DEPUTY COMMISSIONER OF INCOME TAX,, BANGALORE vs. M/S IDEB PROJECTS P LTD, BANGALORE

Per Jason P Boaz, Accountant Member

(i) Bad Debts written off - Rs.1,79,85,785/- (ii) Loss on sale of fixed assets - Rs.45,55,60,536/- (iii) Interest expenditure - Rs.16,98,17,147/- (iv) Excess POCM written back - Rs.134,83,44,874/- (v) Property Management Expenses - Rs.14,39,30,117/- 2.2 Aggrieved by the order of assessment dated 25.03.2013 for Assessment Year 2010-11, the assessee preferred an appeal before the CIT(A)-1, Bangalore who disposed off the same vide the impugned order dated 18.07.2014, allowing the assessee partial relief.

1. The order of the CIT (A) is opposed to law and the facts and circumstances of the case.

2. The Ld.CIT(A), erred in deleting the disallowance u/s 36(1)(iii) holding that no borrowed funds have been advanced to the sister concerns during the year,by following the order of his predecessor in assessee's own case for the A.Y.2009-10 without appreciating that the assessee ,has to prove the commercial expediency of making any loan to its group concerns and also and 1389/Bang/2014 Page 3 of 12 that the relied upon decision in assessee's own case has not been accepted and further appeal is filed.

3. The CIT(A) erred in deleting the disallowance of reversal of POCM of Rs. 134,83,44,874/- without appreciating that there are no documentary evidences on record to show that the project have been terminated mid-way because of which the work had stopped and because of which such reversal had to be made. For these and such other grounds that may be urged at the time of hearing, 4. it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.

5. Ground No. 2 – Disallowance u/s 36(1)(iii) of the Act 5.1 In this ground (supra), Revenue contends that the CIT(A) erred in deleting the disallowance made by the assessing officer (‘AO’) u/s 36(1)(iii) of the Act amounting to Rs.16,98,17,147/-; holding that no borrowed funds have been advanced to sister concerns during the year and in following his own order for Assessment Year 2009- 10. It is contended that the CIT(A) has deleted the said disallowance without appreciating that the assessee has to establish commercial expediency of making loans to its group concerns. The learned DR for Revenue vehemently supported the AO’s order submitting that the AO made the disallowance u/s 36(1)(iii) of the Act on the ground that interest expenditure is relatable to the amounts which have been given to sister concerns as interest bearing funds have been diverted for this purpose.

5.2 The learned AR for the assessee submitted that the issue is covered in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the ITA Nos.1388 and 1389/Bang/2014 Page 4 of 12 assessee’s own case for Assessment Year 2009-10 in dated 28.04.2017; as the funds position remains almost the same in the year under consideration i.e., in Assessment Year 2010-11 as it was in the previous Assessment Year 2009-10.

5.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited (supra). In our considered view, this issue is covered in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the assessee’s own case for Assessment Year 2009-10. In this regard, the co-ordinate bench in its order in dated 28.04.2017 for Assessment Year 2009-10 at paras 12 and 13 thereof has held as under:

“12. Regarding Grounds 5 to 9 in respect of deletion of disallowance interest of Rs. 23,25,95,267/- u/s 36 (1) (iii), learned DR of the supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also submitted that as per the revised Balance Sheet on page 17 of the paper book, the own interest free funds are to the extent of Rs. 151.44 Crores on 31.03.2009 and Rs. 179.63 Crores on 31.03.2008. Then he drawn our attention to page 11 of the assessment order and pointed out that as per the AO., the interest free advances to sister concern a on 31.03.2009 is only Rs.128.89 Crores and on 31.03.2008 only Rs. 136.12 Crores. He submitted that own interest free funds on both these dates i.e. 31.03.2009 and 31.03.2008 is in excess of interest free advances and therefore, no disallowance of interest is justified. He placed reliance on the tribunal order rendered in the case of M/s Kems Auto Components Ltd. vs. DCIT in dated 6.09.2016 (Copy Filed) and pointed out that in that case, the tribunal followed the Judgment of Hon'ble Bombay High Court rendered in the case of CIT vs. Reliance Utilities & Power Ltd., 313 ITR 540.

13. We have considered the rival submissions. In view of the facts noted above as per which, own interest free funds on both these dates i.e. 31.03.2009 and 31.03.2008 is in excess of interest free advances and by respectfully following the tribunal order cited by the learned AR of the assessee having been rendered in the case of M/s Kems Auto Components Ltd. vs. DCIT (Supra) and the Judgment of Hon'ble Bombay High Court rendered in the case of CIT vs. Reliance Utilities & Power Ltd. (Supra), we decline to interfere in the order of CIT (A) on this issue. These grounds are rejected.” and 1389/Bang/2014 Page 5 of 12 5.3.2 In the year under consideration before us, i.e., Assessment Year 2010-11, the facts remain almost similar to those of the earlier Assessment Year 2009-10. A perusal of the financial statements filed by the assessee in the Paper Book shows that the assessee has non-interest bearing funds of approx. Rs.125.12 Crores available with it in the form of Share Capital of Rs.22,55,36,130/-; General Reserves of Rs.8,50,49,181/-; Revaluation Reserve of Rs.5,83,65,852/-; Security Deposit of Rs.10,48,11,289/- and interest free advances from its customers of Rs.77,80,13,431/-; Whereas the amounts advanced to sister concerns is to the extent of about Rs.111.55. Crores. Further, it is seen that the amounts advanced to sister concerns are predominantly opening balances pertaining to earlier years and not advanced during the year under consideration. This being the factual matrix of the case, it is clear that the assessee has sufficient non-interest bearing funds available and therefore, in our view, the decision of the co-ordinate bench of the Tribunal in the assessee’s own case for Assessment Year 2009-10 (supra) is squarely applicable and respectfully following the same in this year i.e., for Assessment Year 2010-11 also, we dismiss this ground No. 2 raised by Revenue.

6 Ground No. 3 – Disallowance of reversal of POCM (Percentage Completion Method)

6.1 In this ground, the assessee contends that the CIT(A) erred in deleting the disallowance of reversal of POCM of Rs.134,83,44,874/-; without appreciating that there are no documentary evidences on record to show that the project had been terminated mid-way because of which the work had stopped; to justify requirement of such reversal. The learned DR for Revenue was heard in the matter and submitted that this issue has to be restored to the file of the AO for the purpose of examining the fact as to whether the assessee in the earlier Assessment Years has offered income under the project completion method (POCM) in its books of account in respect of projects it had undertaken in those years. In the event that the income is already and 1389/Bang/2014 Page 6 of 12 offered in those earlier years, then only the reversal of income already recognized may be allowed in the year under consideration.

6.2 The learned AR for the assessee submitted that the assessee’s contracts were cancelled during the year under consideration and the assessee’s account with the bankers had become NPAs, therefore the Banks seized all the assets. In these circumstances, the assessee could not continue the project which it had started and had recognized income from such project by following the POCM and for these reasons which were beyond the assessee’s control, it reversed the income which was already offered in the earlier Assessment Years as income. In support of the proposition that reversal of income offered on POCM is permissible in law and is to be upheld in the case on hand, the assessee placed reliance on the decision of the Hon’ble jurisdictional High Court of Karnataka in the case of CIT and Another Vs. John Brown Technologies (India) Pvt. Ltd., in dated 23.06.2014.

6.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The issue for consideration before us is covered in favour of the assessee by the decision of the jurisdictional High Court of Karnataka in the case of CIT & Another Vs. John Brown Technologies (India) Pvt. Ltd., in dated 23.06.2014; wherein at para 8 thereof it has been held as under:

“8. In the light of the afore stated facts and rival contentions, it is not in dispute that the assessee has declared revenue to the extent of Rs.1,50,74,698/-. He has shown the net profit of Rs.50,13,244/-. He claims deduction of Rs.25,06,622/- during the assessment year 1999-2000. This claim is in accordance with law, which is not in dispute. However, the project was stopped mid way vvhi.ch resulted in assessee abandoning the project. During the subsequent year, no revenue has been shown in respect of the project. He also did not receive the full revenue, which has been credited in the earlier year. Therefore, the assessee during the subsequent year, reversed in amount of Rs.36,70,287/- from the turnover of the year which and 1389/Bang/2014 Page 7 of 12 represents the amount credited, but not received. When the said amount was reversed and deduction claimed, the assessee did not put forth any claim under Section 80HHB to that extent in the subsequent year on that amount and therefore, it cannot be said that the assessee had double benefit. When once according to percentage completion contract method of accounting adopted by the assessee, he is expected to declare the revenue as well as the profit even in respect of amounts which he has not received, merely because, he claimed deduction under Section 80HHB, he cannot be denied of reversal of entry and deduction of the amount which he did not receive, which was the subject matter of earlier years return by claiming such deduction. The claim of SOHHB deduction is also given up to that extent. There is no double benefit as contended by the Revenue. Therefore, the order passed by the Appellate Authorities are strictly in accordance with law and no case for interference is made out. Hence, the substantial questions of law 1 and 2 are answered in favour of the assessee and against the Revenue.”

6.3.2 In our considered view, the principle enunciated by the Hon’ble Karnataka High Court in the case of CIT & Another Vs. John Brown Technologies (India) P. Ltd., (supra) is applicable to the facts of the case on hand. We, therefore, hold the reversal of POCM is permissible in respect of income which was already offered to tax in the earlier Assessment Years and the rejection/denial thereof by the authorities below is not tenable in the facts and circumstances of the case on hand. Having accepted the method adopted by the assessee; on reversal of income offered by the assessee in earlier years by adopting POCM; we set aside this issue to the file of the AO for the limited purpose of verification of whether or not the reversal of POCM during the year under consideration was in respect of income from projects offered in the earlier Assessment Years. In the event it is found that the assessee has offered the income in the earlier Assessment Years under POCM, then to the extent of income from such project, the assessee is entitled to reverse the income offered earlier under POCM. The AO is accordingly directed. Consequently, ground No. 3 of Revenue’s appeal is partly allowed for statistical purposes as indicated above. and 1389/Bang/2014 Page 8 of 12 7. In the result, Revenue’s appeal for Assessment Year 2010-11 is partly allowed for statistical purposes. for Assessment Year 2011-12 8.1 For Assessment Year 2011-12, the assessee filed its return of income on 30.09.2011 declaring loss of Rs.26,07,30,276/-. The return was processed u/s 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was concluded u/s 143(3) of the Act vide order dated 25.03.2013 wherein the assessee’s income was determined at Rs.36,64,38,948/- in view of certain additions/disallowances to the loss returned by the assessee.

8.2 Aggrieved by the order of assessment dated 25.03.2013 for Assessment Year 2011-12, the assessee preferred an appeal before the CIT(A)-1, Bangalore who disposed off the same vide the impugned order dated 18.07.2014 allowing the assessee partial relief.

2. The CIT(A) erred in deleting the disallowance of Rs.46,21,993/- u/s 8D(2)(ii) in respect of investments in assets yielding tax free income, holding that the investment was made out of interest free funds without appreciating the provisions of Section 14A read with Rule 8D(2)(ii) in its true sense and right spirit and the fact that when the interest expense incurred cannot be directly attributed to any particular income or receipts, provisions of Rule 8D(2)(ii) are automatically applicable and 1389/Bang/2014 Page 9 of 12 3. The CIT(A) erred in not appreciating the fact that provisions of Section 14A read with rule 8D(2)(ii) are applicable even if no exempt income is earned during the year as exempt income could be earned in a later or earlier year out of the expenditure incurred during the year. 4. The Ld.CIT(A), erred in deleting the disallowance u/s 36(1)(iii) holding that no borrowed funds have been advanced to the sister concerns during the year,by following the order of his predecessor in assessee's own case for the A.Y.2009-10 without appreciating that the assessee has to prove the commercial expediency of making any loan to its group concerns and also that the relied upon decision in assessee's own case has not been accepted and further appeal is filed. 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. The appellate craves to ad, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal 10 Ground Nos. 1, 5 and 6 being general in nature, no adjudication is called for thereon.

11 Ground Nos. 2 and 3 – Disallowance u/s 14A r.w.r. 8D(2)(ii)

11.1 In these grounds (supra), Revenue contends that the CIT(A) erred in deleting the disallowance of Rs.46,21,993/- u/s 14A r.w.r 8D(2)(ii) without appreciating the fact that these provisions are applicable even if the assessee has not earned any exempt income. The learned DR prayed that the impugned order of the CIT(A) be reversed and the disallowance made by the AO u/s 14A r.w.r. 8D(2)(ii) be restored.

11.2 Per contra, the learned AR for the assessee contended that since assessee has admittedly not earned any exempt dividend income in the year under consideration, no disallowance can be made u/s 14A r.w.r. 8D. In support of the assessee’s

ITA Nos.1388 and 1389/Bang/2014 Page 10 of 12 contention on this short point, reliance was placed on the following judicial pronouncements: (i) Cheminvest Ltd., Vs. CIT (2015) 61 taxmann.com 118 (Del. H.C.); and (ii)Assetz Infrastructure Pvt. Ltd., in dated 09.02.2018 11.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited (supra). It is not in dispute that in the year under consideration, the assessee has not earned any exempt dividend income. Revenue is, however, of the view that disallowance u/s 14A r.w.r 8D(2)(ii) can be made even if there is no exempt income. Taking into account the factual and legal matrix of the case on hand, we are of the view that where the assessee has not earned any exempt income in the year under consideration, no disallowance can be made u/s 14A r.w.r. 8D. In coming to this view, we drew support from the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd., (supra) wherein at para 23 thereof the Hon’ble Court has held that when no exempt income is earned in the year under consideration; then no disallowance can be made u/s 14A r.w.r. 8D. Similar view was taken by the Hon’ble Madras High Court in the case of CIT Vs. Chettinad Logistics (P) Ltd., (2017) 80 taxmann.com 221 (Madras) after referring to the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd., Vs. CIT (supra). Therefore on this short point raised, respectfully following the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd., Vs. CIT (supra) and of the Hon’ble Madras High Court in the case of Chettinad Logistics (P) Ltd., (supra), we hold that since the assessee has not earned any exempt income in the year under consideration, no disallowance u/s 14A r.w.r. 8D can be made and therefore we dismiss grounds 2 and 3 of Revenue’s appeal in respect of disallowance u/s 14A r.w.r. 8D(2)(ii). and 1389/Bang/2014 Page 11 of 12 12. Ground No. 4 – Disallowance u/s 36(1)(iii) of the Act 12.1 In this ground (supra), Revenue assails the order of the CIT(A) for deleting the disallowance u/s 36(1)(iii) of the Act amounting to Rs.2,05,24,755/-. The learned DR was heard in support of the ground raised.

12.2 Per contra, the learned AR for the assessee supported the finding of the learned CIT(A) in the impugned order submitting that fund availability position in the year under consideration i.e., in the Assessment Year 2011-12 is almost the same as that which prevailed in Assessment Years 2009-10 and 2010-11. It is prayed that in these circumstances as discussed above, this issue is covered in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the assessee’s own case for Assessment Year 2009-10 (supra). The learned DR also fairly conceded that while this issue is covered by the aforesaid decision of this Tribunal in the assessee’s own case for Assessment Year 2009-10, the said decision has not been accepted by the Department and further appeal has been filed before the High Court.

12.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited (supra). Taking into account the facts and circumstances of the case; that the fund availability position is similar to that which prevailed in the earlier Assessment Years 2009-10 and 2010-11; which fact has not been controverted by Revenue; we are of the view that the issue is covered in favour of the assessee by the decision of the co-ordinate bench in the assessee’s own case for Assessment Year 2009-10 in dated 28.04.2017 and also by the finding rendered by us in the assessee’s own case for Assessment Year 2010-11 in order in . Consequently, ground No. 4 of Revenue’s appeal is dismissed.

Pronounced in the open court on this 05th day of November, 2018.