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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 5TH DAY OF FEBRUARY, 2021
PRESENT
THE HON’BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON’BLE MR. JUSTICE V. SRISHANANDA
I.T.A. NO.825/2017
BETWEEN
THE PR.COMMISSIONER OF INCOME TAX-4, BMTC COMPLEX
KORAMANGALA, BENGALURU.
THE INCOME TAX OFFICER
WARD-4(3)(3), BENGALURU.
…APPELLANTS
(BY SRI SANMATHI.E.I, ADVOCATE)
AND M/S MAHAVEER CALYX NO.9,MAHAVEER HOMES 24TH MAIN, 6TH PHASE J.P NAGAR BANGALORE-560 078
…RESPONDENT
(BY SRI A.SHANKAR, SR.ADVOCATE FOR SRI M.LAVA, ADVOCATE)
THIS I.T.A. IS FILED UNDER SEC. 260-A OF THE INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 14.06.2017 PASSED IN ITA NO.1765/BANG/2016, FOR THE
ASSESSMENT YEAR 2011-2012, PRAYING TO (1) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED. (2) SET ASIDE THE APPELLATE ORDER DATED 14.06.2017 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BANGALORE AS SOUGHT FOR, IN THE RESPONDENT - ASSESSEE'S CASE, IN ITA NO.1765/BANG/2016 FOR A.Y.2011-12.
THIS I.T.A., COMING ON FOR HEARING, THIS DAY, V. SRISHANANDA. J., DELIVERED THE FOLLOWING:
JUDGMENT
Revenue-State has preferred this appeal under Section 260-A of the Income Tax Act, 1961 [hereinafter referred to as 'the Act' for short]. The subject matter of the appeal pertains to the assessment year 2011-12. The appeal was admitted by this Court on 5.11.2018 for consideration of the following substantial questions of law: (i) Whether on the facts and circumstances of the case, the Tribunal is correct in law in allowing the deduction under section 80IB to the assessee when the project was approved with a sanctioned built-up area and the assessee has eventually constructed the area far in excess of what was approved?
(ii) Whether on the facts and circumstances of the case, the assessee is eligible to claim deduction under section 80IB that the assessee has violated the plan approved and that the assessee did not get any further approval for "Floor Area Ratio" (FAR) by the authorities?"
Facts leading to filing of this appeal briefly stated are that the assessee is a firm and had filed its return of income declaring 'Nil income' after claiming chapter VI(A) deduction of Rs.7,25,97,346/-. The return of income is processed. This case is selected for scrutiny to examine the correctness of claim made under Section 80IB(10) of the Act. The main issue in this case pertains to claim of deduction under Section 80IB(10) of the Act. The assessment was concluded under Section 143(3) by disallowing the claim u/s.80IB(10) of the Act. It is submitted that there was a deviation from the sanctioned plan. The project was approved with a sanctioned built up area is for 1,53,044 sq.ft. whereas the total built up area is 2,20,220 sq. ft. far in excess of what was approved. By doing so, the assessee has
violated the law under which the sanction was granted and therefore, the assessee is not eligible for deduction under Section 80IB of the Act and accordingly, the assessee's claim of deduction under Section 80IB is disallowed and brought to tax. Assessee appealed against the order of the assessing authority before the CIT(A)-iv. The said authority allowed the assessee's appeal by an order dated 21.07.2016. 3. Being aggrieved by the order of the Commissioner of Income Tax (Appeals), the revenue preferred this appeal. On the issue of deduction under Section 80IB(10) of the Act, the Tribunal relied on the earlier decision which has not reached finality and even when the assessee has not constructed the flats as per the approved plan and conditions set out in Section 80IB(10) are not satisfied by assessee. Therefore, the Tribunal is erred in allowing deduction under Section 80IB(10) of the Act when the project was approved with a sanctioned built up area and the assessee has eventually constructed the area far in excess of what was approved and prayed for allowing of this appeal.
On the other hand, learned Senior counsel for the assessee submitted that this Court in 'CIT Vs. BRIGADE ENTERPRISES LTD.' (2020) 120 TAXMANN.COM 346 (KAR) and 'CIT Vs. SJR BUILDERS', supra and the decision of Madras High Court in 'CIT Vs. ARUN EXCELLO FOUNDATIONS (P) LTD.' (2013) 259 CTR 362, has held that accounting Standard 7 was not applicable to the real estate developers. Therefore, he submitted that percentage of completion method cannot be thrashed upon assessee and assessee was right in following the project completion method as per accounting standard 9. 5. In Brigade Enterprises supra, the co-ordinate bench of this court, has raised as many as five substantial questions of law and for the purpose of this appeal, substantial question of law Nos.1 & 2 alone are necessary which reads as under:
(i) Whether the tribunal is correct in deleting the disallowance of Rs.15,27,310/- under Rule 8D(2)(II) while making the disallowance under Section 14A of the Act
without appreciating that, when the interest 3 expenses incurred cannot be directly attributed to any particular income or receipt, provision of rule 8D(2)(ii) automatically becomes applicable? (ii) Whether the tribunal is correct in deleting the disallowance under Section 36(1)(iii) holding that the advances to its subsidiaries were in the normal course of business, for business purposes without appreciating that as the funds from the overdraft account were utilized to make interest - free advances for acquiring lands, property advances?
While dealing with the said substantial questions of law, the Division Bench of this Court referred Section14A(2) and Rule 8D(2) as it existed prior to its substitution by income tax 14th amendment Rules, 2016 with effect from 2.6.2016 which is applicable to the facts of this case and has held in paragraph Nos.1o to 13 as under:
"10. Before dealing with first substantial question of law, it is apposite to take note of Section 14A(2) and Rule 8D(2) as it existed prior to its substitution by income tax 14th
amendment Rules, 2016 with effect from 02.06.2016, which will apply to the facts of the case as the Assessment Year is 2009-10, which read as under:
14A.(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the 1st day of April, 2001.
Rule 8D(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of the total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the Previous Year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A x B/C Where
A = amount of expenditure by way of interest other than the amount of interest included in clause (f) incurred during the Previous Year;
B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the Previous Year;
C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the Previous Year.
(iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the Previous Year.
The 'CIT VS. RELIANCE UTILITIES AND POWER LTD.', 313 ITR 340 (Bom), the Bombay High Court has held that where interest free funds exceed the value of investments, it can safely be inferred that investments have been made out of interest free funds and no disallowance under Section 14A towards any interest expenditure can be made. Similar view was taken in CIT VS. HDFC BANK LTD., 366 ITR 505 (Bom). The aforesaid decisions were followed by a bench of this court in 'PRINCIPAL COMMISSINOER OF INCOME TAX AND ANOTHER VS. GOLDMEN SACHS SERVICES P. LTD.', 409 ITR 268 (KARN). In the light of the aforesaid legal position, we may advert to the findings recorded by the Commissioner of Income Tax
(Appeals). In para 4.5, the Commissioner of Income Tax (Appeals) has held that there is no material on record to show that overdraft amount has directly been used for tax exempt investments. It has also noted that in fact, tax free investments have come down to Rs.34,78,31,000/- as on 31.03.2009 from Rs.405,21,54,000/- as on 31.03.2008. On perusal of the balance sheet the finding has been recorded that assessee has received an amount of Rs.146.52 Crores as advances from customers, which are interest free and the reserves and surpluses are to the tune of Rs.882.67 Crores. Thus, it has been held that all the aforesaid amounts are interest free funds and are sufficient to make tax free investments and therefore, the finding of the Assessing Officer that overdraft facility was directly used for making tax exempt investments have been reversed. The tribunal has affirmed the aforesaid finding in para 8.4.3 of its order. Thus, concurrent findings of fact have been recorded on the aforesaid issue, which could not be demonstrated to be perverse. Therefore, no interference is called with the aforesaid concurrent findings of fact in this appeal under Section 260A of the Act. [SEE: SYEDA
RAHIMUNNISA VS. MALAN BI BY L.RS. AND ORS. (2016)10 SCC 315 and PRINCIPAL COMMISSIONER OF INCOME TAX, BANGALORE & ORS. VS. SOFTBRANDS INDIA P. LTD., (2018) 406 ITR 513].
Thus, the first substantial question of law is also answered against the revenue and in favour of the assessee.
This takes us to the second substantial question of law. The Supreme Court in MUNJAL SALES Corpn. VS. COMMISSIONER OF INCOME- TAX, LUDHIANA, has held that where the assessee had sufficient funds and has given loan to sister concern out of its own funds, the assessee is entitled to deduction of interest on loan. Similar view has been taken by this court in BRINDAVAN BEVERAGES PVT. LTD. supra. The Commissioner of Income Tax (Appeals) in para 5.6 has held that the subsidiaries of the assessee are special purpose vehicle companies and as the assessee is involved in the real estate business, the advances were paid in the normal course of business. The assessee had to pay advances to the land owner for the purposes of entering into Joint Development Agreement for development of real estate projects, therefore, the advances
are business advances and cannot be treated as non business or capital advances. The tribunal in para 10.5.1 has held that reserves and surplus earned by assessee company is approximately to the extent of Rs.994.92 Crores as against total advances and deposits of Rs.248.24 Crores. Thus, the tribunal has found that the assessee's own fund are far in excess of advances and deposits made during the year and has held that Commissioner of Income Tax (Appeals) has rightly deleted the disallowance of interest to the extent of Rs.76,66,638/-. The aforesaid concurrent findings of fact are based on meticulous appreciation of evidence on record and by no stretch of imagination can be said to be perverse."
In this regard, learned Senior Counsel also invited the attention of this court with regard to the clarification issued by the Chartered Accountants as to the applicability of the revised accounting Standard 7 to the enterprises which are in construction activity. He drew our attention to para Nos.6 and 11 of the aforesaid clarification in support of his contentions.
We have carefully considered the submissions made on behalf of the parties and perused the records. 9. On close scrutiny of the judgment rendered by this court in Brigade Enterprises Ltd., supra, and the facts involved in the said case, we are of the considered opinion that the substantial question of law involved in this appeal is squarely answered in the said case. 10. Following the dictum in Brigade Enterprises, the substantial questions of law raised in this appeal are answered against the Revenue and in favour of the assessee. Resultantly, the appeal fails and is hereby dismissed.
Sd/-
JUDGE
Sd/- JUDGE
PL*