DY. COMMISSIONER OF INCOME TAX , CENTRAL CIRCLE-1(1), HYDERABAD vs. CYBERCITY BUILDERS & DEVELOPERS PRIVATE LIMITED , HYDERABAD

O R D E R

PER L.P. SAHU, AM:

1. The Ld. CIT(A) erred both in law and on facts of the case.

2. The Ld. CIT(A) erred in deleting the addition of Rs.1,49,51,533/- u/s.14A without appreciating the facts and circumstances of the case.

3. The Ld. CIT(A) erred in deciding the present appeal relying upon the decision as held by Cybercity Builders & Developers Pvt. Ltd., , Hyd. jurisdictional ITAT in the case of M/s. Karvy Stock Broking Limited Vs. Deputy Commissioner of Income tax in which the assessee has not earned any exempt income, whereas in the present case the assessee earned exempt income during the year.

4. The Ld. CIT(A) erred in deleting the addition u/s.14A without any supporting evidence/basis.

5. The Ld. CIT(A) erred in deleting the addition on the assessee's reiteration of the submissions made before the Assessing Officer without bringing on record as to why he is differing from the decision of the Assessing Officer. Therefore, decision of the CIT(A) is perverse and bad in law, when Para 4.4 of the assessment order clearly speaks about the exempt income.

6. The Ld. CIT(A) erred in ignoring the fact that the assessee has actually earned exempt income of Rs. 29,91,859/- during the year and hence the entire expenditure incurred for earning the exempt income is liable for disallowance U/s.14A.

7. The Ld.CIT(A) erred in ignoring the fact that the assessee earned exempt income being share of profit from the firm M/s. Cyber Homes amounting to Rs.29,91,859/- which is clearly mentioned at Para 4.4 of the assessment order.

8. The Ld.CIT(A) erred in allowing relief to the assessee on the ground that the assessee has not earned any exempt income during the year when Para 4.4 of the assessment order clearly speaks about the exempt income. 9 Any other ground(s) that may be urged at the time of hearing.”

Cybercity Builders & Developers Pvt. Ltd., , Hyd. 2. Briefly the facts of the case are that the assessee filed its return of income on 30/11/2016 declaring income at Rs. 25,46,81,620/-. Accordingly, the AO issued notices u/s 143(2) and 142(1) to the assessee, against which, the AR of the assessee filed the information.

2.1 On verification of the assessee's books of accounts and details furnished, the AO observed that the assessee had invested funds in the firms where it is one of the partners. He further observed that total such investment was made up to the A.Y under consideration was Rs. 67,70,03,347/- out of which Rs. 50,28,98,229/- had been invested during the year under consideration. The said investment was found to have been made in the firms like M/s Ammaris Associates, Mis Iconica projects, M/s Aram cybercity etc. According to the AO, the income whatever received and receivable from such investment would be exempt from income tax. Accordingly, the assessee was asked to explain as to why proportionate expenditure attributable to such exempt income received or receivable should not be disallowed as per provisions of sec 14A of IT Act read with Rule 8D and various circulars and clarifications issued by the concerned authority time to lime.

2.2 The assessee could not furnish any convincing explanation nor any documentary evidences in any form in support of its claim. Only could submit that no Cybercity Builders & Developers Pvt. Ltd., , Hyd. portion of the borrowed fund has been invested in the above firms. It was further argued that the amount of investment referred above represent the accumulated investment up to the A.Y in question. The assessee asserted that as it has made the investment out of the profit accrued only and no expenses related to those investment have been claimed in the P&L A/c disallowance of any expenditure on the above ground will not be justified and the same should not be made.

2.3 The AO observed that the assessee had tried to explain that the investment in the said firms were made out of surplus available with it but the fact is that, for the year under consideration there was not enough surplus fund to make investment of Rs. 50,26,98,229/-. The surplus as on 31.03.2015 was Rs, 69,04,60,256/- and as on 31,03,2016 was Rs. 83,55,86,4671- which implies that surplus available for the year was only Rs. 14,51,26,211/-. The assessee could not furnish even a single line clarification as to how the above huge investment could be made with the surplus fund available which was only of Rs. 14,51,26,211/- for the year. Accordingly, the AO computed the disallowance u/s 14A rwr 8D at Rs. 1,49,51,533/- relying on the Board’s Circular No. 5/2014 as well as the provisions of section 14A rwr 8D.

Cybercity Builders & Developers Pvt. Ltd., , Hyd. 3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A), who deleted the disallowance made by the AO u/s 14A rwr 8D on the ground that the assessee has not earned any exempt income during the year, for which, he relied on the decision of jurisdictional ITAT in the case of M/s Karvy Stock Broking Ltd Vs. DCIT.

“2. The assessee's submission has been considered and verified carefully and found to misleading, not in accordance with the facts and circumstances of the case and based on false assumption. The assessee has tried to explain that the investment in the said firms are made out of surplus available with it but the fact is that, for the year under consideration there was not enough surplus fund to make investment of Rs. 50,28,98,229/-. The surplus as 0" 31.03.2015 was Rs. 69,04,60,256/- and as on 31.03.2016 was Rs. 83,55,86,467/- which implies that surplus available for the year was only Rs. 14,51,26,211/-. The assessee could not furnish even a single line clarification as to how the above huge investment could be made with the surplus fund available which was only of Rs. 14,51,26,211/- for the year. Further, the assessee was miserably failed to clarify that if the accumulated fund was available to such huge extent, what was the purpose behind opting the burden of huge interest payment on the funds borrowed. It is clear and beyond any ambiguity that had the said investment in firms were to be available with the assessee, it would not have been required to raise loans to that extent and incur expenditure on interest on such loans. The assessee could not furnish any explanation on this peculiar activities carried out by it.”

7.1 Before the CIT(A), the assessee submitted that the assessee has made investment in partnership firms and Cybercity Builders & Developers Pvt. Ltd., , Hyd. as per the partnership Act, the assessee shall be entitled to receive interest at the rates specified. Section 28(v) of the Act states that the interest earned on a partnership firm is taxable. It was therefore submitted that the said investment was capable of earning exempt income in the form of share of profit as well as taxable income in the form of interest on partner’s capital, hence, it is not correct to invoke provisions of section 14A. For this proposition, the assessee relied on the decision of the ITAT, Bombay in the case of M/s Delite Enterprises. Later on, it has been decided in favour of the assessee by the Hon’ble Bombay High Court (unreported).

7.2 In the financial statement, under Note No. 18, the assessee has shown under the head other income – interest income is shown at Rs. 98,42,370/- and miscellaneous income is shown at Rs. 3,93,41,118/- as at March 31, 2016. We do not know from the said interest income, whether it is received from partnership firm or whether it is exempt income.

7.3. As observed by the AO in his order at para 4.4, the assessee has received income from one of the firms, namely, M/s Cyber Homes amounting to Rs. 29,91,859/- where it had made investment and the said receipt from M/s Cyber Homes was claimed exempt u/s 10(2A) of the Act.

Cybercity Builders & Developers Pvt. Ltd., , Hyd.

7.4 The submission of the assessee before the CIT(A) that the assessee has made investment in partnership firms and as per the partnership Act, the assessee shall be entitled to receive interest at the rates specified. Section 28(v) of the Act states that the interest earned on a partnership firm is taxable. The case relied on by the assessee before the CIT(A) is squarely applicable to the case of the assessee. If the assessee is unable to substantiate its case in the light of case law relied on by him before the CIT(A), the assessment order stands confirmed. In view of the above observations, we remit the matter back to the file of CIT(A) with a direction to decide the issue afresh in the light of the judgment relied upon by the assessee quotes supra and if it found otherwise, the disallowance be restricted to the extent of exempt income received by the assessee as observed by the Assessing Officer. Accordingly, the grounds raised by the revenue on this issue are partly allowed.