ASST.C.I.T., BANGALORE vs. M/S BHORUKA PARK PVT. LTD.,, BANGALORE

This appeal by the Revenue is against the order dated 27.08.2014 of the CIT(Appeals)-I, Bangalore relating to assessment year 2010-11.

The first ground of appeal by the Revenue is against the order of the CIT(A)’s order deleting the disallowance of Rs. 13,67,830/- under sec 14A read with Rule 8D(ii) being disallowance of proportionate interest payable on borrowings which can be attributed to earning of dividends.

On appeal, the CIT(Appeals) examined the balance sheet as on 31.12.2009 and 31.12.2010 and non-interest bearing funds and interest bearing funds, the details of which are as follows:-

From the above details, the CIT(A) observed that the assessee was having sufficient interest free fund whereas investment appearing in the balance sheet as on 31.3.2009 was at Rs.3,05,85,628 and as on 31.3.2010 at Rs.29,97,589 and in view of the same, there were no new investments made during the previous year relevant to AY 2010-11 and hence no interest is disallowable.

Aggrieved the revenue is in appeal.

The grievance of the revenue is that the Rule 8D should be followed and prorate interest payable on borrowings should disallowed, even if the Assessee had sufficient owned funds for making the investments.

We have heard both the parties. The Delhi High Court in the case of CIT v TAIKISHA ENGINEERING INDIA LTD (370 ITR 338) has held that under sub-section (2) of section 14A of the Income-tax Act, 1961, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, can he

The Delhi High Court in the case of Joint Investments P Ltd v CIT (372 ITR 694) has held that Section 14A or rule 8D of the Income-tax Rules, 1962, cannot be interpreted so as to mean that the entire exempt income is to be disallowed. The window for disallowance was indicated in section 14A and was only to the extent of disallowing expenditure “incurred

The Punjab & Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. [2009] (319 ITR 204 ) and the Gujarat high Court in the case of CIT v Corrtech Energy P. Ltd (372 ITR 97) have held that when the assessee did not make any claim for exemption of any income from payment of tax, no disallowance could be made under section 14A of the Income-tax Act, 1961. The conjoint reading of these decisions would show that (i) the disallowance u/s 14A read with Rule 8D should be made only with respect to Investments which have yielded tax exempt income during the relevant previous year which is excluded from computation of Total income in the Assessment.

The First Appellate Authority has found as a fact that the Assessee had sufficient funds for making the Investment in shares. There is no details as to the shares which had yielded exempt income for applying the provisions of sec 14A. However the CIT(A) has found as a fact that the Assessee had sufficient funds to make the entire investments. There was no new investment made during the year and hence there is no question of any borrowed funds during the year being utilised for making investments which have yielded tax free income. This factual matrix has not been assailed by the department. Their only grievance is that there should be proportionate disallowance of interest payable on borrowings whether or CO No.144/Bang/2015 Page 6 of 13 not the Assessee had sufficient borrowed funds for making the Investments. Only the actual expenditure incurred which can be related to investments even if no exempt income has been earned from such investments.

In our opinion, from a reading of the ratio of various High Courts on this aspect only actual expenditure which can be attributed to Investments and that too only investments from which exempt income has been earned and excluded in the assessment, has to be disallowed u/s 14A. In the circumstances we have no hesitation in upholding the decision of the CIT(A) deleting the notional disallowance of interest expenditure of Rs. 13,67,830/- made u/s 14A by the AO.

The revenue’s appeal on this issue is dismissed.

The next ground of appeal of the revenue is against the deletion of disallowance of interest of Rs. 1,17,112,000/- being interest payable by the Assessee on account of interest free advances of Rs. 7.5 Crores interest free advances given by the Assessee to M/s Bhoruka Steel &Services Ltd (BSSL).

On verification of the details, the AO observed that M/s Bhoruka Steel & Services Limited (BSSL) had held 7 Acres 26 Guntas of land at Mahadevapura Industrial Area, K.R.Puram, Bangalore and It had entered into a Joint Development Agreement with the assessee company. As per

Further as per the JDA M/s BSSL was required to transfer 74% of the land and receive 26% of built up area as consideration for the land transferred. But as per the supplementary agreement dt. 1.11.2007, 26% of the built up area is retained by the assessee company and BSSL retained Rs. 7.5 crores which was given to it as security deposit.

From the above, the AO noticed that Rs. 7.50 crores is retained by BSSL and in lieu of this, the assessee company retained 26% of the built up area in Phase-I. But for the supplementary agreement, the assessee company would have received back Rs. 7.50 crores which is shown as advance in its books of account, thus the company has parked its huge sum of Rs. 7.50 crores with its sister concern, on which no interest is being

On appeal, the CIT(Appeals) observed from -the balance sheet that advance given to others as on 31/03/2009 at Rs.9.76 crores and as on 31/03/2010 at Rs.9.78 crores, the break-up of which was given by the assessee as under:-

From the details given above, the CIT(A) observed that Rs.7.50 crores was advance given to M/s Bhoruka Steel & Services Limited, the sister concern of the assessee. According to the AO, Rs.7.50 Crores has been parked with M/s Bhoruka Steel Services Pvt. Ltd despite of the fact that transaction relating to immovable property (land) was finalised.

The CIT(A), however, held both concerns are closely related and the assessee parked said amount for business purpose i.e. development of I.T.Park and other companies having certain percentage of right and interest on 7 acres 26 guntas of land at Mahadevapura Industrial Area, K.R.Puram, Bangalore. The CIT(A) therefore held interest attributable on an amount of Rs.7.5 crores is not disallowable and deleted the addition of Rs.1,17,12,008/-.

Aggrieved, the Revenue is in appeal before us.

We have heard both the parties. The only grievance of the Revenue is that the facts relating to the Interest free advance given to BSSL Ltd was not submitted before the AO. The CIT(A) has found that the Assessee had sufficient interest free owned funds which will cover the interest free loans to BSSL. This is not disputed by the department. The funds are available from the Financials of the Assessee and hence it cannot be said that this constituted fresh material before the CIT(A). The CIT(A) has found that the interest free advance is in the course of business and out of commercial expediency. It has been submitted before the AO that it has been given in the course of Joint development and in lieu of this advance the Assessee was granted an additional 26% of built up area. The advance therefore is clearly in the course of business and an advance for obtaining additional 26% of built up area. Hence, even if it is assumed that this advance was given out of borrowed funds, no part of the interest payable on such CO No.144/Bang/2015 Page 10 of 13 notional amount of borrowings cannot be disallowed as the advance was given in the course of business. Therefore on the facts of the case, Applying the ratio of the decisions of the Bombay High Court in the case of CIT v. Reliance Utilities And Power Ltd. [2009] 313 ITR 340), we hold that the interest free advance of Rs. 7.5 Crores to BSSL was made by the Assessee out of own funds and the advance was for the purpose of the business of the Assessee in the course of Joint development of property with BSSL. Hence no part of interest payable on borrowings can be disallowed on grounds of interest free advance of Rs. 7.5 Crores to BSSL. The revenue’s appeal on this issue is dismissed.

In the result, the Revenue’s appeal is dismissed.

The CO is filed by the assessee on the ground that the CIT(A) erred in holding that a sum of Rs.10,49,952 is to be disallowed despite the fact that the assessee had not claimed the above sum as expenditure.

The assessee before us submitted that out of the total interest paid during the year, a sum of Rs. 1,00,49,952/- was capitalized to building no.2 and the balance sum of Rs. 8,92,01,800 was debited to profit and loss account. It was submitted before the CIT(A) that the entire sum of Rs. 8.92 crores is in respect of building which are already completed and therefore. allowable as deduction. The CIT(A) accepted the contention of the CO No.144/Bang/2015 Page 11 of 13 assessee, but he held that a sum of Rs. 1,00,49,952/- is required to be disallowed as it had not been reduced from the sum of Rs.9,14,61,789/- being the gross interest paid.

The assessee submitted before us that during the year it had paid the following amounts towards the interest and other financial charges.

We have heard both the parties. We set aside the issue of disallowance of Rs.1,00,49,952 to the file of the Assessing Officer to verify if this amount of Rs. 1,00,49,952 is capitalised or not and thereafter decide the issue in accordance with law.

In the result, the cross objection by the assessee is allowed for statistical purposes.

To sum up, the appeal by the Revenue is dismissed, while the cross objection by the assessee is allowed for statistical purposes.