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TMI Blog2023 (12) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had specified domestic transactions but no adjustment was suggested by the TPO u/s. 92 of the Act. The AO noted that the company has made non-current investments of Rs. 40,48,46,386 in equity shares and current investments of Rs. 7,41,52,285. The company received dividend income on current investments of Rs. 1,25,63,095 which is exempt income under the Act. Hence the AO applied section 14A and observed that the assessee has not reported any expenditure attributable to investment made to earn such exempt income. In this regard, the assessee was asked to provide note on applicability of section 14A along with computation of disallwonace u/s. 14A r.w. Rule 8D. In response the assessee furnished working of disallowance u/s. 14A @ 0.5% of average investment amounting to Rs. 27,36,547 and submitted that the dividend income was earned on shares & mutual funds claimed as exempt u/s. 10(34) & 10(35) of the Act and these investments were made out of own funds, therefore no disallowance was warranted u/s. 14A. The AO noted that the assessee has made fresh investments during the year and the assessee must have employed manpower either own or consultant. He examined the issue in the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... includes Rs. 45 Cr of land which was purchased by the Company by taking term loan from Aditya Birla Finance Ltd. and interest of Rs. 2.76 Cr hos been debited in this account towards the term loan which is used for purchase of land. The interest of Rs. 2.76 Cr on this loan is not an allowable revenue expenditure u/s 36(1)(iii) and necessary direction will be given to the AO to capitalize it in cost of the !and. You have debited Rs. 26.18 Cr as interest payable by the Company on IDFC rupee loan u/s 36(1)(iii). AS explained above the 90 Cr out of loan of Rs. 274 Cr has been shown as capitol work in progress. Hence, the proportionate amount of interest amounting to Rs. 8.8 Cr [Rs. 90Cr x Rs. 26.81/Rs. 274Cr] is to be disallowed as capital in nature as the addition is still in capital work in progress stage. Necessary direction will be given to the AO to disallow the above interest Rs. 8.8 Cr u/s 36(1)(iii) of the IT Act as treating it as capital in nature. It is seen from the account that the opening WDV towards fixed assets is Rs. 208 Cr in the fixed asset schedule. You have taken loan of Rs. 274 Cr. from the IDFC Ltd. for the hostel project in Jaipur and other places. You ore gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er various High Court decisions laws con be claimed as deduction. Hence, we feel the same should not be disallowed. (iii) With regard to your query on disallowance of Interest of Rs. 8.8 crores, please refer to our replies in point 1, and hence we feel the Interest paid should be allowed as a deduction." The assessee has filed further subincision on 12.12.2018 which is as under: 'This is further to the Income Tax scrutiny of one of our clients M/s. Manipal Integrated Services Private Limited and show cause notice received from your office vide letter dated 04-12-2018 We submit herewith additional clarifications further to our letter: submitted on 10-12-201.With regard to your query on how the loan sanctioned from financial institutions are utilized, we submit the following: Amounts in Cr. Loan Sanctioned From Balance as on 31-03-2014 Balance as on 31-03-2015 IDFC-Term Loan 168.00 274.00 Aditya Birla-Unsecured Loan 14.81 13.91 Adityo Birla- Secured Term Loon 20.00 18.49 Aditya Birla- Secured Term Loon - 4.75 CCD - - TOTAL 202.81 311.15 The loans sanctioned during 20.13-14 were fully utilized for the Phase 1 of the Hoste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income treating the same as incurred for capital asset. You are directed to capitalize the amount of interest of Rs. 4.85 Cr. in the hands of the Company, by adding it to total income. B. The assessee had shown capital work in progress of Rs. 106 Cr. during the year. It is submitted by the assessee that it has used CCD of 100 Cr. which was partly utilized in Phase-i of the Jaipur hostel and after release of 125 Cr. loan from IDFC Rs. 46.32 has been used to replace the CCD which was used in Phase-1 of the hostel project of Jaipur. Thus the assessee has used 6 Cr. from IDFC Lon in the capital work in progress on which 11.75% of interest has been paid. In addition to that the assessee has also invested Rs. 25.78Cr. in Phase-1 of the hostel project which has been capitalized in this year. The assessee has shown Rs. 16 Cr. in capitol work in progress as on 31.03.2014. The 2nd phase of the loan from IDFC has been received on 29/30.03.2014. Hence closing capital work in progress as on 31.03.2014 has been constructed either from CCD/own resource/1st Phase loan of IDFC and only 9 Cr used in this year has been used from phase-2 of IDFC loan which has been capitalized. Hence intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 crores sanctioned as loan from IDFC was used for purchase of land in May, 2014. The assessee was in the business of constructing hostel for students. The land was not utilized for business purpose of assessee, therefore interest of Rs. 4.85 crores pertaining to loan used for purchase of land could not have been allowed u/s. 36(1)(iii) of the Act r.w. Explanation to section 43(1). The CIT(Appeals) relied on the decision of the Ahmedabad ITAT in Khyati Chemicals Private Ltd. v. DCIT (2002) 135 taxmann.com 200 (Ahmedabad Trib). 8. Further, the interest of Rs. 2.585 crore paid to IDFC on loan of Rs. 22 crore used for capital work in progress was also confirmed by the CIT(A). 9. Aggrieved from the order of the CIT(Appeals), the assessee is in appeal before the Tribunal. 10. Section 14A Disallowance: The ld. AR reiterated the submissions made before the CIT(Appeals) and submitted a written synopsis which is as under:- "I. Sec.14A disallowance of expenditure income of Rs. 27,36,547/- [See Ground No.1 and 2] Per the Assessing Officer [A.O.] - the Assessee has made non- current investments of Rs. 40,48,46,886/- in equity shares and current investments of Rs. 7,41,52,285/- in unquot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive optionally convertible preference shares in its subsidiary concern. [See Schedule 11]. Therefore, Section 14A of the Act is not applicable to the case at hand, considering the settled position of law enumerated in the decision of the Hon'ble jurisdictional Karnataka High Court [H.C.] in the case of CIT & Anr. Vs. Microlabs Ltd., [2017] 79 taxmann.com 365, that has held that when the investments have been made from a common pool of funds, and when the non- interest-bearing of the Assessee are more than the investment made in tax free securities - then Sec.14A is not applicable. ..... ................. ................. This view finds further support in the decision of the Hon'ble Supreme Court [S.C.] in the case of CIT Vs. Reliance Industries Ltd. [2019 102 taxmann.com 52 (SC)] ............... ........................ Furthermore, the Assessee's appeal for the erstwhile A.Y. 2013- 2014 in which a similar disallowance u/s 14A of the Act had been made by the A.O. - was deleted in favour of the Assessee by the Hon`ble jurisdictional Tribunal, on the basis of the same logic and reasoning. The matter of Sec.14A therefore stands covered in favour of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of CIT vs. Reliance industries limited in Civil Appeal No. 10 to 13 of 2019 dated 02.01.2019, copy kept on record. In this case, it was noted by Hon'ble apex court that this is a finding of the tribunal that the interest free funds available to the assessee were sufficient to meet its investment and hence it could be presumed that the investment were made from the interest free funds available with the assessee. It was held by Hon'ble apex court that this is pure question of fact and since Hon'ble High Court in that case has decided the issue in favour of the assessee on the basis of finding of fact recorded by the tribunal, no interference is called for in the judgment of High court on this issue. Hence, it is seen that this judgment of Hon'ble apex court rendered in the case of CIT vs. Reliance industries limited (Supra) is on the same line as the judgment of Hon`ble Karnataka High Court rendered in the case of CIT and Another Vs. Microlabs Ltd. (supra). 11. Therefore, respectfully following this judgment of Hon'ble Karnataka High Court, we decide this issue in favour of the assessee and accordingly the disallowance of Rs. 92,71,233/-u/s. 14A r.w.r. 80(2)(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of those investments in which the assessee has yielded exempt income. The Hon'ble High Court in the case of Cargo Motors (P.) Ltd. v. Deputy Commissioner of Income-tax reported in [2022] 145 taxmann.com 641 (Delhi) has settled this issue in favour of the assessee. The relevant part of the judgement is as under:- While section 14A is charging section, rule 8D is method/mechanism to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the assessee. By virtue of the charging section, namely, section 14A, the Assessing Officer has the power only to determine the amount of expenditure incurred in relation to such income which does not form part of the total income. [Para 13] Rule 8D(2)(iii) clearly postulates that in calculation of the disallowance amount, 'an amount equal to one half per cent of the value of the investment, income from which does not or shall not form part of the total income' should be taken into consideration. Thus, it is not all investment but only that which is expressly spelt out in rule 8D(2)(iii) read with section 14A and rule 8D(i) which is to be reckoned for purpose of calculat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the land has not been utilized for business purpose. Therefore, the proportionate amount of interest has been calculated and disallowed. The CIT[A] has apart from Sec.36(1)(iii) also referred to Explanation 8 to Sec.43(1) of the Act, to confirm the disallowance. [ This has been challenged by the Assssee via Ground No. 3] - a sum of Rs. 2,58,50,00/- claimed by the Assessee as revenue expenditure has been disallowed by the A.O. [and confirmed by the CIT(A)] - on the erroneous basis that the Assessee has made a total investment in capital work in progress as on 31.03.2015 from a Phase No.2 Loan of IDFC that comes up to 22 Crs. 11.75% of interest on this was required to be capitalized, which has not been done by the Assessee, thus the same stands disallowed. [This has been challenged by the Assssee via Ground No.4] OUR REBUTTAL: Factually, it is submitted that the Assessee has taken only one borrowing from IDFC, i.e., a debt instrument, initially entered into on 19.06.2012, and revised during the F.Y. under consideration via revised Letter of Intent dated 14.03.2014 entered into between the Assessee and IDFC Company Ltd. [and attached to the Paper Book at Pgs. 41 to 62] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surmises and conjectures. It is further submitted that an advance for the purchase of the concerned fixed asset amounting to Rs. 40,20,00,000/- has been paid in the erstwhile financial year itself, i.e., F.Y. 2013-14 and forms part of the 'Capital Advance' declared in the said Financials. Attention in this respect is brought to Schedule 13 r/w Schedule 36 of the Audited Accounts of F.Y. 2013¬14 at Pgs.85 and 101 of the Paper Book. For the sake of brevity and convenience the tabulation of the advance payments made in F.Y. 2013-2014 amounting to Rs. 40.20 Crs is reflected below, wherein the only tranche of payment made qua F.Y. 2014-2015 [A.Y. 2015-2016] i.e., the year under appeal is a sum of Rs. 1.80 Crs (also evident from the table below): ITA No.105/Bang/2023 S. No. Sale Deed Number Date of registration Consideration F.Y. in which payment made 1 1113/14-15 07.05.2014 11,16,00,000 2013-14 2 1115/14-15 07.05.2014 7,74,00,000 2013-14 3 1117/14-15 07.05.2014 11,10,00,000 2013-14 4 1119/14-15 07.05.2014 10,20,00,000 2013-14 5 1116/14-15 07.05.2014 1,80,00,000 2014-15 Total for [F.Y. 13-14] 40,20,00,000 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g funds, available with the Assessee. The stance of the Assessee is supported by the decisions of the Hon'ble Jurisdictional ITAT in the case of RNS Infrastructure Limited Vs. The DCIT, ITA No.1171/Bang/2022, decision dated 17.05.2023 which has held that when the Assessee has funds available that are both interest free and loans taken, then the presumption that would arise is that the investment in the capital asset has been made out of such interest free funds generated -when such interest free funds are sufficient to meet the investment in the capital asset. .................... .................... Furthermore, in the case of Bharath Fritz Werner Ltd. vs. The DC!T, [2023]146 taxmann.com 198 (Bangalore-Trib) - the Hon'ble jurisdictional Tribunal has further gone on to hold that in the event the capital asset stand purchased form a mixed bag of funds [comprising of own + borrowed funds], and the Assessee's own funds were substantial, then it was to be presumed that acquisition of fixed assets was out of own funds and proviso to section 36(1)(iii) could not be invoked to disallowed interest on borrowed loans. ........... ............... Accordingly, the disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company the long term loan has increased to Rs. 406 crores from Rs. 281 crores instead of Rs. 128.35 crores claimed by the assessee. Accordingly the proportionate amount of Rs. 4.85 crores was disallowed. The assessee in the written synopsis submitted that Rs. 40.20 crores were paid in the FY 2013-14 which is clear from Note No.36 placed at PB page No. 101 of financial statement as on 31.03.2014 and Rs. 1.80 crores was paid in the impugned FY 2014-15 and conveyance deed executed in May, 2014. We note from Schedule No.13 of the financial statement under sub-head 'Capital Advances' PB page No. 20 that the amount is reduced from Rs. 54.17 crores to Rs. 22.86 crores. The land appears in the Fixed Assets Schedule of the current year of Rs. 45.04 crores under Note No.10.1 inclusive of stamp duty and miscellaneous charges. The reserves & surplus increased by Rs. 2.76 crores from 37.68 to 40.44 crores. Current investments decreased from Rs. 23.19 to 7.42 crores which is source of cash. As per the cash flow statements the net cash & cash equivalent accrued are Rs. 13.32 crores. As per Note No.04, the CCDs is of Rs. 99,99,90,000 out of Rs. 49,99,90,000 was raised upto 31.3.2013 and Rs. 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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