M/S STERLING DEVELOPERS PVT. LTD.,,BANGALORE vs. JCIT, BANGALORE

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :

These are appeals filed by assessee and Revenue respectively, directed

against the order of CIT (A)-III, Bangalore, dt.27.09.2012, for the assessment

year 2009-10.

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which is consequential in nature and also do not need need specific adjudication. Effective grounds 2 and 3 are reproduced hereunder :

“2. The learned CIT (A) is not justified in sustaining the disallowance pf Rs.3,81,18,472/- out of the total disallowance of Rs.5,20,69,680/- u/s.14A of the Act under the facts and in the circumstances of the appellant’s case. 3. The learned CIT(A) is not justified in upholding the disallowance of Rs.1,64,97,300/- claimed u/s.57 of the Act in respect of the interest paid on borrowed funds under the facts and in the circumstances of the appellant’s case.” 03. As against this, Revenue has taken four grounds of which, grounds 1, 3 and 4 are general, needing no specific adjudication. Effective ground of the Revenue, numbered as ground 2 is reproduced hereunder :

“2. On the facts and in the circumstances of the case the learned CIT (A) has erred in law in directing the AO to allow set off of losses suffered in the eligible 80IB unit against the income from non eligible unit without appreciating the statutory position as envisaged under sub section 5 of Section 80IA which is applicable to Section 80IB also, that the income from eligible unit shall be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the Ays for which the provisions of Section 80IB are applicable.” 04. Facts apropos are that assessee engaged in developing and construction of houses, buildings and other related activities. It filed a return of income declaring income of Rs.4,10,17,850/-. During the course of assessment

proceedings, it was noted by the AO that assessee had claimed deduction u/s.80IB of the Act, in respect of one of its two projects. It had loss in the

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project on which it was eligible for claiming deduction u/s.80IB of the Act, but

it effected a set off of the said loss against its income from projects on which

80IB deduction was not available. AO was of the opinion that loss in the 80IB

unit could not be allowed for set off against business income from non-eligible

units in view of sub-section (13) of Section 80IB of the Act, which inter alia

stipulated application of sub-section 5 and 7 to 12 of Sec.80IA of the Act.

Though the assessee argued before the AO that set off of losses under any

source within a given head was to be allowed in accordance with Section 70 (1)

of the Act, placing reliance on the judgment of Hon’ble Apex Court in the case

of Synco Industries Ltd v. AO [(2008) 299 ITR 444)], Ld. AO was not

impressed. According to him, by virtue of the decision of the Hon’ble Apex

Court in the case of Liberty India v. CIT [(2009) 317 ITR 218] and due to the

overriding provision contained in Sec.80IA of the Act, loss of eligible business

could not be allowed for set off from profit from non-eligible business. Taking

this view of the matter, he disallowed the loss of Rs.1,13,69,446/- claimed for

set off against the business profits of the non-80IB projects.

Rs.54,77,66,006/- and opening value of investments of Rs.57,27,60,174/-,

income from which was exempt u/s.14A of the Act. He noted that in the profit

and loss account assessee had charged Rs.12,13,19,585/- as finance charges

which inter alia included interest on fixed loans Rs.8,58,54,952/- and interest

on other loans of Rs.3,28,42,343/-. Assessee was put on notice as to why

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Section 14A of the Act read along with Rule 8D of the IT Rules should not be

applied. Reply of the assessee was that the investments made were in shares

and debentures of one M/s. Sterling Urban Developments P. Ltd (‘SUDPL’ in

short) during the financial year 2005-06. As per the assessee, it had borrowed

Rs.50 Crores from HDFC for making these investments. Assessee pointed out

that there was a survey u/s.133A of the Act in the premises of the assessee,

when the Department had taken a stand that proportionate interest on the loans

utilised for investments in shares and debentures could not be allowed as

business expenditure. Accordingly as per the assessee, interest pertaining to

shares and debentures were separated out of the business income and placed

under the head ‘income from other sources’ and the related interest out go was

claimed u/s.57 of the Act. As per the assessee, what could be disallowed

u/s.14A of the Act, could at best be Rs.36,80,500/-, being the investment made

in M/s. Padmavathi Associates, a partnership firm, wherein the assessee was a

partner.

him, investments in shares of SUDPL made by the assessee were to earn income

from dividends which was not includible in the total income. According to the

AO, there was no business income directly relatable to the interest expenditure

during the relevant previous year. According to him, a part of the interest out

go of Rs.12,13,19,585/- had to be disallowed applying the formula prescribed

in Rule 8D of the IT Rules. He worked out the ratio of the average investment

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to the average value of the total assets and applied it on the total interest and

arrived at a interest disallowance of Rs.4,92,78,160/- under Rule 8D(2)(ii). A

further disallowance of Rs.27,91,520/- was also made at 0.5% of the average

value of the investment applying Rule 8D(2)(iii).

earned from its investment in debentures with M/s. SUDPL under the head

íncome from other sources. Such interest income, came to Rs.19,05,000/-.

Against the interest income, assessee had claimed interest on the loans raised

from HDFC for subscribing to such debentures coming to Rs.1,64,97,300/-,

which had resulted in a loss under the said head. AO was of the opinion that

what could not be considered as an allowance u/s.37 of the Act, if the income

from interest was reckoned under the head ‘profits and gains from business or

profession’ could not be considered under the head ‘income from other sources’

as well. Further as per the AO, SUDPL was a concern having same directors as

that of the assessee and the said concern had scaled down the interest paid by it

on the debentures from 10% to 1% which resulted in the miniscule interest

income of Rs.19,05,000/- against an interest outgo of Rs.1,64,97,300/-. He

disallowed the claim of interest outgo of Rs.1,64,97,300/-.

CIT (A).

(A) was of the opinion that the procedure followed by the assessee was

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acceptable and for taking this view he relied on his own order in assessee’s own

casefor A. Y. 2008-09. Ld. CIT (A) held that assessee was eligible for claiming

loss under 80IB project against its income from non-80IB project.

argument of the assessee was that it had in its letter dt 15.11.2011 to the AO

specifically mentioned that there was no exempt income earned by it during the

relevant previous year and therefore no disallowance could be made u/s.14A of

the Act. Assessee also placed reliance on the decision of Chennai Bench of the

Tribunal in the case of Siva Industries v. ACIT (ITA.2148/Mds/2010,

dt.20.05.2011). Further, as per the assessee, entire interest expenditure could

not have been considered for application of Rule 8D(2)(ii) since part of the

loans were utilised for its business. Assessee also pointed out that average

investments considered by the AO at Rs.55,83,03,916/- was incorrect and the

actual figure should have been Rs.37,42,52,916/-. CIT (A) partly agreed with

the contentions of the assessee and held that average value of the investments

was wrongly considered by the AO while working out the disallowance under

Rule 8D. He also held that a sum of Rs.44,16,600/- had to be excluded from

the total interest expenditure of Rs.12,13,19,585/- while working out the interest

disallowance. Effectively, he scaled down the disallowance u/s.14A of the Act,

from Rs.5,20,69,680/- to Rs.3,8118,472/-.

other sources’ argument of the assessee before the CIT (A) was that the income

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from the debentures having been declared u/s.56 of the Act, legitimate

expenditure claimed u/s.57 could not be disallowed. As per the assessee, the

reasoning given by the AO that what could be disallowed u/s.37 could not be

claimed u/s.57 was incorrect. CIT (A), though in principle agreed with this

contention of the assessee was of the opinion that income from debentures was

reduced by M/s. SUDPL from 10% to 1% during the relevant previous year,

resulting in substantial reduction of interest income. As per the CIT (A), the

directors of the assessee company were common as that of SUDPL and assessee

had critical control over the SUDPL. CIT (A) was of the opinion that the

assessee could not give proper reasons for reduction of interest from 10% to

1%. As per the CIT (A), assessee had accepted the reduction of interest on

debentures while paying high interest to the loans taken from HDFC which was

utilised for making such investments. Relying on the decision of Hon’ble Apex

Court in McDowell & Co. Ltd v. CTO (154 ITR 148), CIT (A) held that

reduction of interest by SUDPL was only to claim a huge loss on account of

payment of interest and it was a colourable device which had no proper

economic justification and rationale. He confirmed the addition of

Rs.1,64,97,300/- made by the AO, though for a different reason.

CIT (A) to allow set off of loss of 80IB project against profits of non-80IB

projects whereas assessee is aggrieved on the additions made u/s.14A and

disallowance of the claim u/s.57 of the Act.

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ITA.487/Bang/2012, dt.31.01.2013 and the decision was in favour of the assessee.

80IB unit with the profits of non-80IB projects. This Tribunal on appeal filed by the Revenue, in its order dt 31.01.2013, held as under :

5.3.1 We have heard both parties and have carefully perused and considered the material on record. At the outset it must be mentioned here that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) was concerned with tot withstanding anything contained in any other provisions of Section 80 I(6) of the Act, as it existed at that relevant point of time and the same is extracted hereunder for clarity : “ Section 80 I (6) – Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an industrial undertaking on a ship or the business of a hotel (or the business of repairs to ocean going vessels or other powered craft) to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or business of the hotel (or the business of repairs to ocean going vessels or other powered craft) were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made.”

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Let us also peruse and consider the provisions of section 80 IA(5) of the Act which is relied on by the Assessing Officer which is also extracted hereunder : “Section 80-IA(5) - Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.” 5.3.2 From a perusal and comparison of both these provisions, namely sections 80 I(6) and 80 IA(5) of the Act, it is seen that the provisions of section 80 IA(5) of the Act, it is seen that the provisions of section 80 IA(5) of the Act are couched in similar language to the erstwhile provisions of section 80 I(6) of the Act. In other words, the restriction contemplated under section 80 I (6) of the Act, is the same as the restriction contemplated under section 80 IA(5) of the Act. It is in this context that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) held after an elaborate analysis of the provisions at paras 12 and 13 of its order which are extracted and reproduced hereunder : “ 12. The contention that under section 80-I(6) the profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. Section 80-I(1) lays down that where the gross total income of the assessee includes any profits derived from the priority undertaking / unit / division, then in computing the total income of the assessee, a deduction from such profits of an amount equal to 20 per cent has to be made. Section 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand section 80-I(6) deals with determination of the quantum of deduction – section 80- I(6) lays down the manner in which the quantum of deduction has to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words “includes any profits” used by the legislature in section 80-I(1) are very important which indicate that the gross total income of an assessee shall include profits from a priority undertaking. While

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computing the quantum of deduction under section 80-I(6) the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this court finds that the non obstante clause appearing in section 80-I(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under section 80B(5) which is also referred to in section 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. If the interpretation as suggested by the appellant is accepted it would almost render the provisions of section 80A(2) of the Act nugatory and therefore the interpretation canvassed on behalf of the appellant cannot be accepted. It is true that under section 80-I(6) for the purpose of calculating the deduction, the loss sustained in one of the units, cannot be taken into account because sub-section (6) contemplates that only the profits shall be taken into account as if it was the only source of income. However, section 80A(2) and section 80B(5) are declaratory in nature. They apply to all the sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and therefore the non obstante clause in section 80-I(6) cannot restrict the operation of sections 80A(2) and 80B(5) which operate in different spheres. As observed earlier section 80-I(6) deals with actual computation of deduction whereas section 80-I(1) deals with the treatment to be given to such deductions in order to arrive at the total income of the assessee and therefore while interpreting section 80-I(1), which also refers to gross total income one has to read the expression ‘gross total income’ as defined in section 80B(5). Therefore, this court is of the opinion that the High Court was justified in holding that the loss from the oil division was required to be adjusted before determining the gross total income and as the gross total income was ‘Nil’ the assessee was not entitled to claim deduction under Chapter VI-A which includes section 80-I also. 13. The proposition of law, emerging from the above discussion is that the gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income of the assessee is ‘Nil’ the assessee would not be entitled to deductions under Chapter VI-A of the Act.”

5.3.3 The above decision of the Hon'ble Apex Court squarely supports the case of the assessee that the provisions of section 80 IA(5) of the Act would not restrict the operation of the provisions of section 70(1) of the Act with respect to the set off of the loss. The operation of the provision of section 80 IA(5) of the Act is restricted to the computation of the quantum of deduction for which it has to be considered that the eligible business is the only source of income. That restriction, however, cannot be applied to

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render the concept of gross total income in terms of section 80 B(5) to be determined before the set off of the losses under section 70(1) of the Act. We are, therefore, of the view that the learned CIT(Appeals) has rightly applied the decision of the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) and that there is no merit in the plea of revenue that the said judgment is not applicable to the facts of the present case of the assessee. 5.3.4 That apart, the learned counsel for the assessee has rightly contended that the provisions of section 80 IA (5) of the Act applies in computing the profits of an eligible business for the purposes of working out the quantum of deduction for the initial assessment year and for every subsequent year thereafter. The incentive deductions both under section 80 IA and 80 IB of the Act have the concept of initial assessment year in respect of almost all eligible business. However, with respect to the eligible business to which the provisions of section 80 IB(10) of the Act apply, there is no concept of “initial assessment year.” The deduction is granted to undertakings engaged in the business of developing and building housing projects on certain conditions being fulfilled. The provisions of section 80 IB (13) of the Act, that makes the provisions of section 80 IA(5) applicable to section 80 IB also, applies only ‘so far as may be’. Thus, by virtue of the fact that there is no concept of initial assessment year under section 80IB(10) of the Act, we are also of the view that the provisions of section 80 IA(5) of the Act would not be applicable to the deduction claimed under section 80 IB(10) of the Act. From this angle of the matter also, we find no merit in the view taken by revenue.

Following the above view, we dismiss the appeal filed by Revenue.

be no such disallowance when there was no claim of exempt income. Reliance was placed on the decision of the coordinate bench in the case of M/s. ASK Brothers Ltd v. DCIT [ITA.1074 & 1075/Bang/2006, dt.22.08.2014]

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“9. We have duly considered the rival contention and gone through the record carefully. The Assessing Officer has disallowed the interest expenditure on the ground that the assessee has borrowed the money which has been invested. The investment would ultimately result dividend income which will be exempt from tax. Therefore, the expenditure attributable to earning of such dividend income cannot be allowed to the assessee. Accordingly the Assessing Officer has disallowed the interest expenditure incurred on borrowed funds used for investment. Assessing Officer took the help of section 14A which prohibit an assessee to claim any expenditure which is attributable to earning of exempt income. On the other hand the stand of the assessee is that it has not received any exempt income during the year, therefore, section 14A is not applicable. This stand of the assessee has been accepted by the Coordinate Bench in the case of DCIT vs. M/s. Bhuwalka Steel Industries Ltd in ITA No.349/bang/2013. The finding of the Tribunal in this case read as under:” “14. The only issue that arise for consideration in this appeal by the assessee is with regard to the disallowance made by the Assessing Officer by invoking the provisions of section 14A of the Act. The Assessing Officer has observed in the order of the assessment that from the financials of the assessee, it had earned exempt income during the year. The opening investment as on 01.4.2007 was Rs.3,80,00,000/- and the closing investment stood at Rs.13,82,00,000/-. The average investment was Rs. 8,81,00,000/-. The Assessing Officer called upon the assessee to explain as to why the expenditure incurred in earning exempted income should not be disallowed by applying the provisions of section 1 4A r/w Rule 8D In response, the assessee submitted that the investments were made in its subsidiary company out of the profit earned by the assessee. The Assessing Officer did not accept the explanation given by the assessee and was of the view that whether the investment was made with a subsidiary company or with an outside company, the intention of making investment was to earn dividend income which is exempted under the I. T. Act. By applying the provisions of section 14A r/w Rule

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8D, the Assessing Officer disallowed a sum of Rs.4,40,500/- and brought to the same to tax. 15. Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the CIT (A). The Cit (A) confirmed the order of the Assessing Officer for the reasons given in Para 4.8 of his order, which reads as follows: “4.8 The Assessing Officer made a disallowance under rule 8D(2)(iii) amounting to Rs.4,40,500/-. This disallowance is towards expenses in the nature of indirect expenditure. The word ‘expenditure’ used in section 1 4A of the Act has a wider meaning. The term ‘expenditure’ would take in its sweep not only expenditure but also all forms of expenditure regardless of whether it is fixed, direct, indirect, administrative, managerial or financial. Therefore, the said rule provides for the indirect expenditure as a fixed percentage of the average investments as per the formula laid down. As already state, the Assessing Officer has power to invoke rule 8D even in a case where the appellant claims that no expenditure has been incurred by him in relation to income which does not form part of the total income as per sub-section (3) of section 14A of the Act. In the instant case, it is the contention of the appellant that no expenditure has been incurred for earning the exempt income.: The same cannot be accepted because there rf1y be some indirect expenditure, which is not directly visible. Since it is already decided that the term ‘expenditure’ in section 14A includes indirect expenditure, the Assessing Officer’s action in making a disallowance of Rs.4,40,500/- is justified and the same is confirmed”. 16. Before us the learned Counsel for the assessee pointed out that there was no exempt income earned by the assessee during the previous year. In this regard our attention was drawn to page 84 of the assessee’s paper book which contains the computation of total income of the assessee. Our attention was drawn to the fact that no income is claimed as exempt in. the computation of total income. Our attention was also drawn to the profit and loss account at page 51 of the paper book and the item of miscellaneous income which is at schedule No.13 to the P&L a/c. Though there is no break-up of miscellaneous receipts in schedule No.13 of the profit and loss account, the learned Counsel submitted that computation of total income would clearly evidence the fact that the assessee had no exempt income during the previous year. 17. The learned Counsel for the assessee relied on the following judicial pronouncements of the Hon’ble High Courts to the

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proposition that if there is no exempt income during the previous year, then the provisions of section 1 4A of the Act, cannot be invoked: * CIT v. Winsome Textile Industries Ltd (2009) 319 ITR 204 (P&H) * Cit v. Corrtech Energy P. Ltd (Tax Appeal No.23 9 of 2014, dt24.03.2014)(Guj.); * JCIT v. Shivam Motors (F) Ltd (ITA 17/Lkw/2012, dated 12.11.2013) (ITATLucknow); and * CIT v. M/s Shivam Motors (F) Ltd (ITA 88 of 2014, dated 5.5.14)Allahabad High Court. 18. The learned DR relied on the order of the Assessing Officer and drew our attention to the circular No.5 of 2014 dt. 11.02.2014 wherein the CBDT has opined that even in the absence of exempt income earned by the assessee during the previous year, provisions of section 14A have to be invoked. 19. We have given a careful consideration to the rival submissions. On the basis of the documents to which our attention was drawn it is clear that the assessee did not earn any exempt income during the previous year. In such circumstances as laid down in the decisions relied upon by the learned Counsel for the assessee, provisions of section 14A could not be invoked. The Board circular which is contrary to the Hon’ble High Court’s decisions cannot therefore be the basis to sustain the disallowance made by the Revenue authorities. We therefore, hold that the disallowance made u/s 14A of the Act should be deleted. Accordingly, the appeal of the assessee is allowed. 20. In the result, appeal by the Revenue is partly allowed for statistical purpose and the appeal by the assessee is allowed.” 10. The Honbie Allahabad High Court has also considered this issue in the case of CIT vs. M/s. Shivam Motors (P) Ltd. The question formed by the Hon’ble Allahabad High Court on this issue read as under: “3. Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in upholding the decision of CIT (A) in deleting the disallowance of Rs.2, 03,752/- u/s 14A ignoring the fact that there is dfference of opinion of various courts on the view taken by the ITAT that in the absence of tax free income, no disallowance u/s 1 4A is permissible”.

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assessee during the relevant previous year. Other income shown by the assessee

in its Schedule 15, placed at paper book page 10 shows dividend income as nil.

No doubt there is a sum of Rs.160,701,177/- appearing as miscellaneous

income in the P & L account. However, this was the subject of an analysis by

the AO at para 9 of the assessment order. In such analysis, the AO himself has

given a finding that Rs.16 crores was remuneration received by the assessee for

development of properties and not any income considered as exempt. In any

case, computation of income of the assessee which appear at page 12 of the

assessment order start with the figure of Rs.2,44,62,794/- in the negative, which

is the same figure appearing in the audited profit and loss account placed at

paper book page 5, as profit (loss) before taxation. Thus, the whole of the

other income was a part of the net working results and contention of the

assessee that it had not made any claim of exempt income is found to be correct.

We are of the view that a disallowance u/s.14A could not have been made when

there was no claim for exempt income during the relevant previous year by

virtue of the decision of the Coordinate Bench in the case of ASK Brothers Ltd

(supra). Such disallowance stands deleted.

Ld. AR submitted that assessee itself had carved out the interest income from

debentures from its income under the head ‘profits and gains of business’and

placed it under the head ‘income from other sources. As per the Ld. AR, there

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was no dispute that the loan taken from HDFC was utilised for investing in the

debentures. Thus according to him, borrowed funds were utilised for placing

the debentures and interest paid for the borrowed funds had to be allowed.

According to him, sub-section (iii) of Section 57 of the Act, entitled the

assessee to claim such expenditure. Just because the interest rates on the

debentures were lower in the relevant previous year would not mean that the

expenditure incurred for raising the funds, for placing the debentures were to be

disallowed. Ld. AR further submitted that for A. Y. 2008-09, interest income

from debentures shown by the assessee under the head ‘income from other

sources’ were accepted by the AO in an assessment done u/s.143(3) and interest

expenditure on the funds utilised for placing such debentures, claimed u/s.57(iii)

of the Act, were allowed. As per the Ld. AR, Revenue’s claim that reduction in

interest rate on debentures effected by SUDPL was a colourable device was not

substantiated. Ld. AR submitted that M/s. SUDPL was also engaged in the very

same line of business and subscription to its debentures by the assessee were

done as a part of assessee’s business. The income therefrom had to be classified

under the head ‘income from other sources’ since it was in the nature of interest.

Reliance was placed by Ld. AR on the decision of Hon’ble Apex Court in the

case of Union of India v. Azadi Bachao Andolan [(2003) 263 ITR 706].

down from 10% to 1% and assessee was not able to show why its associate

concern SUDPL reduced the interest rate by 9%. As per the Ld. DR, this was

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nothing but a colourable device for claiming the loss on account of interest. Ld.

DR submitted that SUDPL being an associate enterprise of the assessee, a

device was adopted so as to facilitate a claim of loss by the assessee under the

head ‘income from other sources’, when it was obvious that such claim could

not be allowed u/s.37 of the Act, if the income from debentures were shown as

a part of its business income.

disputed that the debentures had earned an interest income of Rs.19,05,000/- to

the assessee. It is also not disputed that such interest income was shown by the

assessee under the head ‘income from other sources’. AO himself has stated in

para 7 of the assessment order that the investment by way of debentures in

SUDPL were sourced out of the loan from HDFC on which an interest of

Rs.1,64,97,300/- was paid to HDFC. As per the AO, had such income been

shown under the head ‘income from business’ then the interest out go would

have been disallowed u/s.37 of the Act. Or in other words according to him,

what was to be disallowed u/s.37 of the Act, could not be claimed by an

assessee u/s.57(iii) of the Act. Assessee has in its return of income for A.Y.

2008-09 also showed interest income from debentures under the head ‘income

from other sources’ in its computation of income placed at paper book pages 27

and 28. Against such interest income, assessee had claimed interest out go of

Rs.2,52,41,251/- and claimed a loss of Rs.61,91,251/- as well for that

assessment year. In the assessment done u/s.143(3) of the Act, for the said year,

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AO had accepted this stand. Though placing of debentures in M/s. SUDPL

might have been in furtherance of its business objects, the immediate source of

the interest income was the debentures. Therefore, interest earned by it from

such debentures were rightly classified under the head ‘income from other

sources’. The sole reason why the interest out go of Rs.1,64,97,300/- has been

disallowed by the AO is that if it was considered as income from business, the

interest expenditure would fall under the personal expenditure. On the other

hand, CIT (A) justified the disallowance on a ground that SUDPL had

unjustifiably reduced the rate of interest from 10% to 1%, and this had resulted

in drastic reduction in the debenture interest in turn leading to an exaggerated

claim of loss which was a colourable device. To establish a colourable device,

it is necessary to show that there was a series of legal steps taken by the

assessee for bringing down its taxable income and the intermediate steps should

show that the real motive of the assessee was to evade tax. CIT (A) relied on

the decision of Hon’ble Apex Court in the case of McDowells & Co Ltd

(supra), for considering the reduction of interest by SUDPL to be a colourable

device. However, as explained by Hon’ble Apex Court in the case of Azadi

Bachao Andolan (supra), it is not part of the judicial function to treat as

nugatory any step whatever which a tax payer might take with a view to

avoidance or mitigation of tax. Their Lordships also observed that a tax payer

where he is in a position to carry through a transaction in two alternative ways,

one of which will result in liability to tax, and the other of which will not, be at

liberty to do the latter, and to do so effectively in the absence of any specific tax

ITA.1417/Bang/2012 & ITA.168/Bang/2013 Page - 20

avoidance provision. Nothing has been placed by the Revenue to show that the

reduction in debenture interest rate by SUDPL was not in accordance with law

and violated any specific tax avoidance provision in the Act. It is not possible

to say that an act which was otherwise valid in law should be treated as non est

merely on the basis of some underlying motive when no credible evidence has

been brought on record to show such underlying motive.

expenditure could be allowed u/s.57(iii) of the Act as expenditure laid out or

expended wholly and exclusively for the purpose of earning the interest income.

As already mentioned by us, the AO in the assessment order has clearly

mentioned that the loans raised from HDFC were utilised for investing in the

debentures. The question therefore boils down to the purpose for which loans

were raised from HDFC. Or in other words, if the purpose of the loans was for

the business of the assessee, can the interest thereon be claimed u/s.57(iii) of the

Act. None of the Authorities below have examined the purpose for which loan

was borrowed from HDFC. U/s.57(iii) of the Act, expenditure should be

incurred wholly and exclusively for the purpose of making or earning the

income. The claim of the assessee is that interest earned on debentures is

‘income from other sources’. Therefore the test for allowing deduction of

expenses against ‘interest income’ laid down in Sec.57(iii) of the Act has to be

satisfied. We are therefore of the view that it would be just and appropriate to

set aside the order of CIT (A) on this issue and remand the issue to the AO for

ITA.1417/Bang/2012 & ITA.168/Bang/2013 Page - 21

the limited purpose of verifying the purpose for which loans were borrowed by the assessee from HDFC Ltd, and which were utilised in making investment in debentures. If the borrowing is for working investments then the deduction

u/s.57(iii) of the Act has to be allowed. Thus this ground is decided accordingly.

Order pronounced in the open court on 23rd June 2015.

Sd/- Sd/-

(N. V. VASUDEVAN) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER