Tanglin Developments Limited, Bangalore V. The Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore

ITA 143/BANG/2021

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 9541 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 30-03-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAIRAM RAIPURA; OSD
• Assessee Lawyers: C RAMESH
• Keywords: Capital asset; Depreciation; Principle of natural justice; Earning of tax free income; Source of fund; Revenue expenditure; Rule 8D; Set aside
• Section: 37; 143(3); 14A; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA No.143 to 146/Bang/2021 Assessment year : 2013-14, 2014-15, 2015-16 & 2017-18 M/s Tanglin Developments Ltd., No.23/2, Coffeeday Square, Vittal Mallya Road, Bengaluru-560 001. PAN –AABCT 0356 N Vs. The Dy. Commissioner of Income- tax, Central Circle-1(3), Bengaluru. ASSESSEE RESPONDENT Assesseeby : Shri C Ramesh, C.A Revenue by : Shri Jairam Raipura, CIT(DR OSD) Date of hearing : 30.12.2021 Date of Pronouncement : 31.01.2022 O R D E R Per Bench These4 appeals by the assessee is directed against the different orders of the CIT(A) for the asst. year 2013-14, 2014-15, 2015-16 & 2017-18 having common dated 15/2/2021. 2. Since the issue in these appeals are common in nature, these are clubbed together, heard together, disposed off together in this common order. ITA No.143 - 146/Bang/2021 Page 2 of 31 Asst. year 2013-14, 2014-15 & 2015-16 3. The first common issue in ITA No.143/Bang/2021 to 145/Bang/2021 is with regard toallowability or otherwise of exchange fluctuation loss claimed by the assessee as revenue expenditure and disallowed by the Assessing Officer. 4. We consider the facts in ITA No.143/Bang/2021 The assessee is in the activity of development of SEZ and software technology park known as Global Village, at Mysore Road, Bangalore. The exchange fluctuation loss claimed related to two foreign currency loans from HDFC Bank of Rs 400 crores and Rs. 120 crores respectively. The loans raised in foreign currency have been utilized for repayment of earlier loan for the purpose of development of SEZ and software technology park and also further development of such SEZ of which the assessee is in receipt of license fee which has been offered as revenue. In this context relying on various Supreme Court decisions it was contended that, the exchange fluctuation loss is allowable as revenue expenditure. 5. The ld.AR submitted that the provisions of section 43A of the Act would be applicable only when a person has acquired asset from a country outside India and a consequential liability is outstanding in the books. 6. It was further submitted that, the exchange fluctuation loss relates to foreign currency loans of Rs.400 crores on 30.06.2011 and also Rs.120 crores on 29.06.2012 respectively raised from HDFC Bank. ITA No.143 - 146/Bang/2021 Page 3 of 31 7. The company has availed secured loan by issue of compulsorily convertible debentures substituted by Hypo Real Estate Bank International AG (HYPO). The sanctioned limit is Rs 380.00 crores and the amount availed as at 31.03.2009 is Rs.379.99 crores with a coupon rate of 12% p.a. The debentures are convertible on or before 31.12.2013. The debentures are secured by a charge on the property of the company at Pattengere, Mylasandra Village, Bangalore. The investment made out of this loan are as under: - (a) During the F.Y.2011-12 the company redeemed Rs.380,00,00,000/- of debentures at a premium of Rs.19,16,816!- by availing foreign currency notional US $ denominated loan of Rs 400 crs from HDFC Ltd. (b) Further, during the F.Y.2012-13 the company availed notional US $ denominated loan of Rs.120 crs from M/s. HDFC Ltd. 8. The loan of Rs 120 crs from HDFC Ltd raised on 29.06.2012 has been utilized for capital expenditure which is lying in capital work in progress. The capital work in progress balance from F.Ys.2012-13 to 2014-15 are as under:- ITA No.143 - 146/Bang/2021 Page 4 of 31 9. The above work in progress is also in the nature of buildings/plant & machinery/facilities which are developed/acquired indigenously in the process of expansion of existing business.Since, all the corresponding assets are acquired/developed in the country and not imported, the provisions of section 43A of the act has no application. 10. The details of loans and exchange fluctuation loss and also the utility of such loans has been furnished hereunder:- Utilisation HDFC - Rs.400 crores HDFC - 120 crores ITA No.143 - 146/Bang/2021 Page 5 of 31 11. As could be seen all the investments are on the above assets which are created indigenously in India. The assets are mainly in the nature of buildings. The plant & machinery and furniture & fixtures etc., which are required for providing facilities of plug and use in an Software Technology Park. There are no investments in any machinery which is used in manufacturing activity. Summary of year wise investment in fixed assets: FY.2006-07 to F,Y.2012-13, out of funds borrowed by issue of debentures to M/s.Hypo Real Estate Bank International AG (HYPO) for Rs.380 crs is attached. Thedebentures were redeemed out of loan from HDFC Ltd. in notional US $ denominated loan (i.e., existing loan is closed out of new borrowings). As explained above the loan of Rs.120 crores is in work in progress upto FY.2014-15. 12. There are no assets acquired from outside India. There is no liability in foreign currency relatable to the asset directly since the assets are acquired and created in India. 13. It was submitted that the provisions of section 43A of the Act has no application.The order in question is under the provisions of section 143(3) r.w.s. 263 of the Act and passed consequent to directions of Hon'ble Principle Commissioner of Income Tax (Central), Bengaluru, dated 23.03.2018. On page 11 in para 11.3 of the order the Pr. Commissioner of Income Tax [Pr.CIT] has given the following finding. “.........the assessee's contention is based on the fact that, section 43A permits capitalization only when the capital asset is acquired from outside India by incurring ITA No.143 - 146/Bang/2021 Page 6 of 31 expenditure in foreign currency. Admittedly the facts of this case are that. the assessee has not obtained any foreign currency loan. It has merely received loan in Indian currency, however pegged to dollar rates for the purposes of repayment. Further the loan was not utilized for importing any capital asset from abroad................” 14. The Pr.CIThas given a clear finding in the order u/s 263 of the Act that, there is no capital asset imported. Hence, this issue is concluded in the order U/s.143(3) r.w.s. 263 of the Act. 15. The Pr.CIThas setaside the order U/s.143(3) of the act, U/s.263 act, with the following directions: - “........... also to disallow the claim of exchange fluctuation loss of Rs. 22,93,48,566/- which is nothing but notional liability and claimed U/s.37(1) without debiting the same to the Profit & Loss account. Therefore, the Assessing Officer is directed to redo the assessment accordingly in the light of findings on the above mentioned issues and by allowing the assessee adequate opportunity of being heard and in accordance with law" 16. ThePr.CIThas given directions in the context of "notional liability” and also in the context of "allowing expenditure without debiting the same in the profit & loss account". 17. The ld.AR further submitted that bothPr.CITin his order U/s.263 of the Act and also the Assessing Officer in his order U/s.143(3) r.w.s 263 of theAct have given a categorical finding that, the loan was not utilized for importing any capital asset from abroad.Under the circumstances, the issue that there are no assets which are imported is not under dispute. ITA No.143 - 146/Bang/2021 Page 7 of 31 18. In the light of the above facts, it was submitted that, the provisions of section 43A of the Act are not applicable to the assessee. It was further submitted that, as explained above the loans were raised during the A.Y.2012-13 and the exchange fluctuation loss claimed in the said year has been allowed. He drew our attention to the statement of assessable income and also copy of the order U/s.143(3) of the Act dated 27.02.2015 for AY 2012-13. Further, both the Pr.CITand also the Assessing Officer have given specific finding that, there are no assets imported and hence the said issue does not arise. 19. He also submitted that, the directions of the Pr.CITin the order was with the following findings:- 1. The liability on exchange fluctuation loss is notional and hence not allowable. 2. The expenditure is not claimed in Profit & loss account and hence not allowable. Exchange fluctuation loss allowable on reinstatement 20. He also relied on the following judgments for the above issue: i) CIT V. Indian Toners & Developers Ltd (2010) 326 ITR 435 (Delhi) ii) Woodward Governor India (F) Ltd (2009) 312 ITR 254 (SC) iii) Oil & Natural Gas Corprn. Ltd V. CIT, Dehradun (2010) 189 Taxman 292 (SC) ITA No.143 - 146/Bang/2021 Page 8 of 31 iv) M/s.Coffeeday Global Ltd for the A.Ys.2013-14 & 2014-15 in ITA Nos.3040 & 3041/Bang/2018. v) Pr.Commissioner of Income Tax V. Albasta Wholesale Services Ltd (2020) 117 Taxmann.com 166 (SC) vi) DCIT, Circle-13(1), New Delhi V. Nitrex Chemicals India Ltd (2015) 62 Taxmann.com 284 (Delhi-Trib) vii) India Gelatine and Chemicals Ltd V. Assistant Commissioner of Income Tax (2014) 46 Taxmann.com 282 (Gujarat) viii) Shankara Infrastructure Materials Ltd V. Assistant Commissioner of Income Tax, Circle- ore (2021) 130 Taxmann.com 67 (Kar) ix) Pr.Commissioner of Income Tax V. Suzlon Energy Ltd (2020) 121 Taxmann.com 137 (SC) Expenditure not claimed in Profit & Loss account, but claimed in the statement of assessable income. 21. He submitted that it is a settled position of law that, entries in the books of accounts are not determinative of the treatment of either income or expenditure for the purpose of computation of income under the provisions of the Act. As explained above in the case of the assessee, the expenditure on exchange fluctuation loss has to be considered notionally on accrual basis on reinstatement. Since the business of the company has already began and the assets are put to use the expenditure is allowable as revenue. 22. As explained, the loan of Rs.400 crores has been utilized for redemption of debentures which were utilized for acquiring assets ITA No.143 - 146/Bang/2021 Page 9 of 31 indigenously and such assets are yielding license revenue. Hence, the exchange fluctuation loss relatable to this loan of Rs.400 crs is allowable as revenue. 23. The balance of loan of Rs.120 crs is lying in work in progress which is in the nature of expansion of the activity of an existing business. Since the expenditure relates to expansion of an existing running business, the exchange fluctuation loss is again allowable as revenue expenditure. 24. Further he relied on following judgments and the ratios laid down for the proposition that entries in the books of accounts are immaterial for the purpose of determining the treatment for the purpose of provisions of the Act. i) Reliance Wellness Ltd V. DCIT-3(3) in ITA No.3444 and 4273/Mumbai/2013, ii) Kedarnath Jute Manufacturing Co., Ltd V. CIT (1971) 82 ITR 363 (SC) iii) M/s.CoffeedayGlobal Ltd for the A.Ys.2013-14 & 2014- 15 in ITA Nos.3040 & 2041/Bang/2018. 25. The ld.DR relied on the order of the CIT(A). 26. We have heard both the parties and perused the materials on record. Admittedly, similar issue came up for consideration before this Tribunal in the assessee’s sister concern case in ITA No.DCIT Vs. Coffee Day Global Ltd., 79 ITR 322 (Bang) (Trib) in ITA No.3040 and 3042/Bang/2018 dated 24/12/2020, wherein held as follows:- ITA No.143 - 146/Bang/2021 Page 10 of 31 “10.8 We have heard the rival submissions and perused the record, The Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT reported in [(1979) 116 ITR 1] = [TS-5017-SC- 1978-O] held as under: “The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee of account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature”. The ratio of the above decision is whether the gain or loss should be brought to tax or allowed as deduction depends upon whether the foreign currency transactions were carried on account of capital or revenue items. If the foreign currency transactions are undertaken on capital account, the gain made out of such transaction is outside ambit of taxation, of course subject to the application of provisions of section 43A of the act. If the transactions undertaken are on account of revenue items, the gain is clearly taxable and so the loss also is clearly allowable. In the present case, in the assessment year 2013-2014, Rs.18.12 crore represent the notional forex loss that is reinstatement of loan as on 31st March by marking to marketing rate and the balance amount is incurred on actual payment made during the year. In the assessment year 2014-2015, Rs.25.55 crore represent notional forex loss as above and balance amount is incurred on actual payment during the year. The Assessing Officer except making bald assertion that the transactions were undertaken on account of capital items no evidence was brought on record to establish that the foreign currency transactions were undertaken on capital items. The Supreme Court in the case of Woodward Governor India Pvt Ltd Vs. CIT [312 ITR 254] had already held that the actual payment was not a condition precedent for ITA No.143 - 146/Bang/2021 Page 11 of 31 making adjustment in respect of foreign currency transactions at the end of the closing year. We are, therefore, unable to concur or agree with the view of the Assessing Officer that liability could arise only when the contract would have matured as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Apex Court in the case of Woodward Governor India Pvt. Ltd. (supra). It is also not in dispute that assessee is following the mercantile system of accounting consistently. The foreign exchange loss is due to the reinstatement of the accounts at the end of the financial year as well as loss incurred on account of exchange fluctuation on repayment of borrowings is similar to the interest expenditure and it is to be allowed as revenue expenditure u/s 37 of the I.T.Act, as per the accounting standard approved by the Institute of Chartered Accountants of India. Hence, we do not find any infirmity in the finding of the CIT(A) on this issue and confirm the same. This ground of appeals of the Revenue is dismissed.” 27. In our opinion, the issue before us is squarely covered by the above order of the Tribunal and taking a consistent view, we are inclined to decide the issue in favour of the assessee. This ground of appeal in asst. year 2013-14 to 2015-16 is allowed. 28. Next ground of appeal in ITA No.144/Bang/2021 to 146/Bang/2021 in asst. years 2014-15 to 2017-18 iswith regard to disallowance of interest. 29. We consider the facts as narrated in asst. year 2014-15. The facts relating to these issues arethat the assessee has claimed interest expenses of Rs.37,55,17,174/- on borrowed funds which are used for the purpose of the business activity. The details of interest expenses claimed are as under:- ITA No.143 - 146/Bang/2021 Page 12 of 31 30. The above loans are for specific purpose and were used for such purpose. The interest expenses were therefore allowable under the provisions of section 36(1)(iii) of the act and hence claimed as revenue expenditure. 31. The Assessing Officer while concluding the assessment has listed out the following loans and advances and also investments as not for the purpose of business. ITA No.143 - 146/Bang/2021 Page 13 of 31 32. The Assessing Officer has stated that, the above amounts are in the nature of advances/ loans without interest. 33. The ld.AR submitted that - 1. The Assessing Officer has quantified the above disallowance without providing any specific opportunity of hearing to the assessee. The action of the Assessing Officer in disallowing expenditure without providing opportunity of hearing to the assessee is against the principles of natural justice. Further, the long term loans and advances to related parties is considered at Rs.140 crores whereas the actual is Rs.14 crores only. The Assessing Officer has erred in quantifying a disallowance arbitrarily adopting wrong figures and also an arbitrary interest rate at 14.5%. The quantification of the Assessing Officer is therefore on wrong set of facts and at an arbitrary percentage. 2. The Assessing Officer has disallowed the whole of the interest of Rs.37,55,17,174/- claimed u/s.36(1)(iii) of the Act. As stated the assessee is in the business of developing SEZ and the sources of income to the assessee are mainly license fee from SEZ & IT parks and also maintenance income. The revenue from operations declared by the assessee during the previous year is as under: - License fee from SEZ and IT Park 68,77,86,282 Maintenance income 7,45,67,563 --------------------- 76,23,53,845 --------------------- ITA No.143 - 146/Bang/2021 Page 14 of 31 3. The borrowed funds of the assessee have been totally utilized for the purpose for which it was borrowed and used for business activities from which substantial revenue has been declared. There has been no diversion of any of the borrowed funds. 4. Under the above circumstances, the action of the Assessing Officer in disallowing the whole of the interest expenses of Rs.37,55,17,174/- is arbitrary and without any basis. 5. No portion of the borrowed funds were diverted towards the alleged advances/investments in group concerns above and therefore there was no case for disallowance of interest. The Assessing Officer has erred in disallowing the whole of the interest claimed. 6. The total of the investments considered by the Assessing Officer as out of alleged diversion of borrowed funds is as under: - (1) Short term loan and advances to related parties 307,85,05,247 (Refer note no.16 to the financials) (2) Advance for purchase of shares 62,05,65,000 (Refer Note No.16 to the financials) (3) Long term loans & advances to related parties 140,00,00,000 (Refer Note No.12 to the financials) ---------------------- 509,90,70,247 ---------------------- 7. As explained the long term loans and advances as per financials is Rs.14 crs and not Rs.140 crs as adopted above. If this error is rectified the advances to be considered as alleged diversion and consequential disallowance is as under: - ITA No.143 - 146/Bang/2021 Page 15 of 31 (1) Short term loan and advances to related parties 307,85,05,247 (Refer note no.16 to the financials) (2) Advance for purchase of shares 62,05,65,000 (Refer Note No.16 to the financials) (3) Long term loans & advances to related parties 14,00,00,000 (Refer Note No.12 to the financials) ---------------------- 383,90,70,247 ---------------------- As against these advances the appellant is in possession of following funds which are interest free. Share capital 5,13,16,580 Reserves & Surplus 24,61,57,434 Loan from M/s.Global Technology Ventures Ltd 145,60,33,192 Loan from M/s.Coffeeday Enterprises (P) Ltd 184,21,83,863 M/s.Coffeeday Resorts (MSM) Pvt Ltd 7,54,66,750 M/s.Coffeeday Hotels & Resorts (P) Ltd 42,91,62,078 Security Deposits 108,36,22,728 ---------------------- 518,39,42,625 ---------------------- 8. The assessee is in possession of interest free funds to the extent of Rs.518.39 crs which exceeds the alleged advance/investment considered by the Assessing Officer of Rs.383.90 crs. Under the circumstances, since the interest free funds cover up the alleged advances/deposits there is no case to presume that, any portion of the borrowed funds have been diverted for such advances/investments. 9. The Assessing Officer has erred in ignoring the above factual position and proceeding to disallow the whole of the interest expense of Rs.37,55,17,174/-. Considering the fact that, the amount of interest free funds far exceeds ITA No.143 - 146/Bang/2021 Page 16 of 31 the advances/investments, to sister concerns, we submit that, there was no case for disallowing any portion of the interest, let alone the whole of the interest. 34. The ld.AR relied on the following decisions in this regard, wherein it is held that, if the assessee is in possession of interest free funds to cover up the advances/loans, there is no case for disallowance of interest under the provisions of section 37 of the Act. i) CIT V. Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom) ii) CIT V. HDFC Bank Ltd (2014) 366 ITR 505 (Bom) iii) Commissioner of Income Tax and Another V. Microlabs Ltd (2016) 383 ITR 490 (Kar) 35. The ld.AR also relied on the decision of the High Court of Punjab & Hariyana in the case of CIT Vs. Max India Ltd (2017) 398 ITR 209 (P & H), wherein it is held that, if an assessee has surplus interest free funds which were utilized to give interest free advances to the subsidiaries, no disallowance of interest is warranted. 36. He further relied on the decision of Hon’ble Supreme Court in the case of Commissioner of Income Tax V. Reliance Industries Ltd (2019) 102 Taxmann.com 52 (SC) wherein it is held that, if interest free funds available with the appellant is sufficient to cover up investment in subsidiaries no disallowance can be made. This issue therefore has reached finality. 37. The ld.AR submitted that, under the circumstances and also the position of law above, there is no case for presumption of diversion and also disallowance of interest. We submit that, the Assessing Officer has erred in disallowing the whole of interest of ITA No.143 - 146/Bang/2021 Page 17 of 31 Rs.37,55,17,174/- whereas on facts and position of law there was no case of disallowance. 38. The breakup of advances to related parties considered by the Assessing Officer for quantifying the disallowance of interest is as under:- Particulars As on 31.03.2014 As on 31.03.2013 Coffeeday Resorts (MSM) Pvt Ltd 6,80,24,417 6,80,24,417 Girividyuth India Ltd 4,95,074 4,55,484 Liqwid Krystal (P) Ltd 9,35,64,097 9,65,64,097 Tanglin Property Development (Mumbai) Pvt Ltd 12,08,68,712 9,73,00,603 Tanglin Retail Reality Developments (P) Ltd 278,54,46,188 269,79,43,127 Sivan Securities (P) Ltd 1,01,06,759 - Terra Firma (SWM) Chennai pvt Ltd - 1,45,45,534 Terra Firma BioTechnologies Ltd - 1,52,17,406 Terra Firma Chennai - 5,00,000 Total 307,85,05,247 299,05,50,668 39. The Assessing Officer has considered the amount of Rs.307,85,05,247/- as diversion of borrowed funds and has quantified a disallowance. 40. The ld.AR submitted that, the opening balances in these accounts totally amounted to Rs.299,05,50,668/-. The increase during the previous year is only to the extent of Rs.8 crores. Majority of the investments were made in the earlier years and was outstanding on the first day of the accounting year. Assessments have been concluded U/s.143(3) of the act for the A.Y.2013-14 and there has been no disallowance of interest in the said year on the ITA No.143 - 146/Bang/2021 Page 18 of 31 advances allegedly made out of borrowed funds for the reason that, the borrowed funds were not utilized for any such advance. 41. The ld.AR prayed that in the light of the fact that, there was no disallowance in the earlier year, there was no case for the Assessing Officer to presume that, any portion of the borrowed funds were diverted during the year warranting disallowance of interest and he reiterated that the action of the Assessing Officer is arbitrary and without any basis. We submit that, there was no case for the Assessing Officer to disallow interest which was on borrowals used for the purpose of the business activity. 42. Out of the advances listed out in para 3 and considered by the Assessing Officer as having been out of borrowed funds which were interest bearing, the major item of advance is M/s.Tanglin Retail Reality Developments (P) Ltd, wherein the advance outstanding is Rs.278,54,46,188/-. The whole of the advance above is sourced by the following loans from related parties. Loan from M/s.Global Technology Ventures Ltd Rs. 145,60,33,192 Loan from M/s.Coffeeday Enterprises Ltd Rs. 184,21,83,863 43. The above loans are interest free. This fact is brought out in note No.4B to the financials. 44. Since the source of the advance has an direct nexus with interest free loans from related parties, we submit that, there is no case for the Assessing Officer to presume that any portion of the borrowed funds were utilized for the purpose of advances above. 45. The Assessing Officer has erred in disallowing interest on presumptions which are far from facts. We submit that, there was no case from the Assessing Officer to consider the advances as ITA No.143 - 146/Bang/2021 Page 19 of 31 having been made out of borrowed funds and quantify interest disallowance. The Assessing Officer has erred in disallowing the whole of interest of Rs.37,55,17,174/-. 46. He further submitted that, the interest expenses claimed by the assessee as detailed in note 20 to financials is Rs.37,55,17,174/-. The summary of Details of interest expenses and the effective rate of interest as under: - Particulars Interest claimed as revenue Effective rate of interest HDFC Limited (Rs.400 cr loan) 32,42,86,428 6.15% HDFC Limited 38,99,767 14.10% HDFC Car loan 3,70,688 11% Interest on electricity deposit 1,07,57,535 12.50% AK capital 3,52,21,404 15% Interest on service tax 9,81,351 37,55,17,173 47. As could be seen from the details above, the borrowals on which interest is paid and claimed are for specific purpose and no portion of such loans have been diverted for the purposes other than business. 48. The major item of interest is Rs.32,42,86,428/- to HDFC Limited. The loans to which the interest relate to are notional USD loans. The loans are for the specific purpose of investment in SEZ/IT Park. The borrowed funds are therefore utilized for development of infrastructure at SEZ/IT park and the income earned by assessee is from such SEZ/IT park. The borrowed funds ITA No.143 - 146/Bang/2021 Page 20 of 31 were specifically for the said purpose and there is a direct nexus between the funds and the fixed assets of the company. Under the circumstances there is no basis to presume that, any portion of these loans have been diverted to advance to related parties which have been considered as out of diversion of borrowed funds. 49. The other interest expenses are also on loans for specific purpose and hence cannot be presumed that, such funds have been diverted. 50. In view of the facts above, it is submitted that, the borrowed funds have been utilized for the purpose of the business activity and hence there is no case for disallowance. The Assessing Officer has erred in disallowing the whole of the interest expense of Rs.37,55,17,174/-. 51. Without prejudice to submissions above, that no portion of the borrowed funds has been utilized for the advances and therefore there is no disallowance warranted, the ld. AR submitted that the percentage adopted for quantifying disallowance at 14.5% is arbitrary and does not have any basis. 52. The ld.AR submitted that, the HDFC Ltd. notional dollar loans of Rs.400 crores is at effective rate of interest of 6.15%. The HDFC car loan is at 11%. The rate of interest varies from loan to loan and such interest on majority of the loans is at less than 11%. The percentage of 14.5% adopted for quantifying disallowance of interest is highly arbitrary and without any basis. ITA No.143 - 146/Bang/2021 Page 21 of 31 53. The ld.AR submitted that, the Assessing Officer has arbitrarily disallowed interest at 14.5%. The action of the Assessing Officer in disallowing the whole of the interest of Rs.37,55,17,174/- is erroneous and not justified. He therefore requested to delete the addition consequent to disallowance of interest expenses of Rs.37,55,17,174/-. 54. The ld.DR submitted that the disallowance of Rs. 375517174/- is on account of interest expenses u/s36(1)(iii). Perusal of assessment order shows assessee company had incurred interest payments totaling Rs. 37,5517174/-. The assessee had simultaneously advanced interest free loans to its own sister concerns totaling Rs. 307,85,05,247/-. The assessee had also advanced Rs.62,05,65000/- and Rs. 140,00,00000/- to M/s Sivan Securities (P) Ltd., another sister concern. 55. In this context, it was submitted that theassessee failed to explain the business and commercial expediency for advancing interest free loans to its sister concerns whereas it claimed Rs. 37,5517,1741- as interest paid. 56. We have heard both the parties and perused the materials on record. The main contention of the ld.AR is that the assessee is having enough interest free funds and interest free advances to sister concern out of interest free funds available with the assessee. We have carefully gone through the financials furnished by the assessee before us as noted from the financials, there is sufficient interest free funds available with the assessee so as to make ITA No.143 - 146/Bang/2021 Page 22 of 31 advance to sister concern for free of interest. Accordingly, in our opinion judgment of Hon’ble Karnataka High Court in the case of Micro Labs Ltd., 383 ITR 490 squarely applicable to the facts of the case wherein held as follows:- “40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paperbook and the same is enclosed as ANNEXURE-111 to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income. 41. The Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Born) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon’ble Bombay High Court in CITv. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. 42. In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly." 57. The same view taken in the case of CIT Vs. Reliance Industries Ltd., 410 ITR 466 where is held as follows:- “7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the ITA No.143 - 146/Bang/2021 Page 23 of 31 assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question. 58. In view of the above, this ground of the appeals of the assessee is allowed. 59. Next ground in ITA No.144/Bang/2021 to 146/Bang/2021 in AY 2014-15, 2015-16 and 2017-18 is with regard to disallowance u/s 14A of the Income-tax Act r.w. Rule 8D(2)(ii) of the Rules 1963. 59.1 We consider the facts in AY 2014-15. DISALLOWANCE U/S.14A OF THE ACT – RS.22,04,380/- 60. The facts of the case are as under: - 1. The appellant has not earned any dividend income exempt under the provisions of the act during the previous year. 2. As per the balance sheet of the appellant made investments in subsidiaries/associates and the Assessing Officer has considered these investments as allegedly made with a purpose to earn income exempt under the provisions of the act. Name of the party Year Ended 31.03.2014 Rs. Year Ended 31.03.2013 Rs. Tanglin Property Developments Mumbai (P) Ltd Nil 1,00,000 Tanglin Retail Reality Developments (P) Ltd 10,00,000 10,00,000 Terra Firm Bio-Tech Ltd Nil 2,28,10,420 Digital Signage Networks India (P) Ltd 2,25,00,000 2,25,00,000 Terra Firma (Solid Waste Management) Chennai Nil 1,00,000 ITA No.143 - 146/Bang/2021 Page 24 of 31 (P) Ltd Way2Wealth Securities (P) Ltd 25,86,00,000 25,86,00,000 Ittiam Systems (P) Ltd 12,87,21,000 12,87,21,000 Giri Vidhyuth India Ltd 1,86,00,000 1,86,00,000 Less: Diminution in the value of investment - 1,00,000 Total 42,94,21,000 45,23,31,420 3. None of the above investments have yielded any income exempt under the provisions of the act. 4. The assessee had not incurred any expenditure in respect of the above investments. 5. All the investments are in subsidiaries/associates and the same have been made with an intention to have controlling interest and in the business interest of the assessee. 6. Majority of the above investments, being shares were held in the earlier years also. 7. The assessee has declared gross revenue of Rs.71,19,14,718/- and all the expenditure claimed in the books relate to the business activity of the company. No expenditure can be attributed to the activity of holding investments which have been allegedly held by the Assessing Officer as having been made for the purpose of earning exempt income. 8. The assessee has maintained regular books of accounts which have been produced before the Assessing Officer for verification. No discrepancies have been found in the books of accounts maintained. ITA No.143 - 146/Bang/2021 Page 25 of 31 61. Under the above facts and circumstances, it was submitted before the Assessing Officer that the assessee has not earned any income exempt under the provisions of the Act. The assessee has not made any investment with the purpose of earning income exempt under the provisions of the Act. Further all the expenditure incurred and recorded in the books of accounts relate to the business activity. 62. It was the case of the assessee that the provisions of section 14A of the act cannot be invoked and no disallowance is warranted under the said provisions for the facts of the assessee. 63. The ld. AR submitted that AO has relied on the following decisions and has quantified a disallowance U/s.14A of the act as under: - i) M/s.MGM Diamond Beach Resorts (P0 Ltd V. DCIT (Chennai ITAT B Bench, on 13/06/2008 in ITA No.2173/Mds/2005, AY. 2002-03). ii) CIT V. SBT in 16 Taxmann.com 289 (Ker) (2011). 64. The computation of disallowance by the Assessing Officer is as under: - A.Y.2014-15 A.Y.2013-14 Investment in companies 42,94,21,000 45,23,31,420 ========== ========== Average investment 44,08,76,210 ========== 0.5% of Average Investment 22,04,380 Disallowance U/s.14A 22,04,380 ITA No.143 - 146/Bang/2021 Page 26 of 31 65. With the above calculation the Assessing Officer has disallowed expenditure of Rs.22,04,380/- under the provisions of section 14A of the Act. 66. The Assessing Officer has not recorded any satisfaction before proceedings to quantify the disallowance above. The formula laid down has been routinely applied and disallowance quantified. The CIT(A) has confirmed the disallowance of the AO. 67. The ld. AR submitted that the issue involved is a covered matter in the assessee’s own case for the A.Y.2012-13, ITA No.1341/Bang/2016, dated 25.10.2017 by the coordinate bench of this Tribunal and it has held that, provisions of sec.14A of the Act cannot be invoked where there is no exempt income earned by the assessee during the relevant previous year. 68. The ld. AR also submitted that even for the A.Y.2013-14 there was a disallowance U/s.14A of the Act of Rs.20,02,760/- under similar facts and circumstances. On appeal this Tribunal has disposed off the appeal in ITA No.49/Bang/2017, dated 04.06.2018, deleting the addition consequent to disallowance U/s.14A of the act. Since the issue is a covered matter, therefore, the addition consequent to disallowance needs to be deleted. 69. It was submitted that the company has not earned any exempt income during the previous year. In view of this, we submit that, there is no expenditure disallowable under the provisions of section 14A of the Act. We rely on the following decisions, wherein ITA No.143 - 146/Bang/2021 Page 27 of 31 it is categorically held that unless the assessee has earned some income exempt under the provisions of the Act no disallowance can be made. The position of law as explained in the below mentioned decisions are that quantification of a disallowance is with reference to exempt income earned and not otherwise. (i) Pr.Commissioner of Income Tax V. GVK Project & Technical Services Ltd (2019) 106 Taxmann.com 161 (SC). (ii) Pr.Commissioner of Income Tax V. Oil Industry Development Board (2019) 103 Taxmann.com 326 (SC). (iii)Pr.Commissioner of Income Tax, Patiala V. State Bank of Patiala (2018) 99 Taxmann.com 286 (SC). (iv) Commissioner of Income Tax V. Reliance Industries Ltd (2019) 102 Taxmann.com 52 (SC). (v) Pr.Commissioner of Income Tax-2 V. Caraf Builders & Constructions (P) Ltd (2019) 112 Taxmann.com 322 (SC) (vi) CCI Ltd V. JCIT, Udupi Range in ITA No.359/2011. (vii) Cheminvest Ltd V. CIT-IV (2015) 61 Taxmann.com 118 (Delhi) 70. It was submitted that the ITAT, Bangalore in the case of Income Tax Officer, Ward-4(1)(1), Bengaluru Vs. M/s.J.P.Distilleries (P) Ltd for the A.Ys.2010-11 and 2011-12, held that, in the absence of exempt income no disallowance can be made under the provisions of section 14A of the Act. 71. It was further submitted by ld. AR that the Assessing Officer has quantified a disallowance U/s.14A of the Act, notionally in a routine fashion without any satisfaction been recorded as to why the claim of the assessee that, no expenditure was incurred in respect of these investments cannot be accepted. The action of the Assessing Officer is against the decision of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co., Ltd V. DCIT (2017) 81 Taxmann.com 111 (SC), wherein it is held that, unless a ITA No.143 - 146/Bang/2021 Page 28 of 31 satisfaction is recorded no disallowance could have been made U/s.14A of the Act. 72. The ld.DR submitted that the disallowance of Rs. 22,04,380/- u/s 14A r.w. r. 8D. Perusal of assessment order shows that the assessee made long term investment in equity shares & mutual funds. In this context, it may be noted that no expenditure incurred for the purpose of earning an exempt income shall be allowed against taxable profits. The assessee stated that it had not incurred any expenditure for earning dividend income. 73. In this context, it may be noted that expenses relating to exempt income cannot be claimed against taxable income.Even if income is not earned during a year, provisions of section 14 A rwr. 8D can be invoked since the legislation was introduced so as to enable the department to determine expenses incurred relating to exempt income. 74. The AO has relied on the several judicial decisions among which is the decision of Hon'ble ITAT Chennai in the case of M/s MGM Diamond Beach Resorts P Ltd in ITA No 2173/ Mds/25 AY 2002-03, In the cited order, the Hon’ble ITAT held that 'once assessee is purchasing the shares, naturally the income would not come only in the form of dividend which is ultimately exempt and will not form part of the total income, and therefore, the expenditure for the purpose of earning such income would not be eligible. Whether any such exempt income has been earned or not is of no consequence' ITA No.143 - 146/Bang/2021 Page 29 of 31 75. Further, the AO also relied on the decision of the Hon'ble Kerala High Court in the case of SBT 16 taxmann.com 289 (Ker) 2011 76. The ld.DR relied on the order of the lower authorities. 77. We have heard both the parties and perused the materials on record. The main contention of the ld.AR is that the assessee is having any exempt income as such there cannot be any disallowance u/s 14A r.w.Rule 8D of the Income-tax Act. In our opinion, there is no dispute that assessee has not earned any disallowance u/s 14A r.w Rule 8D of the Act and this issue is squarely covered by the order of the Tribunal in assessee’s own case in ITA No.49/Bang/2017 dated 4/6/2018. 78. At the time of hearing, the ld. counsel for the assessee brought to our notice that identical issue had come up for consideration before this Tribunal in assessee's own case in assessment year 2012-13, in ITA No.1341/Bang/2016, and this Tribunal by its order dated 25/10/2017 held that provisions of sec. 14A of the Act cannot be invoked where there is no exempt income earned by the assessee during the relevant previous year. The following were relevant observations of the Tribunal. "We heard rival submissions and perused the material on record. We find that the assessee had not received any exempt income therefore, no disallowance under. section 14A is to be made. We have also carefully examined the computation of income and the Balance Sheet and find that the assessee had not earned any exempt income. We have also examined the judgments referred to by the assessee in which proposition has been laid down that in the absence of exempt income, no disallowance u/s 14A ITA No.143 - 146/Bang/2021 Page 30 of 31 can be made. Therefore, we are of the view that when the assesee had not received any exempt income, no disallowance under section 14A can be made. We accordingly set aside the order of the CIT(A) and delete the additions made invoking the provisions of section 14A of the Act." 79. The Tribunal in coming to the aforesaid conclusion has placed reliance onthe decision of the Hon'ble Karnataka High Court in MI CCI Ltd. Vs. JCIT, Udupi Range in ITA No.359/2011. 80. The ld.counsel for the assessee also brought to our notice that similar view has been taken by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT-IV (2015)61 Taxmann.com 118 (Delhi). 81. In view of the aforesaid decisions rendered in assessee's own case and in the decisions rendered by the Hon'ble High Courts, we are of the view that there can be no disallowance of expenditure u/s 14A of the Act. The addition made is, therefore, directed to be deleted and the appeal of the assessee is allowed. 82. In the result, assessee’s appeals are allowed. Order pronounced in court on 31 st January, 2022 Sd/- Sd/- (GEORGE GEORGE K.) ( CHANDRA POOJARI) Judicial Member Accountant Member Bangalore, Dated, 31 st January, 2022 / vms / ITA No.143 - 146/Bang/2021 Page 31 of 31 Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. By order Asst. Registrar, ITAT,Bangalore.