DCIT, CIRCLE- 7(1), NEW DELHI vs. DLF UTILITIES LTD. , NEW DELHI

The present appeal has been filed by the revenue against the order dated 16.03.2017 of the ld. CIT (A)-3, Delhi.

Following grounds have been raised by the revenue:

Brief facts of the case are that the assessee has obtained loans of Rs.17.15 crores on which interest of Rs.1.44 crores has been paid. The assessee has used this amount towards extending interest free loans & advances, investments and capital work. The share capital and the reserves & surplus of the assessee are to the tune of Rs.397.96 crores. Details of own funds Amount(lacs) Share Capital 10,707.46 Reserves & Surplus 29,088.75 Total interest free funds available 39,796.21 Total interest paid 144 Investments: Advance given to DLF Ltd. 117.53 Investment of immovable property 649.14 Investment in Partnership firm 51.89 Advance recoverable 2070.24 Other Advances 81.62 Total Investments 2970.4

The Assessing Officer held that to be eligible for deduction u/s 36(1)(iii), the following conditions must be satisfied: “i. The money must have been borrowed by the assessee. ii. It must have been borrowed for the purposes of the assessee’s own business. iii. The assessee must have paid interest on the said amount and claimed it as deduction.”

The Assessing Officer further held that the amount of the interest paid in respect of capital borrowed for the purposes of business or profession. It is implicit in this provision that the capital so borrowed should not only be invested in the business but that the amount borrowed should continue to remain in the business. This provision cannot be construed as enabling an assessee to burden the business with interest even while taking the amount initially borrowed for the business but 3 DLF Utilities Ltd. subsequently taken out of the business by diverting it as interest free loans or loans on lower rate of interest.

He relied on the following case laws: � Sarabhai Sons P. Ltd. Vs CIT 201 ITR 465 (Guj.) � CIT Vs Sujani Textiles P. Ltd. 151 ITR 653 (Mad.) � India Metals & Ferro Alloys Ltd. Vs CIT 193 ITR 344 � CIT Vs Abishek Industries Ltd. 286 ITR 1 (P&H)

The ld. CIT (A) deleted the addition on the grounds that the amounts extended as loan are neither colorable nor illusionary transactions and since the monies have been rightly used for the purpose of the business no disallowance is warranted.

Before us during the arguments, the ld. DR vehemently argued that once the amounts are interest bearing, any type of interest free loans given should be treated as given for non-business purpose. It was argued that the allowance is only if the borrowed funds are fully and wholly utilized for the purposes of the business. In this case, the interest free loans given do not form a part of the business activities of the assessee and no commercial expediency has been proved.

Rebutting arguments of the revenue, the ld. AR argued that the judgment of Abishek Industries Ltd. (supra) is not more good law and the case of Sujani Textiles P. Ltd. (supra) is distinguishable on the facts that the amounts utilized in this case are for non-business purpose. Similarly, the case of Sarabhai Sons P. Ltd. (supra), it was argued that the predominant purpose of expenditure was different from that of the assessee who is in the regular business of power generation through gas turbines and running of multiplex theatres.

The assessee is in the business of real estate, entertainment & power generation and the loans & advances include investments in the property business of the assessee. Hence, it can be said that the advances recoverable included the advances which are business advances on which no interest is disallowable. It was also part of the record that another advances interest has been charged by the assessee as found out by the ld. CIT (A) on going through the Schedule 17 of the balance sheet. Since, the loans & advances have been given on account of commercial expediency and notional interest can be charged on such advances or interest can be disallowed u/s 36(1)(iii). In the case of Taparia Tools Vs JCIT CA No. 6366 of 2003, the Hon’ble Apex Court observed that while examining the allowability of deduction, the Assessing Officer is to consider the genuineness of the business borrowings and that the borrowings was further purpose of business and genuine. Once, the genuineness is proved and interest is paid on the borrowings, no interest can be disallowed on the grounds that the assessee has not correctly used the amounts borrowed. Further, the Hon’ble Apex Court in the case of SA Builders held that in case of interest bearing loans taken and interest free advances given, what is to be looked into is the measure of “commercial expediency” and “for the purpose of the business”. Hence, keeping in view the facts of the case and legal prepositions laid down on this aspect of allowability of interest u/s 36(1)(iii), we hereby decline to interfere with the order of the ld. CIT (A). The appeal of the revenue on this ground is dismissed.

From the above, it is clear that the investments made by the assessee are far less than the own funds available with the assessee. Further, it is found from the record that the assessee has disallowed Rs.6,76,757/- on account of disallowance u/s 14A. Before us it was argued by the ld. AR that the Assessing Officer has not mentioned anything about dissatisfaction regarding the disallowance made by the assessee in accordance with the provisions of Section 14A(2) and the ld. CIT (A) deleted the addition owing to non-adherence in accordance with the provisions of Section 14A(2). The ld. DR on the other hand, supported the order of the Assessing Officer and argued that to invoke Rule 8D(2), no satisfaction is required as it is an automatic provision for determining the disallowance.

Heard the arguments of both the parties and perused the material available on record. We have gone through the reasons given by the ld. CIT (A) in deleting the addition. The addition was deleted following the judgment of the jurisdictional High Court in the case of Maxxop Investment Ltd. & Ors. 247 CTR 162 (Del.). The relevant portion is as under: "Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which 6 DLF Utilities Ltd. does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is pot satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt

We find that section 14A(2) provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with correctness of the claim of the assessee in respect ,of such expenditure in relation to income which does not form part of the total income under this Act and section 14A(3) provides that, "the provisions of sub section (2) shall apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the 9 DLF Utilities Ltd. total income under this Act". While a lot of emphasis is placed by the counsel on wordings of section 14A(2) which refer to the need of Assessing Officer's satisfaction to the effect that the claim made by the assessee is incorrect, it simply overlooks the provisions of section 14A(3) which state that a disallowance u/s 14A(2) can also be made in a case in which assessee claims that no expenditure has been incurred for earning the tax exempt income. Therefore, a plain reading of the statutory provisions of section 14A(2) and (3) shows that when assessee offers a disallowance u/s 14A,the provisions of section 14A(2) read with Rule 8D cannot be invoked unless the Assessing Officer is satisfied about incorrectness of the disallowance so offered, but when assessee does not offer any disallowance u/s 14A on his own, the provisions of section 14A(2) read with Rule 8D can be invoked without there being any need to express satisfaction about the incorrectness of such a claim.

In the instant case, the assessee had made a suo-moto disallowance of Rs.6,76,757/- and the Assessing Officer has not recorded the dissatisfaction about the disallowance suo-moto made by the appellant and has not identified any expenditure which can be considered to be expended in connection with the investment activity. The appellant has own funds of Rs.39,796.21 lacs which are far more than the investments of Rs.729.98 lacs. The plain reading of the statutory provisions of section 14A(2) and 14A(3) shows that when the assessee offered the disallowance u/s 14A, the provisions of Section 14A(2) read with Rule 8D cannot be invoked unless the Assessing Officer is dissatisfied about the correctness of the disallowance so offered.

In view of the above, the suo-moto disallowance of Rs. 6,76,757/- made by the assessee, the further disallowance made by the Assessing Officer under Rule 8D(2)(ii)&(iii) read with Section 14A, is hereby deleted.