MR.K. CHANDRASHEKAR SHETTY vs. MR. SHEENA NAIK

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 22ND DAY OF OCTOBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.373 OF 2014 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX

C.R.BUILDING

QUEENS ROAD

BANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX

CIRCLE - 11(2)

RASHTROTHANA BHAVAN

NRUPATHUNGA ROAD

BANGALORE. ... APPELLANTS (BY Mr.K.V.ARAVIND, ADV.,) AND: M/S. BRIGADE ENTERPRISES LTD. 29 & 30TH FLOORS, WORLD TRADE CENTRE BRIGADE GATEWAY CAMPUS 26/1 DR.RAJKUMAR ROAD MALLESHWARAM BANGALORE - 560 0055. ... RESPONDENT (BY Mr.CHYTHANYA K.K., ADV.) - - -

2 THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 21.03.2014 PASSED IN ITA NO.236/BANG/2013 FOR THE ASSESSMENT YEAR 2009-2010, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSSED BY THE ITAT, BANGALORE IN ITA NO.236/BANG/2013 DATED 21.03.2014 CONFIRMING THE ORDER OF THE PASSED BY THE DEPUTY COMMISSIIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 11 (2), BANGALORE. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a bench of this Court vide order dated 06.04.2015 on the following substantial questions of law: (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? (iii) Whether the tribunal was right in holding that the assessee is eligible for deduction under Section 10B without appreciating that the assessee have not satisfied the requirements as laid down in clause (a) to (d) of Section 80IB(10)? (iv) Whether the tribunal was correct in allowing proportionate deduction under Section 80IB(10) in respect of the individual units measuring 1500 sq.ft. or less without

4 appreciating that the decision was contrary to the provision of Section 80IB(10) as the section contemplates fulfillment of condition of area of 1500 sq.ft. or less in respect of all units in a project are not in respect of individual units under the same project? (v) The tribunal committed an error in holding that the Assessing Officer has not satisfied himself in invoking the provisions of Section 14A of the Act, when the Assessing Officer as clearly mentioned in his order that the company had availed overdraft facility in earlier years which continued in the current year also and therefore had correctly made disallowance under Section 14A? 2. Facts leading to filing of this appeal briefly stated are that the assessee is engaged in the business of real estate development. The assessee filed the original return of income for Assessment Year 2009-10 on 30.09.2009. Thereafter, the assessee filed a revised return on 09.10.2009, in which income was declared as Rs.46,49,19,837/- after claiming deduction under

5 Section 80IB(10) of the Act to the extent of Rs.25,08,21,669/- in respect of profits of two projects viz., Brigade Gateway and Brigade Metropolis. The case of the assessee was taken up for scrutiny and assessment was completed under Section 143(3) of the Act by an order dated 28.12.2011 by which income of the assessee was determined at Rs.73,61,05,941/- as against the income of Rs.46,49,19,837/- declared by the assessee. The Assessing Officer made disallowance of the claims of the assessee under Section 80IB(10), 14A, 36(1)(iii) and claim towards bad debts, for an amount of Rs.25,08,21,669/-, Rs.1,25,27,272/-, Rs.76,66,638/- and Rs.1,70,525/- respectively. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 14.11.2012 allowed the claim of the assessee for deduction under Section 80IB(10) of the Act and disallowance of interest under Section 36(1)(iii) for an amount of Rs.76,16,638/- was also deleted.

6 However, the interest disallowed under Section14A read with Rule 8D was sustained to the extent of Rs.1,09,99,962/- as per Section 14A read with Rule8D(2)(iii) and interest disallowed as per Section 41A read with Rule 8D(2)(ii) to the extent of Rs.15,27,310/- was deleted. The disallowance of bad debts was sustained to the extent of Rs.70,525/- and the relief of Rs.1,00,000/- was granted to the assessee. Thus, the appeal preferred by the assessee was partly allowed. 4. Being aggrieved, the revenue filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short), whereas the assessee filed cross objections. The tribunal by an order dated 21.03.2014 inter alia held that there is no material on record to substantiate that overdraft account was utilized for making tax free investments and the investment proceeds are from public issue of shares. Therefore, it cannot be held that funds from overdraft account from which interest has been paid has been

7 invested in mutual funds which yields income which is exempt from tax. Thus, deletion of disallowance under Section 14A read with Rule 8D(2)(ii) of the Rules to the tune of Rs.15,27,310/- was upheld. The disallowance of interest expenditure under Section 36(1)(iii) was made on the ground that advances and deposits have been made from the bank overdraft facilities and the advances and deposits were non business advances and capital advances. Thus, it was held that disallowance of interest amounting to Rs.76,638/- was rightly deleted by the Commissioner of Income Tax (Appeals). Accordingly, the appeal preferred by the revenue was dismissed and the cross objections filed by the assessee were partly allowed. In the aforesaid factual background, the revenue has filed this appeal. 5. Learned counsel for the revenue submitted that the tribunal grossly erred in holding that the Assessing Officer did not record satisfaction with regard to incorrectness of the claim of the assessee that tax

8 free investments were not out of borrowed funds. Even otherwise, the tribunal should have remanded the aforesaid issue to the Assessing Officer as was done in the case of cross objection filed by the assessee. It is further submitted that in similar fact situation, the matter was remitted by the Bombay High Court. In support of aforesaid submission, reliance has been placed on decision of the Bombay High Court in 320 ITR 81. It is also urged that the tribunal ought to have appreciated that the burden is on the assessee to establish that interest bearing funds were not used in tax free investments and the tribunal committed an error in shifting the burden on the Assessing Officer to establish that the assessee has made tax free investments out of interest borrowing funds. It is also pointed out that the tribunal has taken a contrary stand with regard to requirement of recording satisfaction. 6. It is also argued that the assessee has not established that interest bearing / overdraft funds were

9 not utilized for advances to subsidiaries and the interest of commercial expediency has not been proved by the assessee. It is also contended that the assessee has not established the fact that subsidiary has used the funds provided by the assessee for business purposes. It is also contended that the tribunal ought to have appreciated that the advances made to subsidiaries was investment in capital field and the interest on the overdraft facility was used to fund the needs of subsidiaries to be capitalized. In support of aforesaid submissions, reliance has also been placed on decision of the Supreme Court in 'S.A.BUILDERS LTD. VS. COMMISSIONER OF INCOME TAX (APPEALS) & ANR.', (2007) 288 ITR 1 (SC). 7. On the other hand, learned counsel for the assessee submitted that substantial question of law No.3 and 4 have already been against the revenue in the case of the assessee by this court vide orders dated 22.09.2020 passed in Commissioner of Income Tax vs.

10 Brigade Enterprises Ltd., in I.T.A.Nos.54/2013 and 55/2013. It is further submitted that where investments are made out of common funds and non interest bearing funds exceeds the interest bearing funds, no disallowance under Section 14A of the Act can be made. It is also argued that disallowance under Section 14A cannot be made by the Assessing Officer in the absence of recording the satisfaction and the Commissioner of Income Tax (Appeals) as well as the tribunal having found that assessee had sufficient funds as well as covering loans and advances made to its Directors and sister concerns rightly allowed deduction of interest on loan. It is also pointed out that the Assessing Officer has failed to establish the nexus of interest bearing funds with interest free advances. In support of aforesaid submissions, reliance has been placed on decisions in 'GOLDMAN SACHS SERVICES 409 ITR 268 KAR, 'MAXOPP INVESTMENT LTD. VS. CIT', (2018) 402 ITR 640 and 'CIT VS. BRINDAVAN BEVERAGES (P.)

11 LTD (2017) 393 ITR 261 (KARNTAKA). 8. We have considered the submissions made by learned counsel for the parties and have perused the record. For the reasons assigned by us in the judgment dated 22.09.2020 in Commissioner of Income Tax. Vs. M/s Brigade Enterprises in I.T.A.No.54/2013 and 55/2013, the substantial question of law Nos.3 and 4 are answered against the revenue and in favour of the assessee. Now we may deal with the substantial question of law No.5. The Assessing Officer in his order dated 28.12.2011 while dealing with the claim of the assessee under Section 14A of the Act after recording the submission made by the assessee in para 12 has recorded its satisfaction in para 13, which reads as under: The submissions of the assessee is concerned and it is seen that the disallowance under Section 14A is mandatory and has to be worked out with respect to the tax exempt investments. The tax exempt investments

12 have been held to be inclusive of investments made in subsidiary companies also. This has been upheld in the case of M/s Maxopp Investments Ltd. Vs. Cit (TS-668-HC- 2011(HC)] by the Hon'ble Delhi High Court following the decision of Hon'ble Bombay High courting the case of M/s Godrej & Boyce Manufacturing Company Ltd. 9. The tribunal has taken note of the claim made by the assessee before the Assessing Officer that no expenditure had been incurred to earn exempt income. However, it has been held that the Assessing Officer has not rendered any finding with regard to incorrectness of the claim of the assessee either with regard to its accounts or with regard to the fact that he is not satisfied with the claim of the assessee in respect of such expenditure in relation to exempt income as is required in accordance with Section 14A(2) of the Act for making a disallowance under Rule 8D. Thus, from perusal of the relevant extract of the order passed by the Assessing Officer, the tribunal has rightly concluded

13 that the Assessing Officer has not recorded the satisfaction with regard to the claim of the assessee for disallowance under Section 14A read with Rule 8D(2) of the Act. For the aforementioned reasons, the substantial question of law No.5 is also answered against the revenue and in favour of the assessee. 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

14 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:-

15 (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

16 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. 11. 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

17 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

18 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]. 12. Thus, the first substantial question of law is also answered against the revenue and in favour of the assessee.

19 13. 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

20 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 view of preceding analysis, the second substantial question of law is also answered in favour of the assessee and against the revenue.

21 In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss