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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL
Before: SHRI G.D. AGRAWAL, G.D. AGRAWAL & AND BEFORE SHRI & AND SHRI KULDIP SINGH SHRI KULDIP SINGHSHRI KULDIP SINGH SHRI KULDIP SINGH
PER G.D. AGRAWAL, PER G.D. AGRAWAL, PRESIDENT PER G.D. AGRAWAL, PER G.D. AGRAWAL, PRESIDENT PRESIDENT :- PRESIDENT
This appeal by the Revenue for the assessment year 2010-11 is directed against the order of learned CIT(A)-IX, New Delhi dated 20th January, 2014.
In this appeal, the Revenue has raised various grounds. However, they are all against the deletion of disallowance of interest amounting to `12,02,07,944/- made by the Assessing Officer.
The facts of the case are that for the year under consideration, the assessee filed the return declaring taxable income of `50,69,200/-. As per the memorandum of articles of association, the business of the assessee is development of infrastructure and to undertake infrastructure projects and to purchase, sell, develop, construct, hire or otherwise acquire and deal in all real or personal estate/properties.
2 ITA-1991/Del/2014 During the year under consideration, the business activities have not been started by the assessee. For the year under consideration, the assessee has shown income of `94,62,276/- in the profit & loss account, the details of which are as under :- i. Interest income `50,63,213/- ii. Dividend on units on mutual fund `43,93,076/- iii. Profit on redemption of mutual fund `5,987/- Total `94,62,276/-
However, when the details were called for and examined by the Assessing Officer, he found that during the year under consideration, the assessee has earned interest amounting to `12,52,71,157/- and the assessee paid interest amounting to `12,02,07,944/-. In the profit & loss account, the assessee has shown only the net interest i.e., `50,63,213/- (`12,52,71,157 - `12,02,07,944). The Assessing Officer raised the query regarding the allowability of interest paid by the assessee amounting to `12,02,07,944/-. After considering the assessee’s submission, the Assessing Officer was of the opinion that payment of interest cannot be set off against the interest income. The conclusion of the Assessing Officer is in paragraph 2.10 and 2.11, which are reproduced below for ready reference :-
“2.10 In view of the facts mentioned above, to sum up, the expenditure on account of interest amounting to Rs.12,02,07,944/- which has been set off against the interest income of Rs.12,52,71,157/- is disallowed for the following reasons :- i. During the year, the assessee has not started any business activity as explained above, but to carry out the business activity had raised the funds as explained in its letter dated 16.01.2013, the relevant extracts of which have been reproduced in Para 2 above.
3 ITA-1991/Del/2014 ii. As a commercial expediency measure, the assessee chose not to keep the funds, so raised idle and opted to earn interest income there from. This has been explained by the assessee in its letter dated 16.01.2013. iii. Since the assessee had not started its business during the year under consideration, no expenditure will be allowed and the expenditure incurred prior to the start of the business will have to be capitalized. iv. The funds raised by the assessee had been utilized for investments in shares. Hence, the interest incurred by the assessee is not allowable expenditure. v. The assessee company is not a ‘Non-Banking Finance Company’ either, and hence cannot claim expenditure on account of interest paid. vi. The expenditure of Rs.12,02,07,944/- is not allowable for the period relevant for A.Y. 2010-11 by applying the ratio of judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. Commissioner of Income Tax [1997] 92 Taxman 502 (SC).
2.11 Hence, the expenditure on account of interest amounting to Rs.12,02,07,944/- is disallowed and added to the total income of the assessee company.”
The Assessing Officer also alternatively opined that interest is also disallowable in view of Section 14A of the Income-tax Act, 1961 because the borrowed money has been invested in shares.
On appeal, learned CIT(A), after considering the submissions of the assessee and the facts of the case, deleted the addition. The Revenue, aggrieved with the order of learned CIT(A), is in appeal before us.
At the time of hearing before us, learned CIT-DR stated that admittedly, during the year under consideration, the business of the assessee has not commenced and therefore, interest on borrowed money cannot be allowed while considering the interest received by 4 ITA-1991/Del/2014 the assessee. She stated that on the facts of the assessee’s case, the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT – [1997] 227 ITR 172 (SC) would be squarely applicable and, in view of the above decision, the interest payment would not be allowed even while computing the income from other sources. She further submitted that the Assessing Officer has held that interest income is disallowable u/s 14A. Learned CIT(A), without properly appreciating the factual as well as legal position, held that no disallowance is required u/s 14A. In support of her contention for disallowability of interest income u/s 14A, she relied upon the decision of Hon'ble Jurisdictional High Court in the case of Indiabulls Financial Services Ltd. Vs. DCIT – [2016] 76 taxmann.com 268 (Delhi) and also the following decisions of the ITAT :-
(i) DCIT Vs. Viraj Profiles Ltd. – 46 ITR 626. (ii) NYK Line India Ltd. Vs. ACIT – 175 TTJ 180. (iii) Super Auto Forge (P) Ltd. Vs. ACIT – 156 ITD 467. (iv) Vipin Malik Vs. ACIT – 45 ITR 589.
The learned counsel for the assessee, on the other hand, stated that in the case of the assessee, during the year under consideration, no business activities had commenced and it was only the borrowing and lending of the money during the year under consideration. The main object of the assessee is investment in real estate, but, in the year under consideration, no real estate project has commenced and therefore, on these facts, the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) would not be applicable because, in that case, the assessee had already started setting up of its business and the assessee has claimed the deduction of interest income against the preproduction expenses which were ultimately to be capitalized. Since the facts of the assessee’s case are altogether different, the above decision of Hon'ble Supreme Court
5 ITA-1991/Del/2014 would not be applicable. He stated that on these facts, the decision of Hon'ble Jurisdictional High Court in the case of Vodafone South Ltd. Vs. CIT – [2015] 378 ITR 410 (Delhi) would be squarely applicable. He referred to page 111 of the assessee’s paper book which is the list of debtors and creditors and from which, the assessee pointed out that the borrowed money has been utilized for earning of interest. Thus, there is a direct nexus between the borrowing of the money and the money advanced on which interest is earned. Therefore, the deduction for the interest paid would be allowable u/s 57(3) from interest received. He further submitted that so far as the applicability of Section 14A is concerned, the Assessing Officer has only used the same as an alternative for disallowance of interest. He has not made out disallowance as per Rule 8D of the ITAT Rules and since no borrowed money is utilized for earning of exempt income, there is no question of any disallowance u/s 14A. Learned CIT(A) has examined the facts of the case and has recorded the finding of fact that no interest is paid on the money invested in shares. This finding of fact has not been controverted by the Revenue. Therefore, the order of learned CIT(A) deserves to be upheld.
Learned CIT-DR, in rejoinder, reiterated her submission that on these facts, the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) would be squarely applicable.
We have carefully considered the arguments of both the sides and perused the material placed before us. The Revenue has heavily relied upon the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra). The facts in that case were that for the purpose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required
6 ITA-1991/Del/2014 by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year ending on June 30, 1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs.2,92,440/-. In its return of income filed on June 22, 1982, the company disclosed the said sum of Rs.2,92,440/- as “income from other sources”. It also disclosed business loss of Rs.3,21,802/-. After setting off the interest income against the business loss, the company claimed the benefit of carry forward of net loss of Rs.29,360/-. The company later on realized its mistake and on December 26, 1984, it filed a revised return showing business loss of Rs.3,21,802/-. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses had to be capitalized, and that, therefore, the interest income of Rs.2,92,440/- should go to reduce the pre-production expenses (including interest and finance charges), which would ultimately be capitalized. The Income-tax Officer rejected the assessee’s claim that the interest income was not exigible to tax. The view of the Income-tax Officer was upheld by the Commissioner of Income-tax (Appeals). The company’s further appeal to the Income-tax Appellate Tribunal was dismissed. In view of the conflict of decisions between the Madras and Andhra Pradesh High Courts, the Tribunal referred the question regarding taxability of income, directly to the Supreme Court.
From the above, it is evident that in the said case, the term loans were obtained from the bank and financial institutions for the purpose
7 ITA-1991/Del/2014 of setting up of the factories. However, part of the borrowed funds which was not immediately required for the purpose for which it was borrowed, the same was invested in short term deposit by the bank. Initially, the assessee offered the interest received as its income from other sources which was set off against the business loss. Subsequently, the assessee filed revised return and claimed that interest income should be set off against the pre-production expenses and should not be taxed as income from other sources. Now, when we compare the facts of the above case with that of the assessee’s case, we find that the facts in the case under appeal before us are altogether different. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), the money was borrowed for the purpose of setting up of the factory. In the case under appeal before us, the real estate business which is the main business of the assessee as per memorandum and articles of association has not commenced at all. The money was not borrowed for any specific purposes. The assessee had borrowed the money from some persons and has advanced it to others. He paid interest to the persons from whom the money was borrowed and charged interest from the person to whom the money was advanced. The details of the persons from whom money was borrowed and to whom money was advanced are at page 111 of the assessee’s paper book. The same is reproduced below for ready reference :-
“Mahalaxmi Designs Private Limited Assessment Year 2010-11 Details of Other Liabilities as on March 31, 2009 Party Name Amount J R Modi Finance P.Ltd. (25,000,000) Narendra Gehlaut (32,500,000) Virendra Dhingra (20,000,000) Pradeep Burman (30,000,000) Rajiv Rattan (2,794,450,000)
8 ITA-1991/Del/2014 Audit Fees Payable 224,720 Saurabh Mittal 800,000 Aarchi Properties P.Ltd. 805,000,000 Gungan Properties P.Ltd. 750,000,000 Gurvit Properties P.Ltd. 750,000,000 Siddhidayak Properties P.Ltd. 600,000,000 Total 4,074,720
In the above list, the last four parties are parties from whom the assessee has borrowed the money and first five parties are the parties to whom the money has been advanced. When the borrowed money and the money advanced is set off, it is found that except `40,74,720/-, the entire borrowed money was advanced. The total borrowed was `290 crores and 50 lakhs, out of which, more than `290 crores was advanced by the assessee. Thus, in this case, there is direct and clear nexus of money borrowed by the assessee and the money advanced by the assessee.
In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), admittedly, the money was borrowed for the purpose of setting up of the factory. However, since the borrowed funds were not immediately required, the same were invested in short term deposits with the bank. However, the facts in the case of the assessee are altogether different. The main object as per memorandum of articles of association is the development of infrastructure and real estate business. However, during the year under consideration, no infrastructure project or real estate development project had commenced and therefore, the question of borrowing of any money for the purpose of such project does not arise. Therefore, in our opinion, the facts of the assessee’s case are altogether different than the facts in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra). Further, in that case, the assessee initially offered the interest income as income from other sources but, subsequently, by filing the revised
9 ITA-1991/Del/2014 return, the assessee claimed that interest income should not be assessed but should go to reduce the pre-production expenses. In the case under appeal, the assessee has never disputed the taxability of interest income. The assessee offered the interest income under the head income from other sources and claimed interest payment there from.
At the time of hearing before us, the assessee submitted that such interest payment is duly allowable under Section 57(iii) of the Income-tax Act, 1961. Section 57 provides the deductions which are allowable while computing the income under the head income from other sources. Sub-section (iii) thereof reads as under :-
“57. The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely :-
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;”
From the above, it is evident that any expenditure which is laid out or expended wholly or exclusively for the purpose of earning of interest income is allowable u/s 57(iii). In the case under appeal before us, we find that the borrowed money has been utilized for the purpose of giving advances to others. There is a direct nexus between the money borrowed by the assessee and money advanced by the assessee. The assessee paid interest on the money borrowed by it and has received the interest on the money advanced by it. Therefore, we have no hesitation to hold that the interest paid by the assessee was incurred wholly and exclusively for the purpose of earning of interest income and therefore, the same was rightly claimed u/s 57(iii) and the learned CIT(A) rightly directed for allowing the same.
10 ITA-1991/Del/2014
On these facts, the decision of Hon'ble Jurisdictional High Court in the case of Vodafone South Ltd. Vs. CIT – [2015] 378 ITR 410 (Delhi) would be squarely applicable, wherein Hon'ble Jurisdictional High Court held at page 420 of the report as under :-
“The sum of Rs.25 crores drawn by the assessee on December 24, 2001, in terms of HSBC’s sanction letter was transferred to SCL on the very same date. Without the facility of credit by the HSBC, the assessee could not have advanced the loan to SCL. Therefore, there was a direct nexus between the earning of interest on the loan advanced by the assessee to SCL and payment of interest to HSBC on the loan drawn in terms of the sanction letter dated August 2, 2001. The income earned on the loan advanced to SCL was rightly offered to tax by the assessee as “Income from other sources”. Since the interest paid to HSBC on the loan availed of was the nature of an expenditure wholly and exclusively laid out for the purpose of earning the interest income, it ought to be permitted to be netted against such “Income from other sources” in terms of section 57(iii).”
After considering the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), the above decision was given by the Hon'ble Jurisdictional High Court. The facts of the assessee’s case are identical. Therefore, the above decision of Hon'ble Jurisdictional High Court would be squarely applicable. Considering the facts of the case and respectfully following the above decision of Hon'ble Jurisdictional High Court, we hold that learned CIT(A) was fully justified in directing the Assessing Officer to allow deduction of interest paid by the assessee against the interest received by the assessee.
Before we part with the matter, we may mention that the Assessing Officer has disallowed the interest mainly by following the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals
11 ITA-1991/Del/2014 and Fertilizers Ltd. (supra), which we have already dealt with. However, before concluding the matter, he has also mentioned that interest is also disallowable u/s 14A because the borrowed money has been utilized for the purpose of investment in shares. Learned CIT(A) has recorded the finding of fact that no borrowed money has been utilized for the purpose of investment in shares. From the details of other liabilities submitted by the assessee, copy of which has been reproduced above in paragraph 11, it is clear that the borrowed money has been utilized for giving advances to others and the Revenue has not been able to point out that any borrowed money has been utilized for investment in shares. The learned counsel for the assessee had pointed out that the investment in shares was mainly out of the 0.001% optionally convertible debentures of `200 crores issued during the year under consideration as well as reserve and surplus of `99 crores and share capital of `1 crore. No interest was paid on any of the above funds which were invested in shares. The above submission made by the assessee has not been controverted before us. In view of the above, we do not find any justification to disturb the finding of the learned CIT(A) that no borrowed money was utilized for investment in shares.
Learned DR has relied upon various decisions to buttress her claim that disallowance u/s 14A read with Rule 8D is called for. However, as we have already mentioned that Assessing Officer has not made any disallowance under Rule 8D. He has made the disallowance of interest while computing the assessee’s income from other sources and alternatively observed that interest paid by the assessee is also disallowable u/s 14A because borrowed money is utilized for investment in shares. Therefore, the limited issue open for our examination is whether the borrowed money has been utilized for the purpose of investment in shares. Learned CIT(A) has recorded the finding that no borrowed money was utilized for investment in shares.
12 ITA-1991/Del/2014 After considering the facts of the case and submissions of both the parties, we concur with the finding of the learned CIT(A). In the above circumstances, the wider question whether disallowance u/s 14A read with Rule 8D is required to be made or not is not before us. In view of the above, we do not find any infirmity in the order of the learned CIT(A). The same is upheld.
In the result, the appeal of the Revenue is dismissed. Decision pronounced in the open Court on 23.11.2017.