TMI Blog2023 (12) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... s in which the assessee has yielded exempt income. The Hon ble High Court in the case of Cargo Motors (P.) Ltd. [ 2022 (10) TMI 571 - DELHI HIGH COURT] has settled this issue in favour of the assessee. Thus we remit this issue to the file of the AO for fresh computation of disallowance under Rule 8D(2)(iii). The assessee is directed to provide necessary documents in support of its claim and avoid seeking unnecessary adjournment for early disposal of the case. Disallowance of interest u/s 36(1)(iii) - Interest paid to IDFC has been capitalized by the AO by observing that the capital asset (land) purchased for which loan was taken, was not put to use in the business of the assessee and the assessee is not in the business of trading of land and this land has been purchased as investment, and therefore it should be capitalized u/s. 36(1)(iii) - HELD THAT:- As interest bearing funds have not been utilized for the purchase of land and the assessee had sufficient interest free funds and also observed by the coordinate bench in the assessee s own case for earlier AYs 2013-14 2014-15 [ 2019 (4) TMI 512 - ITAT BANGALORE] The case law relied by the ld. AR of the assessee in his wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 light of section 14A and found that the assessee has not satisfied correctness of expenditure relating to earning of exempt income. The AO proceeded to calculate disallowance considered the entire average value investments i.e., current non-current investments and accordingly calculated the disallowance as per Rule 8(2)(iii) at Rs. 27,36,547. 3. The AO further noted that the assessee has debited a sum of Rs. 2,86,38,749 into P L account towards loan processing charges. On perusal of details submitted by the assessee, he observed that the loan processing charges were paid for loan for acquiring of capital assets and therefore not allowed as revenue expenditure and added to total income of the assessee. 4. The Addl. CIT after examining the records issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 given on opportunity to explain where the amount of loan taken by the Company, sanctioned on 24.03.2014 has been utilized for the business purpose. You are given an opportunity to explain the utilization of loan from IDFC Ltd for business purpose. The assessee has submitted the objection vide his letter dtd: 10.12.2018 which is as under: As you are aware the company was engaged in the business of construction of hostels for the students who are studying in various Educational Institutions. Once the building is constructed the hostel room rent is collected by M/s. Manipal Integrated Services Private Limited. Thus the surplus for M/s. Manipal Integrated Services Private Limited is the amount remaining after paying the interest on loan and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Hostels and the balance amount for the Building were funded from CCD that were issued. During the relevant period i.e A.Y 2015-16 (F Y 2014-15) an additional loan of Rs. 128.35 cr was sanctioned from IDFC which was used for the following purpose: Purchase of Land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest on Rs. 16 Cr. shown as used from Phase-2 loan of IDFC is not acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unquoted shares, and has received exempt dividend income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale of current investments, i.e., mutual funds sold during the F.Y. under consideration [See Schedule 16]. Against this, the Assessee has only made a fresh investment of Rs. 2,11,03,075/- for the F.Y. under consideration, i.e., equity investment qua purchase of non-cumulative 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest free funds available with the assessee and therefore, no disallowance u/s. 14A r. w.r. 8D (ii) can be made out of interest expenditure. 10. This view of us finds support from a judgment of Hon'ble apex court rendered in the case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity shares and mutual funds, but in the computation of disallowance submitted before us, only the average value of investments made in mutual funds has been considered. The disallowance under Rule 8D(2) (iii) should be made on the basis of average 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 shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture has been disallowed by the A.O. [and confirmed by the CIT(A)] on the erroneous basis that the Assessee is in the business of construction of hostels for students, and a fixed asset, i.e., land has been purchased from a loan of 45.04 Crs sanctioned from IDFC Bank. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 10.1 of the Audited Accounts, at Pg.22 of the Paper Book] it is at the outset submitted that the borrowed funds have not been utilized towards the acquisition of the Land in question, and the disallowance has been made by the Ld.A.O. on a presumptive basis, soley on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 31, 2013 Debentures Compulsory convertible debentures (CCDs) 99,99,90,000 49,99,90,000 - - 99,99,90,000 49,99,90,000 - - Term loans Term loans from financial institutions 1,81,99,13,217 30,00,00,000 81,95,285 No addition to this effect has been made in the case of the Assessee, in the erstwhile A.Y. 2014-2015 [F.Y. 2013-2015]. Now, qua the remainder payment made in the A.Y. under consideration, A.Y. 2015-2016 [F.Y. 2014-2015], the same is also through the Assessee's own funds, since it held a sufficient opening cash balance, visible from Schedule 17 of the audited accounts for F.Y. 2014-2015 at Pg.6 of the Paper Book. Therefore, the Assessee has not utilized any borrowed funds towards the acquisition of the fixed asset either in the preceding A.Y. or even in this A.Y. Even otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est on such loan has been capitalized by the assessee. 16. The ld. DR relied on the orders of the lower authorities. He submitted that the ld. Addl. CIT has examined this issue and gave direction to the AO that the total amount of interest to be capitalized u/s. 36(1)(iii) which has been accordingly done by the AO and confirmed by the CIT(Appeals). Therefore the orders of authorities below should be upheld. 17. After hearing the rival contentions, we note from the record that the interest paid to IDFC of Rs. 4.85 crores has been capitalized by the AO by observing that the capital asset (land) purchased for which loan was taken, was not put to use in the business of the assessee and the assessee is not in the business of trading of land and this land has been purchased as investment, and therefore it should be capitalized u/s. 36(1)(iii) of the Act. The Addl. CIT in the 144A proceedings gave opportunity to the assessee to explain the utilization of loan from IDFC and treatment of interest paid on such loan. The assessee submitted reply on 10.12.2018 which is incorporated in his order. He observed that a sum of Rs. 45.04 crores was utilized to purchase land from the part of fre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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