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Income Tax Appellate Tribunal, ‘B’ BENCH, BENGALURU
Before: SHRI JASON P BOAZ & SHRI PAVAN KUMAR GADALE
O R D E R Per PAVAN KUMAR GADALE, JM : These are appeals filed by the assessee against different orders of the CIT(A)-1, Bengaluru, passed u/s 143(3) r.w.s. 250 of the Income-tax Act,1961 ['the Act' for short] for the assessment years 2012-13 and 2014-15.
Since both the appeals have common issues, they are clubbed together and heard and consolidated order is being passed for the sake of convenience. We consider the grounds & 532/Bang/2018 Page 2 of 12 and facts narrated in assessment year 2012-13. The assessee raised the following grounds of appeal:
In addition to the grounds of appeal, the assessee has filed additional grounds of appeal in respect of addition made by the AO u/s 36(1)(iii) of the Act and prayed for admission of the additional grounds of appeal. The additional grounds of appeal read as under:
The department has no specific objection and accordingly the additional grounds of appeal are admitted.
Brief facts of the case are that the assessee is in the business of real estate development and filed the Return of income for the assessment year 2012-13 The case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued. In compliance Learned AR appeared on various dates and submitted information as called for. Whereas the AO, in the course of assessment found that the assessee has investments to the extent of Rs.20.65 crores in various tax exempted assets and further in page 2 of the assessment order mentioned that these investments are made by the assessee in group companies as well as in mutual funds. The assessee relied on the judicial decisions and submitted that the investments are made in sister concerns and also there is a proximity between investments and dividends. Therefore, the AO is not required to make addition/disallowance u/s 14A. The AO, on perusal of information and bank statement as on 31/3/2011 and 31/3/2012 found that the assessee has increased investments in the financial year 2011-12 and the assessee has received dividend of Rs.9,27,500/-, similarly, the assessee has debited to & 532/Bang/2018 Page 4 of 12 Profit & Loss Account overdraft interest of Rs.1,13,97,703/-. Finally, the AO having considered the provisions and financial statements, made disallowance u/s 14A read with rule 8D(2)(ii) to Rs.91,270/- and rule 8D(2)(iii) based on average investments worked out to Rs.10,08,798/- and total disallowance u/s 14A, is Rs.11,00,074/-.
Similarly, the AO has disallowed interest u/s 36(1)(iii) considering the financial statements whereas the assessee has provided advance to its subsidiary and group concerns and the property advances as on 31/3/2012 to Rs.17,860.06 lakhs. The assessee has filed explanations in respect of advances provided to subsidiary group concerns referred at para.6 of the assessment order and the assessee explained that advances to subsidiary companies’/concern are for development of properties and business purpose and the assessee company is also engaged in joint venture projects, development projects on land owned by the assessee and joint development of projects on land owned by the land owners. Hence, the interest on overdraft has to be allowed.
Whereas the AO is of the opinion that there is no commercial expediency of transaction that the assessee has charged interest on overdraft and the advance amounts were invested in subsidiary group concerns and projects. But the fact remains that the assessee could not substantiate that surplus & 532/Bang/2018 Page 5 of 12 funds available with the assessee for investments in group concerns. The AO relied on judicial decisions and came to unilateral conclusion that the assessee-company has not charged interest to its sister concerns group and whereas the assessee company is paying interest on borrowings and also concluded that advances are in nature of capital advance for purchase of property by the concerns and disallowed interest u/s 36(1)(iii) of Rs.1,13,06,427/- and addition u/s 14A of the Act and determined total income at Rs.27,56,44,380/- and passed order u/s 143(3) dated 13/8/2014.
Aggrieved by the order, the assessee filed an appeal with CIT(A). In the appellate proceedings, the assessee has reiterated the submissions made before the lower authorities. The CIT(A), after considering the grounds, submissions and the provisions of law in respect of addition u/s 14A, has restricted the addition to the extent of Rs.10,08,798/- as against Rs.11,00,074/- made by the AO. Whereas in respect of disallowance of interest u/s 36(1)(iii) the CIT(A) found that the assessee has borrowed funds from banks and there is no commercial expediency and ventured into the nature of projects undertaken by subsidiary companies’/group and observed at page 11 as under: and confirmed the addition u/s 36(1)(iii) and partly allowed the appeal of the assessee.
Aggrieved by the order, the assessee is in appeal before the Tribunal. Before us, Learned AR submitted that the CIT(A) has erred in restricting the disallowance u/s 14A of the Act and confirming the addition u/s 36(1)(iii). In respect of disallowance u/s 14A, Learned AR submitted that the assessee is in appeal on addition under rule 8D(2)(iii) amounting to Rs.10,08,798/- the AO, at the time of making calculation under Rule 8D(2)(iii) has considered total value of investments for calculating the average & 532/Bang/2018 Page 7 of 12 value of amount, whereas only dividend yielding investments are to be considered. Learned AR filed paper book with financial statements and judicial decisions. Learned AR further submitted that this disputed issue is considered in the case of ACIT vs. vs. Vireet Investments (P) Ltd., (82 taxman.com 415) (Del) and prayed that if any disallowance u/s Rule 8D(2)(iii) should be on ratio of above decision. In respect of second ground of appeal on disallowance of interest u/s 36(1)(iii), the learned AR submitted that investments in group concerns are out of surplus funds available to the assessee and no interest bearing funds have been utilized for such advances or investments. Learned AR emphasized that the assessee is in business of real estate and received advances from customers and such advances are being utilized for making advances to subsidiary companies/group concern in real estate and supported with judicial decisions and prayed for allowing the appeal of the assessee.
10. Contra, learned DR vehemently objected to the submissions and submitted that the provisions of section 14A read with rule 8D(2) are mandatory to be applied and the AO was correct in making disallowance. On the ground of disallowance u/s 36(1)(iii) o the Act, the learned DR substantially relied on financial statements and argued that there is increase of investments made in subsidiary & 532/Bang/2018 Page 8 of 12 companies/group concerned, compared to earlier years and the action of the AO be confirmed and further filed chart explaining the usage of funds and also expenditure incurred and prayed for dismissal of assessee’s appeals.
We heard rival submissions and perused material on record. Prima facie, the learned AR submitted that though the provisions of 14A r.w. rule 8D(2)(iii) mandatorily to be applied, the average value of total assets and total investments should be based on dividend yielding investments and only such investment which yielded exempted income should be considered for calculating and relied on Special Bench decision in Vireet Investments (P) Ltd., (supra). We found the submissions of the learned AR are realistic in respect of third calculation of third limb under Rule 8D(2)(iii), where investments which yielded exempted dividend income should only be considered and we find this disputed issue was dealt with by the Special Bench in the case of Vireet Investments (P) Ltd.,(supra) (para.11.16) which read as under: “11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.”
Therefore, we considering the Ratio decidendi are of the substantive opinion that for the purpose of calculation of Third & 532/Bang/2018 Page 9 of 12 limb of Rule 8D(2)(iii), investments which yielded exempted income has to be considered. Accordingly, we remit his issue to the file of the AO to recalculate disallowance under sec.14A r.w. rule 8D(2)(iii) with investments which yield dividend income. Accordingly, the first ground of appeal of the assessee is allowed for statistical purposes.
In respect of second ground of appeal, the learned AR’s submissions supported by financial statements that the assessee company is having surplus funds out of IPO proceeds and advances are received from Real estate customers and the same amounts were utilized for providing advances to sister concerns/companies. But though the assessee obtained loan/overdraft, the same was utilized for purpose of regular business activity or working capital expenses. But no part of loans or overdraft funds were utilized for making investments. Learned AR relied on judicial decisions in this regard. Learned AR emphasized that similar issue was dealt in assessee’s own case for assessment year 2009-10 in dated 21/3/2014.
13. Whereas the learned DR submitted that the Hon’ble Tribunal in the assessee’s own case has only referred to the observations in respect of Bank overdraft facility. In the present case, the assessee, neither before the AO nor before the first appellate authority has been able to substantiate that interest- & 532/Bang/2018 Page 10 of 12 free funds have been utilized for investments. The learned DR further mentioned that the assessee has not proved whether investments in subsidiary companies/group concern are for participating in Real Estate business activities or yielding dividend income.
When a query was raised to the learned AR from the Bench whether the assessee has substantiated before lower authorities with evidences that surplus funds have been utilized for the purpose of investments in group concern and the activity of group concern is on commercial expediency. But the explanations envisaged by the learned AR that this exercise/submission was not made before the lower authorities in respect of linking the advances from customers used for the purpose of making investments. We found, though there is a decision of the Tribunal with observation on Bank overdraft facility, since the department has raised the disputed issues in respect of linking advances received from customers used for the purpose of making investment/deposits which could not be substantiated by the assessee and the learned AR conceded before the Tribunal, we, therefore, considering the material filed on record and the judicial decisions, are of the substantive opinion that the matter needs to be further examined in respect of usage of surplus funds for investment in subsidiary companies or sister concerns on commercial expediency or any profit & 532/Bang/2018 Page 11 of 12 motive in sharing the project. We found neither the Revenue nor the assessee was able to substantiate with any proper evidences or in the present hearing and further that the assessee should substantiate with proofs and financial statement that only non-interest-bearing funds have been utilized for the purpose of investment to claim expenditure. Accordingly, in the interests of substantial justice, we remit this disputed issue to the file of the AO to verify and examine in respect of usage of funds and the operational activities of subsidiary companies in group concern in respect of investments, and nevertheless to say that the assessee shall be provided adequate opportunity of hearing and shall co-operate in submitting information as expeditiously as possible and we order accordingly.
In the result, the assessee’s grounds of appeal are allowed for statistical purposes.
Order pronounced in the open court on 05th February, 2019.