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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
ORDER Per Shri A.T.Varkey, JM Both these appeals filed by the revenue and Cross Objection filed by the assessee are against the order of Ld. CIT(A)-XII, Kolkata for AY 2008-09 dated 21.02.2014. Since the appeal and the cross objection are against the common order, we dispose of both by this consolidated order.
The sole ground of appeal of revenue is against the order of Ld. CIT(A) in allowing the interest amounting to Rs.1,77,54,031/- as revenue expenditure related to the business purpose without considering the calculation made by the AO to determine the interest not related to business purpose. Brief facts of the issue are that the AO disallowed the interest payment on unsecured loan on the ground that the assessee diverted Rs.36.76 cr. for non business purposes out of the borrowed funds. According to AO, the said investment of 2 & CO No.74/Kol/2014 Emami Realty Ltd., AY- 2008-09 Rs.36.76 cr has had no relation with the assessee’s business. The AO noted that out of the total borrowed fund of Rs.97.68 cr., the unsecured loan amounting to Rs.83,93 cr was interest bearing and the balance of Rs.13.75 cr was related to optionally convertible debentures. In view of this, proportionate interest of Rs.1,77,54,031/- was disallowed by AO . On appeal, the Ld. CIT(A) held that the capitalization of interest and other project cost in WIP is nothing but a credit (income) in the P&L Account. He further noted that the amount of interest to the extent of Rs.1,46,54,769/- capitalized for the project under construction was nothing but stock in trade/revenue for the company. According to him all the investments made by the assessee were for the purpose of the business. The interest incomes were earned out of advances made for real estate business only. Therefore, the Ld. CIT(A) held that since the assessee had not diverted any borrowed funds on which interest was paid for non-commercial purposes, there is no question of disallowance of interest out of interest paid by the assessee under sec. 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). Therefore, he deleted the disallowance of interest of Rs.1,77,54,031/-. Aggrieved, revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We find that the AO had disallowed the interest payment on unsecured loan on the ground that the assessee had diverted Rs.36.76 cr. for non-business purposes out of the borrowed funds. The Ld. AR in order to controvert this contention of the AO argued that the assessee is having own funds to the tune of Rs.25.90 cr. including the interest free loans in the form of optionally convertible debenture. Meaning thereby that, in any case, the disallowance of interest made by the AO should be reduced proportionately to the extent of availability of own funds. The AO, however, noted that an amount of Rs.5,51,88,177/- was shown as payment of interest towards unsecured loans taken from different parties and out of the said amount, Rs.1,46,54,769/- was shown in project expenses and was capitalized under the head “work in progress”. And the balance of Rs.4,05,33,408/- was debited in the P&L Account. The AO after perusal of the Tax Audit Report observed that the assessee is in the business of “Real Estate Development” and no income from the said business was shown in the relevant AY and according to him, no other business receipt was also found in the P&L Account. The AO noted that the assessee has made investment of Rs.36,76,23,626/- in shares of its subsidiaries companies, unquoted investment in shares of 3 & CO No.74/Kol/2014 Emami Realty Ltd., AY- 2008-09 its associated companies, investment in unquoted debentures, investment in Partnership firms, advances against purchase or shares and advance to Prajay properties, which according to AO had no business relation with the assessee. To the query of AO as to why the claim of assessee in respect to interest expenditure of Rs.4,05,33,408/- may not be allowed, the assessee not only defended the claim of interest expenditure to the tune of Rs.4,05,33,408/-, it made an additional claim in respect of the capitalized amount of interest (which it had included under the head project expense) i.e. Rs.1,46,54,769/-. However, the AO without accepting the additional claim proceeded to disallow proportionate amount of interest as computed by him in page 7 of his order at Rs.1,77,54,031/-. On appeal, the Ld. CIT(A) held that the assessee had disclosed work in progress as part of its stock in trade and had duly credited the same in its P&L Account. The contention of the assessee that the interest debited to the P&L Account is also part of such stock in trade has been accepted by the Ld. CIT(A) while granting relief to the assessee. Accordingly, the Ld. CIT(A) held that there is no diversion of borrowed funds for non-business purposes so as to warrant disallowance of interest u/s. 36(1)(iii) of the Act. This decision of Ld. CIT(A) is challenged before us as erroneous.
We have not gone through the Memorandum of Association of the assessee company to know the business conducted by the assessee. However, we note from the documents produced before us that assessee had two segments of income i.e. one from interest i.e. from the lending segment and the other from the real estate segment. From a perusal of the P&L Account at page 19 of the paper book, we note that assessee has shown inventory of closing work in progress of Rs.1,98,07,566/- cr. in the income side. However, the AO noted that there is no income from the real estate segment. We note that the assessee had credited and debited the same amount in P&L Account, so it is revenue neutral. However, the Ld. CIT(A) has taken note of the inventory of closing work in progress in the P&L Account and has stated that the assessee has offered income. However, the Ld. CIT(A) has lost sight of the fact that the same amount (Rs.21,45,945/- as opening work in progress and a sum of Rs.1,76,61,621/- towards project expenses, totaling Rs.1,98,07,566/-) has been debited in the P&L Account and the Ld. CIT(A) has taken not of only the credit side of Rs.1,98,07,566/- the P&L Account, ignoring the debit side of Rs.1,98,07,566/-. From this, it could be inferred that there is absolutely no income offered by the assessee towards the 4 & CO No.74/Kol/2014 Emami Realty Ltd., AY- 2008-09 activity of work in progress as it is revenue neutral. However, on perusal of significant accounting policies of the assessee company enclosed in page 26 of the paper book which reveals on the accounting treatment given for revenue recognition, the assessee has stated as under:
“a)Construction work in progress reflects the cost incurred for project pending completion. The same shall be charged to revenue in the year in which income from sale of such project is recognized which shall be recognized on the completion of such project. b) Interest income is recognized on accrual basis. c) Dividend income is accounted for when right to receive the same is established.” From a perusal of the aforesaid accounting policy it is clear that assessee had accepted the fact that no revenue has been recognized in its P&L Account with regard to construction work in progress. Thus, the Ld. CIT(A) erred in finding that assessee had offered income from construction activity.
So from the discussion above, the finding of fact by the AO that the assessee had only utilized Rs. 47 cr. for business purpose and has not utilized Rs.36 cr. for business (non- business purpose) has not been found to be factually wrong by the Ld. CIT(A). The Ld. CIT(A) has simply found fault with the AO after perusal of the P&L Account and was of the opinion that the AO was wrong in stating that no income was offered by the assessee in the P&L Account and thereby he allowed the interest on loan, which action of the Ld. CIT(A) cannot be countenanced because as we noted earlier the assessee’s income from the real estate segment has not been offered by the assessee in the P&L Account. The interest on loan has to be allowed if the assessee had utilized the loan amount for business purpose. We also find from note no. 2 of Notes on Account to audited financial statement which is enclosed in page 26 of the paper book wherein the assessee had stated as under:
ii) In pursuance to the real estate activities undertaken the company has provided unsecured loans to the subsidiaries for the execution of the projects undertaken therein. From the perusal of the above, we find that the assessee has given certain unsecured loans to its subsidiaries as part of its real estate activities. But we find that there is no finding in this regard in the orders of the lower authorities. According to AO, the investments made in subsidiary companies and associate companies, among others were made by the assessee out of its borrowed funds and which are for non-business purposes. We find that the statement
We note that though the assessee has contended before the Ld. CIT(A) that the sum of Rs.36.76 cr. has been spent on SPVs etc., the details of which have been given in page 9 of the impugned order of the ld. CIT(A) which has not been gone through by the Ld. CIT(A) or by the AO to give a factual finding as to whether the assessee had utilized the said amount of Rs.36.76 cr. for business purpose as contended by the assessee. Hence, under these facts and circumstances it is necessary to determine the actual fact whether lending of monies and the investments in subsidiaries, associate companies, partnership firm as tabulated in page 6 of the assessment order and page 9 of CIT(A)’s order are part and parcel of business activity of the assessee. This factual finding would be necessary to determine the fact of utilisation of borrowed funds for the business purposes which will in turn be essential to determine the allowability of interest u/s. 36(1)(iii) of the Act. Hence, in the fitness of things we deem it appropriate to remand this issue to the file of the AO to address this issue in the light of directions given above. The assessee is also at liberty to adduce evidence in support of its contentions. Accordingly, revenue’s ground of appeal is allowed for statistical purposes.
7. In respect of the assessee’s Cross Objection, we note that the AO has made disallowance u/s. 14A of the Act applying rule 8D(2)(iii) of the Rules taking the average investment as Rs. 2.485 cr. The main grievance of the assessee is that the entire investment should not be taken for computation under Rule 8D(2)(iii). From the grounds in CO No. 2 the assessee claims it had made investment in the following and according to assessee, the investments are not tax exempt so, it should be excluded while computation is made applying Rule 8D(2)(iii) of the Rules :
(a) investment in Debentures – Rs.8,41, 50,000/-, which is not a tax exempt investment and (b) investment in capital of a partnership firm, from which the company has earned a taxable interest of Rs.41,16,090/- during the year and cannot be included in the investment as envisaged u/s. 14A read with Rule 8D of the Rules.
We note that the assessee had made investment and issued debentures to the tune of Rs. 8.41 cr., the return of which would be in the form of interest which is taxable. Hence,
6 & CO No.74/Kol/2014 Emami Realty Ltd., AY- 2008-09 we are inclined to accept the argument of the Ld. AR that the same should be excluded while calculating disallowance u/s. 14A read with Rule 8D of the Rules. Similarly, in respect of investment made in the capital of a partnership firm, the assessee has earned taxable interest of Rs.41,16,090/- and accordingly, the said investment also would be outside the purview of sec. 14A read with Rule 8D of the Rules and therefore, we direct both these amounts should be excluded while 8D(2)(iii) investment is computed.
Coming back to computation of Rule 8D(2)(iii) of the Rules. This Tribunal has consistently followed the dictum of law laid down in REI Agro Ltd. Vs. DCIT 144 ITD 141 in which the Tribunal held that only investment which has given rise to the exempted income should be taken into consideration while computing disallowance u/s. 14A read with Rule 8D. This order has been upheld by the Hon’ble High Court vide judgment dated 23.12.2013. Respectfully following the same, we direct the AO to re-compute the disallowance as above mentioned.
In the result, appeal of the revenue is allowed for statistical purposes and the cross objection of assessee is partly allowed for statistical purposes.
Order is pronounced in the open court on 16.03.2018 Sd/- Sd/- (P. M. Jagtap) (Aby. T. Varkey) Accountant Member Judicial Member Dated : 16th March, 2018 Jd.(Sr.P.S.) Copy of the order forwarded to:
1. 1. Appellant – ITO, Ward-12(2), Kolkata 2 Respondent – M/s. Emami Realty Ltd. 687, E. M. By Pass, Anandapur, Kolkata-700 107.