BRIGADE ENTERPRISES LTD,BANGALORE vs. ADDITIONAL COMMISSIONER OF INCOME TAX,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE

BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER and SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER

ITA No.1275/Bang/2014 (Assessment year: 2010-11)

M/s.Brigade Enterprises Ltd., 29th & 30th floor, World Trade Centre, Brigade Gateway Campus, 26/1, Dr.Rajkumar Road, Rajajinagar, Bangalore-560055. … Appellant PAN: AAACB7459F Vs. Addl. Commissioner of Income-tax, Range-11, Bangalore. … Respondent

AND

ITA No.1323/Bang/2014 (Assessment year: 2010-11) Deputy Commissioner of Income-tax, Circle 11(2), Bangalore. … Appellant Vs. M/s.Brigade Enterprises Ltd., Bangalore. … Respondent

Assessee by: Shri Padamchand Khincha, CA. Revenue by: Dr. P.K.Srihari, Addl.CIT(DR).

Date of hearing : 30/06/2015. Date of pronouncement: 08/07/2015.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 2 of 25 O R D E R Per Smt. P.MADHAVI DEVI, JM: These cross appeals, both by the assessee and the revenue, are against the order of the CIT(A)-I, Bangalore, dated 09/06/2014 for the assessment year 2010-11. 2. Brief facts of the case are that the assessee-company filed its return of income for the assessment year 2010-11. During the assessment proceedings u/s 143(3) of the Income-tax Act, 1961 [‘Act'], the Assessing Officer (AO) called for various details which were filed by the assessee on various dates. The AO observed that the assessee has made investment of Rs.14.70 crores in various tax exempt assets but has not made any disallowance u/s 14A of the Act. Assessee’s explanation was called for as to why assessee has not made any disallowance u/s 14A even though the assessee has earned dividend income of Rs.2,42,26,499/- out of which Rs.37,64,000/- was by way of dividend on investment in Mutual Funds and Rs.4,62,500/- was the dividend on investment in shares of M/s.Tandem Allied Services (P) Ltd., which is exempt u/s 10(35) of the Act. Assessee submitted that the funds used for investment are out of advances from customers of the company against project bookings made by them. It was submitted that the total advance received by the company from its customers as on 31/3/2010 was Rs.124.54 crores and the total amount standing to the credit of reserve and surplus was Rs.913.14 crores and therefore out of

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 3 of 25 the total assets of Rs.1.680.13 crores, reserve and surplus and advances from customers itself were to the tune of Rs.1037.68 crores and the balance was either share capital or secured loans taken from banks against specific project. It was, therefore, submitted that investments in the shares and Mutual Funds were out of its own funds and not out of any borrowed funds. The AO, however, was not convinced with the assessee’s contentions and held that the provisions of rule 8D are applicable to the assessee and therefore the proportionate indirect interest on investments has to be disallowed under rule 8D(2)(ii) of the Act and also 0.5% of the average amount of tax exempt investment is to be made under rule 8D(2)(iii). Accordingly, he brought it to tax.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 4 of 25 AO. Copies of the orders of the Tribunal for both the assessment years are also filed before us.

The learned Departmental Representative, however, supported the orders of the authorities below.

“8.1 Grounds No.7 to 13 of revenue’s appeal and Ground No.1 of the assessee's C.O. pertain to the issue of disallowance under section 14A of the Act. We, accordingly, take up these grounds and the C.O. for consideration together. The facts of the matter, as emerge from the record, are as under : In the course of assessment proceedings, the Assessing Officer noticed that the assessee had received tax exempt dividend amounting to Rs.11,55,53,320 and that no amount was offered for disallowance under section 14A of the Act. On being called upon to explain as to why disallowance should not be made under section 14A r.w. Rule 8D, the assessee submitted that the dividend income of Rs.11,55,53,320 were earned out of investments made in debt and liquid mutual funds, out of approximately Rs.903 Crores raised out of public issue of shares. It was submitted that till such time that the funds raised by the public issue of shares were utilized for new projects in a phased manner as construction of new projects progresses, these funds were parked by way of investments in mutual funds which have resulted in the earning of dividends to the tune of Rs.11.55 Crores. It was submitted that the loans availed by the assessee form Banks are in respect of specific projects and no prudent company would borrow from banks at market rates of approx.. 13% and invest the same in liquid funds giving a return of around 5% and therefore the question of the said bank loans being invested in mutual funds does not arise. The assessee contends that the investment made in mutual funds is out of the proceeds of the public issue of shares and not out of loans borrowed by the assessee company and there are no expenses incurred by it to earn dividend income and therefore no disallowance is called for

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 5 of 25 under section 14A r.w. rule 8D. In support of the proposition that disallowance under section 14A r.w. Rule 8D necessitates the establishment of expenses being incurred for earning exempt income and in the absence of such connection between expenditure incurred and exempt income earned, no disallowance can be made, the assessee placed reliance on the following decisions : i) CIT V Hero Cycles (2010) 323 ITR 518 (P&H) ii) CIT V Walfort Share and Stock Brockers P. Ltd. (2010) 326 ITR 1 (SC). iii) Godrej & Boyce Mfg. Co. Ltd. V DCIT (2010) 328 ITR 81 (Bom) 8.1.2 The Assessing Officer did not accept the above arguments put forth by the assessee and proceeded to make a disallowance under section 14A r.w. Rule 8D. Direct expenditure pertaining to exempt income was taken at NIL. Interest paid on Over draft amounting to Rs.91,93,948 was considered as indirect interest for the purpose of disallowance under section 14A of the Act. The proportionate indirect interest attributable to exempt income was computed at Rs.15,27,310 under Rule 8D(2)(ii) and a sum of Rs.1,09,99,962 computed at 0.5% of the average amount of tax exempt investments was computed under Rule 8D(2)(iii). The total disallowance under section 14A r.w. Rule 8D was thus quantified at Rs.1,25,27,272 (i.e. Rs.15,27,310 plus Rs.1,09,99,962). 8.1.3 On appeal, before the learned CIT (Appeals) the assessee reiterated its contentions as set out before the Assessing Officer, arguing that no disallowance is to be made under section 14A of the Act. The assessee also relied on the decision of the co- ordinate bench of this Tribunal in its own case for Assessment Year 2008-09 in ITA No.1279/Bang/10 dt.12.1.2012 wherein the disallowance under section 14A r.w. Rule 8D(2)(iii) was set aside to the file of the Assessing Officer to be decided afresh keeping in view of the guidelines laid down by the Hon'ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). 8.1.4 The learned CIT (Appeals) deleted the disallowance made under Rule 8D(2)(ii) amounting to Rs.15,27,310 holding that interest payments which are not attributable to any taxable income or exempt income alone can be considered. The learned CIT (Appeals) held that :- (i) there is no material available on record to show that the overdraft amount has been directly used for tax exempt investments; (ii) tax free investments have come down from Rs.405,21,54,000 as on 31.3.2008 to Rs.34,78,31,000 as on 31.3.2009;

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 6 of 25 (iii) the assessee has received advances from customers amounting to Rs.146.52 Crores which are interest free and the reserves and surplus amounting to Rs.882.67 Crores; all these amounts are interest free funds and are sufficient to make the tax free investments. Accordingly, the learned CIT (Appeals) held that the overdraft facility was not used for making tax exempt investments and deleted the disallowance of Rs.15,27,310 made under rule 8D(2)(ii). 8.1.5 In respect of the disallowance under rule 8D(2)(iii) amounting to Rs.1,09,99,962, the learned CIT (Appeals) held that the above disallowance is with regard to other indirect expenses which are normally estimated as per accounting principles as it cannot be quantified directly. The learned CIT (Appeals) held that, in this regard, there is no discretion available with the Assessing Officer and the provisions of section 14A(3) of the Act will apply even in a case where the assessee claims that no expenditure has been incurred in relation to exempt income. In this view of the matter, the learned CIT (Appeals) confirmed the disallowance ofRs.1,09,99,and 962 made under rule 8 D (2)(iii). 8.2 The learned Departmental Representative relied and placed support on the order of the Assessing Officer on this issue and the grounds raised by revenue in this appeal. 8.3 The learned Authorized Representative relied on the findings of the learned CIT (Appeals) on this issue and submitted that revenue has not brought any material on record to controvert the findings of the learned CIT (Appeals). The learned Authorized Representative also relied on the decisions of the co- ordinate bench of this Tribunal in the case of M/s.Bharatiya Reserve Bank Note Mudran Pvt. Ltd. V DCIT in ITA No.650/Bang/2011 dt.7.12.2012 and M.P. No.43 & 51/Bang/2013 dt.31.5.2013 in the same case, in support of the contention that the Assessing Officer had resorted to Rule 8D for making the disallowance under section 14A of the Act without recording a finding as to why the assessee's claim that no expenses has been incurred to earn the exempt income is incorrect. 8.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co- ordinate bench of this Tribunal in the case of Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (supra) after considering the various aspects of section 14A of the Act, Rule 8D of the IT Rules, 1963 and the decision of the Hon'ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) held that Rule 8D cannot be invoked unless the Assessing Officer records his satisfaction about the correctness or otherwise of the claim made by the

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 7 of 25 assessee having regard to the accounts of the assessee. The relevant portion of the above decision is extracted and reproduced hereunder :- “ 19. The observations of the Hon’ble Court shows that (a)Sub-s. (2) of s. 14A does not enable the AO to apply the method prescribed by r. 8D without determining in the first instance the correctness of the claim of the assessee, having regard to the accounts of the assessee. (b) The satisfaction envisaged by sub-s. (2) of s. 14A is an objective satisfaction that has to be arrived at by the AO having regard to the accounts of the assessee. (c)Rule 8D of the Rules applies only for AY 08-09 and subsequent Assessment years and not to earlier Assessment Years. 20. In the present case the AY is 2008-09 and therefore Rule 8D of the Rules are applicable. The Assessee made a claim before the AO that no expenditure was incurred for earning income which does not form part of the total income under the Act. The AO rejected the claim of the Assessee for the reason that funds for making the investments flowed from a common pool of funds i.e., cash credit/overdraft account where the receipts in the course of business are also deposited. The Assessee’s plea that it had sufficient interest free funds which were enough to make the investments in question could not be rejected by the AO with certainty. This is made clear by the AO in para 3.4 of his order. 21. The AO has applied the provisions of Rule 8D(2)(ii) of the Rules and therefore the disallowance u/s.14A of the Act has to be confined only to the interest expenditure debited in the profit and loss account. The claim of the Assessee before the AO was that no interest expenditure was incurred for making investments in units of mutual funds. The funds for making investment in units of mutual funds have its origin in the cash credit/overdraft Account of the Assessee. The Bank statement for the period ending 31.3.2008 shows that the outflow from the bank account for the investment in question was on 31.3.2008. Therefore during the previous year till the last day of the previous year all the funds had been used by the Assessee for the purpose of business and

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 8 of 25 not used for making investment which can yield tax free income. The above being the factual position it cannot be said that the AO arrived at a satisfaction that the assessee has incurred expenditure by way of interest during the previous year and that the said interest expenditure is not directly attributable to any particular income or receipt contemplated by Rule 8D(2)(ii) of the Rules. We therefore hold that as far as the present Assessment year is concerned, no disallowance can be made under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules. The addition made by the AO and confirmed by the CIT(A) is directed to be deleted.” 8.4.2 In the case on hand, it is not in dispute that the assessee made a claim before the Assessing Officer that no expenditure had been incurred to earn the exempt income, which is reproduced at para 8 of the order of assessment. The Assessing Officer considered the submissions of the assessee and held that the disallowance under section 14A of the Act is mandatory and has to be worked out with respect to tax exempt investments in accordance with Rule 8D and proceeded to make a disallowance of Rs.15,27,310 under section 14A r.w. rule 8D(ii). In the case on hand, we find that the Assessing Officer has not rendered any finding regarding the incorrectness of the assessee's claim having regard to its accounts or that he is not satisfied with the correctness of the assessee's claim 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. 8.4.3 As per Rule 8D(2)(ii), disallowance can be made in respect of that interest expenditure which is not directly attributable to any particular income or receipt. The learned CIT (Appeals) after considering the facts on record held that there is no material on record to show that the overdraft cannot has been directly used for tax exempt investments and that the interest free funds, reserves and surplus are sufficient to make the tax free investments. Revenue has not brought on record any material to substantiate that the overdraft account was utilized for making tax free investments. Revenue has also not disputed that the investments proceeds from the public issue of shares. Thus, it cannot be said that funds from the overdraft account, on which interest is paid, has been invested in mutual funds which yield tax exempt income. In this factual matrix, we hold that the learned CIT (Appeals) was justified in deleting the disallowance under section 14A r.w. Rule 8D(2)(ii) amounting to Rs.15,27,310. Consequently, Ground Nos.7 to 13 raised in revenue’s appeal are dismissed.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 9 of 25 9.1 Ground No.1 of the assessee's C.O. deals with the disallowance confirmed by the learned CIT (Appeals) under section 14A r.w. rule 8D (2)(iii) amounting to Rs.1,09,99,962. We have already considered the facts and material on record while adjudicating the revenue’s grounds No.7 to 13 in respect of the disallowance under Rule 8D(2)(ii). It is seen that the Assessing Officer has not considered the assessee's claim that no expenditure has been incurred to earn tax exempt income and therefore the Assessing Officer has not arrived at an objective satisfaction that the claim of the assessee is not correct. The co- ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2008-09 vide order in ITA No.1279/Bang/2010 dt.12.1.2012 set aside the issue of disallowance under Rule 8D to the file of the Assessing Officer holding at para 10 thereof as under : “ 10. In the present case, it is noticed that the Assessing Officer had not established the nexus between the expenditure incurred and income earned. He considered the entire amount of expenditure by way of interest as well as of expenses incurred towards IPO as the expenses related to the earning of dividend income. The learned CIT (Appeals) also confirmed the action of the Assessing Officer without bringing any material on record, which could have established the nexus between the expenditure incurred and the dividend income earned by the assessee. We, therefore, considering the totality of the facts, deem it appropriate to set aside the issue to the file of the Assessing Officer to be decided afresh, by keeping in view the guidelines laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (supra).” 9.2 On similar facts and circumstances of the case and law applicable, the co-ordinate bench of this Tribunal in Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (supra) has at paras 18 to 20 of this order held as under : “ 18. In the present case, the assessee, in so far it relates to common expenses [falling within the ambit of Rule 8D(2)(iii) of the Rules], has taken a stand that no expenses whatsoever was incurred by the assessee. The AO in para 3.4 of his order has only dealt with the expenditure in the form of interest. With regard to other indirect common expenses, he has only made an observation that the assessee does not maintain separate accounts to enable identification of expenditure relating to exempt income. It is thus clear that as far as indirect expenses are concerned, neither the assessee has given any basis for his claim that no

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 10 of 25 expenses were incurred for earning the exempt income, nor has the AO arrived at an objective satisfaction regarding the claim of the assessee that no indirect expenses were incurred to earn the tax-free income is not correct. In the circumstances, we are of the view that it would be just and appropriate that the order of the CIT(A) should be set aside and the issue with regard to disallowance to be made of indirect expenses under Rule 8D(2)(iii) of the Rules should be remanded to the AO for fresh consideration. The assessee should make a claim before the AO specifying the basis on which a claim is made that no indirect expenses were incurred to earn exempt income. The AO should examine such a claim and arrive at an objective satisfaction regarding the correctness or otherwise of the claim made by the assessee. If the AO comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. Even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The plea of the assessee that applying the Rule 8D blindly by the AO will lead to absurd results, in our view, is without any basis because while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. 19. With regard to decisions relied upon by either of the parties before us viz., the decision in the case of Hero Cycles Ltd. (supra), Walfort Share & Stock Brokers (supra), we are of the view that those decisions would not be relevant to the present case which relates to A.Y. 2008-09 to which the provisions of Rule 8D are applicable. In the case of Hero Cycles Ltd. (supra), it was a case where there was no nexus shown to exist between expenditure incurred and

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 11 of 25 exempt income. The Hon’ble High Court emphasized that a finding in this regard is required to make disallowance u/s. 14A of the Act. In our view, section 14A(2) as well as Rule 8D(1) contemplate such a finding to be given by the AO on an objective basis. Similarly the decision in the case of Walfort Share & Stock Brokers (supra) is a case where the Hon’ble Supreme Court held that section 14A and section 94(7) of the Act operate in different fields and in our opinion, will have no bearing on the present case. 20. We are of the view that in the light of the discussion in the earlier part of this order, the question of disallowance to be made under Rule 8D(2)(iii) of the Rules is remanded to the AO for fresh consideration and the order of the CIT(A) in this regard is set aside. The assessee as well as the AO shall follow the directions given in para 18 of this order. The issue will be decided by the AO after giving opportunity of being heard to the assessee.” 9.3 In view of the above, and following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (supra), the disallowance under rule 8D(2)(iii) amounting to Rs.1,09,99,962 confirmed by the learned CIT (Appeals) is set aside and the matter is restored to the file of the Assessing Officer for fresh consideration in accordance with law. The Assessing Officer shall consider the claim of the assessee and record his satisfaction as to whether the said claim is correct or not having regard to the accounts of the assessee after affording adequate opportunity of hearing to the assessee. Ground No.1 of the assessee's C.O. is therefore treated as allowed for statistical purposes.” Since the facts and circumstances during the relevant assessment year are also similar, respectfully following the decision of the co- ordinate bench to which one of us i.e. the Judicial Member is the signatory, we confirm the order of the CIT(A) as far as disallowance under rule 8D(2) is concerned and set aside the issue of disallowance u/s rule 8D(2)(iii) to the file of the AO with similar direction as given by the Tribunal.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 12 of 25 6. The second issue considered by the AO is the assessee’s claim of deduction u/s 80IB(10) of the Act. He observed that the assessee has claimed deduction with respect of 17 projects during the year, out of which the assessee-company has claimed deduction u/s 80IB(10) on 4 projects on proportionate basis. He observed that in these projects, the assessee-company has constructed some of the flats of the dimension of more than 1500 sq.ft. and therefore it claimed deduction on proportionate basis. The AO was of the opinion that 4 projects were conceived with substantial number of flats measuring more than 1500 sq.ft. and therefore deduction u/s 80IB(10) is not allowable with regard to these projects. He accordingly, disallowed the deduction for all the 4 projects and brought it to tax.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 13 of 25 The learned Departmental Representative, however, supported the orders of the authorities below.

“7.3 In support of the grounds raised at S.No.2 to 6, the learned Departmental Representative placed reliance on the order of the Assessing Officer and submitted that the design, layout and approval of the plan itself disclose that in the projects ‘Brigade Gateway’ and ‘Brigade Metropolis’ only 30% and 68% of its flats were less that 1,500 sq. ft.. It was strongly urged that since the aforesaid projects were having built up area of residential flats in excess of 1,500 sq. ft. by approved plans, they shall not be eligible for deduction as per the provisions of section 80-IB(10) of the Act, since they do not fulfill the conditions stipulated therein in relation to a housing project as a whole. 7.4.1 The learned Authorized Representative, on the other hand, argued that the above facts raised in the grounds of appeal by revenue have already been considered by the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 and 2008-09 in respect of the very same projects i.e. ‘Brigade Gateway’ and ‘Brigade Metorpolis’ and deduction u/s.80-IB(10) of the Act have been allowed in respect of residential units of these projects having built up area of upto OR less than 1500 sq. ft. vide Tribunal’s order in ITA Nos.1356 & 1357/Bang/2010 dt.7.1.2012. It was submitted that in this order, the co- ordinate bench of this Tribunal followed the decision of another co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2004-05 in (2008) 119 TTJ 269 (Bangalore) dt.29.8.2008 and Assessment Year 2006-07 in ITA No.1355/Bang/2010 dt.11.10.2011. 7.4.2 It was submitted by the learned Authorized Representative that Revenue’s appeal against the decision of the co-ordinate bench of this Tribunal for Assessment Year 2004-05 was dismissed by the Hon'ble Karnataka High Court by order in ITA No.763 c/w 25/2009 dt.29.2.2012. It was further submitted that Revenue’s appeal against the decision of the co-ordinate bench of this Tribunal for Assessment Year 2006-07 was also dismissed by the Hon'ble Karnataka High court vide order in ITA No.61/2012 dt.5.10.2012.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 14 of 25 7.4.3 The learned Authorized Representative further submitted that Revenue’s Special Leave Petition (‘SLP’) against the aforesaid decision of the Hon'ble Karnataka High Court in ITA No.25/2009 for Assessment Year 2004-05 was dismissed by the Hon'ble Apex Court vide order dt.6.5.2013. It is submitted that in view of the above facts and the decisions / orders of the co-ordinate bench of this Tribunal (supra), the Hon'ble Karnataka High Court and the Hon'ble Apex Court (supra) in the assessee's own case, the assessee is entitled for being allowed deduction u/s.80-IB(10) of the Act in respect of residential units having built up area of less than 1,500 sq. ft. in ‘Bangalore Gateway’ and ‘Brigade Metropolis’ housing projects. 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited. In the year under consideration, the Assessing Officer denied the assessee's claim for deduction u/s.80-IB(10) of the Act in respect of the housing projects ‘Brigade Gateway’ and ‘Brigade Metropolis’ for the reason that the design, layout and approval of the plans in respect of the above two housing projects had only 68% and 30% of the units respectively measuring less than 1500 sq. ft. Therefore projects having units more than 1500 sq. ft. by approved plans are not entitled to deduction u/s.80- IB(10) of the Act. The conclusion of the Assessing Officer followed the order of assessment in the assessee's case for Assessment Year 2008-09. 7.5.2 As submitted by the learned Authorized Representative, we find that this issue of the deduction u/s.80-IB(10) of the Act was considered by a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 and 2008-09 in order in ITA Nos.1356 & 1357/Bang/2010 dt.7.9.2012. In this order, the co-ordinate bench of this Tribunal held that deduction u/s.80-IB(10) of the Act should be allowed proportionately in respect of housing projects ‘Brigade Gateway’ and ‘Brigade Metropolis’ in respect of those residential units with built up area of 1500 sq. ft. or less. The relevant portion at para 8 of the order reads as under : “8. We have heard the rival submissions. As far as the objection with regard to the action of the CIT (Appeals) in allowing proportionate deduction in section 80-IB(10) of the Act in respect of units in which the constructed space to individual units was less than 1500 sq. ft., we find that the issue stands squarely covered by the decision in assessee's own case for the A.Y. 2004-05 to 2006-07. Following the aforesaid decisions, we uphold the order of CIT (Appeals) on this issue.”

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 15 of 25 7.5.3 The proportionate deduction u/s.80-IB(10) of the Act was allowed by the co-ordinate bench in its order for Assessment Years 2007-08 and 2008-09 relying on its earlier decision for Assessment Year 2004-05 in the assessee's own case in ITA No.198/Bang/2997 dt.29.8.2008. The relevant portion of the order of the co-ordinate bench for Assessment Year 2004-05 (supra) allowing proportionate deduction u/s.80-IB(10) of the Act at para 5.1 and para 5.2 thereof is extracted hereunder : “ 5.1 ….. As per clause ( c ) of section 80-IB(10), a residential unit should have a maximum built up area of 1500 sq. ;ft. Clause ( c ) refers to “area” of “residential area”. The use of words “residential unit” means that deduction should be computed unit-wise. Therefore, if a particular unit satisfies the condition of 80-IB, the assessee is entitled for deduction. So considered, it is only in respect of those units which have not fulfilled the stipulated conditions, deduction should be denied. The law prescribes maximum permissible area with reference to each residential unit….. 5.2….. Further, profits from the units will have to be arrived based on the method of accounting employed. Accounting principles would mandate recognition of profits from each unit separately. It is with reference to such profits that the deduction u/s.80-IB would be allowed. The manner of accounting for profits would also support a conclusion that the deduction u/s.80-IB is to be computed qua each residential unit.” The above decision of the co-ordinate bench of this Tribunal was followed and proportionate deduction u/s.80-IB(10) of the Act was allowed by the other co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2006-07 and 2008-09. 7.5.4 Revenue’s appeal against the order of the co- ordinate bench of this Tribunal for Assessment Years 2004-05 and 2005-06 was dismissed by the Hon'ble Karnataka High Court in its orders in ITA No.25/2009 for Assessment Year 2004-05 and ITA No.763/2009 for Assessment Year 2005-06 dt.29.2.2012. Revenue’s appeal against the order of the co- ordinate bench for Assessment Year 2006-07 was determined by the Hon'ble Karnataka High Court vide order in ITA No.61/2012 dt.5.10.2012. Revenue’s SLP against the decision of the Hon'ble Karnataka High Court in ITA no.703/2009 for Assessment Year 2005-06 was dismissed by the Hon'ble Apex Court vide order dt.4.1.2013 in SLP

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 16 of 25 No.1049 of 2013. Following the order, Revenue’s SLP against the decision of the Hon'ble Karnataka High Court in ITA No.25/2009 for Assessment Year 2005-06 was also dismissed by the Hon'ble Apex Court vide order dt.6.5.2013. Further, the Review Petition No.490 of 2013 filed against the SLP dismissed by the Hon'ble Apex Court vide order dt.1.5.2013. 7.5.5 In the case on hand, the housing projects “Brigade Gateway” and “Brigade Metropolis” were same for Assessment Years 2007-08, 2008-09 and 2009-10 in respect of which deduction under section 80-IB(10) of the Act was denied by the Assessing Officer. Revenue has failed to demonstrate as to how the facts in the assessment year under consideration i.e. 2009-10 are different, even though in ground No.5 of revenue’s appeal it is stated that the facts of the present assessment year are different. It appears to us that the facts and circumstances of the case as it prevailed for Assessment Years 2007-08 and 2008-09 are identical for the Assessment Year under consideration i.e. 2009-10. As explained above, proportionate deduction under section 80- IB(10) of the Act has been allowed by different co-ordinate benches of this Tribunal in the assessee's own case for earlier assessment years. Revenue’s appeals against the aforesaid decisions of the Tribunal (supra) have been dismissed by the Hon'ble Karnataka High Court (supra) and Revenue’s SLPs by the Hon'ble Apex Court (supra). In this view of the matter, respectfully following the decisions of the co-ordinate benches of this Tribunal, the Hon'ble Karnataka High Court and the Hon'ble Apex Court in the assessee's own case for the earlier assessment years (supra), we hold that the assessee is entitled for deduction under section 80-IB(10) of the Act in respect of residential units having built up area of 1500 sq. ft. or less in ‘Brigade Gateway’ and ‘Brigade Metropolis’ housing projects. We, therefore, dismiss grounds No.2 to 6 raised by revenue in this appeal. ”

Since the issue before us is similar to the issue in the earlier assessment year and the CIT(A) has also followed the Tribunal’s order for earlier assessment year, we do not see any reason to interfere with the order of the CIT(A).

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 17 of 25 business for business purposes. It is the grievance of the revenue that the CIT(A) has deleted the same without appreciating that the funds from the overdraft account were utilized to make interest free advances to the assessee’s subsidiary and also for acquiring lands and property and also has erroneously relied upon the decision of this Tribunal in the assessee’s own case though it has not been accepted and further appeal is filed.

“10. Disallowance of Interest paid u/s.36(1)(iii) of the Act : Rs.76,66,638. 10.1 Grounds No.14 & 15 of Revenue’s appeal of interest paid amounting to Rs.76,66,638 by the learned CIT (Appeals). In the course of assessment proceedings, the Assessing Officer noticed that the assessee has made certain advances and deposits, details of which are as under : Sl. Particulars Amount No. Rs. 1 Amounts advanced to subsidiaries 9,85,23,071 2 Amount advanced to subsidiary company, 112,21,69,506 M/s. BCV Developers Pvt. Ltd. for acquiring lands 3 Other property advances 90,18,17,578 4 Other deposits for Joint Development Projects. 35,98,98,250 Total : 248,24,08,405 The assessee submitted before the Assessing Officer that the above advances and deposits were made out of own funds i.e. reserves and surplus earned by the assessee company and were made for the purpose of business and for earning revenues for the company. The Assessing Officer, however, was of the opinion that the above advances and deposits constituted non-business advances and capital advances and

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 18 of 25 that these have flown from the overdraft account on which interest was paid to the extent of Rs.91,93,948. Since interest paid amounting to Rs.15,27,310 had been disallowed by the Assessing Officer under section 14A r.w. Rule 8D(2)(ii), the remaining amount of interest paid amounting to Rs.76,66,638 (Rs.91,93,948 less Rs.15,27,310) was disallowed by the Assessing Officer under section 36(1)(iii) of the Act. 10.2 On appeal, before the learned CIT (Appeals), it was contended that the bank overdraft facility is taken solely with a view to meeting the assessee's working capital requirements, cash and fund flow management and all these funds were utilized solely for the purpose of business. It was submitted that this interest debited to the profit and loss account during the period under consideration pertains to revenues earned as reflected therein. The learned CIT (Appeals) after considering the arguments put forth and the facts and material on record, held that since the submissions are special purpose vehicles (‘SPV’) Companies and the assessee is involved in real estate business, advances to these subsidiaries are in the natural course of business. The learned CIT (Appeals) also held that the advances to Joint Venture companies are in the normal course of business of real estate wherein land and buildings are held stock-in-trade and not as capital assets and hence the entire advances and deposits cannot be treated as non- business or capital advances. The learned CIT (Appeals) also observed that the assessee has got sufficient interest free funds for making these advances and even if interest bearing funds are utilized for making these advances, which are for the purpose of business, the interest expenditure is allowable under section 36(1)(iii) of the Act. In this view of the matter, the learned CIT (Appeals) deleted the disallowance of Rs.76,66,638 made under section 36(1)(iii) of the Act. 10.3 The learned Departmental Representative relied on the finding in the order of the Assessing Officer on this issue and submitted that since the overdraft account was utilized to make interest free advances and for acquiring lands, etc. the interest paid on the overdraft account is to be disallowed. 10.4 Per contra, the learned Authorized Representative relied on the findings in the order of the learned CIT (Appeals) on this issue. It was contended by the learned Authorized Representative that no disallowance is to be made in respect of interest expenditure claimed as deduction, placing reliance on a separate compilation of cases filed. 10.5.1 We have heard the rival contentions and perused and carefully considered the material on record. It appears that the disallowance of interest expenditure under section

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 19 of 25 36(1)(iii) of the Act has been made for the following two reasons :- i) that the advances and deposits have been made from the bank overdraft facility bearing interest and ii) that these advances and deposits were non-business advances and capital advances. The conclusion of the Assessing Officer that the advances and deposits have been made from the overdraft account is not borne out by the facts or material on record. Further, we find that the Assessing Officer has not been able to controvert the contentions of the assessee that these advances and deposits were made out of own funds, i.e. reserves and surplus earned by the assessee company which were approx.. Rs.994.92 Crores as against the total advances and deposits of approx. Rs.248.24 Crores. The learned CIT (Appeals) on an appreciation of the material on record found that the non- interest bearing funds or the assessee's own funds are far in excess of the advances and deposits made during the year. The Hon'ble Apex Court in Munjal Sales Corporation V CIT (2008) 298 ITR 298 deleted the disallowance of interest claimed as a deduction, inter alia, for the reason that the opening balance / profit for the year are sufficient to cover the loans and advances given. Para 17 of the said order reads as under : “17. One aspect needs to be mentioned during the Assessment Year 1995-96, apart from the loan given in August / September, 1991, the assessee advanced interest free loan to its sister concern amounting to Rs.5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee firm out of its own funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The opening balance as on 1.4.1994 was Rs.1.91 Crores whereas the loan given to the sister concern was a small amount of Rs.5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs.5 lacs.” 10.5.2 In Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) at para 10 thereof, it was held as under : “ 10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 20 of 25 woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (supra), the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and / or loans taken, then a presumption would arise that the investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(Appeals) and ITAT.” 10.5.3 Similarly in CIT V Motor Sales Ltd. (2008) 304 ITR 123 (All), it was held as under : “ We find that the Commissioner of Income Tax (Appeals) had found that the respondent-assessee had paid up capital/reserve/surplus of Rs.6.10 Crores on which no interest was being paid and therefore interest free advances made by it are covered. There is no question of any disallowance of notional interest on loan taken by it. The Tribunal, however, had also recorded a finding that the assessee has not diverted any borrowed fund on which interest was paid for non-commercial purposes and therefore, there is no question of disallowance of interest out of the interest paid by the assessee. The view of the Tribunal is in consonance with the decision of this court in the case of C/Tribunal V Radico Khaitan Ltd. (2005) 274 ITR 354 and of the apex court in the case of S.A. Builders Ltd. V C/Tribunal (Appeals) (2007) 288 ITR 1. That being the position the substantial question of law referred to above is answered in favour of the assessee and against the Revenue and consequently the appeal fails and is dismissed.”

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 21 of 25 10.5.4 In view of the above and considering the fact that there appears to be no material on record to justify the Assessing Officer’s conclusion that deposits and advances have flown from out of the bank overdraft facility, we are of the considered view that the learned CIT (Appeals) has rightly deleted the disallowance of interest amounting to Rs.76,66,638. 10.6 The second reason of the Assessing Officer that the advances and deposits were made for non-business purposes and are capital advances are also not borne out by the material on record. The advances and deposits were made for Joint Development Projects, for acquiring lands, properties, etc. Admittedly, the assessee is engaged in the business of real estate with land and buildings as stock-in-trade and in the factual matrix of the case on hand, the learned CIT (Appeals) was right in holding that the deposits and advances were made in the normal course of the assessee's business. It is also seen that the Assessing Officer’s view that the bank overdraft facility has not been utilized for the purpose of the assessee's business has not been supported by any evidence and is therefore factually unsustainable. Further, we also find that the Assessing Officer has not been able to establish a clear nexus of interest bearing funds being given as interest free advances. In this view of the matter, we are of the considered opinion that the learned CIT (Appeals) has rightly deleted the disallowance of interest paid amounting to Rs.76,66,638 under section 36(1)(iii) of the Act and therefore uphold his decision in the matter. Accordingly Grounds no.14 & 15 of Revenue’s appeal are dismissed.”

The CIT(A) has only followed the decision of this Tribunal in the assessee’s own case for the earlier assessment year 2009-10. Respectfully following the decision of the co-ordinate bench to which one of us i.e. Judicial Member is the signatory, we do not see any reason to interfere with the order of the CIT(A).

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 22 of 25 of the AO. Therefore, this ground of appeal is treated as allowed for statistical purposes.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 23 of 25 results in increase in the business profit. In the light of our decision on alternative ground of appeal No.2 above, this ground of appeal is allowed and the AO is directed to give deduction u/s 80IB(10) of the Act on this ground.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 24 of 25 maintenance, net rental income of Rs.10,50,000/- was brought to tax.

ITA Nos.1275 & 1323/Bang/2014 M/s.Brigade Enterprises Ltd., Page 25 of 25 22. As regards the ground of appeal No.8 is concerned, we find that it is against levy of interest u/s 234B and 234C of the Act and as this interest is consequential in nature, we direct the AO to grant consequential relief, if any, to the assessee.

Pronounced in the open court on 8th of July, 2015.

sd/- sd/- (Abraham P George) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore