JCIT (OSD), CIRCLE 14, PUNE vs. KUMAR BUILDER MUMBAI REALTY PRIVATE LIMITED, PUNE

3 21 & 22/PUN/2020 6. For the facts and such other reasons an may be urged at the time of hearing, the order of the Ld. Commissioner of Income Tax(Appeals)- 9, Pune may be vacated and that of the Assessing Officer be restored. 7. The above ground of appeal may kindly be allowed to be amended, altered, modified etc. in the interest of natural justice.”

5. Briefly, the facts of the case are as under : The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of promoters, builders and developers of land. The Return of Income for the assessment year 2013-14 was filed on 30.09.2013 declaring Rs.Nil income. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-14, Pune (‘the Assessing Officer’) vide order dated 30.03.2016 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at total income of Rs.18,43,46,100/-. While doing so, the Assessing Officer made the following disallowances/additions :- (i) Disallowance of service tax not paid u/s 43B of Rs.49,93,213/-. (ii) Disallowance of interest u/s 36(1)(iii) of Rs.26,31,67,414/- (iii) Addition on account of notional rent on account of completed flats of Rs.1,05,000/-.

6. The factual background leading to the above disallowances/additions is as under : During the course of assessment proceedings for the year under consideration, on verification of Balance Sheet, the Assessing Officer found that the respondent-assessee made loans and advances to sister concerns of Rs.156,88,11,555/- without charging any interest and assessee company had claimed interest expenditure of Rs.32,17,30,099/- out of which a sum of Rs.6,34,32,208/- was offered suo moto disallowance under the provisions of section 14A of the Act. The Assessing Officer inferred that the interest bearing funds had been diverted to the sister concern for non-business purposes and accordingly, disallowed the interest expenditure of Rs.26,31,67,414/-. While doing so, the Assessing Officer adopted the average rate of interest @ 14% which comes to Rs.27,08,89,405/- but restricted the disallowance to the actual expenditure of Rs.26,31,67,414/-. Similarly, the Assessing Officer also disallowed the service tax of Rs.49,93,213/- which remain, unpaid before due date of filing of return of income by invoking the provisions of section 43B of the Act. The Assessing Officer also brought to tax notional annual 5 21 & 22/PUN/2020 value of flats unsold of Rs.1,05,000/- under the head “Income from house property”.

6 21 & 22/PUN/2020 9. The ld. CIT-DR contends that the ld. CIT(A) ought not to have directed the Assessing Officer to delete the addition u/s 36(1)(iii) of Rs.26,31,67,414/- in the absence of any nexus between the interest free share capital and reserves and the loans and advances given to the sister concerns. As regards to the disallowance u/s 14A, he submits that when the assessee company himself offered the disallowance u/s 14A, the ld. CIT(A) ought not to have deleted the addition by entertaining the additional ground of appeal

10. On the other hand, ld. Counsel for the respondent-assessee taking us through the Paper Book, pages no.38 and 39 submits that no fresh loans and advances were made to the sister concern during the year under consideration similar disallowance made in the earlier assessment years by the Assessing Officer came to be allowed by this Tribunal in assessee’s own case vide ITA No.1569/PUN/2017 for A.Y. 2012-13 dated 23.10.2020, ITA Nos.2164 and 2175/PUN/2016 for A.Y. 2011-12 dated 14.08.2019, ITA Nos.39 & 46/PUN/2015 for A.Y. 2010-11 dated 31.10.2017, ITA Nos.1628 & 1636/PUN/2013 for A.Y. 2009-10 dated 02.02.2017 and ITA No.66/PUN/2015 for A.Y. 2008-09 dated 28.06.2017. He also filed the copies of the said ITAT’s orders in 7 21 & 22/PUN/2020 the assessee’s own case (supra), wherein this Tribunal had deleted addition u/s 36(1)(iii) on the ground that no addition on account of disallowance of interest on the ground that interest bearing funds were diverted for non-business purposes is warranted, as the own funds are more than the loans and advances made to the sister concern placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC).

11. As regards, the disallowance under the provisions of section 14A, ld. AR submits that it is a settled position of law that in the absence of any exempt income, resort to the provisions of section 14A cannot be made. This is purely a legal issue requiring no verification of facts and, therefore, the ld. CIT(A) rightly allowed the claim of the respondent-assessee that no disallowance u/s 14A is warranted in the absence of any exempt income. Mere fact that the respondent-assessee himself had offered suo moto disallowance does not alter the position.

9 21 & 22/PUN/2020 development agreement, which stood at Rs.3,95,69,87,520/- and the loans and advances made to the sister concern stood at Rs.1,95,28,56,884/-. Relying on proposition that when the interest free funds available to the respondent-assessee are sufficient to meet the investments with the sister concern, it should be presumed that the investments are made out of the interest free funds. As law laid down by the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. vs. CIT 224 ITR 627 (SC) held that no disallowance of interest is called for relying upon the ratio of the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC). The correctness of this finding of the ld. CIT(A) is under challenge before us vide this ground of appeal no.2 and 3.

13. It is an admitted position that the interest free funds available to the respondent-assessee as on 31.03.2013 stood Rs.3,95,69,87,520/- and investments in loans and advances made to the sister concern, stood at Rs.1,93,49,24,321/-. Thus, it is evident that own funds far exceeds the loans and advances made to the sister concern. It is settled position of law that in the case of mixed funds of borrowed funds and own funds, presumption has to be drawn that own funds are utilized for the purpose of making the interest free 10 21 & 22/PUN/2020 advances to the sister concern, as held by the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. (supra) and, therefore, the question of disallowance does not arise. Even recently, the same proposition had been reiterated by the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC) and South Indian Bank Ltd. vs. CIT 130 taxmann.com 178 (SC). Therefore, the order of the ld. CIT(A) is based on the proper appreciation of relevant material facts on record and in consonance with the law laid down by the Hon’ble Apex Court (supra).

no.2 11 ITA Nos.20, 21 & 22/PUN/2020 and 3 filed by the Revenue. Hence, the ground of appeal no.2 and 3 filed by the Revenue stands dismissed.

15. Ground of appeal no.4 and 5 challenges the correctness of the findings of the ld. CIT(A) that in the absence of any exempt income, no disallowance u/s 14A can be made in spite of fact that the assessee had himself offered suo moto disallowance of Rs.6,34,32,208/- in the return of income. We find from the assessment record the assessee suo moto offered disallowance of Rs.6,34,32,208/- u/s 14A of the Act. However, during the course of proceedings before the ld. CIT(A), the respondent-assessee company raised a plea that in the absence of any exempt income, the question of disallowance u/s 14A does not arise. The ld. CIT(A) placing reliance on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders 349 ITR 336 (Bombay) admitted the additional ground and proceeded to dispose of the same following the decision of the Hon’ble Bombay High Court in the case of CIT vs. Ballarpur Industries Ltd. (ITA No.51/2016 order dated 13.10.2016) and the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT 378 ITR 33 (Delhi) and the decision of ITAT in assessee’s own case (supra) held that in the absence of any exempt income, the question of 12 21 & 22/PUN/2020 disallowance u/s 14A does not arise. The correctness of this finding of the ld. CIT(A) is under challenge before us in the present grounds of appal no.4 and 5 primary on the ground that the claim which has not gone through the process of assessment, cannot be adjudicated by the ld. CIT(A) placing reliance on the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT 284 ITR 323 (SC) and on the ground that the assessed income will be lower than the returned income.

no.4 and 5 raised by the Revenue stand dismissed.

18. In the result, the appeal filed by the Revenue in ITA No.20/PUN/2020 stands dismissed.

19. Now, we take up the appeal of the Revenue in ITA No.21/PUN/2020 for assessment year 2014-15 for adjudication. ITA No.21/PUN/2020, A.Y. 2014-15 :

20. The Revenue raised the following grounds of appeal :- “1. “The order of the Ld CIT(A) is contrary to law and to the facts and circumstances of the case. 2. “The learned Commissioner of Income Tax(Appeals) grossly erred in deleting the addition on account of expenses not related to the business of the assessee of Rs. 3,73,84,490/- instead of confirming the same.

3. The learned Commissioner of Income-Tax (Appeals) grossly erred in appreciating the decision of Supreme Court in the case of Lashmirathan Cotton Mills Co. Ltd Vs. CIT(1969) 73 ITR 634(SC) wherein it was held that in order to claim that an nexus of that expenditure to its business what the assessee has failed to dispose off. 4. “Whether on the facts and in the circumstances of the case and in law, the CIT(A) was justified in allowing the additional ground raised by the assessee in respect of reversal of disallowance u/s 14A of Rs.1,28,13,319/- made by the assessee itself in its return of income while computing its income thereby disregarding the judicial pronouncement of the Hon’ble Supreme Court in the case of Goetze(India) Ltd. ITR 323?

5. Whether on the facts and in the circumstances of the case and in law, the CIT(A) was correct in holding that no disallowance u/s 14A is called for, thereby resulting in a situation where the assessed income of the assessee would now be less than the income returned by the assessee?

15 21 & 22/PUN/2020 6. For the facts and such other reasons an may be urged at the time of hearing, the order of the Ld. Commissioner of Income Tax(Appeals)- 9, Pune may be vacated and that of the Assessing Officer be restored. 7. The above ground of appeal may kindly be allowed to be amended, altered, modified etc. in the interest of natural justice.”

21. Briefly, the facts of the case are that the respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of promoters, builders and developers of land. The return of income for the assessment year 2014-15 was filed on 30.11.2014 declaring Rs.Nil income. Against the said return of income, the assessment was completed by the Income Tax Officer, Ward-14(2), Pune (‘the Assessing Officer’) vide order dated 30.12.2016 passed u/s 143(3) of the Act at total income of Rs.3,74,89,490/-. While doing so, the Assessing Officer made disallowance of interest of Rs.3,73,84,490/- u/s 36(1)(iii) on the ground that interest bearing funds have been diverted to the sister concern in the form of loans and advances without charging any interest. The Assessing Officer also made addition on account of notional rent on completed flats of Rs.1,05,000/-.

22. Being aggrieved by the order of assessment, an appeal was preferred before the ld. CIT(A) who vide impugned order directed the Assessing Officer to delete the addition of interest u/s 36(1)(iii)

16 21 & 22/PUN/2020 by holding that not disallowance is warranted u/s 36(1)(iii) for the reason that the interest free own funds far exceeds the loans and advances made to the sister concern following the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC) and the decision of this Tribunal in assessee’s own case in the earlier assessment years (supra). Similarly, the ld. CIT(A) also directed the Assessing Officer not to make any addition on account of notional rent of unsold flats. The ld. CIT(A) also allowed the additional ground of appeal challenging the addition u/s 14A in spite of fact that the respondent-assessee had himself offered suo moto disallowance of Rs.1,28,13,994/- by holding that the appellant had not any exempt income.

23. Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present appeal.

24. Ground of appeal no.1, 6 and 7 are general in nature do not require any adjudication.

25. Ground of appeal no.2 and 3 challenges the correctness of the decision of the ld. CIT(A) in holding that no disallowance of interest u/s 36(1)(iii) of Rs.3,73,84,490/- is warranted. An identical issue was dealt by us in assessee’s own case for assessment year 2013-14 in ITA No.20/PUN/2020 in the foregoing paragraphs of 17 ITA Nos.20, 21 & 22/PUN/2020 this order. It is an admitted position that there is no change of facts in the present year. In the circumstances, on the parity of reasoning given by us in assessee’s own case for assessment year 2013-14, we hold that the order of the ld. CIT(A) is in consonance with the well- settled position of law and we do not find any perversity, illegality in the finding of the ld. CIT(A). Accordingly, the ground of appeal no.2 and 3 filed by the Revenue stands dismissed.

26. Ground of appeal no.4 and 5 challenges the correctness of the decision of the ld. CIT(A) in allowing the additional ground of appeal raised by the respondent-assessee challenging the disallowance u/s 14A of Rs.1,28,13,319/-. For the reason stated in the order for the assessment year 2013-14 in ITA No.20/PUN/2020, we do not find any illegality in admitting this additional ground of appeal by the ld. CIT(A). However, we find that the findings of the ld. CIT(A) that no exempt income is earned by the respondent- assessee during the previous year relevant to the assessment year under consideration is contrary to the fact that the assessee had earned exempt income of Rs.2.04 crores. Thus, the finding of the ld. CIT(A) that in the absence of any exempt income, no disallowance u/s 14A can be made, is reversed. However, we find from the material on record that interest free funds are far exceeds 18 21 & 22/PUN/2020 the investments made as evident from page no.77 of the Paper Book and, therefore, no disallowance of interest is warranted u/s 14A r.w. Rule 8D(2)(ii) of the Income Tax Rules, 1963 (‘the Rules’) in view of well settled position of law. However, for the purpose of computing the disallowance under limb of Rule 8D(2)(iii) of the Rules, we restore the matter to the file of the Assessing Officer for the purpose of computing the disallowance under Rule 8D(2)(iii) of the Rules with direction that the amount of disallowance should be computed by considering the value of those investments, which yielded the exempt income alone for the purpose of arriving at average value of investments, in view of the decision of the Hon’ble Delhi High Court in the case of in the case of Joint Investments Pvt. Ltd. vs. CIT, 374 ITR 694 (Delhi), the decisions of Hon’ble Madras High Court in the cases of ACB India Ltd. Vs. Assistant Commissioner of Income Tax, Marg Ltd. Vs. CIT, 318 CTR (Mad.) 148 and CIT Vs. Shriram Ownership Trust 318 CTR (Mad.) 233 and also by the Hon’ble Karnataka High Court in the case of Pragathi Krishna Gramin Bank Vs. Jt.CIT, 95 Taxman.com 41 (Kar.). Thus, the ground of appeal no.4 and 5 filed by the Revenue stands partly allowed.

19 21 & 22/PUN/2020 27. In the result, the appeal filed by the Revenue in ITA No.21/PUN/2020 for A.Y. 2014-15 stands partly allowed. 28. Now, we take up the last appeal of the Revenue in 2014-15 for adjudication. ITA No.22/PUN/2020, A.Y. 2014-15 : 29. The Revenue raised the following grounds of appeal :- “1. “The order of the Ld CIT(A) is contrary to law and to the facts and circumstances of the case. 2. “The learned Commissioner of Income Tax(Appeals) grossly erred in deleting the addition on account of expenses not related to the business of the assessee of Rs. 2,70,11,676/- instead of confirming the same.

3. The learned Commissioner of Income-Tax (Appeals) grossly erred in appreciating the decision of Supreme Court in the case of Lashmirathan Cotton Mills Co. Ltd Vs. CIT(1969) 73 ITR 634(SC) wherein it was held that in order to claim that an nexus of that expenditure to its business what the assessee has failed to dispose off.

4. For the facts and such other reasons an may be urged at the time of hearing, the order of the Ld. Commissioner of Income Tax(Appeals)- 9, Pune may be vacated and that of the Assessing Officer be restored.

5. The above ground of appeal may kindly be allowed to be amended, altered, modified etc. in the interest of natural justice.”

30. Briefly, the facts of the case are that the respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of promoters, builders and developers of land. The return of income for the assessment year 2014-15 was filed on 29.11.2014 declaring Rs.Nil income. Against 20 ITA Nos.20, 21 & 22/PUN/2020 the said return of income, the assessment was completed by the Income Tax Officer, Ward-14(2), Pune (‘the Assessing Officer’) vide order dated 30.12.2016 passed u/s 143(3) of the Act at total income of Rs.3,00,66,635/-. While doing so, the Assessing Officer made addition by disallowing the interest of Rs.2,70,11,676/- by holding that the interest bearing funds have been diverted to the sister concern in the form of interest free loans and advances. The Assessing Officer also made an additional addition of Rs.55,00,000/- on account of cash credits on the ground that the respondent-assessee had failed to prove the genuineness and creditworthiness of the credits received during the year.

31. Being aggrieved by the above assessment order, an appeal was preferred before the ld. CIT(A) who vide impugned order had allowed the appeal.

32. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us in the present appeal challenging the decision of the ld. CIT(A) deleting the addition on account of disallowance of interest of Rs.2,70,11,676/-.

33. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the correctness of the decision of the ld. CIT(A) deleting the addition of proportionate 21 21 & 22/PUN/2020 interest of Rs.2,89,21,612/-. During the course of assessment proceedings, the Assessing Officer observed that the respondent- assessee company diverted the interest bearing loans to the sister concern to Kumar Builders and Kumar Housing and Land Development, hence, the Assessing Officer was of the opinion that the interest proportionate to such land should be disallowed. Accordingly, the Assessing Officer made disallowance of Rs.2,70,11,676/-. On appeal before the ld. CIT(A), the ld. CIT(A) considering the position that own funds and interest free funds are far exceeds the loans and advances given to the sister concern directed the Assessing Officer to delete the addition placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC) and the decision of this Tribunal in assessee’s own case in the earlier assessment years (supra). The correctness of this finding of the ld. CIT(A) is under challenge before us in the present appeal. It is an admitted position that as extracted by the ld. CIT(A) from the ld. CIT(A)’s order at page no.19 para 3.3.1 that interest free funds or own funds far exceeds as on 31.03.2014 stood at Rs.27,90,64,928/- whereas the loans and advances made to the sister concern stood at 23,19,05,317/-. Therefore, it can be safely concluded that the loans 22 21 & 22/PUN/2020 and advances are made to the sister concern out of the interest free own funds and, therefore, no disallowance of interest is warranted in the of the settled position of law as settled by the Hon’ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC). Similar view has been taken by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT, 130 taxmann.com 178 (SC) by holding as under :- “17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No. 1225 of 2015, dated 28-11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was justified in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion.