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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJIT SINGH
/ Date of Hearing : 13.11.2019 सुनवाई क� तारीख / / / घोषणा क� तारीख /Date of Pronouncement : 21.11.2019 आदेश / O R D E R
PER RAJESH KUMAR ACCOUNTANT MEMBER
This appeal is filed by the Revenue against the order of the Ld. CIT(A)-13, Mumbai dated 28.02.2018 pertaining to assessment year 2014- 15 in deleting the disallowances made by the AO u/s.36(1)(iii) and u/s.14A of the Act.
The Revenue has raised ten grounds of appeal in the memorandum of appeal however, there are only two effective issues in all the grounds of appeal. The first issue raised by the Revenue is against the order of the ld.CIT(A) deleting the disallowance made by the AO u/s.36(1)(iii) of the Act by relying on the decision of the Hon'ble Mumbai High Court in the case of Reliance Utilities and Power Ltd without appreciating the facts that the facts of the assessee’s case were distinguishable.
The facts in brief are that certain entities were amalgamated with the assessee with the appointed date as on 01.10.2013. The approval was granted by Hon'ble High Court on 31.10.2014. In the meantime, the individual entities had prepared the respective standalone financial statements and filed their return for financial year. Subsequently, the revised financial statement of the appellant after incorporating the transactions of merged entities were prepared, post receipt of approval from High Court. During the course of assessment proceedings, the AO observed that work in progress was Rs.20.35 crores and accordingly, the assessee was asked to explain whether corresponding interest was capitalized or not, which was replied by the assessee vide letter dated 28.12.2016 wherein the assessee submitted that it had not taken any loan for the acquisition of asset and thus, no question arises as to capitalization of interest in WIP. Thereafter the AO asked the assessee to produce the bank statement to verify the utilisation of secured and unsecured loans.
The AO found that there was always negative balance in the bank statement which proved that the assessee has withdrawn the funds from the bank and made addition in WIP. The AO also noted that the assessee has acquired some assets appearing in CWIP in the earlier years, which were not put used till 31.3.2014 and accordingly, came to a conclusion that interest on loans which were utilised to acquire the said assets in the earlier years and not put to use, was required to be capitalize to the closing CWIP and thus held that interest cannot be allowed u/s.36(1)(iii) of the Act and consequently disallowed a sum of Rs.1.77 crores and added the same to the CWIP.
In the appellate proceedings, ld.CIT(A) allowed this issue after taking into consideration of submissions and contentions as raised during the course of appellate proceedings by observing and holding as under:-
“4.2 I have examined the submission made by the appellant and the reasons recorded by the AO. I am in agreement with the submission of the appellant that the AO should have examined the standalone accounts of the merged entities before drawing any adverse inference. If we examine the standalone accounts we find that capital work in progress of MCIE is Rs.11,79,64,135 and own funds of this entity in form of share capital and reserve are Rs.931,51,30,000. Similarly, capital work in progress of MCL is Rs.91,95,418 and own funds of this entity in form of share capital and reserves are Rs.15,42,05,700. Capital work in progress of MHIL is Rs.1,20,36,692 and own funds of this entity in form of share capital and reserves are Rs.154,20,10,000 and capital work in progress of MUSCO is Rs.6,42,23,223 and own funds of this entity in form of share capital and reserves are Rs.357,65,00,000. MUSCO
HAS NO BORROWED FUNDS. Thus, it can be seen that interest-free funds are available with these companies in form of share capital and reserves are much more than the capital work in progress. Looking to this fact and the fact that funds for capital work in progress have been paid out of a common account in which all receipts are also credited, I am of the opinion that no part of interest can be disallowed. Accordingly, disallowance of interest amounting to Rs.1,77,00,000 and addition of the same to the work in progress is directed to be deleted. Reliance in this regard is placed on the decisions of the Hon'ble jurisdictional High Court in CIT Vs. Reliance utilities & Power Ltd (2009) 313 ITR 340 (Bom) and in the case of CIT Vs.HDFC Bank Ltd (IT Appeal No.330 of 2012) and also Hon'ble Supreme Court decision in the case of Munjal Sales Corporation Vs. Another (2008) 298 ITR 298(SC), ITAT Mumbai in the case of Shrenuj & Co. Ltd A.Y. 2006-07 (In and A.Y. 2007-08 (in ITA No.7948/Mum/2011) and ITAT, Delhi in the case of Lakhani INida Ltd., A.Y. 2006-07 (ITA No.2057/Delhi/2011)”
After hearing both the parties and perusing the material available on record, we observe that the assessee has sufficient funds in the form of share capital and reserves. Ld.CIT(A) noted that in the case of MCIE , CWIP was Rs.11,79,64,135 and own funds of this entity in form of share capital and reserves were Rs.931,51,30,000. In MCL, CWIP was Rs.91,95,418 and own funds of this entity in form of share capital and reserves were Rs.15,42,05,700. Similarly, CWIP in MHIL was Rs.1,20,36,692 and own funds of this entity in form of share capital and reserves were Rs.154,20,10,000. We find that clear cut findings have been recorded by the ld.CIT(A) and came to a conclusion that no interest disallowance can be made as the funds used for work in progress has been paid out of own sources . Ld.CIT(A) while deleting the addition relied on the decisions of Hon'ble jurisdictional High Court in CIT Vs. Reliance utilities & Power Ltd (2009) 313 ITR 340 (Bom) and in the case of CIT Vs. HDFC Bank Ltd (IT Appeal No.330 of 2012) and also Hon'ble Supreme Court decision in the case of Munjal Sales Corporation Vs. Another (2008) 298 ITR 298(SC) and other various ITAT decisions. We find that the ld.CIT(A) has passed a speaking and reasonable order while relying on the various decisions as cited supra and accordingly, we are inclined to uphold the same by dismissing the grounds of the revenue relating to deletion of disallowance u/s.36(1)(iii) of the Act.
The second issue raised by the Revenue is against the order of the ld.CIT(A) deleting the disallowance made by the AO u/s.14A of the Act.
Read with Rule 8D of Income Tax Rules, 1962.
The facts in brief are that the AO during the course of assessment noted that the assessee was having investments of Rs.6265.10 lakhs and accordingly called upon the assessee to show cause why the disallowance u/s.14A of the Act should not be made, which was replied by assessee by submitting that it is not incurred any expenses in relation to income earned which does not form of total income. Besides, the assessee submitted that the income earned from the sale of mutual fund, which was offered for tax.
The AO however not finding the reply of assessee as tenable and calculated disallowance at Rs.1168.40 lacs comprising of Rs. 586.43 lacs under Rule 8D(2)(ii) and Rs.581.97 under Rule 8D(2)(iii).
In the appellate proceedings, ld.CIT(A) allowed the appeal of assessee by holding that no disallowance u/s.14A of the Act was called for by observing and holding as under:-
“7.2 I have conidered the submission made by the appellant and the reasons recorded by the AO. I am in agreement with the submission of the appellant that no disallowance u/s.14A was called for in respect of investment of Rs.25,500 in the shares of The Saraswat Co-op. Bank Ltd., investment of Rs.14,56,81,52,195 in the shares of Foreign Companies because income from these shares is not exempt as per the provisions of the Act. Similarly, no disallowance is called for in respect of investment in the shares of Wardha Power Company Ltd. because the investment is for the purpose of obtaining power at subsidised rate and these shares are not entitled for any dividend. In fact, this investment is being written off by the appellant over a period of 25 years. Though I am not in agreement with the claim of the appellant that disallowance should not be made u/s.14A of the IT Act in respect of investment of Rs.79,36,65,729 in the shares of Mahindra Gears & Transmissions Pvt Ltd., because it is a strategic investment but I am in agreement with the claim of the appellant that no disallowance should be made u/s.14A of the IT Act in respect of this investment because no dividend has been earned from the same during the year. Reliance in this regard is placed on the following decisions:-
Special Bench ITAT(Delhi) decision in case of ACIT Vs.Vireet investment (P) Ltd 188 TTJ(Delhi)(SB) CIT Vs.Holcim India (P) Ltd (2014) 272 CTR (Del.) 282 CIT vs. Corrtech Energy P Ltd 223 Taxmann 130(Guj) Hon'ble’Allahabad decision in of 2014 in thecase of CIT Vs.Shivam Motors P Ltd ITAT Chennai decision in the case of ACIT Vs.Bhaskaran in ITA No.1717/Mds/2013 for A.Y. 2009-10. Sarabhai Holdings (P) Ltd – ITA No.2328/AHD/2012
Thus, disallowance u/s.14A of the IT Act can only be made out of investment in debt oriented mutual funds. From the details submitted by the appellant it is seen that this investment has been made by only two entities MCIE and MUSCO, both of which have sufficient interest-free loan funds, as mentioned in the preceding paras, to make investment of Rs.39,08,34,000 amd 7,00,00,000 respectively. In view of these facts, I am in agreement with the contention of the appellant that no disallowance was called for under Rule 8D(ii) because it had sufficient interest-free own funds in form of capital and reserved.
As per the submission of the appellant, disallowance under Rule 8D(2)(iii) in respect of this investment works out to Rs.25,43,361. The AO is directed to verify the computation made by the appellant and restrict the disallowance to this amount, if the computation made by the appellant is found to be correct. This ground of appeal is accordingly, partly allowed.”
9. After hearing both the parties and perusing the material available on record, we observe that the ld.CIT(A) has given a clear cut finding as to how no disallowance is required to be made u/s.14A of the Act in respect of investments in shares of The Saraswat Co-op. Bank Ltd and shares of foreign companies. Ld.CIT(A) has rightly observed that income from these shares is not exempt and accordingly no disallowance is called for.
Similarly, in respect of investment in shares of Wardha Power Company, ld.CIT(A) noted that assessee is not entitled to any dividend and as such has not received any dividend. Considering the facts on record and the order of the ld.CIT(A), we are of the view that no interference is called for in the appellate order passed by ld CIT(A). Accordingly, we uphold the order of the ld.CIT(A) by dismissing the grounds raised by the Revenue.