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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
The captioned appeal by the assessee is directed against the order of the CIT(A)-41, Mumbai dated 29.10.2014, pertaining to the Assessment Year 2010-11, which in turn has arisen from the order passed by the Assessing Officer dated 26.3.2013 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
2 M/s. Horizon Infrastructure Ltd.
In its appeal, assessee has raised the following Grounds of appeal:-
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax - (Appeals) [CIT(A)] has erred in upholding the views of the Assessing Officer (AO) by confirming the interest disallowance made of Rs.6,58,14,482/-.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the views of the AO by Confirming the disallowance made of Rs.1,01,25,000/- in respect of loan processing charges.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in computing disallowance u/s.14A of the Income Tax Act at Rs.89,57,903/- as against NIL considered by the appellant. The learned CIT(A) has further erred in considering the interest portion already disallowed of Rs.6,58,14,482/- u/s.36(iii)/37(1) of the Income Tax Act, while considering interest for the purposes of Rule 8D(2)(ii) r.w.s. 14A of the Income Tax Act. The AO has computed the disallowance u/s.14A at Rs.1,98,62,048/-.”
In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of development of infrastructure projects. In an assessment finalised u/s 143(3) of the Act dated 26.3.2013, the total income was determined at Rs.16,53,00,190/- as against returned income of Rs.6,64,36,950/- after making certain additions/disallowances. The assessee’s appeal against such additions/disallowances was partly allowed by the CIT(A) and not being satisfied with the order of CIT(A), assessee is in further appeal before us on the aforestated Grounds of appeal.
3 M/s. Horizon Infrastructure Ltd.
Insofar as the issue in Ground of appeal nos. 1 and 2 are concerned, the same relate to borrowing of Rs.200 crores made by the assessee during the year from Central Bank of India. In the course of assessment proceedings, the Assessing Officer required the assessee to explain the purpose for which the loan was utilised so as to justify the deduction of interest expenditure of Rs.15,07,16,855/-. Based on the details furnished by the assessee, it was noticed that the loan funds were utilised to make interest bearing advances to two entities, namely Shri Bhakti Realtors Pvt. Ltd. (in short ‘Shri Bhakti’) and Mahakaleshwar Knowledge Infrastructure Pvt. Ltd. (in short ‘Mahakaleshwar’) amounting to Rs. 50 crores and Rs.150 crores respectively. Assessee also explained that the purpose of advancing the money to Shri Bhakti was for meeting the expenditure for initial development of the project of the assessee to develop an industrial cluster at Navi Mumbai in an industrial park spread over an area of 300 to 500 acres. With regard to the advances made to Mahakaleshwar, it was explained that the amount was paid as an initial advance for development of a state-of- the-art knowledge corridor in Navi Mumbai region on an area of 500 acres of land (approx.). Before the Assessing Officer, assessee also furnished the respective agreements entered with the two entities as also the loan sanction letter of Central Bank of India. The respective copies of Account with the two entities were also furnished to the Assessing Officer and it was also pointed out that Mahakaleshwar had become a subsidiary of the assessee-company after the close of the instant financial year. The Assessing Officer noted that assessee- company had charged interest on the advances made to the two
4 M/s. Horizon Infrastructure Ltd. entities at a rate lower than the rate at which interest was paid to the bank. The Assessing Officer noted that since there was a direct nexus between the funds borrowed from the bank and the advances made to the two entities, the interest expenditure incurred on payment to the bank was allowable only to the extent it was recouped from the two entities. In this view of the matter, the Assessing Officer held that interest expenditure was allowable to the extent of Rs.8,49,02,373/-, which was the amount recovered from the two entities, as against assessee’s claim for deductibility of expenditure of Rs.15,07,16,855/- representing the interest paid to the bank. As a consequence, an addition of Rs.6,58,14,482/- was made to the returned income. At this point, we may also notice that the loan processing charges of Rs.1,01,25,000/- incurred by the assessee for the purpose of obtaining the aforesaid loan from the bank has also been disallowed by the Assessing Officer for the reasons taken by him to disallow a portion of the interest expenditure. Both these aspects were carried in appeal before the CIT(A), who has upheld the same. Before us, said issues have been agitated by the assessee by way of Ground of appeal nos. 1 & 2 respectively.
5. At the time of hearing, the learned representative for the assessee vehemently pointed out that the partial disallowance of interest expenditure by the lower authorities is unjustified. The learned representative explained that the lower authorities have made a disallowance of Rs.6,58,14,482/- out of the total expenditure of Rs.15,07,16,855/-, which is comprised of two parts, namely, firstly, the 5 M/s. Horizon Infrastructure Ltd.
difference between the rate of interest paid to the bank and the rate of interest charged from the two entities – Rs.1,18,83,557/-; and secondly, penal interest stated to have been paid to the bank for failure to provide timely security – Rs.5,40,00,000/-. The learned representative has referred to pages 36 to 43 of the Paper Book wherein is placed a copy of the loan sanction letter of the bank dated 7.9.2009, and it is sought to be canvassed that the loan has been sanctioned with the purpose of meeting the expenditure on initial development work of various infrastructure projects, which, inter-alia, was required to be secured by offering collateral security of non-agricultural land of approx. 100 acres owned by Mahakaleshwar as well as furnishing of corporate guarantee by Mahakaleshwar. The learned representative explained that assessee had proposed to develop an industrial cluster at Navi Mumbai, which was to be spread over 300 to 500 acres, and in order to achieve this objective, Mahakaleshwar was identified to help in acquisition of land, an entity which later on became assessee’s subsidiary on 5.10.2010. Since such a project required acquisition of large pieces of land, assessee also approached Shri Bhakti and its proposed subsidiary, Mahakaleshwar to aggregate land for the project. In order to enable Mahakaleshwar to acquire land from time to time, the amount was advanced by the assessee. The learned representative also referred to pages 149 to 154 of the Paper Book to point out the utilisation of the loan raised by referring to the copies of the bank account placed therein. Attention was also invited to pages 155 to 165 of the Paper Book wherein is placed the bank statement of the assessee of the account maintained with HDFC Bank. Reference has also been made to the copy of bank account of the assessee with State Bank of 6 M/s. Horizon Infrastructure Ltd.
India placed at page 166 to 263 of the Paper Book. All these material have been referred by the assessee to show that over a period of time the amount of loan raised from the bank was deployed for undertaking the development of projects by advancing monies to Mahakaleshwar and Shri Bhakti. It is pointed out that in the interregnum, assessee had also placed some amount of funds with its bankers as fixed deposits, which had also earned interest.
The learned representative emphasised that the assessee has deployed the interest bearing funds with an objective of commercial expediency and it is pointed out that subsequently, when Mahakaleshwar became a subsidiary on 5.10.2010, the entire loan was transferred by the bank to Mahakaleshwar on 12.9.2011. The learned representative pointed out that the entire factual matrix would show that the loan fund has been utilised for the purpose for which it was sanctioned. With regard to the advance made to Shri Bhakti, the learned representative specifically pointed out that the said concern acted as a land aggregator for the assessee-company in the area of Navi Mumbai and that the advance was made in terms of loan agreement dated 4.11.2009, which clearly brings out the objectives of the advance. It was pointed out that though in the case of Shri Bhakti, the land offered to the assessee was not found suitable and the monies were returned back, but thereafter the entire funds were utilised in the project of development of industrial park by its subsidiary, Mahakaleshwar. It is further asserted that the factual matrix is not disputed by the lower authorities.
7 M/s. Horizon Infrastructure Ltd.
Before us, the learned representative also pointed out that there was justifiable commercial expediency in advancing the amounts to the two concerns at a lower rate of interest because assessee was looking at business returns from the projects. It has also been pointed out that the loan was raised not only on the financial strength of the assessee- company, but also on the strength of Mahakaleshwar inasmuch as the corporate guarantee as well as collateral security of 100 acres of land was provided by Mahakaleshwar. It was, therefore, contended that merely because there is a difference between the rate at which interest is paid to the bank vis-à-vis the rate at which advances are made to the two entities, it would not destroy the commercial expediency involved in advancing monies to the two entities.
With regard to the element of disallowance of Rs.5,40,00,000/- stated to be on account of penal interest, the learned representative pointed out that on this aspect, the records show that no such payment has indeed been made. In this context, the learned representative referred to the following findings of the CIT(A) to canvass that no such payment has been made by the assessee :-
“The appellant also could not adduce any proof of payment of penal interest of Rs.5.40 crores during the F.Y relevant to the A.Y under consideration. Thus, there is no concrete evidence or cogent materials on record so as to support the claim of the appellant for deduction of penal interest of Rs.5.40 crores said to have been paid to the Bank.”
At the time of hearing, apart from reiterating the reliance on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd.,
8 M/s. Horizon Infrastructure Ltd.
288 ITR 1 (SC), the following decisions have been relied upon to support the case of the assessee:- i) Bombay Samachar Ltd., 74 ITR 723 (Bom) ii) Walchand and Co. (P) Ltd., 65 ITR 381 (SC) iii) Indian Bank, 56 ITR 77 (SC) iv) Century Flour Mills Ltd., 334 ITR 377 (Madras) v) Agarwal Global Steels Ltd., 141 ITD 76 vi) Hero Cycles (P.) Ltd., 379 ITR 347 (SC)
On the other hand, the ld. DR appearing for the Revenue has primarily reiterated the stand of the lower authorities, which we have already noted in the earlier paragraphs, and is not being repeated for the sake of brevity. The ld. DR emphasised the point that in the present case, assessee had raised the loan from bank @ 13.50% whereas the impugned advances were made to Shri Bhakti and Mahakaleshwar at a lower rate of 11.50% and, therefore, it does not reflect any commercial expediency. In this context, the ld. DR referred to the observations of the CIT(A) in para 5.3.2 of his order to the effect that assessee had failed to explain satisfactorily “as to what business interest” was achieved by making advances at interest rate lower than the rate at which the amounts were borrowed from the bank. Apart therefrom, the ld. DR also pointed out that the CIT(A) noted that in the case of Mahakaleshwar, the funds advanced were not used for the stated purpose of acquiring the land and, therefore, for that reason also, it could not be said that the monies were advanced by the assessee for commercial expediency. For the said reasons, he has sought to support the orders of the authorities below.
9 M/s. Horizon Infrastructure Ltd.
We have carefully considered the rival submissions. Ostensibly, as the aforesaid discussion reveals, the controversy before us revolves around the application of Sec. 36(1)(iii) of the Act, which permits deduction on account of interest expenditure while computing business income. Sec. 36(1)(iii) of the Act allows deduction in computing ‘business income’ of the amount of interest paid in respect of capital borrowed “for the purposes of the business”. In fact, the rationale of Sec. 36(1)(iii) of the Act is provided by the presence of the expression “for the purposes of the business”. In terms of the prescription of Sec. 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed is to be allowed as a deduction so long as the corresponding capital is borrowed for the purposes of business. In the present case, and as has been noted by the Assessing Officer also, assessee’s stated business is of infrastructure development. It has been canvassed by the assessee before us, on the basis of the loan sanction letter of the bank, that the impugned loan of Rs. 200 crores was raised by the assessee for the purpose of meeting the cost of “initial development work of various infrastructure projects”. To this extent, there is no dispute that the raising of the loan is for the purposes of assessee’s business. The dispute arises hereinafter whereby the Revenue has contested the claim of the assessee that the borrowed funds have been used for the purpose of business. The assessee supported its plea of having used the borrowed funds for the purpose of business by pointing out that the amounts were advanced to two concerns, namely, Shri Bhakti and Mahakaleshwar in furtherance of its business of infrastructure development. As per the explanation which has been consistently
10 M/s. Horizon Infrastructure Ltd. furnished by the assessee before the income tax authorities and as well as before us, assessee was proposing to develop an industrial cluster at Navi Mumbai spread over 300 to 500 acres and in order to achieve this objective, it identified the aforesaid two concerns who would acquire the lands and act as land aggregators. Insofar as the transaction with Mahakaleshwar is concerned, it was explained that subsequently the said concern became assessee’s subsidiary and the relevant loan raised from the bank was also transferred to the said entity, as it carried on the project further. With regard to Shri Bhakti, it was explained that the land offered by it was not found suitable and ultimately, the money was received back and redeployed in the project thereafter. The case made out by the Revenue is that in the instant year, the amounts were advanced to the two concerns @ 11.50% whereas assessee raised the loan @ 13.50%, and thus there is no commercial expediency in the transaction. Notably, the absence of commercial expediency has been found only with respect to portion of interest short-recovered from the two concerns, since the disallowance is limited to the difference between the interest paid to the bank and the amount charged from the two concerns.
Insofar as the objection of the Revenue that the rate of interest charged from the two concerns was not adequate to cover the cost of funds is concerned, the same, in our view, is not conclusive to say that there was no commercial expediency. The fact that the two concerns indeed acted in terms of the agreement with the assessee to act as land aggregators is not disputed. In order to appreciate as to whether the transaction falls within the expression “for the purposes of the 11 M/s. Horizon Infrastructure Ltd.
business”, a slightly wider and flexible approach is required, as has been emphasised by the Hon'ble Supreme Court in the case of Madhav Prasad Jatia vs. CIT, AIR 1979 SC 1291 as well as in Commissioner of Income Tax vs. Malayalam Plantations Ltd., 53 ITR 140 (SC). In the case of Madhav Prasad Jatia (supra) the borrowed amount was donated to college with a view to commemorate the memory of assessee’s deceased husband, and it was held that the interest on such borrowed fund was not allowable as it could not be said to be advanced for commercial expediency; so however, what was emphasised by the Hon'ble Supreme Court was that the expression “for the purpose of business” was much wider than the expression “for the purpose of earning income, profits or gains”. The said view has been further reiterated and confirmed by the Hon'ble Supreme Court in the case of Malayalam Plantations Ltd. (supra) as well as S.A. Builders Ltd. (supra). Considered in this light, in our view, the factum of the assessee having recovered only 11.50% rate of interest from the two concerns, as against 13.50% charged to it by the bank, is of no consequence to determine the commercial expediency so long as it can be demonstrated that the funds were otherwise advanced to the two concerns in furtherance of its business purpose. At this stage, we may also refer to another important aspect which is emerging from the record that the impugned loan from the bank was secured against the personal guarantee of the Directors as well as the collateral security of non-agricultural land of approximately 100 acres owned by Mahakaleshwar. We are pointing out the said fact only to emphasise that Mahakaleshwar was not a complete stranger to the transaction of raising of loan by the assessee from the bank and its utilisation. In fact,
12 M/s. Horizon Infrastructure Ltd.
Mahakaleshwar became assessee’s subsidiary subsequently and since it has been canvassed that the project has thereafter been undertaken under the aegis of the said concern, the liability for the loan from the bank also stood transferred to the said concern subsequently. All this goes to show that both at the time of raising of the loan as well as at the time of advancing of monies to Mahakaleshwar, assessee was acting as a prudent businessman with the purpose of furthering its stated business of infrastructure development. No doubt, with respect to Shri Bhakti, the purpose of land procurement was not achieved as it was not found suitable, but as explained, the amount has been received back and thereafter utilised in the business of infrastructure development. Therefore, on an overall consideration of facts, it is quite clear that there is a nexus between the interest expenditure and the business purpose of the assessee, namely, business of infrastructure development and once it is so established, the reasonableness or otherwise of the quantum of return or profits cannot be a factor to decide its commercial expediency. In this context, we may reproduce hereinafter the following observation of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) :-
“We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see
13 M/s. Horizon Infrastructure Ltd. how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”
In fact, the entire case of the Revenue in the instant case is driven by the fact that the assessee has charged lower rate of interest than the rate at which it has paid for the borrowed funds. This precise argument has been repelled by the Hon'ble Bombay High Court in the case of Bombay Samachar Ltd. (supra) wherein reliance was placed on the following observations in its earlier judgment in the case of Calico Dyeing & Printing Works vs. CIT, 34 ITR 265 (Bom.) :-
“Where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(iii) of the Income-tax Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. If the capital is used in the year of account and the use is for the purpose of the business of the assessee, it is immaterial whether the user of the capital actually yielded profit or not and it is not open to the department to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital is unremunerative.” [underlined for emphasis by us] To the similar effect is the ratio of the judgment of the Hon'ble Supreme Court in the case of Walchand & Co. Pvt. Ltd. (supra).
Considering the ratio of the aforesaid judicial pronouncements, it has to be inferred that since the advances given by the assessee to the 14 M/s. Horizon Infrastructure Ltd.
two concerns were for the purpose of business of land aggregation for its infrastructure development project in Navi Mumbai, and thus a part of the interest expenditure relatable to such deployment of funds could not be disallowed u/s 36(1)(iii) of the Act.
Before parting, we may refer to the judgments relied upon by the CIT(A). Firstly, reliance has been placed on the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Income-Tax vs Doctor and Co., 180 ITR 627 (Bom.). In this case, assessee had diverted borrowed funds to its sister concerns without any business reason and, therefore, the corresponding interest expenditure was disallowed. The aforesaid decision is not applicable in the present case inasmuch as in the instant case, we have observed that the expenditure of interest has a nexus with the purpose for which the funds were deployed. Secondly, the CIT(A) has relied upon the judgment of the Hon'ble Kerala High Court in the case of CIT Vs. Accelerated Freeze Drying Company Limited., 324 ITR 316 (Kerala). In this case also, it was the failure to demonstrate the commercial expediency which justified the disallowance of interest expenditure. Again, the ratio of the judgment is not applicable in the instant case. Thirdly, CIT(A) has relied upon the judgment of the Hon'ble Delhi High Court in the case of Punjab Stainless Steel Industries Vs. CIT, 324 ITR 396 (Delhi). In the said case, assessee had made interest-free advance to a sister concern in which two of the partners of the assessee-firm were also partners. The Hon'ble High Court upheld the disallowance of interest expenditure by noticing various facts. Primarily, the Hon'ble High Court noted that the assessment
15 M/s. Horizon Infrastructure Ltd. proceedings did not show that assessee made any claim that the advance to the sister concern was actuated by way of any commercial expediency. The only plea of the assessee was that the interest-free advances were made out of interest-free funds available with it. The Hon'ble High Court upheld the disallowance of interest by noticing the absence of any case being set-up by the assessee of commercial expediency in advancing the interest-free loan to the sister concern. The fact-situation in the instant case stands on a different footing, as our aforesaid discussion has revealed, therefore, the ratio of the judgment of the Hon'ble Delhi High Court is not applicable in the present case.
Thus, in our considered opinion, having regard to the above discussion, the partial interest expenditure disallowed by the lower authorities is not justified, and is hereby directed to be deleted.
Another element of the disallowance is with regard to penal interest of Rs.5,40,00,000/-. In this context, the plea of the assessee is that no such interest has indeed been incurred/paid by the assessee- company to the Central Bank of India on the impugned Term loan and, therefore, no disallowance ought to have been made. At the time of hearing, the learned representative submitted that due to incorrect understanding of one of the tax officials of the assessee-company, it was erroneously submitted before the Assessing Officer that the interest expenditure of Rs.15,07,00,000/- included payment of penal interest of Rs.5,40,00,000/- to the bank. We find that the CIT(A) has 16 M/s. Horizon Infrastructure Ltd.
discussed the issue in paragraphs 5.3.3 and 5.3.4 of his order and specifically in paragraph 5.3.4, he notes that there is no proof of payment of penal interest of Rs.5,40,00,000/- during the year under consideration. The learned representative has pointed out that in the absence of any evidence of assessee having paid such interest, the correct course for the CIT(A) ought to have been to delete the addition and not uphold the same. The learned representative vehemently pointed out that the issue of payment of penal interest does not arise inasmuch as even in the loan sanction letter of the bank, which is placed at pages 36 to 43 of the Paper Book, there is no clause providing for payment of penal interest. The statement of Term loan of Central Bank of India, placed at page 149 of the Paper Book, has also been referred to, to justify that there is no claim by the bank of recovering any penal interest. In our considered opinion, the plea of the assessee with regard to the disallowance of penal interest is not without merit. Ostensibly, if there is no claim/recovery by the bank of penal interest, the question of any disallowance of the same would not arise. So however, since the said fact involves a factual appreciation, we direct the Assessing Officer to verify as to whether the penal interest has been paid to the bank or not. If it is found that no penal interest of Rs.5,40,00,000/- has been paid to the bank, no disallowance would be warranted and the entire expenditure of interest would be allowable u/s 36(1)(iii) of the Act in view of our aforesaid discussion. If his finding is to the contrary, the Assessing Officer shall be free to decide the allowability as per law, after hearing the assessee. Therefore, for this limited purpose, the matter is remanded back to the file of the Assessing Officer.
17 M/s. Horizon Infrastructure Ltd.
In the result, Ground of appeal no. 1 is allowed as above.
Insofar as Ground of appeal
no. 2 is concerned, the same relates to disallowance of Rs.1,01,25,000/- in respect of loan processing charges paid to the bank. The said disallowance was made by the lower authorities as a consequence of disallowing a portion of the interest paid to the bank, an issue which we have dealt with in Ground of appeal no.
1. Since we have held that the interest expenditure is allowable, as a consequence, the expenditure incurred by the assessee in respect of loan processing charges deserves to be allowed. We hold so. Accordingly, Ground of appeal no. 2 is allowed.
19. The last Ground in this appeal relates to disallowance sustained by the CIT(A) u/s 14A of the Act at Rs.89,57,903/- as against Rs.1,98,62,048/- made by the Assessing Officer. The stand of the assessee is that the CIT(A) has wrongly part-sustained the disallowance made by the Assessing Officer whereas in the facts and circumstances of the case no disallowance u/s 14A of the Act is warranted.
20. In brief, the relevant facts are that assessee had earned dividend income – Rs.4,09,024/- and Long Term Capital Gain – Rs.5,20,778/-, which were claimed as exempt. In the course of assessment proceedings, the Assessing Officer noted that inspite of declaring exempt income, assessee had not made any disallowance u/s 14A of the Act in relation to the expenditure incurred on earning such exempt income. The claim of the assessee was that no expenditure has been 18 M/s. Horizon Infrastructure Ltd.
incurred in relation to the exempt income, which was not accepted by the Assessing Officer. Instead, the Assessing Officer determined the disallowance u/s 14A of the Act at Rs.1,98,62,048/- by applying the formula contained in Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’). In terms of Rule 8D(2)(ii) of the Rules, the Assessing Officer computed the disallowance out of interest expenditure at Rs.1,87,36,126/- and in terms of Rule 8D(2)(iii) of the Rules, the disallowance out of overheads/administrative expenses was determined at Rs.11,25,992/- thereby resulting in total disallowance of Rs.1,98,62,048/-. In appeal before the CIT(A), assessee raised various submissions, inter-alia, pointing out that during the year under consideration no fresh investments have been made and that the exempt income has been earned on shares/securities which were invested in the past years. It was also pointed out that the major investment was in 100% owned subsidiary, Metrotech Technology Parks Ltd. and other associated concerns, which were in the nature of strategic investments and ought to be excluded while computing the disallowance u/s 14A of the Act. Assessee also pointed out that out of the interest expenditure of Rs.15,21,78,000/-, the Assessing Officer had disallowed Rs.6,58,14,482/- u/s 36(1)(iii) of the Act itself and that the balance of the interest was inclusive of interest of Rs.9,60,759/- paid on car loan and Rs.5,00,716/- on delayed payment of TDS; and, the aforesaid sums ought to have been removed for the purpose of computing the disallowance u/s 14A, if any. Even with regard to the disallowance out of overheads/administrative expenses, the claim of the assessee was that no particular expenditure has been incurred for such purpose. The CIT(A) partly accepted the plea of the assessee and 19 M/s. Horizon Infrastructure Ltd. noted that the Assessing Officer ought to have computed the disallowance out of interest expenditure by excluding the amount of interest disallowed u/s 36(1)(iii) as also interest paid on car loan and on delayed payment of TDS. The CIT(A) also directed the Assessing Officer to exclude the value of investments made in assessee’s 100% subsidiary while computing the disallowance out of overheads/administrative expenditure in terms of Rule 8D(2)(iii) of the Rules. As a consequence, the CIT(A) determined the disallowance at Rs.89,57,903/-, which comprises of Rs.78,64,831/- as per Rule 8D(2)(ii) of the Rules on account of interest expenditure; and, Rs.10,93,072/- as per Rule 8D(2)(iii) of the Rules out of overheads/administrative expenditure. Not being satisfied with the order of CIT(A), assessee is in further appeal before us.
Before us, the learned representative for the assessee reiterated that no portion of the interest expenditure is relatable to the impugned investments inasmuch no fresh investments have been made during the year and that in the earlier assessment year, the investments were made out of own capital and reserves and, in fact, no part of interest expense was disallowed. The learned representative pointed out that in Assessment Year 2009-10, the only element of expenditure disallowed u/s 14A of the Act was by application of Rule 8D(2)(iii) of the Rules out of overheads/administrative expenditure. It was, therefore, canvassed that no disallowance out of interest expenditure is warranted. On this aspect, the ld. DR has not disputed the factual matrix, but has merely justified the disallowance made by the lower authorities.
20 M/s. Horizon Infrastructure Ltd.
We have carefully considered the rival stands and find that a perusal of the Balance-sheet of the assessee, copy of which is placed at pages 17 to 35 of the Paper Book, reveals that no new fresh investments have been made during the year, and rather, during the year, assessee has sold shares acquired in the earlier years, which has yielded Long Term Capital Gain of Rs.5,20,778/-. Further, it is also emerging that in the earlier year, i.e. Assessment Year 2009-10, in an assessment made u/s 143(3) dated 25.03.2011, a copy of which is placed at pages 353 to 357 of the Paper Book, the only disallowance u/s 14A of the Act is out of overheads/administrative expenditure and no part of interest expenditure has been found to be relatable to the investments which have yielded the exempt income. Factually, the investments during the year which have yielded the exempt income are very much the same, which were held by the assessee in the earlier assessment year. Therefore, once no interest expenditure has been found to be relatable to such investments in the past, then, in the instant year it is inconceivable as to how certain interest expenditure can be attributable to the same. Even otherwise, we find that the interest expenditure debited by the assessee in its Profit & Loss Account is majorly on account of loan raised from Central Bank of India, which we have already discussed in the earlier paras and the balance of the expenditure on car loan and on late payment of TDS. None of the aforesaid elements of interest expenditure can be said to be relatable to the exempt income. It is quite well-settled that interest expenditure which are directly attributable to the taxable income cannot form a part of the interest expenditure which is considered for disallowance as per
21 M/s. Horizon Infrastructure Ltd.
Rule 8D(2)(ii) of the Rules. Considering the entirety of facts and circumstances of the case, in our view, no disallowance in terms of Rule 8D(2)(ii) of the Rules is merited out of interest expenditure. Thus, on this aspect, assessee succeeds.
Insofar as the disallowance out of overheads/administrative expenditure of Rs.10,93,072/- as per Rule 8D(2)(iii) of the Rules is concerned, the only plea of the assessee is that the investments which have not yielded the exempt income be excluded while computing the disallowance. The said plea of the assessee is supported by the judgement of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. Commissioner of Income Tax, 378 ITR 33 (Delhi). On this aspect, we direct the Assessing Officer to recompute the disallowance as per Rule 8D(2)(iii) of the Rules after excluding the investments which have not yielded the exempt income during the year. Accordingly, the assessee partly succeeds in this Ground. Resultantly, insofar as Ground of appeal no. 3 is concerned, the assessee partly succeeds.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 15th November, 2017.