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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI PRADIP KUMAR KEDIA
Per N V Vasudevan, Vice President This is an appeal by the Revenue against the order dated 20.5.2014 of CIT(Appeals)-1, Bangalore, relating to assessment year 2012-13.
Grounds No.1, 9 & 10 raised by the revenue are general in nature and calls for no specific adjudication. Grounds No.2 to 6 are with regard to the grievance of the revenue against the order of the CIT(A) whereby the CIT(A) allowed the claim of the Assessee for deduction u/s.80IAB(4)(iii) of the Income Tax Act, 1961 (Act). These grounds read as follows:-
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“2. The CIT (A) erred in holding that the assessee is entitled for deduction u/s.80IA(4)(iii) by following his orders in ITA No.182/DC-11(3)/A-I/2009-10 dated 23/3/2013 for A.Y.2004-05, ITA No.283/DC-11(3)/A-I/13-14 dated 30-4-2014 for A.Y.2005- 06, ITA No.191/DC-11(3)/A-I/12-13 dated 30-08-2013 for A.Y.2007-08, ITA No.284/DC-11(3)/A-I/13-14 dated 30-04- 2014 for A.Y.,2011-12 in the assessee's own case without appreciating that the relied upon orders have not been accepted and appeals us/.253 have been preferred and the assessee had not fulfilled the conditions for the approval granted by the Ministry of Commerce and Industry. 3. The CIT(A) erred in not appreciating that there were three tenants. in the industrial park as against the first condition that 4 units should be located in the industrial park and a super built up area of 1,38,000 sq. ft. was leased to M/s. I-Flex Solutions Ltd., which is more than 60% of the total allocable area. 4. The CIT(A) erred in not appreciating the fact that out of the three companies found to be available, M/s. Transworks Information Services Ltd. and M/s. Transworks IT services were actually one and the same company amalgamated by an order of Hon'ble High Court of Mumbai. 5. The CIT(A) erred in allowing relief without appreciating that in the relied upon order for the assessment year 2004-05 the CIT himself has made an observation that the assessee started with only one tenant in the period relevant to the assessment year 2004-05. 6. The CIT(A) erred in directing to grant deduction 80IA(4)(iii) of the I.T. Act following the orders for the earlier years in view of the decision of the jurisdiction Bench of the ITAT in the case of Primal Projects Pvt. Ltd.(139-TTJ-233) without appreciating that the said decision has not yet reached a finality.” 3. As far as the aforesaid grounds of appeal are concerned, the facts are that the Assessee is a company engaged in property development including Information Technology Park (IT Park) and Special Economic Zone (SEZ). The Assessee filed return of income for AY 2012-13 declaring
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Nil income on 30.9.2012. Subsequently, the Assessee filed revised return on 8.11.2013 and 5.3.2013 declaring nil income after claiming deduction u/s.80IAB amounting to Rs.1,57,57,266/-. The Assessee was carrying out projects which were eligible for deduction u/s.80IAB(4)(iii) of the Act i.e. Income from developing, operating and maintaining SEZ Park, as well as projects which were eligible for deduction u/s.80IA of the Act. In so far as the deduction u/s.80IAB(4)(iii) of the Act is concerned, in the past the Assessee claimed deduction under the said provision in respect of income derived from a SEZ project known as Millennium Towers. In AY 2012-13 the Assessee did not claim deduction u/s.80IAB(4)(iii) of the Act in respect of income derived from the said project but declared income from Millennium Towers project under the head “Income from House Property” and computed a loss of Rs.17,32,732/-. The said computation is as follows:
Income Rental Income 4,08,22,924 Maintenance Receipt 74.84,364 Miscellaneous Income 1,38,036 Sub-Total 4,84,45,324 Expenses Millennium Tower Expenses 22,20,678 Electricity Charges 6,19,156 Maintenance Expenses 10,81,614 Security Expenses 4,24,670 Bank Interest/Charges 3,31,15,939 Office Admn & Selling Expenses 1,06,30,969 Rates & Taxes 20,85,030 Sub-Total 5,01,78,056
Net Profit/Loss -17,32,732
The AO treated income received from the project Millennium towers of Rs.4,08,22,924 as income from business declared as above as income from business and held that the interest expenditure of Rs.2,90,87,733
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would be allowed as deduction from the said income and the remaining sum of Rs.1,17,35,191 would be treated as taxable income from business. In this regard AO observed in his order at paragraph-6.2 that if the Assessee takes a view before the appellate authorities that alternatively it is eligible to claim deduction u/s.80IAB(4)(iii) of the Act, such deduction should not be allowed for the reasons which he had given in his order of Assessment for AY 2011-12. In the grounds of appeal before the CIT(A) in ground No.3 the Assessee has raised a ground challenging the action of the AO in denying deduction u/s.80IAB(4)(iii) of the Act but that ground of appeal mentions the sum of Rs.3,29,18,939/- which sum is the sum claimed as deduction in AY 2011-12. It should be read as Rs.1,17,35,191/- which was the sum treated by the AO as income from Millennium Project.
The CIT(A) in paragraph 4.3 of his order held that if the AO considers income from Millennium project as Business income then he should allow all the expenses claimed by the Assessee and therefore the income from Millennium project arrived at by the AO at Rs.1,17,35,191 was not proper. By reason of this conclusion, there would be only loss from the project Millennium and therefore there is no occasion to allow deduction u/s.80IAB(4)(iii) of the Act. However there was also a disallowance of expenditure u/s.14A of the Act. The disallowance u/s.14A of the Act was sustained by the CIT(A) at a sum of Rs.65,65,245/-. The CIT(A) in para 6.10 of his order observed that if the profit of the Assessee increases after the disallowance of expenses u/s.14A of the Act, the Assessee would be eligible for deduction u/s.80IAB(4)(iii) of the Act/80IA of the Act on such enhanced profit. There is no bifurcation of the sum of Rs.65,65,245 between the Millennium Towers project eligible for deduction u/s.80IAB(4)(iii) of the Act and the other project on which the Assessee claimed deduction u/s.80IA of the Act. The CIT(A) however in paragraph-7 of his order observed that the Assessee has negative income after setting
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off loss of earlier years business loss and hence he did not allow any deduction u/s.80IAB(4)(iii) of the Act. Therefore the grounds raised by the revenue in this regard are without any basis and does not arise out of the order of the CIT(A). In any event, we hold that the order of the ITAT for AY 2011-12 rendered on identical facts will hold good and are applicable for AY 2012-13 also. Consequently, Grds.2 to 6 raised by the revenue are dismissed.
The next issue raised by the Revenue in its grounds of appeal is with regard to disallowance of expenses u/s.14A of the Act. The AO computed disallowance u/s.14A of the Act as follows:-
“7.4 It is seen that the assessee company has claimed a finance charges amounting to Rs.15,48,91,549/-, out of which, the indirect expenditure is calculated at Rs.14,79,79,010/-. 7.5. The investment portfolio given by the assessee is as under:- As at March As at March 31, 2012 31, 2011 A Gopalan 37,07,97,773 35,49,98,955 Capital in Homes B Investment in Gopalan 107,20,05,206 82,82,33,610 Enterprises Total 144,28,02,979 118,32,32,565
7.6. The disallowance attracted u/s 14A r.w. Rule 8D is worked out as under: -
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Disallowance attracted u/s 14A read with Rule 8D A Total Amount of Direct Interest/Other NIL expenses pertaining to tax-exempt investments B Total interest Rs. 14,79,79,010/- amount of indirect pertaining to tax exempt investments A.Y.2012-13A.Y. 2011-10 Average C Average amount of 118,32,63,765 144,28,34,179 131,30,48,968 tax exempt investments D Average Amount of Total 627,36,26,645 543,67,72,896 585,51,99,771 Assets E Proportionate indirect B X C 14,79,79,010 x 131,30,48,968 interest to be disallowed D 585,51,99,771 = 3,31,84,809 F 0.5% of average amount 65,65,245 of tax exempt investment G Total Disallowance 3,97,50,054 attracted u/s. 14A read with Rule 8D
7.6. Accordingly an amount of Rs.397,50,064/- is disallowed and added back to the total income u/s. 14A r.w. Rule 8D of the Income-tax Act.” 7. On appeal by the Assessee, the CIT(A) reduced the disallowance made by the AO to Rs.65,65,245 which is the disallowance under Rule 8D(2)(iii) of the Income Tax Rules, 1962 (Rules) which is other expenses other than direct expenses and interest expenses attributable to earning exempt income. As far as disallowance under rule 8D(2)(ii) of the Rules regarding interest expenses is concerned, the CIT(A) deleted the disallowance of interest expenses on the reasoning that the interest expense claimed as deduction were all related to borrowings which were used for the purpose of business and therefore none of the borrowings on which interest was paid were used for making investment in shares which
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would yield tax free income. The following were the relevant findings of the CIT(A):-
“6.5 Thus, if any interest which is not directly attributable to any particular source of income or the receipt of income, then the same has to be considered for disallowance under the aforesaid rule. In the instant case, the appellant incurred the following indirect interest payment as per Schedule 24 of the Profit and Loss Account for the period ending 31/3/2012:
FINANCE CHARGES Bank charges & Processing Charges Rs. 68,53,369 Forex gain/loss Account Rs. 12,770 Interest on term loans Rs. 11,88,91,273 Interest paid on loan Rs. 2,90,87,737 Interest on OD Rs. 38,936 Interest paid to others Rs. 7,464 Total Rs. 15,48,91,549
6.6 It may be seen from the above that the major amount of interest payment is towards term loans i.e working capital loan. Similarly, the appellant also paid interest on other loans and interest on OD apart from bank charges and loan processing charges. A perusal of the details of the said financial charges clearly indicates that the above interest payments are directly attributable to the earning of business income of the appellant company. Therefore, none of the interest payments can be considered under Rule 8D(2)(ii) of the I.T. Act. In this context, the decision of the Hon'ble Tribunal of Kolkata Bench in the case of Champion Commercial Ltd. [139 ITD 108(Kol)] supports the above view. The relevant portion of the said decision is extracted below: "we make it clear that common interest expenses which are to be allocated in terms of the formula under Rule 8D (2) (i ) will be only such interest expenses as are neither directly attributable borrowings specifically used for tax-
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exempt incomes or receipts nor are directly attributable to borrowing specifically used taxable incomes or receipts." 6.7 Thus the said payment cannot be attributed to borrowing specifically used for tax exempt income. There is no material / evidence on record to show the nexus between the borrowals and tax-free investments. Further, even though the appellant has made tax free investments during the year under consideration, but it is also noted that the appellant having sufficient non- interest bearing fund during the year. 6.8 In view of the above decision, none of the interest payments claimed by the appellant can be taken for the purpose of Rule 8D(2)(ii) of I.T. Rules. Therefore, the disallowance of Rs.3,31,84,809/- is hereby deleted.” 8. Aggrieved by the order of the CIT(A), the revenue has raised Grds.No.7 & 8 before the Tribunal which reads as follows:-
“7. The CIT(A) erred in deleting the disallowance of Rs.3,31,84,809/- by holding that none of the interest payments can be taken for the purposes of Rule 8D(2)(ii) without appreciating the provisions of Section 14A read with Rule 8D in its true sense and right spirit and the fact that when the interest expense incurred cannot be directly attributed to any particular income or receipt, provisions of Rule 8D(2)(ii) are automatically applicable. 8. The CIT (A) erred in holding that the payments cannot be attributable to borrowings specifically used for tax exempt income and holding that there is no material/evidence on record to show the nexus between the borrowers and tax free investments by relying on the decision of Hon'ble Tribunal of Kolkata Bench in the case of Champion Commercial Ltd., [139 ITD 108 (Kol)] without appreciating the fact that investments are made from a common pool of funds ,i.e., working capital and / or cash credit or overdraft accounts and the provisions of Rule 8D(2)(ii) are automatically applicable as held in the case of Champion Commercial Ltd 139 ITD) 108 (Kol) which clarified that common interest expenses which are to be allocated in terms of the formula under rule 81)(2)(10 will be only such interest
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expenses as are neither directly attributable to borrowings specifically used for tax ¬exempt incomes or receipts nor are directly attributable to borrowing specifically used for taxable incomes or receipts.”
We have heard the submission of the learned DR who reiterated the stand of the revenue as reflected in the grounds of appeal referred to above. The learned counsel for the Assessee however submitted that the Assessee had sufficient own funds which were much more than the investment that are likely to yield tax free income and therefore the order of CIT(A) should be sustained.
We have carefully considered the rival submissions. In the grounds of appeal the plea of the revenue is primarily based on the theory that the own funds and borrowed funds were in a common hotchpotch and therefore Rule 8D(2)(ii) of the Rules were applicable i.e., where interest expenses are not directly attributable to any particular income or receipt. The revenue has not challenged the finding of the CIT(A) with regard to availability of own funds which is much more than the investments that are likely to yield tax free income in the last sentence of paragraph 6.7 of its order. In this regard we have perused the Balance Sheet of the Assessee as on 31.3.2012 and we find that the investments by the Assessee are to the tune of Rs.144,28,34,179 whereas the availability of own funds as on that date were in the form of share capital and reserves and surplus of Rs.36,40,000/- and Rs.185,38,73,455 respectively besides availability of rental deposits which are interest free of Rs.230,47,70,914/-. There can be no dispute on the availability of own funds more than the investments that are likely to yield tax free income. This finding of the CIT(A) has not been shown to be erroneous except a submission that own funds and borrowed funds come from a common pool of funds. The law by now is well-settled
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that if available interest-free funds are much more than investments in dividend yielding shares, then there can be no disallowance under rule 8D(2)(ii) of the Act. In the case of CIT Vs. HDFC Bank Ltd. [2014] 49 taxmann.com 335 (Bombay) it was held where assessee's own funds and other non-interest bearing funds were more than investment in tax free securities, no disallowance of part of interest payments under section 14A of the Act can be made. In light of the above factual and legal position, we are of the view that disallowance of interest under rule 8D(2)(ii) cannot be sustained and was rightly deleted by the CIT(A). Besides the above the interest expenditure claimed by the Assessee as deduction were all in respect of borrowings which by its very nature was not capable of being used by the Assessee for the purpose other than business purpose of the Assessee and not for making investment. We find no grounds to interfere with the order of the CIT(A) and dismiss the relevant grounds of appeal of the revenue.
In the result, appeal by the revenue is dismissed.
Pronounced in the open court on this 6th day of March, 2020.
Sd/- SD/- ( PRADIP KUMAR KEDIA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore, Dated, the 6th March, 2020.
/Desai S Murthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar ITAT, Bangalore