DCIT, Bangalore V. M/s Kristal Projects (India) Pvt. Ltd., Bangalore

ITA 1342/BANG/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6092 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-06-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 15-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: L V BHASKAR REDDY JT
• Keywords: Capital asset; Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.1342/BANG/2012 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. VS. M/S. KRISTAL PROJECTS (INDIA) PVT. LTD., NO.1, 4 TH CROSS, 29 TH MAIN, BTM LAYOUT, 2 ND STAGE, BANGALORE 560 076. PAN: AACCK 0263E APPELLANT RESPONDENT APPELLANT BY : SHRI L.V. BHASKAR REDDY, JT. CIT(DR) RESPONDENT BY : NONE DATE OF HEARING : 02.06.2014 DATE OF PRONOUNCEMENT : 13.06.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER D ATED 31.07.2012 OF THE CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMEN T YEAR 2009-10. 2. NOTICE OF HEARING OF THIS APPEAL WAS SERVED ON THE ASSESSEE BY RPAD FOR HEARING ON 2.6.2014. HOWEVER, NONE APPEAR ED ON BEHALF OF THE ITA NO. 1342/BANG/2012 PAGE 2 OF 7 ASSESSEE. WE THEREFORE PROCEED TO DISPOSE OF THE AP PEAL AFTER PERUSING THE RECORD AND HEARING THE SUBMISSIONS OF THE LD. DR. 3. GROUND NOS.1, 7 & 8 RAISED BY THE REVENUE ARE GE NERAL IN NATURE AND CALL FOR NO ADJUDICATION. 4. GROUND NOS.2 & 3 RAISED BY THE REVENUE READS AS FOLLOWS:- 2. THE LD. CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE ON THE ISSUE OF DISALLOWANCE U/S. 14A R.W. RULE 8D WITHOUT CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND WITHOUT APPRECIATING THE PROVISIONS OF RULE 8D WHEREIN CLAU SE (II) OF SUB- RULE (2) IT IS CLEARLY LAID DOWN THAT INTEREST EXPE NSES INCURRED ON THE GENERAL POOL OF LOANS ARE TO BE APPORTIONED TO EXEMPT INCOME AS PRESCRIBED. 3. THE LD. CIT(A) HAS ERRED IN HOLDING THAT INTERES T EXPENSES OF RS.24,85,442/- ARE DIRECTLY ATTRIBUTABLE TO A PA RTICULAR INCOME AND THEREFORE DO NOT QUALITY TO BE APPORTIONED AS P RESCRIBED IN CLAUSE (II) OF SUB-RULE (2) OF RULE 8D, WITHOUT APP RECIATING THAT THE INTEREST EXPENSES WERE INCURRED FOR GENERAL CAP ITAL REQUIREMENTS OF THE BUSINESS NECESSITY (OF) WHICH A ROSE BECAUSE EARLIER FUNDS OUT OF THE CAPITAL BORROWED OR SELF-G ENERATED, WERE INVESTED TO EARN INCOME. 5. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF PROMOTION OF RESIDENTIAL FLATS AND VILLAS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD INVESTED A SUM OF RS.8,90.02,887 IN THE SHARE CAPITAL OF ITS SUBSIDIARY COMPANY, M/S. KRISTAL INFRASTRUCTURE LTD. SINCE THE INCOME OF SUCH INVESTMENT IN THE FORM OF DIVIDEND DID NOT FORM PART OF TOTAL INCOME UNDER THE ACT, THE AO WAS OF THE VIEW THAT THE EXPENSES INCURRED IN MAKING TH E INVESTMENTS HAD TO BE ITA NO. 1342/BANG/2012 PAGE 3 OF 7 DISALLOWED U/S. 14A OF THE ACT. WHEN THIS WAS POIN TED OUT TO THE ASSESSEE, THE ASSESSEE SUBMITTED THAT THERE WAS NO INCOME ON THE INVESTMENTS DURING THE YEAR AND THEREFORE THE PROVISIONS OF SEC TION 14A ARE NOT APPLICABLE. THE AO, HOWEVER, WAS OF THE VIEW THAT THE CONTENTION OF THE ASSESSEE WAS NOT ACCEPTABLE AND EVEN IN THE ABSENCE OF ANY EXEMPT INCOME HAVING BEEN DERIVED BY THE ASSESSEE DURING T HE PREVIOUS YEAR, DISALLOWANCE OF EXPENDITURE HAS TO BE MADE. THE AO ACCORDINGLY MADE THE DISALLOWANCE OF EXPENSES IN THE FOLLOWING MANNE R:- TOTAL DIRECT INTEREST EXPENDITURE NIL TOTAL INDIRECT INTEREST EXPENDITURE RS.2,53,29,952 D = AXB , C WHERE A = INDIRECT INTEREST EXPENDITURE B = AVERAGE OF INVESTMENTS, AND C = AVERAGE OF ASSETS A = RS.2,25,29,952 B = RS.4,45,01,444 C = RS.49,81,22,754 2,25,29,952 X 4,45,01,444 49,81,22,754 = 22,62,935 E = 0.5 % OF AVERAGE OF INVESTMENTS WORKS OUT TO RS .2,22,507. HENCE, DISALLOWANCE U/S. 14A R.W. RULE 8D IS RS.24, 85,442 (D+E), THIS IS ADDED BACK TO INCOME. 6. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) DELE TED THE ADDITION MADE BY THE AO UNDER RULE 8D(2)(II) OF THE ACT OF R S.22,62,935. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE CIT (APPEALS):- 3.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPE LLANT. THE AO WORKED OUT AN AMOUNT OF RS.22,62,935/- AS INDIRE CT INTEREST EXPENDITURE UNDER RULE 8D(2)(II) AND AN AMOUNT OF R S.2,22,507/- AS OTHER INDIRECT EXPENDITURE U/R 8D(2)(III). THUS THE TOTAL DISALLOWANCE UNDER RULE 8D OF I.T. RULES READ WITH SECTION 14 A ITA NO. 1342/BANG/2012 PAGE 4 OF 7 IS RS.24,85,442/-. THE APPELLANT INCURRED INTEREST EXPENDITURE OF RS.2,53,29,952/-. THE AO CONSIDERED THIS INTEREST EXPENDITURE AS INDIRECT INTEREST EXPENDITURE FOR THE PURPOSE OF RU LE 8D. HOWEVER, THERE IS NO MATERIAL ON RECORD TO SHOW THA T THIS INTEREST EXPENDITURE WAS NOT ATTRIBUTABLE TO ANY PARTICULAR RECEIPT OF INCOME. IT IS SEEN FROM THE RECORDS THAT ALL THE L OANS WERE OBTAINED FOR BUSINESS PURPOSE AND EVEN OTHERWISE TH ERE WERE SUFFICIENT SURPLUS FUNDS FOR MAKING THE TAX FREE IN VESTMENTS. THERE IS NO NEXUS FOUND BETWEEN THE BORROWALS AND I NVESTMENT IN TAX-FREE INVESTMENTS. IN THE ABSENCE OF ANY SUCH M ATERIAL ON RECORD, IT IS DIFFICULT TO SUSTAIN THE DISALLOWANCE OF THE ITEM OF RS.22,62,935/-. 3.4 THE APPELLANTS ARGUMENT TO THE EFFECT THAT THE RE SHOULD BE EXEMPT INCOME FOR INVOKING THE PROVISIONS OF SECTIO N 14A OF THE ACT IS NOT ACCEPTABLE IN VIEW OF THE DECISION OF TH E HONBLE ITAT, DELHI BENCH REPORTED IN 121 ITD 318. 3.5 THE OTHER ARGUMENTS OF THE APPELLANT REGARDING THE NATURE AND PURPOSE OF THE INVESTMENT IS FOR THE PURPOSE OF BUSINESS ARE ALSO NOT ACCEPTABLE IN VIEW OF THE AMENDED PROVISIO NS OF SECTION 14A, WHICH ARE VERY CLEAR. 7. BEFORE US, THE LD. DR SUBMITTED THAT THE CIT(APP EALS) HAS WRONGLY CAST THE BURDEN OF SHOWING THAT INTEREST EXPENDITUR E INCURRED WAS IN RELATION TO INVESTMENTS MADE IN EQUITY SHARES OF SU BSIDIARY COMPANY ON THE REVENUE. ACCORDING TO HIM, THE ONUS WAS ON THE ASS ESSEE TO SHOW THAT NO EXPENDITURE WAS INCURRED WHICH WARRANTS DISALLOWANC E U/S. 14A OF THE ACT. IT WAS ALSO BROUGHT TO OUR NOTICE THAT EVEN BEFORE THE AO, THE ASSESSEE ADMITTED THAT INVESTMENTS WERE MADE OUT OF BORROWED FUNDS ON WHICH INTEREST WAS PAID. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. DR . WE ARE OF THE VIEW THAT THE CIT(APPEALS) HAS WRONGLY CAST THE BUR DEN ON THE REVENUE TO ITA NO. 1342/BANG/2012 PAGE 5 OF 7 SHOW THAT INTEREST EXPENDITURE CLAIMED BY THE ASSES SEE WAS NOT FOR THE PURPOSE OF MAKING INVESTMENTS IN EQUITY SHARES OF T HE SUBSIDIARY WHICH WOULD YIELD TAX FREE DIVIDEND INCOME. IN THE ABSE NCE OF EVEN A SUBMISSION IN THIS REGARD, WE ARE OF THE VIEW THAT THE ADDITIO N MADE BY THE AO HAS TO BE SUSTAINED. WE ACCORDINGLY ALLOW GROUNDS NO.2 & 3 RAISED BY THE REVENUE. 9. GROUNDS NO.4 & 5 RAISED BY THE REVENUE IS WITH R EGARD TO DISALLOWANCE OF INTEREST U/S. 36(1)(III) OF THE ACT . THE AO NOTICED THAT THE ASSESSEE HAD DIVERTED BORROWED FUNDS ON WHICH INTER EST WAS PAID FOR THE PURCHASE OF LAND. THE AO THEREFORE PROPOSED TO DIS ALLOW THE ASSESSEES CLAIM FOR INTEREST ON LOANS BORROWED ON THE GROUND THAT THE LOANS BORROWED WERE NOT USED FOR THE PURPOSE OF BUSINESS OF THE AS SESSEE WHICH IS THE REQUIREMENT FOR ALLOWING DEDUCTION U/S. 36(1)(III) OF THE ACT. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE AO DISALLOWED A SUM OF RS.79,10,856. 10. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) FOL LOWING THE ORDER OF THE CIT(APPEALS) IN ASSESSEES OWN CASE FOR THE A.Y . 2008-09, DELETED THE ADDITION MADE BY THE AO. 11. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR N OTICE BY THE LD. DR THAT THE ORDER OF THE CIT(APPEALS) FOR THE A.Y. 2008-09 HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ITA NO.522/BAN G/2011 AND THIS TRIBUNAL BY ITS ORDER DATED 31.8.2012 WAS PLEASED T O SET ASIDE THE ORDER OF ITA NO. 1342/BANG/2012 PAGE 6 OF 7 THE CIT(A) AND DIRECTED THE AO TO EXAMINE THE ISSUE WITH REGARD TO ALLOWING DEDUCTION U/S. 36(1)(III) OF THE ACT AFRES H. FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: 5.3 THE LEARNED COUNSEL FOR THE ASSESSEE ON HIS PART SUPPORTED THE ORDERS OF THE LEARNED CIT(A). 5.4 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PERUS ED AND CONSIDERED THE MATERIAL ON RECORD AND THE JUDICIAL DECISIONS CITED. IT IS SEEN THAT THE FINDING OF THE ASSESSING OFFICE R IN MAKING THE DISALLOWANCE OF RS.63,67,322 FOR CAPITALIZATION OF INTEREST PERTAINING TO UNCOMPLETED PROJECTS APPEARS TO HAVE ARISEN SOLELY FROM THE LANGUAGE AND TENOR OF THE SUBMISSIONS AND ADMISSIONS MADE BY THE ASSESSEE IN ITS LETTER DT.22.10.2010. FROM A PERUSAL OF THE LEARNED CIT(A)S ORDER ALSO WE NOTICE THAT T HE LEARNED CIT(A) HAS NOT EXAMINED THE CRUX OF THE ISSUE AS TO WHETHER AND TO WHAT EXTENT THE INTEREST DEBITED BY THE ASSESSEE PERTAINED TO EXISTING RUNNING PROJECTS OR FOR ACQUIRING CAPITAL ASSETS FOR PROJECTS NOT COMMENCED. FURTHER, WE ALSO FIND THAT THE LEARNED CIT(A) HAS ALLOWED THE ASSESSEE RELIEF APPLYING THE DECISION IN THE CASE OF CORE HEALTH CARE LTD. (SUPRA) WHICH WAS RENDERED FOR ASSESSMENT YEARS 1992-93 TO 1997-98 WITHOUT CONSIDE RING THE AMENDED PROVISO OF SECTION 36(1)(III) OPERATIVE W.E .F. 1.4.2004 WHICH WOULD HAVE BEEN APPLICABLE IN THE INSTANT CAS E OF THE ASSESSEE WHICH IS FOR ASSESSMENT YEAR 2008-09. IN T HESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT IN THE IN TEREST OF EQUITY AND JUSTICE, THE MATTER BE REMITTED BACK TO THE FIL E OF THE ASSESSING OFFICER TO BE RE-EXAMINED AFRESH AS TO WH ETHER OUT OF THE INTEREST OF RS.3,56,85,324 DEBITED THE AMOUNT O F RS.63,67,322 IS EXPENDED FOR RUNNING PROJECTS OR FOR ACQUIRING O F CAPITAL ASSETS FOR PROJECTS THAT HAVE NOT YET COMMENCED. THE ASSES SING OFFICER IS DIRECTED TO DISPOSE OFF THE MATTER AFTER AFFORDI NG THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD. THE ASSESSEE I S ALSO DIRECTED TO CO-OPERATE IN THESE PROCEEDINGS BY FILING DETAIL S CALLED FOR SO THAT THE MATTER CAN BE DISPOSED OFF EXPEDITIOUSLY. IT IS ORDERED ACCORDINGLY. ITA NO. 1342/BANG/2012 PAGE 7 OF 7 12. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL AND SINCE THE FACTS AND CIRCUMSTANCES OF THE CASE ARE IDENTICAL TO THE ASSESSMENT YEAR 2008- 09, FOLLOWING THE DECISION OF THE TRIBUNAL, WE SET ASIDE THE ORDER OF THE CIT(APPEALS) ON THIS ISSUE AND REMAND THE SAME TO T HE ASSESSING OFFICER FOR RE-EXAMINATION AFRESH AS PER THE DIRECTIONS GIV EN BY THE TRIBUNAL FOR A.Y. 2008-09. 13. IN THE RESULT, THE APPEAL BY THE REVENUE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF JUNE , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 13 TH JUNE , 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.