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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI N.K. PRADHAN
Date of Hearing – 09.07.2019 Date of Order –
O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid appeals, three by the assessee and one by the Revenue, arise out of separate orders passed by the learned
3 Mumbai SEZ Limited Commissioner of Income Tax (Appeals), Mumbai. For the assessment years 2010–12 and 2012–13 are by the assessee only, whereas, there are cross appeals for the assessment year 2011–12.
./2014 Assessee’s Appeal – A.Y. 2010–11
In ground no.1, the assessee has challenged the decision of learned Commissioner (Appeals) in holding that interest earned on inter corporate deposits (ICDs) is to be treated as income from other sources.
Brief facts are, the assessee company is engaged in the business of setting–up and development of infrastructure facilities in India. For the assessment year under consideration the assessee filed its return of income on 25th September 2010, declaring income of ` 16,14,158. In the course of assessment proceedings, the Assessing Officer, after calling for various details and examining them, observed that the assessee was in the process of developing Special Economic Zone (SEZ), however, even in the impugned assessment year the whole project is at the stage of work–in–progress. Thus, he was of the view that assessee’s business operation has not yet commenced. Further, he observed, assessee’s claim of commencement of business was not accepted while completing the assessments in assessment years 2008–09 and 2009–10. Further, he observed, except interest income
4 Mumbai SEZ Limited and profit on redemption of current investment, no other income has been credited to the Profit & Loss account. Thus, ultimately, he concluded that the interest income credited to the Profit & Loss account cannot be treated as business income, but has to be assessed as income from other sources. Consequently, he disallowed various expenditures claimed by the assessee. Being aggrieved with the aforesaid decision of the Assessing Officer, the assessee preferred appeal before the first appellate authority.
After considering the submissions of the assessee in the context of facts and material on record, learned Commissioner (Appeals) having found that while deciding assessee’s appeal in assessment year 2003–04, the Tribunal has held that assessee’s business has commenced, accepted assessee’s claim that its business has commenced. Further, he observed, since assessee’s business has commenced, the expenditure debited to the Profit & Loss account towards development of SEZ and other related expenditures have to allowed. As regards the interest be earned by the assessee, whether is to be assessed as business income or income from other sources, learned Commissioner (Appeals) found that during the year under consideration, the assessee had earned interest on fixed deposit with bank amounting to ` 53,61,204, and interest on ICDs at ` 1,32,71,507. After considering the submissions of the assessee,
5 Mumbai SEZ Limited learned Commissioner (Appeals), though, allowed assessee’s claim that interest on fixed deposit with bank is to be treated as business income, however, he did not accept such claim of the assessee with regard to interest on ICDs. The reason for doing so as stated by the learned Commissioner (Appeals) is, since the assessee is not engaged in the business of financing and money lending, the interest on ICDs with two sister concerns at concessional rate of interest cannot be regarded as business income.
Shri Madhur Agarwal, the learned Authorised Representative for the assessee submitted, surplus funds which were not immediately required by the assessee for utilization in its business project was invested in short term deposits in bank and ICDs since the assessee did not want to keep the funds idle. As a prudent businessman assessee wanted to earn some income by investing the surplus funds. He submitted, since such funds are business funds and for the purpose of earning some income during the period when it was not required to be invested in the business, it has to be treated as business income. The learned Authorised Representative submitted, since the nature character of deposits both in the fixed deposits and ICDs are similar, there is no reason to treat the interest earned on ICDs as income from other sources.
6 Mumbai SEZ Limited 6. Shri D.G. Pansari, the learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).
We have considered rival submissions and perused the material on record. Though, the Assessing Officer has treated the interest income received by the assessee as income from other sources on the reasoning that assessee’s business has not yet commenced, however, learned Commissioner (Appeals) has given a factual finding that assessee’s business has commenced. Further, learned Commissioner (Appeals) has also accepted assessee’s claim of interest earned on fixed deposits with bank as business income. The only reason on which he has rejected assessee’s claim of interest earned on ICDs as business income is, the assessee is not in money lending business. In our view, the aforesaid reasoning of the learned Commissioner (Appeals) defies logic. There is no dispute that the assessee has parked surplus business funds, which is not immediately required for utilization in business, in short term deposits with bank or IDCs. The entire purpose of such deposits was not to keep the funds idle and earn some income. If the aforesaid reasoning of the assessee is valid for the interest earned on fixed deposits, the same cannot be invalid or unacceptable in case of interest earned on ICDs. When it is accepted that the assessee has taken a prudent business decision to earn some income by utilizing the idle business funds, no differentiation can be 7 Mumbai SEZ Limited made between the investments made in banks and ICDs. In view of the aforesaid, we hold that the interest income earned on ICDs should be treated as income from business. This ground is allowed.
Ground no.2, is not pressed, hence, dismissed.
In ground no.3, the assessee has challenged the decision of learned Commissioner (Appeals) in disallowing expenditure incurred for earning interest and other income.
As discussed earlier, while completing the assessment the Assessing Officer did not allow various expenditures claimed by the assessee on the ground that assessee’s business has not commenced. However, learned Commissioner (Appeals) allowed certain expenditure debited to the Profit & Loss account towards development of SEZ, though, he did not allow assessee’s claim of expenditure incurred towards earning interest income. While doing so, he observed, for claiming deduction under section 57 of the Act the assessee has to prove that the expenditure was wholly and exclusively incurred for earning the income.
The learned Authorised Representative submitted, learned Commissioner (Appeals) has completely misconstrued the submissions of the assessee as the deduction claimed under section 57 of the Act is by way of an alternative submission. He submitted, the main
8 Mumbai SEZ Limited contention of the assessee was, the interest expenditure incurred towards borrowal of funds being wholly and exclusively for the purpose of business, it should be allowed as expenditure. He submitted, learned Commissioner (Appeals) has failed to adjudicate the aforesaid main claim of the assessee. The learned Authorised Representative submitted, since learned Commissioner (Appeals) has accepted that assessee’s business has commenced, the expenditure claimed should have been allowed as business expenditure. He submitted, in assessment year 2013–14, learned Commissioner (Appeals) has allowed similar expenditure claimed by the assessee. In this context, he furnished a copy of the order passed by the learned Commissioner (Appeals) for the assessment year 2013–14. Thus, he submitted, the assessee’s claim should be allowed.
The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).
We have considered rival submissions and perused the material on record. Undisputedly, learned Commissioner (Appeals) has accepted assessee’s claim that its business has already commenced. The only reason on which the learned Commissioner (Appeals) has disallowed interest expenditure on borrowed fund is, it is not directly related to the interest income earned on ICDs. It is a fact on record
9 Mumbai SEZ Limited that the assessee had borrowed the funds for development of the SEZ project. Therefore, the interest on such borrowed funds is allowable as business expenditure. It is also relevant to observe, learned Commissioner (Appeals) has accepted that the assessee had mixed funds. On a careful perusal of the order of learned Commissioner (Appeals), it is also noticed that he has completely overlooked assessee’s main claim that the interest expenditure should be allowed as business expenditure. When there is no dispute that the borrowed funds were utilized for the purpose of business, the interest expenditure on such borrowed funds has to be allowed as business expenditure. In any case of the matter, since while deciding ground no.1, we have held that the interest earned on ICDs is to be treated as business income of the assessee, logically, the interest expenditure has to be allowed. Accordingly, the ground raised is allowed.
Ground no.4, is consequential to ground no.3 in the sense that in this ground, the assessee has made an alternative claim of deduction under section 57(iii) of the Act in respect of interest expenditure of ` 1,27,22,576. As discussed earlier, income earned from ICDs was held by the Departmental Authorities as income from other source as against business income claimed by the assessee. The alternative claim made by the assessee for deduction of interest expenditure under section 57(iii) of the Act in respect of such income was rejected
10 Mumbai SEZ Limited on the ground that such interest expenditure has no nexus with the interest earned on ICDs. While deciding grounds no.1 and 3, of assessee’s appeal, we have held that interest earned on ICDs are to be treated as income from business. Consequently, the interest expenditure claimed by the assessee has to be allowed. Therefore, the alternative claim of deduction under section 57(iii) of the Act becomes redundant. Suffice it to say, assessee’s claim of deduction under section 57(iii) of the Act in respect of interest expenditure has been allowed by learned Commissioner (Appeals) in assessment years 2009–10 and 2010–11 and the issue has attained finality as neither the assessee nor the Revenue has contested the order of learned Commissioner (Appeals). Therefore, even otherwise also, assessee’s claim of deduction under section 57(iii) of the Act is allowable. The ground is disposed of accordingly.
In ground no.5 the assessee has challenged disallowance of ` 46,50,272, under section 14A r/w rule 8D.
It is the contention of the learned Authorised Representative before us that during the year under consideration, the assessee had not earned any exempt income, therefore, question of making any disallowance under section 14A r/w rule 8D does not arise.
11 Mumbai SEZ Limited 17. Having considered rival submissions and perused material on record, the factual position which emerges is, in the year under consideration the assessee has not earned any exempt. That being the case, as per settled principle of law, no disallowance under section 14A r/w rule 8D can be made. In this context, we may refer to the decision of the Hon'ble Jurisdictional High Court in PCIT v/s Rivian International Pvt. Ltd., of 2015, judgment dated 21st November 2017. In view of the aforesaid, we delete the disallowance made by the Assessing Officer and sustained by learned Commissioner (Appeals). This ground is allowed.
Grounds no.6, 7 and 8, being general in nature, no separate adjudication is required, hence, dismissed.
In addition to the aforesaid grounds, the assessee, vide letter dated 4th July 2019, has raised the following additional grounds:–
“The CIT(A) erred in confirming the view of the Assessing Officer in disallowing differential interest of ` 44,23,836, without appreciating the facts of the case placed before him during the appellant proceedings.”
At the outset, we must observe that the issue raised in the additional ground arises out of the order of the Departmental Authorities. Therefore, the additional ground is admitted for adjudication.
12 Mumbai SEZ Limited 21. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that while the assessee has borrowed funds by paying interest @ 8%, it has made investment by way of ICDs in a sister concern viz. Dharti Investments and Holdings Ltd. @ 6%. Relying upon the assessment order passed for the assessment year 2007–08, wherein, it was held that advance given to the sister concern is not out of commercial expediency, hence, differential rate of interest amounting to 2% cannot be capitalized but has to be reduced from the work–in–progress, the Assessing Officer followed the same and did not capitalized the differential amount of interest of 2% worked out at ` 44,23,836. The aforesaid decision of the Assessing Officer was also upheld by the learned Commissioner (Appeals).
The learned Authorised Representative submitted, the question of capitalization of interest would arise only in case assessee’s business would not have commenced. He submitted, when it has been accepted that assessee’s business has commenced, the expenditure debited to the Profit & Loss account has to be allowed. He submitted, the interest expenditure debited to the Profit & Loss account being the same as the cost of borrowing of 8%, it should be allowed.
The learned Departmental Representative submitted, since the assessee has borrowed @ 8% and advanced loan to the sister concern
13 Mumbai SEZ Limited @ 6%, disallowance has to be made by applying the provisions of section 40A(2)(b) of the Act.
In rejoinder, the learned Authorised Representative submitted, the assessment order does not reveal application of section 40A(2)(b).
We have considered rival submissions and perused the material on record. Undisputedly, the Assessing Officer had observed that assessee’s business has not commenced. however, learned Commissioner (Appeals) has held that assessee’s business has commenced from the assessment year 2003–04. Therefore, when assessee’s business has already commenced, there is no question of allowing or disallowing capitalization of interest expenditure. Undisputedly, the assessee has debited the interest expenditure to the Profit & Loss account. Therefore, such expenditure has to be set–off against the business income. As regards the submission of the learned Departmental Representative that the Assessing Officer has applied section 40A(2)(b) of the Act, we do not find such submission to be factually correct. Neither the Assessing Officer nor learned Commissioner (Appeals) has made any reference to the provisions of section 40A(2)(b) of the Act. On the contrary, the Departmental Authorities have simply disallowed capitalization of the interest expenditure. In view of the aforesaid, assessee’s claim is allowed. Additional ground is allowed.
14 Mumbai SEZ Limited
In the result, assessee’s appeal is partly allowed. ./2017 Revenue’s Appeal – A.Y. 2011–12
The Revenue has filed this appeal being aggrieved with the decision of learned Commissioner (Appeals) in holding that assessee’s business has commenced.
It is relevant to observe, while deciding assessee’s appeal in assessment year 2003–04, the Tribunal has held that assessee’s business has already commenced. Following the aforesaid decision of the Tribunal, learned Commissioner (Appeals) while deciding the assessee’s appeal for the assessment year 2010–11 and 2011–12 has held that assessee’s business has commenced since the assessment year 2003–04. In fact, the aforesaid decision of learned Commissioner (Appeals) has been accepted by the Revenue in assessment year 2010–11. In view of the aforesaid, we do not find any infirmity in the order of the learned Commissioner (Appeals). Ground is dismissed.
In the result, Revenue’s appeal is dismissed. ./2017 Assessee’s Appeal – A.Y. 2011–12
Ground no.1, is identical to ground no.1 of ITA no.4939/Mum./ 2014, decided in the earlier part of the order. Following our decision therein, we allow assessee’s claim. This ground is allowed.
15 Mumbai SEZ Limited
Ground no.2, is not pressed, hence, dismissed.
Grounds no.3 and 4, are similar to grounds no.3 and 4 raised in ITA no.4939/Mum./2014. Our decision thereon will apply mutatis mutandis to this ground as well.
The issue raised in ground no.5, is identical to the issue raised in the additional ground of ITA no.4939/Mum./2014. Following our decision there, we allow this ground.
Grounds no.6, 7 and 8, being general in nature, do not require adjudication, hence, dismissed.
In the result, assessee’s appeal is partly allowed. ./2017 Assessee’s Appeal – A.Y. 2012–123
Grounds no.1, 3, 4 and 5 are identical to grounds no.1, 3, 4 and 5 of ITA no.4939/Mum./ 2014. Our decision therein would apply mutatis mutandis to these grounds also. Accordingly, these grounds are disposed off in terms of our decision in grounds no.1, 3, 4 and 5 of ITA no.4939/Mum./2014.
Grounds no.6, 7 and 8 being general in nature, hence, do not require separate adjudication.
16 Mumbai SEZ Limited
In the result, assessee’s appeal is partly allowed.
To sum up, assessee’s appeals are partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 26.07.2019