance made to Shri Bhakti, the learned representative specifically pointed out that the said concern acted as a land aggregator for the assessee-company in the area of Navi Mumbai and that the advance was made in terms of loan agreement dated 4.11.2009, which clearly brings out the objectives of the advance. It was pointed out that though in the case of Shri Bhakti, the land offered to the assessee was not found suitable and the monies were returned back, but thereafter the entire funds were utilised in the project of development of industrial park by its subsidiary, Mahakaleshwar. It is further asserted that the factual matrix is not disputed by the lower authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, assessee had raised the loan from bank @ 13.50% whereas the impugned advances were made to Shri Bhakti and Mahakaleshwar at a lower rate of 11.50% and, therefore, it does not reflect any commercial expediency. In this context, the ld. DR referred to the observations of the CIT(A) in para 5.3.2 of his order to the effect that assessee had failed to explain satisfactorily as to what business interest was achieved by making advances at interest rate lower than the rate at which the amounts were borrowed from the bank. Apart therefrom, the ld. DR also pointed out that the CIT(A) noted that in the case of Mahakaleshwar, the funds advanced were not used for the stated purpose of acquiring the land and, therefore, for that reason also, it could not be said that the monies were advanced by the assessee for commercial expediency. For the said reasons, he has sought to support the orders of the authorities below. 10. We have carefully considered the rival submissions. Ostensibly, as the aforesaid discussion reveals, the controversy before us revolves around the application of Sec. 36(1)(iii) of the Act, which permits deduction on account of interest expenditure whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts were advanced to the two concerns @ 11.50% whereas assessee raised the loan @ 13.50%, and thus there is no commercial expediency in the transaction. Notably, the absence of commercial expediency has been found only with respect to portion of interest short-recovered from the two concerns, since the disallowance is limited to the difference between the interest paid to the bank and the amount charged from the two concerns. 11. Insofar as the objection of the Revenue that the rate of interest charged from the two concerns was not adequate to cover the cost of funds is concerned, the same, in our view, is not conclusive to say that there was no commercial expediency. The fact that the two concerns indeed acted in terms of the agreement with the assessee to act as land aggregators is not disputed. In order to appreciate as to whether the transaction falls within the expression for the purposes of the business , a slightly wider and flexible approach is required, as has been emphasised by the Hon'ble Supreme Court in the case of Madhav Prasad Jatia vs. CIT, AIR 1979 SC 1291 as well as in Commissioner of Income Tax vs. Malayalam Plantations Ltd., 53 ITR 140 (SC). In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is a nexus between the interest expenditure and the business purpose of the assessee, namely, business of infrastructure development and once it is so established, the reasonableness or otherwise of the quantum of return or profits cannot be a factor to decide its commercial expediency. In this context, we may reproduce hereinafter the following observation of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) :- We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had diverted borrowed funds to its sister concerns without any business reason and, therefore, the corresponding interest expenditure was disallowed. The aforesaid decision is not applicable in the present case inasmuch as in the instant case, we have observed that the expenditure of interest has a nexus with the purpose for which the funds were deployed. Secondly, the CIT(A) has relied upon the judgment of the Hon'ble Kerala High Court in the case of CIT Vs. Accelerated Freeze Drying Company Limited., 324 ITR 316 (Kerala) . In this case also, it was the failure to demonstrate the commercial expediency which justified the disallowance of interest expenditure. Again, the ratio of the judgment is not applicable in the instant case. Thirdly, CIT(A) has relied upon the judgment of the Hon'ble Delhi High Court in the case of Punjab Stainless Steel Industries Vs. CIT, 324 ITR 396 (Delhi) . In the said case, assessee had made interest-free advance to a sister concern in which two of the partners of the assessee-firm were also partners. The Hon'ble High Court upheld the disallowance of interest expenditure by noticing various facts. Primarily, the Hon'ble High Court no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, placed at page 149 of the Paper Book, has also been referred to, to justify that there is no claim by the bank of recovering any penal interest. In our considered opinion, the plea of the assessee with regard to the disallowance of penal interest is not without merit. Ostensibly, if there is no claim/recovery by the bank of penal interest, the question of any disallowance of the same would not arise. So however, since the said fact involves a factual appreciation, we direct the Assessing Officer to verify as to whether the penal interest has been paid to the bank or not. If it is found that no penal interest of ₹ 5,40,00,000/- has been paid to the bank, no disallowance would be warranted and the entire expenditure of interest would be allowable u/s 36(1)(iii) of the Act in view of our aforesaid discussion. If his finding is to the contrary, the Assessing Officer shall be free to decide the allowability as per law, after hearing the assessee. Therefore, for this limited purpose, the matter is remanded back to the file of the Assessing Officer. 17. In the result, Ground of appeal no. 1 is allowed as above. 18. Insofar as Ground of appeal no. 2 is concerned, the same r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in 100% owned subsidiary, Metrotech Technology Parks Ltd. and other associated concerns, which were in the nature of strategic investments and ought to be excluded while computing the disallowance u/s 14A of the Act. Assessee also pointed out that out of the interest expenditure of ₹ 15,21,78,000/-, the Assessing Officer had disallowed ₹ 6,58,14,482/- u/s 36(1)(iii) of the Act itself and that the balance of the interest was inclusive of interest of ₹ 9,60,759/- paid on car loan and ₹ 5,00,716/- on delayed payment of TDS; and, the aforesaid sums ought to have been removed for the purpose of computing the disallowance u/s 14A, if any. Even with regard to the disallowance out of overheads/administrative expenses, the claim of the assessee was that no particular expenditure has been incurred for such purpose. The CIT(A) partly accepted the plea of the assessee and noted that the Assessing Officer ought to have computed the disallowance out of interest expenditure by excluding the amount of interest disallowed u/s 36(1)(iii) as also interest paid on car loan and on delayed payment of TDS. The CIT(A) also directed the Assessing Officer to exclude the value of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been found to be relatable to such investments in the past, then, in the instant year it is inconceivable as to how certain interest expenditure can be attributable to the same. Even otherwise, we find that the interest expenditure debited by the assessee in its Profit Loss Account is majorly on account of loan raised from Central Bank of India, which we have already discussed in the earlier paras and the balance of the expenditure on car loan and on late payment of TDS. None of the aforesaid elements of interest expenditure can be said to be relatable to the exempt income. It is quite well-settled that interest expenditure which are directly attributable to the taxable income cannot form a part of the interest expenditure which is considered for disallowance as per Rule 8D(2)(ii) of the Rules. Considering the entirety of facts and circumstances of the case, in our view, no disallowance in terms of Rule 8D(2)(ii) of the Rules is merited out of interest expenditure. Thus, on this aspect, assessee succeeds. 23. Insofar as the disallowance out of overheads/administrative expenditure of ₹ 10,93,072/- as per Rule 8D(2)(iii) of the Rules is concerned, the only plea of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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