DCIT, NEW DELHI vs. M/S. UNITECH LTD., NEW DELHI

We will first take up revenue’s appeal wherein the only ground raised is, deletion of addition of Rs. 7,24,88,104/- proposed by the AO on account of interest paid to Tata Realty Infrastructure Limited. The facts in brief are that assessee company had entered into a MOU with Tata Realty Infrastructure Limited (TRIL) on 5.10.2007 for purchase of land, by virtue of which, TRIL was to pay Rs. 2,500 crores to M/s. Unitech Ltd. for a land purchase pertaining to 517 acres, against which sum of Rs. 1700 crores were paid as advance. Later on, the said deal was revised and area of land to be purchased was reduced in acres which were purchased through acquisition of 6 companies; and now the reduced amount payable to Unitech Ltd. was agreed for Rs. 601 crores. The balance amount refundable to TRIL amounted to Rs.1,59,39,46,799/-. In this year assessee has claimed the interest payment in view of settlement with TRIL, amounting to Rs. 7,24,88,104/- which has been debited as expenditure. Ld. AO held that there was no enabling clause in the MOU for the interest payment which warrant a situation, where interest was to be paid to TRIAL. He observed that, this issue was raised by the special auditor in Asstt. Year 2009-10 that the interest paid to TRIL was not paid in view of the MOU. He has also quoted clause 4 of the MOU dated 5.10.2007 and also amended MOU later on, which has been incorporated at page 13 to 14 of the assessment order. Thereafter, Ld. AO proceeded to disallow the claim of expenditure claimed after observing as under:- “6.2. In the assessment order for the A.Y. 2009-10, the AO found that: 1. No clauses enabling interest payment are applicable to situation warranting interest payment to TRIL which is elaborated as under: 2. Clause 4 of MOU dated 5-10-2007 is not applicable as no evidence produced for verification that the due diligence

Following the earlier years, AO held that there is no change in the fact, therefore, interest paid for sums amounting to Rs. 7,24,88,104/- to TRIL as full and final settlement during the relevant year which is to be disallowed u/s 36(1)(iii).

The DRP also following the CIT (Appeal)’s order for the assessment year 2009-10 has directed for deletion of such disallowance.

Before us Ld. Counsel, submitted that AO has not doubted the genuineness of the purpose of the transaction; and MOU specifically provided for charge of interest which is evident from clause 4 of the MOU dated 5.10.2007, wherein there was a clause of interest payment @ 12% per annum on the refund of the deposit of Rs. 1700 crores. Even under the MOU dated 9.1.2007, assessee and TRIL as agreed to a similar clause. The department has neither conducted any inquiry or the investigation whatsoever from TRIL to controvert the claim of the assessee and accordingly such a disallowance of interest is purely based on suspicion and surmises. Further, the assessee has actually paid interest as per the MOU’s recipient of interest, i.e., and TRIAL has offered this income for taxation and has also confirmed that such interest was received during the year. Not only that, TDS was also

On the other hand Ld. CIT(DR) strongly relied upon the order of the AO and submitted that, once, it has been found by special auditor in earlier years that such payment of interest was not in pursuance of MOU, then interest paid cannot be held to be business expenditure.

We have heard the rival submissions and also perused the relevant finding given in the impugned orders as well as material referred to before us. It is an undisputed fact that there was business transaction between the assessee and TRIL for sale of land and MOU was entered on 5.10.2007, wherein TRIL was to pay sum of Rs. 2500 crores to assessee for a land purchase of 517 acres. Against which, sum of Rs. 1700 crores were paid as advance. Later on, this deal was revised and now the area of land to be purchased was reduced which was to be purchased through acquisition of 6 companies and the reduced amount payable by TRIL to the assessee was Rs. 601 crores and the balance amount out of Rs. 1700 crore was to be refunded to TRAIL. This amount was paid by the assessee in various instalments starting from financial year 2008-09 to the relevant assessment year along with the interest. During the year full and final settlement was made and sum of Rs. 7,24,88,104/- was paid as interest. One of the main grounds for making the disallowance by the Assessing Officer was that the MOU did not contain any clause, enabling interest payment applicable to a situation stated by the assessee which warranted any amount of interest payment. Since similar addition was made in the earlier years, therefore, AO has made the addition in this year. Admittedly the Ld. CIT (A) in Asstt. Year 2009-10 and 2010-11 has deleted the said addition which has been followed by the DRP. First of all, it is seen that clause 4 of MOU dated 5.10.2007, reads as under: - “Notwithstanding what is stated herein above the Solicitors for the purchaser shall be entitled to independently examine the title to the said property and carry out accounting and legal due diligence, In the event the due diligence report are not to the satisfaction of the purchaser, then in such event the vendors shall forthwith return the entire deposit of Rs. 1700 Crores (Rupees One

Ld. Counsel has drawn our attention to revised MOU dated 9.10.2007, wherein similar kind of clause 4 was there and it had been contented that due to delay in transaction and non-performance of certain conditions mentioned in the clause, the deal of purchase itself got modified and assessee was required to refund the part of advance. Since assessee could return the advance at ago hence and there was delay in returning such advance, therefore, the advance was returned to TRIL along with the mutually agreed interest rate to be paid by the assessee. Thus, payment of interest in case of non-performance or part performance of a contract was very much flowing from the MoU. Not only that, we find that it is not in dispute that assessee has paid interest to TRIL on which TDS has duly been deducted. It is also not a case of the department that TRIL has not treated the interest as its interest income or has not offered it for tax. No inquiry or investigation has been done by the AO at any stage from TRIL seeking the details of interest payment. If the interest has been paid during the regular course of business and under commercial expediency in terms of a contract and other party has also acknowledged the receipt of such a payment as interest, then revenue cannot judge the transaction so as to disallow payment of interest as a non-business expenditure or can hold that it is not for business purpose. The expenditure has to be allowed if it has been incurred wholly and exclusively in the course of

It has been informed by the Ld. Counsel at the time of hearing that the revenue’s appeal for the assessment years 2009-10 and 2010- 11, this Tribunal has quashed the assessment on the issue of limitation and no decision was given on merits. Since, we have already deleted the disallowance on merits based on material facts on record, therefore our finding is independent of past precedence. The order of the Ld. DRP in deleting the said disallowance is thus upheld. In the result appeal of the revenue is dismissed.

Now we come to the assessee’s appeal, wherein the assessee has raised several grounds. The main issue raised are: - i) treatment of capital gain as business income (ground No. 2 to 2.4 & 3); ii) disallowance of Rs. 23,71,65,830/- by characterising share application money as interest free advance (ground No. 4 to 4.2):

The facts in brief qua the issue of treatment of capital gain as business income are that, assessee has shown as capital gain on sale of shares of wholly owned subsidiaries: - (i) Drass Properties Pvt. Ltd.: Rs.92,80,000 (ii) Aral Properties Ltd.: Rs. 51,96,62,684 (iii) Unitech Service Apartments Ltd.: Rs. 89,01,11,100 (iv) Chintpurni Construction Pvt. Ltd.: Rs. 52,99,50,896 (vi) Greenline Builders Ltd.: Rs. 9,77,00,000 (vii) Sarnath Builders Ltd.: Rs. 6,15,20,000.

Before us, Ld. Counsel submitted that the assessee had shown investment of shares of the subsidiary companies as investment in the balance sheet in the previous financial years which stands accepted

On the other hand, Ld. CIT(DR) strongly relied upon the order of the AO and DRP submitted that assessee was regularly selling and purchasing the shares of its subsidiary companies which were nothing but holding land and assessee being a developer, is frequently engaged in selling shares of subsidiary companies holding land and therefore, it has to be treated as business transaction for earning of business income. Because of the peculiar facts of the case, the ratio and principle of Hon’ble Karnataka High Court as relied upon by the Ld. Counsel will not apply.

We have heard the rival submissions and also the material referred to before us. The sole reason for treating the sale of shares of subsidiary company as business income by the Revenue is that, assessee company is engaged in an organised manner to do business of real estate and have acquired 100% shares in its subsidiary companies who in turn were owning land. Thus, assessee is selling land held by these companies through transfer of shares and what has been received by the assessee company is sale price of land and therefore, there is direct nexus with trading activity of the assessee company. According to AO, these transactions have been carried out in a manner which indicates systematic and organised activity with profit motive, therefore, it becomes a business profit and not capital gain. However, from the perusal of the documents referred to by the

The next issue relates to disallowance to Rs. 23,71,65,830/- by recharacterizing the share application money as interest free advance. The facts in brief are that the assessee has shown sum of Rs. 4,30,24,00,000/- as an outstanding balance of share application money as on 31st March 2011. The details of such outstanding balances were as under: -

SHARE APP. MONEY- - - UNITECH ARDENT PROJ. PVT. LTD. 295,000,000 (295,000,000) 16. SHARE APP. MONEY – 2,800,000,000 2,800,000,000 29,488,219 Unitech Infra Ltd. 17. SHARE APP. MONEY – 9,900,000 9,900,000 1,036,652 VIVIANA INFRA DEVELOPERS PVT. LTD. TOTAL 1,838,926,000 2,463.474,000 4,302,400,000 237,165,830

According to the AO, when the amount of share application money given by the assessee company has crossed reasonable period of time then, it has to be treated as loan. Here in this case share application money has exceeded more than 60 days and at the same time assessee company has huge borrowings by way of loans, debentures, fixed deposits on which substantial interest is being paid, hence the amount of interest paid on such borrowings to the extent of share application money has to be treated as loan. Accordingly, he held that in view of section 36(1)(iii) only amount of interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as deduction. Here, since huge amount has been given as share application money, therefore, interest on amount advanced in the form of share application money to the Indian Entities has to be imputed at an average borrowing rate and same has to disallowed or added. Accordingly, he worked out disallowance of Rs. 23,71,65,830/- The reasoning given by him for making the disallowance was as under:- “The nature of the funds given by the assessee company has following further issues to be seen for disallowance u/s 36(1)(iii) :- 1. Almost entire amounts are getting forward from earlier years and since how long the same are outstanding have not been clarified by the assessee.

On the other hand. Ld. CIT(DR) strongly relied upon the order of the AO and submitted that here in this case the shares have been allotted in subsequent years and amount of share application money given to the related companies after a reasonable time has to be treated as in the nature of loan given. Therefore, proportionate interest could have been charged on these loans because assessee company operating on borrowed funds. Thus, he strongly relied upon directions of the DRP.

We have heard the rival submissions and also perused the relevant finding given in the impugned orders. The assessee has subscribed for share application money in various companies which at

Further, if at all such disallowance is being made on notional and hypothetical basis treating share application money as advance or interest free loan, then AO also needs to take into consideration, whether assessee company has sufficient surplus fund or not; and if surplus fund exceeded the amount of advance, then again, no notional interest or disallowance can be made. Here it is undisputed fact that assessee company has more than Rs. 9281.87 crores of accumulated reserves and during the year itself its reserves have increased by Rs. 1379 crores and amount of share application money advance was only Rs. 245.34 crores. Thus, in such circumstances, presumption is always in the favour of the assessee that these are advances out of surplus funds only and such presumption has been laid down by the Hon’ble Jurisdictional High Court in the case of CIT vs. Max India Ltd. (P&H) High Court, reported in 398 ITR 209. Thus, under the facts and circumstances of this case, we hold that no disallowance can be made. In so far as reliance placed on earlier year orders, Ld. Counsel has brought on record that the revenue’s appeals for the Asstt. Year 2009- 10 and 2010-11 have been dismissed by the Tribunal by quashing the assessments on the ground of limitation. Thus, on merits we hold that no addition is called for and consequently the ground no. 4 to 4.2 is treated as allowed.

The next ground relates to transfer pricing adjustment made by the TPO by recharacterizing the share application money invested in associate enterprises as loan and accordingly, disallowance of notional interest of Rs. 10,19,55,814/- u/s 36(1(iii) has been proposed. The facts in brief are that assessee company has invested sum of Rs. 1,64,15,00,400/- (equivalent to USD 3,63,50,000/-) by

Before us, Ld. Counsel submitted that the transaction does not fall within the definition of international transaction u/s 92B(1) as capital financing is different from capital contribution. The recharacterization of transaction of a share application money as deemed loan transaction is not permissible under the Act and in support he relied upon the following judgements: - (i) Judgment of Hon’ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. vs UOI reported in 368 ITR 1 (ii) Order of Hon’ble ITAT Delhi in the case of First Blue Home Finance Ltd. vs. DCIT in ITA No. 3072/Del/2013 (iii) Order of Hon’ble ITAT Mumbai Aegis Limited vs. ACIT in ITA No. 1213/M/2014. (iv) Bharti Airtel vs ACIT (ITAT Delhi) reported in 161 TTJ 428.

On the other hand, Ld. DR strongly relied upon the order of the AO and submitted that here in this case, the share application money pending with the AE was for consideration time and therefore, it has to be reckoned as loan after a reasonable period of time and in an unrelated or uncontrolled transaction no third party would have given such share application money for a long time, hence such a transaction is not only international transaction but also interest has to be charged for determining the arms length price.

We have heard the rival submissions and also perused the relevant finding given in the impugned orders. First of all, we have to see, whether on a plain reading of section 92B (1) such a transaction falls within the purview of income arising from international transaction which is condition precedent for application of transfer pricing provision under chapter X. The transaction of subscribing of share application money is always on capital account and would become taxable to the extent it impacts the income. It is only income which is to be adjusted to the arm’s length price and not tax on capital receipt. AO has recharacterized the share application money as a loan simply because during the year the shares have been not allotted. Such recharacterization first of all, cannot be made unless there is an intention of the parties or there is any arrangement, understanding or action in concert. If any money has been advanced for acquisition of shares which is a capital asset, same cannot be treated as capital financing unless the parties have intended or agreed to convert the

Even otherwise also, the charge of income has to be first seen in terms of section 4 and 5 and the income which can be brought to tax has been defined under u/s 2(24) of the Act. Share application money for subscription of shares is for acquisition of capital asset and money received by the company is a capital receipt. A capital receipt is not an income under section 2(24) unless it is chargeable to tax as capital gains under Section 45. It is for this reason that under section 2(24)(vi) the Legislature has expressly stated, that income shall include any capital gains chargeable under section 45. Otherwise, a capital receipt is not reckoned as income. This issue of recharacterization of share application money into loan has been considered at length by the Hon’ble Bombay High Court in the case of Vodafone India Services (P) Ltd. vs UOI (Supra), wherein Hon’ble High Court after detail discussion has concluded that provisions of chapter X are not applicable to international transaction of issuance of equity shares. Here in this case it has been brought on record that the shares have been allotted to the assessee company in the subsequent year; and therefore, such shares ostensibly fall into capital account that cannot be treated as capital financing which needs to be benchmarked for the purpose of determining the ALP by imputing any kind of interest. TPO/ AO cannot disregard any apparent transaction and substitute it by recharacterizing the said transaction without any

In ground No. 6 to 7.2 assessee has challenged the disallowance of Rs. 1,32,17,15,364/- as interest imputed by AO on interest free loan/ advance to sister concerns. The facts in brief are that assessee company has given advances during the year to subsidiaries/joint venture/associates for sum of Rs. 233.01 crores. The outstanding balance as on 31.3.2001 aggregated to Rs. 986,67,87,694/-, the details of outstanding balances have been incorporated at page 11 of the assessment order. AO has held that this issue has been examined in detail during the assessment proceedings for the assessment year 2009-10 and 2011-12, wherein it has been held that interest paid by the assessee on this borrowed fund should be disallowed @ 14%. Following the same precedent AO has calculated the disallowance of interest on borrowed capital funds to Rs. 1,32,17,15,364/- by applying the interest rate of 14%.

Before us, Ld. Counsel has submitted that the assessee has huge surplus funds which is evident from the fact that it has accumulated reserves of Rs. 9281.87 crores, therefore there cannot be any presumption that money has been advanced to subsidiaries out of borrowed funds. In any case the money which has been advanced to these companies/concerns were also engaged in real estate business

On the other hand, Ld. DR strongly relied upon the order of the AO.

After considering the rival submissions and relevant finding given in the impugned orders, we find that nowhere the AO has rebutted the contention of the assessee that these advances to sister concerns were for business purpose or for commercial expediency nor he has tried to establish the nexus between the money advanced from the borrowed funds or has asked the assessee to establish that such advance has been given out of surplus or interest through fund. Here in this case the subsidiary companies/concerns to whom money have been advanced were also engaged in real estate business with whom assessee company had entered into joint venture for various projects. Once such a contention of the assessee has not been rebutted or refuted by the AO, then it has to be accepted that such an advance was for the business purpose. Accordingly, we hold that such an advance was for commercial expediency and therefore, no disallowance could have been made in view of the judgment of Hon’ble Supreme Court in the case of SA Builders Ltd. vs CIT(A) 288 ITR 1(SC).

It is further noticed that the assessee company had huge surplus funds which far exceeded the advances; and therefore, without their being a nexus proved by the AO that only borrowed funds were advanced, then presumption can be drawn that such advances have been given out of interest free funds. This view is now

The next issue relates to addition of Rs. 3,92,03,610/- on account of treatment of rental income from properties as business income by the AO. The assessee company has shown rental income of Rs. 13,06,78,701/- under the head ‘income from house property’ and accordingly has claimed standard deduction @ 30% of a sum of Rs. 3,92,03,610/-. The AO on his own hypothesis presumed that assessee might be claiming maintenance expenditure in the profit and loss account indirectly for which it has not given any separate details and therefore, there is no justification to claim standard deduction claimed. However, he has allowed depreciation amounting to Rs. 98,73,901/-. Though he has not specifically held that it is business income but such an action of the AO ostensibly means that he has treated the rental income as business income of the assessee.

Before us Ld. Counsel submitted that, first of all, no depreciation on the rental income has been claimed in the computation of income and right from the beginning the assessee has let out the property only for the purpose of earning rental income as owner of the property. Assessee has not incurred any expenditure in relation to the maintenance of the property, as such maintenance expenses have been borne by the tenants. In support, he has strongly relied upon the judgment of Hon’ble Supreme Court in the case of Chennai Properties vs CIT reported in 373 ITR 673 and Rayala Corporation vs. ACIT.

On the other land Ld. CIT(DR) strongly relied upon the order of the AO.

After hearing both the parties and on perusal of the impugned order it is seen that, nowhere it has been denied that the rental income by the assessee is from leasing of the premises and such rental income has been declared under the head ‘income from house property’. The entire finding of the AO is based on presumption that assessee must have incurred certain expenditure in relation to the earning of rental income without identify as to which expenditure can be said to be related to earning of rental income or there is any systematic activity for exploiting the property for commercial or business purpose. Here the entire rental income has been earned from letting out the properties owned by the assessee, hence when income has been earned from simply letting out the property then it has to be taxed under the head ‘income from house property’. Hon’ble Supreme Court in the case of Raj Dadarkar vs ACIT reported in 394 ITR 592, after considering the earlier judgements of the Hon’ble Supreme Court as cited by the Ld. Counsel has held that wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, if the conditions of provisions of Section 22 of the Act are satisfied. Moreover, it has also been pointed out by the Ld. Counsel that all throughout in the earlier years assessee has been showing rental income under the head ‘income from house property’ which has been accepted by the revenue under the scrutiny proceedings in various years. The details of earlier assessment accepting the rental income as income from house property has been given in the chart enclosed at page 3 of the paper book volume V. Thus, under these facts and circumstances, we hold that rental income cannot be treated as business income and consequently, benefit of standard deduction of 30% has to be allowed.

The next issue relates to disallowance of prior period expenditure of Rs. 5,27,339/- as per the details given at page 4 of paper book volume V, which has been added back to the income of the assessee by the AO. 37. After considering the rival submissions and on perusal of the relevant finding given in the impugned order, we find that AO has nowhere doubted the veracity of the expenses though the same pertained to previous year. As pointed out by the Ld. Counsel the liability has been crystallised during the relevant assessment year and it was never claimed in preceding assessment year. He also drew our attention to the relevant bills given at page 4 of the additional paper book –V to show that most of the bills related to consultancy charges and travelling expenses of the Directors which was submitted and received by the assessee during the year and therefore, based on these bills assessee has claimed expenditure. Accordingly, when bills have been received during the year then we do not find any reason as to why such expenditure is to be disallowed and hence same is deleted.

Lastly, coming to the disallowance of Rs. 12,37,07,018/- made u/s 14A, the facts in brief are that assessee has earned exempt income of Rs. 97,48,142/-. Assessee in the computation of income has suo moto made disallowance u/s 14A at Rs. 1,65,04,335/-, which far exceeded the exempt income. Ld. AO without examining the accounts and nature of expenditure debited and recording his satisfaction has mechanically proceeded to make disallowance u/s 8D for sum of Rs. 12,37,07,018/-. Now in view of the judgment of Hon’ble Jurisdictional High Court in the case of Joint Investment (P) Ltd. vs CIT, reported in 372 ITR 694 and Cheminvest vs. CIT, reported in 378 ITR 33, it has been well settled that disallowance u/s 14A cannot exceed the exempt income, therefore, no disallowance could have been made more than