Emami Realty Limited, Kolkata V. ITO, WD-12(2), KOLKATA, Kolkata

CO 74/KOL/2014

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 3593 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 8 month(s) 9 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 16-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-06-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 07-07-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PINAKI MUKHERJEE
• Assessee Lawyers: R R MODI
• Keywords: Business income
• Section: 14A

Judgement Text

1 ITA NO.956/KOL/2014 & CO NO.74/KOL/2014 EMAMI REALTY LTD., AY- 2008-09 , A , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOL KATA ( ) BEFORE . . , /AND . . , ) [BEFORE SHRI P. M. JAGTAP, AM & SHRI A. T. VARKEY, JM] I.T.A. NO. 956/KOL/2014 ASSESSMENT YEAR: 2008-09 INCOME TAX OFFICER, WD-12(2), KOLKATA VS. M/S. EMAMI REALTY LTD. (PAN: AABCE6823B) APPELLANT RESPONDENT & C.O. NO. 74/KOL/2014 IN I.T.A. NO. 956/KOL/2014 ASSESSMENT YEAR: 2008-09 M/S. EMAMI REALTY LTD. VS. INCOME TAX OFFICER, WD-1 2(2), KOLKATA CROSS OBJECTOR RESPONDENT DATE OF HEARING 18.12.2017 DATE OF PRONOUNCEMENT 16.03.2018 FOR THE REVENUE SHRI PINAKI MUKHERJEE, ADDL. CIT FOR THE RESPONDENT SHRI R. R. MODI, FCA ORDER PER SHRI A.T.VARKEY, JM BOTH THESE APPEALS FILED BY THE REVENUE AND CROSS O BJECTION FILED BY THE ASSESSEE ARE AGAINST THE ORDER OF LD. CIT(A)-XII, KOLKATA FOR AY 2008-09 DATED 21.02.2014. SINCE THE APPEAL AND THE CROSS OBJECTION ARE AGAINST THE COMM ON ORDER, WE DISPOSE OF BOTH BY THIS CONSOLIDATED ORDER. 2. THE SOLE GROUND OF APPEAL OF REVENUE IS AGAINST THE ORDER OF LD. CIT(A) IN ALLOWING THE INTEREST AMOUNTING TO RS.1,77,54,031/- AS REVEN UE EXPENDITURE RELATED TO THE BUSINESS PURPOSE WITHOUT CONSIDERING THE CALCULATION MADE BY THE AO TO DETERMINE THE INTEREST NOT RELATED TO BUSINESS PURPOSE. BRIEF FACTS OF THE IS SUE ARE THAT THE AO DISALLOWED THE INTEREST PAYMENT ON UNSECURED LOAN ON THE GROUND THAT THE AS SESSEE DIVERTED RS.36.76 CR. FOR NON BUSINESS PURPOSES OUT OF THE BORROWED FUNDS. ACCOR DING TO AO, THE SAID INVESTMENT OF 2 ITA NO.956/KOL/2014 & CO NO.74/KOL/2014 EMAMI REALTY LTD., AY- 2008-09 RS.36.76 CR HAS HAD NO RELATION WITH THE ASSESSEE S BUSINESS. THE AO NOTED THAT OUT OF THE TOTAL BORROWED FUND OF RS.97.68 CR., THE UNSECURED LOAN AMOUNTING TO RS.83,93 CR WAS INTEREST BEARING AND THE BALANCE OF RS.13.75 CR WAS RELATED TO OPTIONALLY CONVERTIBLE DEBENTURES. IN VIEW OF THIS, PROPORTIONATE INTERES T OF RS.1,77,54,031/- WAS DISALLOWED BY AO . ON APPEAL, THE LD. CIT(A) HELD THAT THE CAPIT ALIZATION OF INTEREST AND OTHER PROJECT COST IN WIP IS NOTHING BUT A CREDIT (INCOME) IN THE P&L ACCOUNT. HE FURTHER NOTED THAT THE AMOUNT OF INTEREST TO THE EXTENT OF RS.1,46,54,769/ - CAPITALIZED FOR THE PROJECT UNDER CONSTRUCTION WAS NOTHING BUT STOCK IN TRADE/REVENUE FOR THE COMPANY. ACCORDING TO HIM ALL THE INVESTMENTS MADE BY THE ASSESSEE WERE FOR THE P URPOSE OF THE BUSINESS. THE INTEREST INCOMES WERE EARNED OUT OF ADVANCES MADE FOR REAL E STATE BUSINESS ONLY. THEREFORE, THE LD. CIT(A) HELD THAT SINCE THE ASSESSEE HAD NOT DIVERTE D ANY BORROWED FUNDS ON WHICH INTEREST WAS PAID FOR NON-COMMERCIAL PURPOSES, THERE IS NO Q UESTION OF DISALLOWANCE OF INTEREST OUT OF INTEREST PAID BY THE ASSESSEE UNDER SEC. 36(1)(I II) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). THEREFORE, HE DELETED T HE DISALLOWANCE OF INTEREST OF RS.1,77,54,031/-. AGGRIEVED, REVENUE IS BEFORE US. 3. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE AO HAD DISALLOWED THE INTER EST PAYMENT ON UNSECURED LOAN ON THE GROUND THAT THE ASSESSEE HAD DIVERTED RS.36.76 CR. FOR NON-BUSINESS PURPOSES OUT OF THE BORROWED FUNDS. THE LD. AR IN ORDER TO CONTROVERT THIS CONTENTION OF THE AO ARGUED THAT THE ASSESSEE IS HAVING OWN FUNDS TO THE TUNE OF RS. 25.90 CR. INCLUDING THE INTEREST FREE LOANS IN THE FORM OF OPTIONALLY CONVERTIBLE DEBENTURE. ME ANING THEREBY THAT, IN ANY CASE, THE DISALLOWANCE OF INTEREST MADE BY THE AO SHOULD BE R EDUCED PROPORTIONATELY TO THE EXTENT OF AVAILABILITY OF OWN FUNDS. THE AO, HOWEVER, NOTED THAT AN AMOUNT OF RS.5,51,88,177/- WAS SHOWN AS PAYMENT OF INTEREST TOWARDS UNSECURED LOAN S TAKEN FROM DIFFERENT PARTIES AND OUT OF THE SAID AMOUNT, RS.1,46,54,769/- WAS SHOWN IN P ROJECT EXPENSES AND WAS CAPITALIZED UNDER THE HEAD WORK IN PROGRESS. AND THE BALANCE OF RS.4,05,33,408/- WAS DEBITED IN THE P&L ACCOUNT. THE AO AFTER PERUSAL OF THE TAX AUDIT REPORT OBSERVED THAT THE ASSESSEE IS IN THE BUSINESS OF REAL ESTATE DEVELOPMENT AND NO IN COME FROM THE SAID BUSINESS WAS SHOWN IN THE RELEVANT AY AND ACCORDING TO HIM, NO O THER BUSINESS RECEIPT WAS ALSO FOUND IN THE P&L ACCOUNT. THE AO NOTED THAT THE ASSESSEE HA S MADE INVESTMENT OF RS.36,76,23,626/- IN SHARES OF ITS SUBSIDIARIES COM PANIES, UNQUOTED INVESTMENT IN SHARES OF 3 ITA NO.956/KOL/2014 & CO NO.74/KOL/2014 EMAMI REALTY LTD., AY- 2008-09 ITS ASSOCIATED COMPANIES, INVESTMENT IN UNQUOTED DE BENTURES, INVESTMENT IN PARTNERSHIP FIRMS, ADVANCES AGAINST PURCHASE OR SHARES AND ADVA NCE TO PRAJAY PROPERTIES, WHICH ACCORDING TO AO HAD NO BUSINESS RELATION WITH THE A SSESSEE. TO THE QUERY OF AO AS TO WHY THE CLAIM OF ASSESSEE IN RESPECT TO INTEREST EXPEND ITURE OF RS.4,05,33,408/- MAY NOT BE ALLOWED, THE ASSESSEE NOT ONLY DEFENDED THE CLAIM O F INTEREST EXPENDITURE TO THE TUNE OF RS.4,05,33,408/-, IT MADE AN ADDITIONAL CLAIM IN RE SPECT OF THE CAPITALIZED AMOUNT OF INTEREST (WHICH IT HAD INCLUDED UNDER THE HEAD PROJECT EXPEN SE) I.E. RS.1,46,54,769/-. HOWEVER, THE AO WITHOUT ACCEPTING THE ADDITIONAL CLAIM PROCEEDED TO DISALLOW PROPORTIONATE AMOUNT OF INTEREST AS COMPUTED BY HIM IN PAGE 7 OF HIS ORDER AT RS.1,77,54,031/-. ON APPEAL, THE LD. CIT(A) HELD THAT THE ASSESSEE HAD DISCLOSED WORK IN PROGRESS AS PART OF ITS STOCK IN TRADE AND HAD DULY CREDITED THE SAME IN ITS P&L ACCOUNT. THE CONTENTION OF THE ASSESSEE THAT THE INTEREST DEBITED TO THE P&L ACCOUNT IS ALSO PART OF SUCH STOCK IN TRADE HAS BEEN ACCEPTED BY THE LD. CIT(A) WHILE GRANTING RELIEF TO THE ASSESSE E. ACCORDINGLY, THE LD. CIT(A) HELD THAT THERE IS NO DIVERSION OF BORROWED FUNDS FOR NON-BUS INESS PURPOSES SO AS TO WARRANT DISALLOWANCE OF INTEREST U/S. 36(1)(III) OF THE AC T. THIS DECISION OF LD. CIT(A) IS CHALLENGED BEFORE US AS ERRONEOUS. 4. WE HAVE NOT GONE THROUGH THE MEMORANDUM OF ASSOC IATION OF THE ASSESSEE COMPANY TO KNOW THE BUSINESS CONDUCTED BY THE ASSESSEE. HO WEVER, WE NOTE FROM THE DOCUMENTS PRODUCED BEFORE US THAT ASSESSEE HAD TWO SEGMENTS O F INCOME I.E. ONE FROM INTEREST I.E. FROM THE LENDING SEGMENT AND THE OTHER FROM THE REAL EST ATE SEGMENT. FROM A PERUSAL OF THE P&L ACCOUNT AT PAGE 19 OF THE PAPER BOOK, WE NOTE THAT ASSESSEE HAS SHOWN INVENTORY OF CLOSING WORK IN PROGRESS OF RS.1,98,07,566/- CR. IN THE INC OME SIDE. HOWEVER, THE AO NOTED THAT THERE IS NO INCOME FROM THE REAL ESTATE SEGMENT. W E NOTE THAT THE ASSESSEE HAD CREDITED AND DEBITED THE SAME AMOUNT IN P&L ACCOUNT, SO IT IS RE VENUE NEUTRAL. HOWEVER, THE LD. CIT(A) HAS TAKEN NOTE OF THE INVENTORY OF CLOSING W ORK IN PROGRESS IN THE P&L ACCOUNT AND HAS STATED THAT THE ASSESSEE HAS OFFERED INCOME. H OWEVER, THE LD. CIT(A) HAS LOST SIGHT OF THE FACT THAT THE SAME AMOUNT (RS.21,45,945/- AS O PENING WORK IN PROGRESS AND A SUM OF RS.1,76,61,621/- TOWARDS PROJECT EXPENSES, TOTALING RS.1,98,07,566/-) HAS BEEN DEBITED IN THE P&L ACCOUNT AND THE LD. CIT(A) HAS TAKEN NOT O F ONLY THE CREDIT SIDE OF RS.1,98,07,566/- THE P&L ACCOUNT, IGNORING THE DEBI T SIDE OF RS.1,98,07,566/-. FROM THIS, IT COULD BE INFERRED THAT THERE IS ABSOLUTELY NO IN COME OFFERED BY THE ASSESSEE TOWARDS THE 4 ITA NO.956/KOL/2014 & CO NO.74/KOL/2014 EMAMI REALTY LTD., AY- 2008-09 ACTIVITY OF WORK IN PROGRESS AS IT IS REVENUE NEUTR AL. HOWEVER, ON PERUSAL OF SIGNIFICANT ACCOUNTING POLICIES OF THE ASSESSEE COMPANY ENCLOSE D IN PAGE 26 OF THE PAPER BOOK WHICH REVEALS ON THE ACCOUNTING TREATMENT GIVEN FOR REVEN UE RECOGNITION, THE ASSESSEE HAS STATED AS UNDER: A)CONSTRUCTION WORK IN PROGRESS REFLECTS THE COST INCURRED FOR PROJECT PENDING COMPLETION. THE SAME SHALL BE CHARGED TO REVENUE IN THE YEAR IN WHICH INCOME FROM SALE OF SUCH PROJECT IS RECOGNIZED WHICH SHALL BE RECOGNIZED ON THE COMPLET ION OF SUCH PROJECT. B) INTEREST INCOME IS RECOGNIZED ON ACCRUAL BASIS. C) DIVIDEND INCOME IS ACCOUNTED FOR WHEN RIGHT TO R ECEIVE THE SAME IS ESTABLISHED. FROM A PERUSAL OF THE AFORESAID ACCOUNTING POLICY IT IS CLEAR THAT ASSESSEE HAD ACCEPTED THE FACT THAT NO REVENUE HAS BEEN RECOGNIZ ED IN ITS P&L ACCOUNT WITH REGARD TO CONSTRUCTION WORK IN PROGRESS. THUS, THE LD. CIT(A ) ERRED IN FINDING THAT ASSESSEE HAD OFFERED INCOME FROM CONSTRUCTION ACTIVITY. 5. SO FROM THE DISCUSSION ABOVE, THE FINDING OF FAC T BY THE AO THAT THE ASSESSEE HAD ONLY UTILIZED RS. 47 CR. FOR BUSINESS PURPOSE AND H AS NOT UTILIZED RS.36 CR. FOR BUSINESS (NON- BUSINESS PURPOSE) HAS NOT BEEN FOUND TO BE FACTUALL Y WRONG BY THE LD. CIT(A). THE LD. CIT(A) HAS SIMPLY FOUND FAULT WITH THE AO AFTER PER USAL OF THE P&L ACCOUNT AND WAS OF THE OPINION THAT THE AO WAS WRONG IN STATING THAT N O INCOME WAS OFFERED BY THE ASSESSEE IN THE P&L ACCOUNT AND THEREBY HE ALLOWED THE INTEREST ON LOAN, WHICH ACTION OF THE LD. CIT(A) CANNOT BE COUNTENANCED BECAUSE AS WE NOTED E ARLIER THE ASSESSEES INCOME FROM THE REAL ESTATE SEGMENT HAS NOT BEEN OFFERED BY THE ASS ESSEE IN THE P&L ACCOUNT. THE INTEREST ON LOAN HAS TO BE ALLOWED IF THE ASSESSEE HAD UTILI ZED THE LOAN AMOUNT FOR BUSINESS PURPOSE. WE ALSO FIND FROM NOTE NO. 2 OF NOTES ON ACCOUNT TO AUDITED FINANCIAL STATEMENT WHICH IS ENCLOSED IN PAGE 26 OF THE PAPER BOOK WHEREIN THE A SSESSEE HAD STATED AS UNDER: II) IN PURSUANCE TO THE REAL ESTATE ACTIVITIES UND ERTAKEN THE COMPANY HAS PROVIDED UNSECURED LOANS TO THE SUBSIDIARIES FOR THE EXECUTION OF THE PROJEC TS UNDERTAKEN THEREIN. FROM THE PERUSAL OF THE ABOVE, WE FIND THAT THE ASS ESSEE HAS GIVEN CERTAIN UNSECURED LOANS TO ITS SUBSIDIARIES AS PART OF ITS REAL ESTATE ACTIVIT IES. BUT WE FIND THAT THERE IS NO FINDING IN THIS REGARD IN THE ORDERS OF THE LOWER AUTHORITIES. ACC ORDING TO AO, THE INVESTMENTS MADE IN SUBSIDIARY COMPANIES AND ASSOCIATE COMPANIES, AMONG OTHERS WERE MADE BY THE ASSESSEE OUT OF ITS BORROWED FUNDS AND WHICH ARE FOR NON-BUSINES S PURPOSES. WE FIND THAT THE STATEMENT 5 ITA NO.956/KOL/2014 & CO NO.74/KOL/2014 EMAMI REALTY LTD., AY- 2008-09 MENTIONED IN THE NOTES ON ACCOUNT BY THE ASSESSEE A ND THE FINDING BY THE AO IS PER SE CONTRADICTORY OF EACH OTHER. 6. WE NOTE THAT THOUGH THE ASSESSEE HAS CONTENDED B EFORE THE LD. CIT(A) THAT THE SUM OF RS.36.76 CR. HAS BEEN SPENT ON SPVS ETC., THE DE TAILS OF WHICH HAVE BEEN GIVEN IN PAGE 9 OF THE IMPUGNED ORDER OF THE LD. CIT(A) WHICH HAS N OT BEEN GONE THROUGH BY THE LD. CIT(A) OR BY THE AO TO GIVE A FACTUAL FINDING AS TO WHETHER THE ASSESSEE HAD UTILIZED THE SAID AMOUNT OF RS.36.76 CR. FOR BUSINESS PURPOSE AS CONTENDED BY THE ASSESSEE. HENCE, UNDER THESE FACTS AND CIRCUMSTANCES IT IS NECESSARY TO DETERMINE THE ACTUAL FACT WHETHER LENDING OF MONIES AND THE INVESTMENTS IN SUBSIDIARI ES, ASSOCIATE COMPANIES, PARTNERSHIP FIRM AS TABULATED IN PAGE 6 OF THE ASSESSMENT ORDER AND PAGE 9 OF CIT(A)S ORDER ARE PART AND PARCEL OF BUSINESS ACTIVITY OF THE ASSESSEE. THIS F ACTUAL FINDING WOULD BE NECESSARY TO DETERMINE THE FACT OF UTILISATION OF BORROWED FUNDS FOR THE BUSINESS PURPOSES WHICH WILL IN TURN BE ESSENTIAL TO DETERMINE THE ALLOWABILITY OF INTEREST U/S. 36(1)(III) OF THE ACT. HENCE, IN THE FITNESS OF THINGS WE DEEM IT APPROPRIATE TO REM AND THIS ISSUE TO THE FILE OF THE AO TO ADDRESS THIS ISSUE IN THE LIGHT OF DIRECTIONS GIVEN ABOVE. THE ASSESSEE IS ALSO AT LIBERTY TO ADDUCE EVIDENCE IN SUPPORT OF ITS CONTENTIONS. ACC ORDINGLY, REVENUES GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 7. IN RESPECT OF THE ASSESSEES CROSS OBJECTION, WE NOTE THAT THE AO HAS MADE DISALLOWANCE U/S. 14A OF THE ACT APPLYING RULE 8D(2 )(III) OF THE RULES TAKING THE AVERAGE INVESTMENT AS RS. 2.485 CR. THE MAIN GRIEVANCE OF T HE ASSESSEE IS THAT THE ENTIRE INVESTMENT SHOULD NOT BE TAKEN FOR COMPUTATION UNDER RULE 8D(2 )(III). FROM THE GROUNDS IN CO NO. 2 THE ASSESSEE CLAIMS IT HAD MADE INVESTMENT IN THE F OLLOWING AND ACCORDING TO ASSESSEE, THE INVESTMENTS ARE NOT TAX EXEMPT SO, IT SHOULD BE EXC LUDED WHILE COMPUTATION IS MADE APPLYING RULE 8D(2)(III) OF THE RULES : (A) INVESTMENT IN DEBENTURES RS.8,41, 50,000/-, W HICH IS NOT A TAX EXEMPT INVESTMENT AND (B) INVESTMENT IN CAPITAL OF A PARTNERSHIP FIRM, F ROM WHICH THE COMPANY HAS EARNED A TAXABLE INTEREST OF RS.41,16,090/- DURING THE YEA R AND CANNOT BE INCLUDED IN THE INVESTMENT AS ENVISAGED U/S. 14A READ WITH RULE 8D OF THE RULES. 8. WE NOTE THAT THE ASSESSEE HAD MADE INVESTMENT AN D ISSUED DEBENTURES TO THE TUNE OF RS. 8.41 CR., THE RETURN OF WHICH WOULD BE IN THE F ORM OF INTEREST WHICH IS TAXABLE. HENCE, 6 ITA NO.956/KOL/2014 & CO NO.74/KOL/2014 EMAMI REALTY LTD., AY- 2008-09 WE ARE INCLINED TO ACCEPT THE ARGUMENT OF THE LD. A R THAT THE SAME SHOULD BE EXCLUDED WHILE CALCULATING DISALLOWANCE U/S. 14A READ WITH R ULE 8D OF THE RULES. SIMILARLY, IN RESPECT OF INVESTMENT MADE IN THE CAPITAL OF A PART NERSHIP FIRM, THE ASSESSEE HAS EARNED TAXABLE INTEREST OF RS.41,16,090/- AND ACCORDINGLY, THE SAID INVESTMENT ALSO WOULD BE OUTSIDE THE PURVIEW OF SEC. 14A READ WITH RULE 8D O F THE RULES AND THEREFORE, WE DIRECT BOTH THESE AMOUNTS SHOULD BE EXCLUDED WHILE 8D(2)( III) INVESTMENT IS COMPUTED. 9. COMING BACK TO COMPUTATION OF RULE 8D(2)(III) OF THE RULES. THIS TRIBUNAL HAS CONSISTENTLY FOLLOWED THE DICTUM OF LAW LAID DOWN IN REI AGRO LTD. VS. DCIT 144 ITD 141 IN WHICH THE TRIBUNAL HELD THAT ONLY INVESTMENT WHI CH HAS GIVEN RISE TO THE EXEMPTED INCOME SHOULD BE TAKEN INTO CONSIDERATION WHILE COM PUTING DISALLOWANCE U/S. 14A READ WITH RULE 8D. THIS ORDER HAS BEEN UPHELD BY THE HONBLE HIGH COURT VIDE JUDGMENT DATED 23.12.2013. RESPECTFULLY FOLLOWING THE SAME, WE DI RECT THE AO TO RE-COMPUTE THE DISALLOWANCE AS ABOVE MENTIONED. 10. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTION OF ASSESSEE IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. ORDER IS PRONOUNCED IN THE OPEN COURT ON 16.03.201 8 SD/- SD/- (P. M. JAGTAP) (ABY. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 16TH MARCH, 2018 JD.(SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1. APPELLANT ITO, WARD-12(2), KOLKATA 2 RESPONDENT M/S. EMAMI REALTY LTD. 687, E. M. BY PASS, ANANDAPUR, KOLKATA-700 107. 3. THE CIT(A) KOLKATA. 4. 5. CIT KOLKATA DR, ITAT, KOLKATA. / TRUE COPY, BY ORDER, SR. PVT. SECRETARY