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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANDEEP GOSAIN
The captioned appeal filed by the Revenue pertaining to Assessment Year 2009-10 is directed against an order passed by CIT(A)-12, Mumbai dated 03.01.2013, which in turn arises out of an order passed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 28.12.2011.
M/s. Kohinoor Planet Construction Pvt. Ltd.
In this appeal, the Revenue has raised the following Grounds of appeal:-
“1. On the facts and circumstances of case and in law, the Ld. CIT(A) erred in deleting the addition u/s 69C by considering fresh evidences but without providing reasonable opportunity to the A.O under Rule 46A.
2. On the facts and circumstances of case and in law, the Ld. CIT(A) erred in directing the AO to make disallowance u/s 14A r.w. Rule 8D @ 0.5% of the average investment only ignoring the fact that the assessee could not file or explain satisfactorily how the interest expense of Rs.4.49 crores out of total interest expenses of Rs. 21.11 crores was not incurred towards earning exempt dividend income of Rs.29.40 crores.
3. The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside to the file of the AO or confirm the order of the AO.”
In order to appreciate the controversy in the Ground of appeal no. 1, the relevant facts are as follows. The respondent-assessee is engaged in the business of construction building – both commercial as well as residential. During the year under consideration, its construction activity was in progress at Kurla known as “Kohinoor City”. In the course of assessment proceedings, the Assessing Officer noted that as per the terms and conditions of the loan raised from Cosmos Co-operative Bank Ltd., assessee was required to submit certain documents to the bank including “CA Certificate of expenses incurred for project”. The Assessing Officer, inter-alia, required the assessee to produce copies of such Certificate submitted to the bank. Accordingly, a Certificate of the CA, Shri S.V. Mauskar was furnished, which was examined by the Assessing Officer. As per the Assessing Officer, the expenses stated to have been incurred on the project in terms of the CA Certificate as on 31.03.2009 was Rs.10113.04 lacs whereas the expenses debited in the Profit
M/s. Kohinoor Planet Construction Pvt. Ltd.
& Loss Account was Rs.7966.47 lacs thereby revealing difference of Rs.2146.67 lacs. On being asked to show cause the difference, assessee furnished reply which, inter-alia, included a head-wise reconciliation between the expenditure as per the CA’s Certificate and the Audited accounts. The Assessing Officer summoned the CA, Shri S.V. Mauskar and recorded his statement on 08.12.2011, which is also a part of the assessment order as an Annexure. The main contention of the assessee all along was that the main reason for difference between the amount stated in the CA’s Certificate dated 08.04.2009 and the amount mentioned in the Audited accounts, which was finalised on 04.09.2009, was on account of wrong apportionment of certain expenses. It was explained that the expenses debited in the accounts have been incurred and duly claimed, but until the final auditing of the accounts the actual allocation of expenses to the correct projects could not be done and what was done at the time of issuance of Certificate was on the basis of estimates as per the book entries. In sum and substance, the claim of the assessee was that the expenses as debited in the Audited accounts was correct and that the expenses stated in the Certificate issued by the CA on 08.04.2009 showed a difference merely because the subsequent scrutiny of entries in the books of account led to correct apportionment/allocation of expenses under different projects and heads. The Assessing Officer, however, was not satisfied with the explanation furnished by the assessee. As per the Assessing Officer, considering the Certificate issued by the CA, the only logical inference was that lower amount of expenses was debited in the Audited accounts, and that such difference of Rs.2146.67 lacs reflected expense which was incurred but not accounted for in the account books. As per the Assessing Officer, assessee did not have any satisfactory explanation regarding the incurrence
M/s. Kohinoor Planet Construction Pvt. Ltd. of such unaccounted expenses on construction of building and, therefore, an amount of Rs.21,46,67,000/- was deemed to be the income of the assessee u/s 69C of the Act.
Before the CIT(A), assessee made varied submissions on facts and in law. On the point of law, assessee challenged the invoking of Sec. 69C of the Act inasmuch, as according to the assessee, it had fully explained the source of expenditure entered in its books of account. Even with regard to the difference between the expenditure stated in the CA’s Certificate and the account books, assessee furnished the complete explanation, which has been reproduced by CIT(A) in his order. The CIT(A) also records that copy of the submissions were made available to the Addl. CIT, Range-6(2), Mumbai with a request to send a report. It is recorded by the CIT(A) that the Addl. CIT, Range-6(2), Mumbai, who was the Assessing Officer in the case, filed submissions dated 30.10.2012, which has been noted by him in his order. The CIT(A) also reproduced the response of the assessee and has thereafter proceeded to adjudicate the issue. The CIT(A) has passed a lengthy order taking into consideration each and every objection brought out by the Assessing Officer in the assessment order as well as in the remand submissions dated 30.10.2012, his conclusion is that there was no justification in the present case for invoking Sec. 69C of the Act and secondly, in any case, assessee had enough funds to justify the expenditure. The operative part of his order is contained in para 3.22, which is reproduced hereinbelow :-
“3.22 Therefore keeping the totality of circumstances into question, I find that since the basic condition for making addition u/s 69C of the Act have not been fulfilled by the AO, the addition made u/s. 69C is untenable. The M/s. Kohinoor Planet Construction Pvt. Ltd. source of the expenditure regarding the residential project have been explained by the appellant and are available in the same certificate from where the AO has picked up the figures of expenditure to make the addition. This itself establishes that the certificate of CA, Shri S.V. Mauskar cannot be doubted and has to be read and considered in full. And when this is done it is seen that section 69C of the Income-tax Act cannot be applicable in the case of the appellant as the expenditure incurred stands fully substantiated by receipts. It has been held in the case of Nishant Housing Development (Pvt.) Ltd. v/s CIT (1995) (52 ITR 103) (Pat-Trib) that where construction was the main business of the assessee and the assessee had recorded lesser cost in books of accounts, the excess amount could not be treated as assessee’s income under section 69C because the ultimate result would be Nil; where the same amount would be debited in P&L Account. Besides this, the accounts of the appellant clearly indicate the amount of funds available in totality with the appellant and the amount spent by the appellant. This has not been questioned by the assessing officer. In fact, the assessment order is totally silent on this issue. The fund movement statement of the appellant clearly explains the fact that section 69C cannot apply in the case of the appellant. The AO was given an opportunity to consider all material on record and establish that section 69C is applicable but this has not been done. It has not been established that the expenditure was from undisclosed source of income. Instead the AO has asked the appellate authority to look into the issue. This does not discharge the burden of the AO. Therefore, as the AO has not rejected the books of accounts of the appellant, doubted or questioned the availability of total funds with the appellant, examined the totality of situation in the case of the appellant, the expenditure incurred cannot be treated as unexplained expenditure/investment on a piecemeal basis with an inference that such investment has been financed from undisclosed income and accordingly no addition regarding under section 69C is warranted in the case. The addition made u/s 69C of Rs.21,46,67,000/- is, therefore, deleted and the 1st ground of appeal allowed.”
Against the aforesaid decision, Revenue is in appeal before us. Pertinently, a perusal of the aforestated Grounds of appeal reveal that the grievance of the Revenue is on a very limited issue. The case sought to be M/s. Kohinoor Planet Construction Pvt. Ltd.
made out by the Revenue is that the CIT(A) erred in deleting the addition by considering fresh evidence, but without providing reasonable opportunity to the Assessing Officer as per Rule 46A of the Income Tax Rules, 1962. Even at the time of hearing, the ld. DR has urged indulgence of the Bench on the grievance manifested in the aforestated Grounds of appeal. Pertinently, at the time of hearing, it was put across to the ld. DR to elucidate the evidences which, according to the perception of the Revenue, were in the nature of additional evidence for which appropriate opportunity was not allowed to the Assessing Officer. In fact, per contra, the learned representative for the assessee made the following points to say that there was no departure made by the CIT(A) in deciding the case by considering fresh evidence which was not in the knowledge of the Assessing Officer. The said points read as under:-
“(1) Enough opportunities have been given to the Assessing Officer, both under Rule 46A as well as in the course of entire appellate proceedings. The instances mentioned in the appellate order are as under:
(i) On page 1 of the CIT(A)'s order, it is clearly reflected that the previous Addl. CIT as well as the present Addl. CIT both were present from time to time.
(ii) Kindly refer para 2.2 of the CIT(A)'s order, where the Assessing Officer was requested by the CIT(A) to remain present on each and every hearing. The CIT(A) has also requested to submit report / reply to the submissions received from the Appellant.
(iii) Again in para 2.3 it was clearly mentioned that previous Assessing Officer who is in the rank of Addl. CIT along with the present Assessing Officer who is also in the rank of Addl CIT were present and attended from time to time and were heard by the CIT(A).
M/s. Kohinoor Planet Construction Pvt. Ltd.
(iv) In para 3.8. it was mentioned by the CIT(A) that copies of the Appellant's submissions were made available to Addl CIT Range 6(2), Mumbai. Then the Addl. CIT Range 6(2), Mumbai filed his submissions vide letter dated 30/10/2012 and the entire submissions which were in response to the Appellant submission were considered by the CIT(A) in his appellate order.
(v) In para 4.4, submissions of the appellant were forwarded to the Assessing Officer for his comments. The Assessing Officer has given reply vide letter dated 30/10/2012. The Assessing Officer's reply was considered by the CIT(A) in his appellate order.
(2) Thus, from the above facts it is very clear that CIT(A) has given sufficient opportunity to the Assessing Officer and Assessing Officer's reply was also been considered. Interestingly, at all the hearings, the previous Assessing Officer as well as the present Assessing Officer both were present. Thus, there is no violation of Rule 46A.”
In this context, we have also perused para 2.2 and 2.3 (which we reproduce hereinafter) of the order of CIT(A), which are quite eloquent and completely bring out the fact that whatever submissions and material that were considered by the CIT(A) in order to delete the addition was very much in the knowledge and presence of the Assessing Officer.
“2.2 By letter dated 23/4/2012 the assessing officer i.e. the Additional Commissioner of Income Tax, Range-6(2), Mumbai had submitted that the AO would wish to represent the revenue at the time of hearing of the appeal filed in the present case. Taking cognizance of this, the AO was apprised of each & every date of hearing and requested to make it convenient to attend the same. The submissions as received from the appellant were also made available to the assessing officer. The AO was also requested to submit report/reply to the submission as received from the appellant so that the same could be considered along with the submission made by the appellant at the time of adjudication of the grounds of appeal filed by the appellant-company.
M/s. Kohinoor Planet Construction Pvt. Ltd.
2.3 Smt. Vandana Sagar, the then Addl. CIT, Range-6(2), Mumbai, and Shri Ranjan Kumar, the present Addl. CIT, Range-6(2), Mumbai, attended on behalf of the Revenue and they were heard.”
In our considered opinion, the grievance being articulated by the Revenue by way of the aforesaid Ground of appeal is completely misconceived and is contrary to the findings of the CIT(A) in the impugned order, which we have briefly narrated in the earlier paras. Therefore, we are unable to accept the Ground raised by the Revenue, which is hereby dismissed.
Insofar as Ground of appeal no. 2 is concerned, the same relates to disallowance u/s 14A of the Act made by the Assessing Officer of Rs.4,49,20,407/-, which comprised of Rs.3,69,75,771/- relating to interest expenditure and Rs.79,44,636/- relating to administrative overheads. In this context, the relevant facts are that the assessee had claimed exempt income of Rs.29,40,43,045/- in terms of Sec. 10(34) of the Act being dividend income. Assessee had not made any disallowance u/s 14A of the Act on the ground that it had not incurred any expenditure in order to earn the said exempt dividend income. It was pointed out that the investment was made in Gorakhpur Expressway Ltd., which had resulted in the exempt dividend income of Rs.29.40 crores, and that the same was invested in the earlier financial year of 2006-07. On being show caused, assessee furnished a reply dated 13.09.2011 whereby disallowance u/s 14A of the Act was worked out at Rs.70,77,150/-, which was subsequently scaled down to Rs.12,80,794/-. The Assessing Officer worked out the disallowance in terms of Rule 8D of the Income Tax Rules, 1962 and accordingly a sum of Rs.3,69,75,771/- was M/s. Kohinoor Planet Construction Pvt. Ltd.
computed as per Rule 8D(2)(ii) of the Rules and Rs.79,44,636/- was worked out as per Rule 8D(2)(iii) of the Rules totalling to Rs.4,49,20,407/-.
The CIT(A) deleted the disallowance made by Assessing Officer out of interest expenditure and so far as the disallowance made under Rule 8D(2)(iii) of the Rules out of administrative overhead is concerned, he has retained the same. The Revenue is in appeal challenging the decision of the CIT(A) in deleting the interest expenditure.
It is noticed that the CIT(A) found that the investment which has generated the exempt income was in equity shares of Gorakhpur Expressway Ltd. of Rs. 25,00,00,000/-, which was made in the earlier year. The CIT(A) notes that the investment has been made by the assessee out of its own funds and that so far as the borrowed funds were concerned, they have been utilised in the business of the assessee. Thus, the CIT(A) relied on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd., 313 ITR 340 (Bom) as well as the judgment in the case of CIT vs K. Raheja Corporation Pvt. Ltd., of 2009 dated 08.08.2011 that once it is established that the investment are out of own funds and not out of borrowed funds, interest expenditure would not automatically be considered for disallowance u/s 14A of the Act on account of Rule 8D(2)(ii) of the Rules. Against such a decision, Revenue is in appeal before us.
On this aspect, the ld. DR has reiterated the stand of the Assessing Officer and contended that assessee could not establish that the interest
M/s. Kohinoor Planet Construction Pvt. Ltd. expenditure was relatable to its business activities so as to be outside the purview of disallowance envisaged u/s 14A of the Act.
Per contra, the learned representative for the respondent-assessee pointed out to the submissions of the assessee, which have been detailed by the CIT(A) in para 4.2 and 4.3 of his order, which according to him, clearly establish that the investments which have yielded the exempt income have been made out of own funds and interest bearing funds have been used for business purpose.
We have carefully considered the rival submissions. We find that a pertinent plea of the assessee before the CIT(A) was that no interest expenditure can be considered for calculating disallowance under Rule 8D(2)(ii) of the Rules for the purpose of Sec. 14A of the Act inasmuch as the investments in question, which have given rise to the exempt income, have been made out of own funds and no borrowed funds have been utilised for the same. In this context, the CIT(A) has noted that “To establish its contention, the appellant has submitted details of funds and interest free advances available with it along with the details of investments made (as reproduced above in this order). I find this issue was also raised before the assessing officer by the appellant however, the AO has disregarded it saying that clause (ii) of sub-section 2 of Rule 8D of the Income Tax Rules, 1962, takes care of the fact that even if no interest is debited in Profit & Loss Account on account of investment made to earn exempt income the same would still need to be considered. I find that the contention of the assessing officer cannot be accepted. Before taking into consideration interest expenses incurred by the appellant on borrowed funds for making the M/s. Kohinoor Planet Construction Pvt. Ltd.
disallowance u/s 14A of the IT Act, holding that the borrowed funds have been used by the appellant for making investments giving rise to tax-free income, the assessing officer has to show and establish the nexus between the borrowed funds and the tax-free investment. If that has not been done, disallowance of interest expenditure is not possible. Reliance is placed on the observation of the Hon'ble jurisdictional Court in the case of K. Raheja Corporation which directly covers up the issue. The AO's statement that the appellant cannot be covered under the order of the Hon'ble Bombay high Court in the case of Reliance Utility (313 ITR 340) as the said case covers only disallowance made under section 36 (1) (iii) is misplaced. The principle behind the case is clearly applicable to the appellant as, if, it is found that the investments made by the appellant are entirely out of own funds the question of disallowing any interest paid on borrowed funds would not apply. Under the circumstances, as the appellant has been able to establish that it had enough surplus own funds available with it to make the said investments and it was not necessary for the appellant to use borrowed funds to do so, the action of the assessing officer in making disallowance in respect of interest paid by the appellant cannot be upheld and confirmed.”
The aforesaid findings of the CIT(A) are based on the assertions made by the assessee before him, which has also been reproduced by him in his order. Pertinently, the assessee had brought out before him that the Balance-sheet itself showed that the total investments shown in Schedule-7 was to the tune of Rs.287.55 crores while the total own funds available, i.e. the Share Capital and free Reserves was to the tune of Rs.458.67 crores. Assessee also referred to the earlier year’s figures wherein the Share Capital and Reserves stood at Rs.412.25 crores as against investment of Rs.36.22
M/s. Kohinoor Planet Construction Pvt. Ltd. crores. These facts were brought out by the assessee to say that on the beginning of the financial year as well as on the closing of the year under consideration, sufficient own funds were available with the assessee so as to cover the investments which have yielded the exempt income. All such factual assertions of the assessee, which have been upheld by the CIT(A), have not been controverted by the Revenue in any manner before us and, therefore, we are unable to interfere with the ultimate decision of CIT(A), which we hereby affirm. Notably, in view of the aforesaid fact-situation, the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) is fully attracted and the disallowance has been correctly deleted by the CIT(A). Thus, on this aspect also, Revenue fails.
Resultantly, appeal of the Revenue is dismissed.
Order pronounced in the open court on 10th August, 2018.