TMI Blog2021 (10) TMI 1097X X X X Extracts X X X X X X X X Extracts X X X X ..... proportionate interest u/s 36 (1) (iii) - AO disallowed interest expenditure incurred on bank overdraft and interest payable to financial institutions - as submitted advances were given to the sister concern due to commercial expediency who also engaged in the same business as that of assessee - HELD THAT:- The audited accounts filed by assessee revealed that there were sufficient funds with assessee as on 31/03/2013. The argument that assessee had sufficient own funds cannot be the only reason to allow the claim of assessee. And we also note that, when assessee had sufficient funds, why should it depend on borrowed funds. In any case, if at a given point of time assessee has own funds and they have advanced it as interest-free loans to sister concerns for meeting their business needs, in which assessee also has an interest, then such advances should not lead to disallowance of interest paid on borrowings. In other words, unless the assesses establishes with cash flow statements about availability of its own funds at the time of making the interest-free advances. For this reason a cash flow statement needs to be verified for the period under consideration. We therefore remit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses from eligible units was positive - In our view, the computation of gross total income in respect of the eligible units u/s. 80IB in the present facts of the case is to be consonance with the above principles approved by the Hon ble Supreme Court in the case of IPCA Laboratories Ltd. [ 2004 (3) TMI 9 - SUPREME COURT] We direct the Ld.AO to compute the profits under the head business income from eligible undertaking by netting of the losses earned by assessee from other eligible undertaking for determining the deduction to be computed under section 80IB(10) of the act. Whether the deduction claimed can be only against the business profits or can it be against the other heads of income? - If the gross total income was loss, deduction u/s. 80IA/IB was to be rejected. Section 80IA/IB for that matter, are controlled by 80AB of the Act. Gross total income means gross total income computed as per the provisions of the Act. This was clearly interpreted by the Hon ble Supreme Court in the case of Synco Industries Ltd [ 2008 (3) TMI 13 - SUPREME COURT] and it was held that gross total income had to be arrived at after making deduction as per appropriate computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned AO has erred in making a disallowance of indirect proportional interest amounting to ₹ 5,32,41,623/- claimed as a deduction under section 36(l)(iii) and the learned CIT(A) has erred in confirming the said disallowance. 3.2. The learned CIT(A) has erred in not appreciating that the appellant has advanced amounts to sister concerns who are also engaged in the same business as the appellant for the purposes of commercial expediency. 3.3. The learned CIT(A) has erred in not appreciating the fact that the acquisition of land and formation of Joint Development Agreements for carrying out specific projects is the main business of the appellant. 3.4. On facts and circumstances of the case and law applicable, interest expenditure amounting to ₹ 5,32,41.623/- is to be allowed as claimed in the return of income. 4. Disallowance under section 35D 4.1. The learned AO has erred in making a disallowance of ₹ 13,20,000/- claimed as a deduction under section 35D and the leaned CIT(A) has erred in confirming the said disallowance. 4.2. The learned AO and CIT(A) has erred in not appreciating the fact that expenditure incurred towards initial publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 142(1) of the act. Upon receipt of the notices, representatives of assessee appeared before the Ld.AO and filed requisite details as called for. The Ld.AO observed that assessee had claimed deduction under section 80IB(10) amounting to ₹ 29,03,88,814/-. From the details filed it was observed by the Ld.AO that over a period of time subsequent or completion of project, 5 of the projects made losses, however on percentage completion basis these projects had returned profits during the years and the same were claimed under Section 80IB(10) of the Act. The Ld.AO issued notice dated 16/03/2016 calling upon assessee to explain the allowability of deduction on those projects that had resulted in loss as per the project completion method that is by the end of the project tenure under section 80IA(15). 2.1 The Ld.AO observed that, assessee reported income of ₹ 19.95 crore under profit and gains from business, which consisted income/loss of all the projects, eligible as well as normal projects undertaken by assessee. 2.2 The Ld.AO was of the opinion that, assessee was eligible for deduction under section 80IB(10) only to the extent of ₹ 19,95,90,524/-, as against clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the expenses incurred towards initial public offer as not eligible under section 35D of the act and the disallowance made under section 80IB(10) of the act, by the Ld.AO. 2.11 Aggrieved by the additions made by the Ld.AO assessee is in appeal before us now. 2.12 The Ld.AR submitted that, Ground No.1 is general in nature and therefore do not require any adjudication. 3. Ground No.2 is in respect of disallowance under section 14A read with Rule 8D of the rules 1961. 3.1 Before us, Ld.AR submitted that the investment for relevant year was only 32.67 crores. He submitted that, total assets of assessee for year under consideration was ₹ 2,752.36 crores. He submitted that the share capital, reserve and surplus an advance from customers was to the extent of ₹ 1,327.56 crores. He submitted that, the assessee had sufficient money of its own for making all the investments. It has been thus argued by the Ld.AR that no disallowance could be made under Rule 8D(ii) of the Act. Insofar as applicability of Rule 8D(iii) of the Act is concerned Ld.AR submitted that the disallowance at the most could be restricted to 0.5% of the investments that has yielded dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded on the aforesaid issue, which could not be demonstrated to be perverse. Therefore, no interference is called with the aforesaid concurrent findings of fact in this appeal under Section 260A of the Act. [SEE: SYEDA RA HIMUNNISA VS. MA LA N BI BY L.RS.AND ORS. (2016)10 SCC 315 and PRINCIPAL COMMISSIONER OF INCOME TAX, BANGAL ORE ORS VS. SOFTBRANDS INDIA P. LTD., (2018) 406 ITR 513]. 3.5 We are in agitation with the contention of the ld. AR. However, assessee should prove the availability of interest free funds to make such investments by filing necessary cash flow statements on the date of investment in view of para 7 of the decision by the Hon ble Supreme Court in the case of Reliance Industries Ltd., reported in (2019) 102 taxmann.com 52/307 CTR 121 . 3.6 Respectfully following the same, we direct the Ld.AO to carry out necessary verification based on the documents filed by assessee in accordance with law. 3.7 For disallowance under section Rule 8D(iii) needs to be computed as assessee has not even disallowed suo moto expenditure that could be attributable to earning of such income. In our view it would be fair enough to restrict the disallowance at 0.5% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable under section 36(1)(iii); and in the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv). 4.6 The audited accounts filed by assessee revealed that there were sufficient funds with assessee as on 31/03/2013. The argument that assessee had sufficient own funds cannot be the only reason to allow the claim of assessee. And we also note that, when assessee had sufficient funds, why should it depend on borrowed funds. In any case, if at a given point of time assessee has own funds and they have advanced it as interest-free loans to sister concerns for meeting their business needs, in which assessee also has an interest, then such advances should not lead to disallowance of interest paid on borrowings. In other words, unless the assesses establishes with cash flow statements about availability of its own funds at the time of making the interest-free advances. 4.7 For this reason a cash flow statement needs to be verified for the period under consideration. We therefore remit this issue back to Ld.AO for due verification. Assessee is directed to file the cash flow statement during the period under consideration which shall be verified b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allows amortisation of such expenses that have been incurred towards expansion/extension of the undertaking, it could not be denied in the subsequent period also. Accordingly this ground raised by assessee stands allowed. 6. Ground No.5-6 is in respect of disallowance of deduction claimed under section 80 IB of the Act. 6.1 Following two issues arises from these grounds: Issue (a) Whether loss of one eligible undertaking is to be set off against the profits of another eligible undertaking? Issue (b) Whether the deduction claimed can be only against the business profits or can it be against the other heads of income? 6.2 The Ld.AR submitted that assessee follows percentage completion method consistently that is in conformity with the accounting standard. During the year under consideration assessee claimed deduction of ₹ 29,03,88,814/- under section 80 IB of the Act and the project wise detail are as under: 6.3 The Ld.AR relied on page 159 wherein the period during which the project started and the last claim has been tabulated as under: 6.4 It was submitted by the Ld.AR that all these above projects satisfies following condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erling Developers Pvt Ltd (supra) . The relevant extract of the decision that dealt with the similar objections raised by the Ld. DR is as under: 5.3.1 We have heard both parties and have carefully perused and considered the material on record. At the outset it must be mentioned here that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) was concerned with not withstanding anything contained in any other provisions of Section 80-I(6) of the Act, as it existed at that relevant point of time and the same is extracted hereunder for clarity : Section 80-I(6) - Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an industrial undertaking on a ship or the business of a hotel (or the business of repairs to ocean going vessels or other powered craft) to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or business of the hotel (or the business of repairs to ocean going ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand section 80-I(6) deals with determination of the quantum of deduction - section 80-I(6) lays down the manner in which the quantum of deduction has to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words includes any profits used by the legislature in section 80-I(1) are very important which indicate that the gross total income of an assessee shall include profits from a priority undertaking. While computing the quantum of deduction under section 80-I(6) the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this court finds that the non obstante clause appearing in section 80-I(6) of the Act, is ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 80 IA(5) of the Act would not restrict the operation of the provisions of section 70(1) of the Act with respect to the set off of the loss. The operation of the provision of section 80 IA(5) of the Act is restricted to the computation of the quantum of deduction for which it has to be considered that the eligible business is the only source of income. That restriction, however, cannot be applied to render the concept of gross total income in terms of section 80B(5) to be determined before the set off of the losses under section 70(1) of the Act. We are, therefore, of the view that the learned CIT (Appeals) has rightly applied the decision of the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) and that there is no merit in the plea of revenue that the said judgment is not applicable to the facts of the present case of the assessee. 5.3.4 That apart, the learned counsel for the assessee has rightly contended that the provisions of section 80IA(5) of the Act applies in computing the profits of an eligible business for the purposes of working out the quantum of deduction for the initial assessment year and for every subsequent year thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed after setting off losses from eligible units was positive, amounting to ₹ 29,03,88,814/-. In our view, the computation of gross total income in respect of the eligible units u/s. 80IB in the present facts of the case is to be consonance with the above principles approved by the Hon ble Supreme Court in the case of IPCA Laboratories Ltd. Vs. CIT (supra). 6.9. Respectfully following the same, we direct the Ld.AO to compute the profits under the head business income from eligible undertaking by netting of the losses earned by assessee from other eligible undertaking for determining the deduction to be computed under section 80IB(10) of the act. Accordingly this issue is decided against assessee. 6.10. Issue(b): It is argued by the Ld.AR that, while computing total income , deduction is available under section 80IA/80IB is to be set off against the gross total income. He placed reliance on decision of Hon ble Supreme Court in case of CIT vs Reliance Energy Ltd. reported in (2012) 127 Taxmann.com 69 . On the contrary, the Ld.CIT.DR argued that it is only the profits under the head business income from eligible undertaking that has to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ap in sub-section (1) that the deduction cannot exceed the 'business income'. On the other hand, it is the case of the Assessee that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the 'eligible business' as the only source of income. It was submitted by Mr. Vohra, learned Senior Counsel, that the final computation of deduction under section 80-IA for the assessment year 2002-03 as accepted by the Assessing Officer, was arrived at by taking into account the profits from the 'eligible business' as the 'only source of income'. He submitted that, however, sub-section (5) is a step antecedent to the treatment to be given to the deduction under sub-section (1) and is not concerned with the extent to which the computed deduction be allowed. To explain the interplay between sub-section (5) and sub-section (1) of Section 80-IA, it will be useful to refer to the facts of this Appeal. The amount of deduction from the 'eligible business' computed under section 80-IA for the assessment year 2002-03 is ₹ 492,78,60,973/-. There is no dispute that the said amount represents income from the & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80- E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. This Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit under section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. 15. In the case before us, there is no discussion about Section 80-IA(5) by the Appellate Authority, nor the Tribunal and the High Court. However, we have considered the submissions on behalf of the Revenue as it has a bearing on the interpretation of sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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