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2018 (3) TMI 953

n business purposes out of the borrowed funds - Held that:- It is necessary to determine the actual fact whether lending of monies and the investments in subsidiaries, associate companies, partnership firm as tabulated in page 6 of the assessment order and page 9 of CIT(A)’s order are part and parcel of business activity of the assessee. This factual finding would be necessary to determine the fact of utilisation of borrowed funds for the business purposes which will in turn be essential to determine the allowability of interest u/s. 36(1)(iii). Hence, in the fitness of things we deem it appropriate to remand this issue to the file of the AO to address this issue in the light of directions given above. Accordingly, revenue’s ground of appeal is allowed for statistical purposes. - Disallowance u/s. 14A applying rule 8D(2)(iii) of the Rules taking the average investment as ₹ 2.485 cr. - Held that:- Assessee had made investment and issued debentures to the tune of ₹ 8.41 cr., the return of which would be in the form of interest which is taxable. Hence, we are inclined to accept the argument of the Ld. AR that the same should be excluded while calculating disallowance u .....

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8377; 1,77,54,031/- was disallowed by AO . On appeal, the Ld. CIT(A) held that the capitalization of interest and other project cost in WIP is nothing but a credit (income) in the P&L Account. He further noted that the amount of interest to the extent of ₹ 1,46,54,769/- capitalized for the project under construction was nothing but stock in trade/revenue for the company. According to him all the investments made by the assessee were for the purpose of the business. The interest incomes were earned out of advances made for real estate business only. Therefore, the Ld. CIT(A) held that since the assessee had not diverted any borrowed funds on which interest was paid for non-commercial purposes, there is no question of disallowance of interest out of interest paid by the assessee under sec. 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the Act ). Therefore, he deleted the disallowance of interest of ₹ 1,77,54,031/-. Aggrieved, revenue is before us. 3. We have heard rival submissions and gone through the facts and circumstances of the case. We find that the AO had disallowed the interest payment on unsecured loan on the ground that the assessee had .....

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cordingly, the Ld. CIT(A) held that there is no diversion of borrowed funds for non-business purposes so as to warrant disallowance of interest u/s. 36(1)(iii) of the Act. This decision of Ld. CIT(A) is challenged before us as erroneous. 4. We have not gone through the Memorandum of Association of the assessee company to know the business conducted by the assessee. However, we note from the documents produced before us that assessee had two segments of income i.e. one from interest i.e. from the lending segment and the other from the real estate segment. From a perusal of the P&L Account at page 19 of the paper book, we note that assessee has shown inventory of closing work in progress of ₹ 1,98,07,566/- cr. in the income side. However, the AO noted that there is no income from the real estate segment. We note that the assessee had credited and debited the same amount in P&L Account, so it is revenue neutral. However, the Ld. CIT(A) has taken note of the inventory of closing work in progress in the P&L Account and has stated that the assessee has offered income. However, the Ld. CIT(A) has lost sight of the fact that the same amount (Rs.21,45,945/- as opening work .....

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ctivities undertaken the company has provided unsecured loans to the subsidiaries for the execution of the projects undertaken therein. From the perusal of the above, we find that the assessee has given certain unsecured loans to its subsidiaries as part of its real estate activities. But we find that there is no finding in this regard in the orders of the lower authorities. According to AO, the investments made in subsidiary companies and associate companies, among others were made by the assessee out of its borrowed funds and which are for non-business purposes. We find that the statement mentioned in the Notes on Account by the assessee and the finding by the AO is per se contradictory of each other. 6. We note that though the assessee has contended before the Ld. CIT(A) that the sum of ₹ 36.76 cr. has been spent on SPVs etc., the details of which have been given in page 9 of the impugned order of the ld. CIT(A) which has not been gone through by the Ld. CIT(A) or by the AO to give a factual finding as to whether the assessee had utilized the said amount of ₹ 36.76 cr. for business purpose as contended by the assessee. Hence, under these facts and circumstances it is .....

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