TANGLIN DEVELOPMENTS LIMITED,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(3), BANGALORE

Since the issue in these appeals are common in nature, these are clubbed together, heard together, disposed off together in this common order.

We consider the facts in ITA No.143/Bang/2021 The assessee is in the activity of development of SEZ and software technology park known as Global Village, at Mysore Road, Bangalore. The exchange fluctuation loss claimed related to two foreign currency loans from HDFC Bank of Rs 400 crores and Rs. 120 crores respectively. The loans raised in foreign currency have been utilized for repayment of earlier loan for the purpose of development of SEZ and software technology park and also further development of such SEZ of which the assessee is in receipt of license fee which has been offered as revenue. In this context relying on various Supreme Court decisions it was contended that, the exchange fluctuation loss is allowable as revenue expenditure.

The ld.AR submitted that the provisions of section 43A of the Act would be applicable only when a person has acquired asset from a country outside India and a consequential liability is outstanding in the books.

It was further submitted that, the exchange fluctuation loss relates to foreign currency loans of Rs.400 crores on 30.06.2011 and also Rs.120 crores on 29.06.2012 respectively raised from HDFC Bank.

The company has availed secured loan by issue of compulsorily convertible debentures substituted by Hypo Real Estate Bank International AG (HYPO). The sanctioned limit is Rs 380.00 crores and the amount availed as at 31.03.2009 is Rs.379.99 crores with a coupon rate of 12% p.a. The debentures are convertible on or before 31.12.2013. The debentures are secured by a charge on the property of the company at Pattengere, Mylasandra Village, Bangalore. The investment made out of this loan are as under: -

The loan of Rs 120 crs from HDFC Ltd raised on 29.06.2012 has been utilized for capital expenditure which is lying in capital work in progress. The capital work in progress balance from F.Ys.2012-13 to 2014-15 are as under:-

The above work in progress is also in the nature of buildings/plant & machinery/facilities which are developed/acquired indigenously in the process of expansion of existing business.Since, all the corresponding assets are acquired/developed in the country and not imported, the provisions of section 43A of the act has no application.

The details of loans and exchange fluctuation loss and also the utility of such loans has been furnished hereunder:-

As could be seen all the investments are on the above assets which are created indigenously in India. The assets are mainly in the nature of buildings. The plant & machinery and furniture & fixtures etc., which are required for providing facilities of plug and use in an Software Technology Park. There are no investments in any machinery which is used in manufacturing activity. Summary of year wise investment in fixed assets: FY.2006-07 to F,Y.2012-13, out of funds borrowed by issue of debentures to M/s.Hypo Real Estate Bank International AG (HYPO) for Rs.380 crs is attached. Thedebentures were redeemed out of loan from HDFC Ltd. in notional US $ denominated loan (i.e., existing loan is closed out of new borrowings). As explained above the loan of Rs.120 crores is in work in progress upto FY.2014-15.

There are no assets acquired from outside India. There is no liability in foreign currency relatable to the asset directly since the assets are acquired and created in India.

It was submitted that the provisions of section 43A of the Act has no application.The order in question is under the provisions of section 143(3) r.w.s. 263 of the Act and passed consequent to directions of Hon'ble Principle Commissioner of Income Tax (Central), Bengaluru, dated 23.03.2018. On page 11 in para 11.3 of the order the Pr. Commissioner of Income Tax [Pr.CIT] has given the following finding. “……...the assessee's contention is based on the fact that, section 43A permits capitalization only when the capital asset is acquired from outside India by incurring

The Pr.CIThas given a clear finding in the order u/s 263 of the Act that, there is no capital asset imported. Hence, this issue is concluded in the order U/s.143(3) r.w.s. 263 of the Act.

The Pr.CIThas setaside the order U/s.143(3) of the act, U/s.263 act, with the following directions: - “……….. also to disallow the claim of exchange fluctuation loss of Rs. 22,93,48,566/- which is nothing but notional liability and claimed U/s.37(1) without debiting the same to the Profit & Loss account. Therefore, the Assessing Officer is directed to redo the assessment accordingly in the light of findings on the above mentioned issues and by allowing the assessee adequate opportunity of being heard and in accordance with law"

ThePr.CIThas given directions in the context of "notional liability” and also in the context of "allowing expenditure without debiting the same in the profit & loss account".

The ld.AR further submitted that bothPr.CITin his order U/s.263 of the Act and also the Assessing Officer in his order U/s.143(3) r.w.s 263 of theAct have given a categorical finding that, the loan was not utilized for importing any capital asset from abroad.Under the circumstances, the issue that there are no assets which are imported is not under dispute.

In the light of the above facts, it was submitted that, the provisions of section 43A of the Act are not applicable to the assessee. It was further submitted that, as explained above the loans were raised during the A.Y.2012-13 and the exchange fluctuation loss claimed in the said year has been allowed. He drew our attention to the statement of assessable income and also copy of the order U/s.143(3) of the Act dated 27.02.2015 for AY 2012-13. Further, both the Pr.CITand also the Assessing Officer have given specific finding that, there are no assets imported and hence the said issue does not arise.

He also submitted that, the directions of the Pr.CITin the order was with the following findings:- 1. The liability on exchange fluctuation loss is notional and hence not allowable. 2. The expenditure is not claimed in Profit & loss account and hence not allowable.

He also relied on the following judgments for the above issue:

As explained, the loan of Rs.400 crores has been utilized for redemption of debentures which were utilized for acquiring assets

The balance of loan of Rs.120 crs is lying in work in progress which is in the nature of expansion of the activity of an existing business. Since the expenditure relates to expansion of an existing running business, the exchange fluctuation loss is again allowable as revenue expenditure.

Further he relied on following judgments and the ratios laid down for the proposition that entries in the books of accounts are immaterial for the purpose of determining the treatment for the purpose of provisions of the Act. i) Reliance Wellness Ltd V. DCIT-3(3) in ITA No.3444 and 4273/Mumbai/2013, ii) Kedarnath Jute Manufacturing Co., Ltd V. CIT (1971) 82 ITR 363 (SC) iii) M/s.CoffeedayGlobal Ltd for the A.Ys.2013-14 & 2014- 15 in ITA Nos.3040 & 2041/Bang/2018.

The ld.DR relied on the order of the CIT(A).

We have heard both the parties and perused the materials on record. Admittedly, similar issue came up for consideration before this Tribunal in the assessee’s sister concern case in ITA No.DCIT Vs. Coffee Day Global Ltd., 79 ITR 322 (Bang) (Trib) in ITA No.3040 and 3042/Bang/2018 dated 24/12/2020, wherein held as follows:-

In our opinion, the issue before us is squarely covered by the above order of the Tribunal and taking a consistent view, we are inclined to decide the issue in favour of the assessee. This ground of appeal in asst. year 2013-14 to 2015-16 is allowed.

Next ground of appeal in ITA No.144/Bang/2021 to 146/Bang/2021 in asst. years 2014-15 to 2017-18 iswith regard to disallowance of interest.

We consider the facts as narrated in asst. year 2014-15. The facts relating to these issues arethat the assessee has claimed interest expenses of Rs.37,55,17,174/- on borrowed funds which are used for the purpose of the business activity. The details of interest expenses claimed are as under:-

The above loans are for specific purpose and were used for such purpose. The interest expenses were therefore allowable under the provisions of section 36(1)(iii) of the act and hence claimed as revenue expenditure.

The Assessing Officer while concluding the assessment has listed out the following loans and advances and also investments as not for the purpose of business.

The Assessing Officer has stated that, the above amounts are in the nature of advances/ loans without interest.

The ld.AR submitted that -

The ld.AR relied on the following decisions in this regard, wherein it is held that, if the assessee is in possession of interest free funds to cover up the advances/loans, there is no case for disallowance of interest under the provisions of section 37 of the Act.

The ld.AR also relied on the decision of the High Court of Punjab & Hariyana in the case of CIT Vs. Max India Ltd (2017) 398 ITR 209 (P & H), wherein it is held that, if an assessee has surplus interest free funds which were utilized to give interest free advances to the subsidiaries, no disallowance of interest is warranted.

He further relied on the decision of Hon’ble Supreme Court in the case of Commissioner of Income Tax V. Reliance Industries Ltd (2019) 102 Taxmann.com 52 (SC) wherein it is held that, if interest free funds available with the appellant is sufficient to cover up investment in subsidiaries no disallowance can be made. This issue therefore has reached finality.

The ld.AR submitted that, under the circumstances and also the position of law above, there is no case for presumption of diversion and also disallowance of interest. We submit that, the Assessing Officer has erred in disallowing the whole of interest of

The breakup of advances to related parties considered by the Assessing Officer for quantifying the disallowance of interest is as under:-

The Assessing Officer has considered the amount of Rs.307,85,05,247/- as diversion of borrowed funds and has quantified a disallowance.

The ld.AR submitted that, the opening balances in these accounts totally amounted to Rs.299,05,50,668/-. The increase during the previous year is only to the extent of Rs.8 crores. Majority of the investments were made in the earlier years and was outstanding on the first day of the accounting year. Assessments have been concluded U/s.143(3) of the act for the A.Y.2013-14 and there has been no disallowance of interest in the said year on the

The ld.AR prayed that in the light of the fact that, there was no disallowance in the earlier year, there was no case for the Assessing Officer to presume that, any portion of the borrowed funds were diverted during the year warranting disallowance of interest and he reiterated that the action of the Assessing Officer is arbitrary and without any basis. We submit that, there was no case for the Assessing Officer to disallow interest which was on borrowals used for the purpose of the business activity.

Out of the advances listed out in para 3 and considered by the Assessing Officer as having been out of borrowed funds which were interest bearing, the major item of advance is M/s.Tanglin Retail Reality Developments (P) Ltd, wherein the advance outstanding is Rs.278,54,46,188/-. The whole of the advance above is sourced by the following loans from related parties.

The above loans are interest free. This fact is brought out in note No.4B to the financials.

Since the source of the advance has an direct nexus with interest free loans from related parties, we submit that, there is no case for the Assessing Officer to presume that any portion of the borrowed funds were utilized for the purpose of advances above.

The Assessing Officer has erred in disallowing interest on presumptions which are far from facts. We submit that, there was no case from the Assessing Officer to consider the advances as

He further submitted that, the interest expenses claimed by the assessee as detailed in note 20 to financials is Rs.37,55,17,174/-. The summary of Details of interest expenses and the effective rate of interest as under: -

As could be seen from the details above, the borrowals on which interest is paid and claimed are for specific purpose and no portion of such loans have been diverted for the purposes other than business.

The major item of interest is Rs.32,42,86,428/- to HDFC Limited. The loans to which the interest relate to are notional USD loans. The loans are for the specific purpose of investment in SEZ/IT Park. The borrowed funds are therefore utilized for development of infrastructure at SEZ/IT park and the income earned by assessee is from such SEZ/IT park. The borrowed funds

The other interest expenses are also on loans for specific purpose and hence cannot be presumed that, such funds have been diverted.

In view of the facts above, it is submitted that, the borrowed funds have been utilized for the purpose of the business activity and hence there is no case for disallowance. The Assessing Officer has erred in disallowing the whole of the interest expense of Rs.37,55,17,174/-.

Without prejudice to submissions above, that no portion of the borrowed funds has been utilized for the advances and therefore there is no disallowance warranted, the ld. AR submitted that the percentage adopted for quantifying disallowance at 14.5% is arbitrary and does not have any basis.

The ld.AR submitted that, the HDFC Ltd. notional dollar loans of Rs.400 crores is at effective rate of interest of 6.15%. The HDFC car loan is at 11%. The rate of interest varies from loan to loan and such interest on majority of the loans is at less than 11%. The percentage of 14.5% adopted for quantifying disallowance of interest is highly arbitrary and without any basis.

The ld.AR submitted that, the Assessing Officer has arbitrarily disallowed interest at 14.5%. The action of the Assessing Officer in disallowing the whole of the interest of Rs.37,55,17,174/- is erroneous and not justified. He therefore requested to delete the addition consequent to disallowance of interest expenses of Rs.37,55,17,174/-.

The ld.DR submitted that the disallowance of Rs. 375517174/- is on account of interest expenses u/s36(1)(iii). Perusal of assessment order shows assessee company had incurred interest payments totaling Rs. 37,5517174/-. The assessee had simultaneously advanced interest free loans to its own sister concerns totaling Rs. 307,85,05,247/-. The assessee had also advanced Rs.62,05,65000/- and Rs. 140,00,00000/- to M/s Sivan Securities (P) Ltd., another sister concern.

In this context, it was submitted that theassessee failed to explain the business and commercial expediency for advancing interest free loans to its sister concerns whereas it claimed Rs. 37,5517,1741- as interest paid.

We have heard both the parties and perused the materials on record. The main contention of the ld.AR is that the assessee is having enough interest free funds and interest free advances to sister concern out of interest free funds available with the assessee. We have carefully gone through the financials furnished by the assessee before us as noted from the financials, there is sufficient interest free funds available with the assessee so as to make

The same view taken in the case of CIT Vs. Reliance Industries Ltd., 410 ITR 466 where is held as follows:-

In view of the above, this ground of the appeals of the assessee is allowed.

Next ground in ITA No.144/Bang/2021 to 146/Bang/2021 in AY 2014-15, 2015-16 and 2017-18 is with regard to disallowance u/s 14A of the Income-tax Act r.w. Rule 8D(2)(ii) of the Rules 1963.

The facts of the case are as under: -

Under the above facts and circumstances, it was submitted before the Assessing Officer that the assessee has not earned any income exempt under the provisions of the Act. The assessee has not made any investment with the purpose of earning income exempt under the provisions of the Act. Further all the expenditure incurred and recorded in the books of accounts relate to the business activity.

It was the case of the assessee that the provisions of section 14A of the act cannot be invoked and no disallowance is warranted under the said provisions for the facts of the assessee.

The ld. AR submitted that AO has relied on the following decisions and has quantified a disallowance U/s.14A of the act as under: -

The computation of disallowance by the Assessing Officer is as under: -

With the above calculation the Assessing Officer has disallowed expenditure of Rs.22,04,380/- under the provisions of section 14A of the Act.

The Assessing Officer has not recorded any satisfaction before proceedings to quantify the disallowance above. The formula laid down has been routinely applied and disallowance quantified. The CIT(A) has confirmed the disallowance of the AO.

The ld. AR submitted that the issue involved is a covered matter in the assessee’s own case for the A.Y.2012-13, ITA No.1341/Bang/2016, dated 25.10.2017 by the coordinate bench of this Tribunal and it has held that, provisions of sec.14A of the Act cannot be invoked where there is no exempt income earned by the assessee during the relevant previous year.

The ld. AR also submitted that even for the A.Y.2013-14 there was a disallowance U/s.14A of the Act of Rs.20,02,760/- under similar facts and circumstances. On appeal this Tribunal has disposed off the appeal in ITA No.49/Bang/2017, dated 04.06.2018, deleting the addition consequent to disallowance U/s.14A of the act. Since the issue is a covered matter, therefore, the addition consequent to disallowance needs to be deleted.

It was submitted that the company has not earned any exempt income during the previous year. In view of this, we submit that, there is no expenditure disallowable under the provisions of section 14A of the Act. We rely on the following decisions, wherein

It was submitted that the ITAT, Bangalore in the case of Income Tax Officer, Ward-4(1)(1), Bengaluru Vs. M/s.J.P.Distilleries (P) Ltd for the A.Ys.2010-11 and 2011-12, held that, in the absence of exempt income no disallowance can be made under the provisions of section 14A of the Act.

It was further submitted by ld. AR that the Assessing Officer has quantified a disallowance U/s.14A of the Act, notionally in a routine fashion without any satisfaction been recorded as to why the claim of the assessee that, no expenditure was incurred in respect of these investments cannot be accepted. The action of the Assessing Officer is against the decision of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co., Ltd V. DCIT (2017) 81 Taxmann.com 111 (SC), wherein it is held that, unless a

The ld.DR submitted that the disallowance of Rs. 22,04,380/- u/s 14A r.w. r. 8D. Perusal of assessment order shows that the assessee made long term investment in equity shares & mutual funds. In this context, it may be noted that no expenditure incurred for the purpose of earning an exempt income shall be allowed against taxable profits. The assessee stated that it had not incurred any expenditure for earning dividend income.

In this context, it may be noted that expenses relating to exempt income cannot be claimed against taxable income.Even if income is not earned during a year, provisions of section 14 A rwr. 8D can be invoked since the legislation was introduced so as to enable the department to determine expenses incurred relating to exempt income.

The AO has relied on the several judicial decisions among which is the decision of Hon'ble ITAT Chennai in the case of M/s MGM Diamond Beach Resorts P Ltd in ITA No 2173/ Mds/25 AY 2002-03, In the cited order, the Hon’ble ITAT held that 'once assessee is purchasing the shares, naturally the income would not come only in the form of dividend which is ultimately exempt and will not form part of the total income, and therefore, the expenditure for the purpose of earning such income would not be eligible. Whether any such exempt income has been earned or not is of no consequence'

Further, the AO also relied on the decision of the Hon'ble Kerala High Court in the case of SBT 16 taxmann.com 289 (Ker) 2011

The ld.DR relied on the order of the lower authorities.

We have heard both the parties and perused the materials on record. The main contention of the ld.AR is that the assessee is having any exempt income as such there cannot be any disallowance u/s 14A r.w.Rule 8D of the Income-tax Act. In our opinion, there is no dispute that assessee has not earned any disallowance u/s 14A r.w Rule 8D of the Act and this issue is squarely covered by the order of the Tribunal in assessee’s own case in ITA No.49/Bang/2017 dated 4/6/2018.

At the time of hearing, the ld. counsel for the assessee brought to our notice that identical issue had come up for consideration before this Tribunal in assessee's own case in assessment year 2012-13, in ITA No.1341/Bang/2016, and this Tribunal by its order dated 25/10/2017 held that provisions of sec. 14A of the Act cannot be invoked where there is no exempt income earned by the assessee during the relevant previous year. The following were relevant observations of the Tribunal. "We heard rival submissions and perused the material on record. We find that the assessee had not received any exempt income therefore, no disallowance under. section 14A is to be made. We have also carefully examined the computation of income and the Balance Sheet and find that the assessee had not earned any exempt income. We have also examined the judgments referred to by the assessee in which proposition has been laid down that in the absence of exempt income, no disallowance u/s 14A

The Tribunal in coming to the aforesaid conclusion has placed reliance onthe decision of the Hon'ble Karnataka High Court in MI CCI Ltd. Vs. JCIT, Udupi Range in ITA No.359/2011.

The ld.counsel for the assessee also brought to our notice that similar view has been taken by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT-IV (2015)61 Taxmann.com 118 (Delhi).

In view of the aforesaid decisions rendered in assessee's own case and in the decisions rendered by the Hon'ble High Courts, we are of the view that there can be no disallowance of expenditure u/s 14A of the Act. The addition made is, therefore, directed to be deleted and the appeal of the assessee is allowed.

In the result, assessee’s appeals are allowed. Order pronounced in court on 31st January, 2022 Sd/- Sd/- (GEORGE GEORGE K.) ( CHANDRA POOJARI) Judicial Member Accountant Member

The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore.