M/s.Golflinks Software Park (P) Ltd., Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 336/BANG/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4157 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 06-05-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 15-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR ITAT BENGALURU
• Assessee Lawyers: G SITARAM
• Keywords: Business income; Depreciation; Earning of tax free income; Wrong claim; Commercial expediency; Revenue expenditure; TDS; Rule 8D; Set aside
• Section: 271(1)(c); 143(3); 14A; 115JB; 201; 148; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER ITA NOS.333 TO 339/BANG/2017 ASSESSMENT YEAR S : 2007 - 08 TO 2013 - 14 GOLFLINKS SOFTWARE PARK (P) LTD., 1 ST FLOOR, EMBASSY POINT, 150, INFANTRY ROAD, BANGALORE 560 001. PAN: AABCG 7106K VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(3), BANGALORE APP EL L ANT RESPONDENT I T (TP) A NO. 384/BANG/2017 ASSESSMENT YEAR : 2013 - 14 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(2), BANGALORE . VS. GOLFLINKS SOFTWARE PARK (P) LTD., BANGALORE 560 001. PAN: AABCG 7106K APP EL L ANT RESPONDENT REVENUE BY : SHRI PRADEEP KUMAR, CIT(DR)( ITAT ), BENGALURU. A SSESSEE BY : SHRI G. SITARAM, CA DATE OF HEARING : 06.05 . 201 9 DATE OF PRONOUNCEMENT : 10 . 0 5 . 201 9 O R D E R PER N V VASUDEVAN, VICE PRESIDENT ITA NO.333/BANG/2017 THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 30.11.2016 OF THE CIT(APPEALS)-3, BENGALURU RELATING TO ASSESS MENT YEAR 2007-08. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 2 OF 32 2. THERE ARE BASICALLY TWO ISSUES RAISED BY THE ASS ESSEE IN THIS APPEAL VIZ., DISALLOWANCE OF INTEREST OF RS.47,62,545 U/S. 36(1)(III) OF THE INCOME- TAX ACT, 1961 [THE ACT] AND ANOTHER ADDITION OF R S.1,00,20,000 BEING INTEREST RECEIVABLE FROM M/S. RPG CAPITAL & CREDITS LTD. [ RPG ]. 3. AS FAR AS THE FIRST ISSUE IS CONCERNED, THE FACT S ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT. IN THE COURSE OF U/S. 143(3) OF THE ACT, THE AO NOTICED TH AT THE ASSESSEE HAD ADVANCED INTEREST FREE LOAN OF RS.63,50,06,012 AS O N 31.3.2007 TO M/S. DYNASTY DEVELOPERS PVT. LTD., [ DDPL ]. DDPL IS A COMPANY IN WHICH THE DIRECTORS OF THE ASSESSEE HAVE SUBSTANTIAL INTEREST . THE ASSESSEE DID NOT CHARGE ANY INTEREST ON THE SUM ADVANCED TO DDPL. T HE AO NOTICED THAT THE ASSESSEE AVAILED OF LOANS OF RS.578,46,86,896 F ROM HDFC BANK AND PAID INTEREST ON SUCH LOANS. THE AO ALSO FOUND THA T THE MONIES THAT WERE RECEIVED AS ADVANCE FROM HDFC BANK WERE TRANSFERRED TO DDPL. 4. THE PROVISIONS OF SEC.36(1)(III) OF THE ACT, REA DS AS FOLLOWS: 36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWI NG CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 . ( III) THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION : PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN R ESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EX TENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHI CH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUC TION. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 3 OF 32 5. THUS, FOR ALLOWANCE OF A CLAIM FOR DEDUCTION OF INTEREST UNDER THIS PROVISION FOLLOWING THREE CONDITIONS ARE REQUIRED T O BE SATISFIED VIZ., (I) THE MONEY, THAT IS CAPITAL, MUST HAVE BEEN BORROWED BY THE ASSESSEE; (II) IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS . (III) THE ASSESSEE MUST HAVE PAID INTEREST ON THE BORROWED AMOUNT I.E. HE HAS SHOWN THE SAME AS AN ITEM OF EXPENDITURE. IF THE BORROWED FU NDS ARE NOT USED FOR THE PURPOSE OF BUSINESS BUT ARE USED FOR GIVING LOANS/A DVANCES TO SISTER CONCERN OR THIRD PARTIES, THEN THE INTEREST EXPENDI TURE TO THE EXTENT BORROWED FUNDS ARE DIVERTED FOR NON BUSINESS PURPOS ES, WILL NOT SATISFY THE TEST OF BORROWED FOR THE PURPOSE OF BUSINESS OF TH E ASSESSEE AND INTEREST EXPENDITURE WILL NOT BE ALLOWED AS A DEDUCTION. TH E LAW ON THIS ISSUE IS SETTLED AFTER THE HONBLE SUPREME COURT JUDGMENT IN THE CASE OF S. A. BUILDERS LTD. V. CIT (APPEALS) [2007] 288 ITR 1 (SC ), IN WHICH THE CONCEPT OF COMMERCIAL EXPEDIENCY WAS USED. THUS, WHERE TH E FUNDS OF THE BUSINESS A DIVERTED FOR INTEREST FREE LOANS THE MAI N CRITERIA FOR PERMISSIBILITY OF INTEREST ON THOSE FUNDS ARE BASED ON WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY OR NOT. THE PHRASE COMMERCIAL EXPEDIENC Y HAS FOLLOWING IMPORTANT TRAITS AS PURPOSE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST. IT MAY INCLUDE MEASURES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS . IT HAS HOWEVER TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF ITS DIR ECTORS OR PARTNERS, AS THE CASE MAY BE. THERE HAS TO BE A NEXUS BETWEEN THE AD VANCING OF FUNDS AND BUSINESS INTEREST OF THE ASSESSEE. SOME BUSINESS OB JECTIVE SHOULD BE SOUGHT TO HAVE BEEN ACHIEVED BY EXTENDING SUCH INTE REST FREE ADVANCES WHEN THE ASSESSEE-FIRM/COMPANY ITSELF IS BORROWING FUNDS FOR RUNNING ITS BUSINESS. THE HONBLE SUPREME COURT HAS ALSO DELVED INTO THE CASE WHERE THERE WOULD BE MIXED FUND AT THE DISPOSAL OF THE ASSESSEE. IT FURTHER CLARIFIES THAT UNDER SECTION 36(1)(III) THE ULTIMATE USE OF THE ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 4 OF 32 FUND IS IMPORTANT. IT MAY NOT BE RELEVANT AS TO WHE THER THE ADVANCES HAVE BEEN EXTENDED OUT OF THE BORROWED FUNDS OR OUT OF MIXED FUNDS WHICH INCLUDE BORROWED FUNDS. THE TEST TO BE APPLIE D IN SUCH CASES IS NOT THE SOURCE OF THE FUNDS BUT THE PURPOSE FOR WHI CH THE ADVANCES ARE EXTENDED. THE ABOVE PRINCIPLES HAS ALSO BEEN R EITERATED BY THE HONBLE SUPREME COURT HERO CYCLES (P) LTD. VS. CIT (CENTRAL, LUDHIANA, CIVIL APPEAL NO.514 OF 2008 DATED 5.11.20 15. 6. IN THE PRESENT CASE, AS WE HAVE ALREADY SEEN BO RROWED FUNDS ON WHICH INTEREST WAS PAID AND WHICH WAS CLAIMED AS DE DUCTION WHILE COMPUTING INCOME FROM BUSINESS HAD BEEN USED TO THE EXTENT OF RS.63,50,06,102/- FOR GIVING INTEREST FREE LOAN TO DDPL. IN THE ABOVE CIRCUMSTANCES, THE AO WAS OF THE VIEW THAT INTEREST EXPENSES CLAIMED AS DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS, ON LOANS FROM HDFC BANK AS A DEDUCTION SHOULD BE DISALLOWED TO THE EXT ENT OF 9% OF THE AMOUNT ADVANCED TO DDPL OF RS. 63,50,06,012 ON THE GROUND THAT THE LOANS ON WHICH INTEREST WAS PAID WAS NOT USED FOR T HE PURPOSE OF BUSINESS OF THE ASSESSEE AND THEREFORE THE CONDITION FOR GRA NTING INTEREST EXPENDITURE AS A DEDUCTION U/S. 36(1)(III) HAS NOT BEEN SATISFIED. 7. IN REPLY TO THE AFORESAID QUERY OF THE AO, THE A SSESSEE SUBMITTED THAT THE LOAN IN QUESTION WAS GIVEN BY HDFC BANK AS A COMMERCIAL LOAN WHICH COULD BE USED FOR ANY PURPOSE. THE ASSESSEE SUBMITTED THAT INTEREST FREE ADVANCES GIVEN TO THE ASSESSEES SIST ER CONCERN, DDPL, HAS TO BE CONSIDERED AS UTILIZATION OF LOANS FOR THE PU RPOSE OF BUSINESS. IN THIS REGARD, THE ASSESSEE SUBMITTED THAT IT WAS IN THE B USINESS OF REAL ESTATE AND THE SUM IN QUESTION WAS GIVEN TO DDPL FOR PROCU RING PROPERTY. HENCE THE INTEREST FREE LOAN GIVEN TO DDPL WAS FOR THE PU RPOSE OF BUSINESS AND ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 5 OF 32 THEREFORE NO DISALLOWANCE OF INTEREST AS PROPOSED B Y THE AO COULD BE MADE. 8. THE AO CALLED UPON THE ASSESSEE TO FURNISH CORRO BORATIVE EVIDENCE TO SHOW THAT ADVANCES WERE GIVEN TO DDPL FOR PROCUR EMENT OF PROPERTY. THE ASSESSEE FILED A LETTER DATED 1.4.2003 FROM DDP L WHEREIN THERE IS A REFERENCE TO ARRANGEMENT FOR PURCHASE OF 9 ACRES OF LAND AT KADUBEESANAHALLI, BANGALORE. THE AO WAS OF THE VIE W THAT BUT FOR THE AFORESAID LETTER, NO OTHER EVIDENCE WAS PRODUCED TO SHOW WHETHER SUBSEQUENTLY THE PROPERTY WAS REGISTERED IN ASSESSE ES NAME IN SUBSEQUENT ASSESSMENT YEARS. IN THESE CIRCUMSTANCE S, THE AO DISALLOWED A SUM OF RS.47,62,545 [9% OF 63,50,06,012] OUT OF I NTEREST EXPENSES CLAIMED AS DEDUCTION BY THE ASSESSEE. 9. AGGRIEVED BY THE AFORESAID ADDITION MADE BY THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS). 10. EVEN BEFORE THE CIT(APPEALS), THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE TO SUBSTANTIATE ITS CASE OF ADVANCE TO SIS TER CONCERN DDPL, BEING FOR BUSINESS PURPOSES. THE CIT(APPEALS), THE REFORE, HELD THAT MERELY BECAUSE BOTH THE ASSESSEE AND ITS SISTER CON CERN ARE ENGAGED IN REAL ESTATE BUSINESS, THERE CANNOT BE A PRESUMPTION THAT THE MONEY ADVANCED TO DDPL WAS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. BEFORE THE CIT(APPEALS), THE ASSESSEE HAD ALSO TAKE N A PLEA THAT FUNDS ON WHICH INTEREST WAS PAID AND WHICH WAS CLAIMED AS DE DUCTION IN THE P&L ACCOUNT WERE NOT USED FOR THE PURPOSE OF MAKING ADV ANCES TO DDPL. THE ASSESSEE HAD CLAIMED THAT IT HAD NON-INTEREST BEARI NG FUNDS OF RS.288.97 CRORES INCLUDING SUNDRY CREDITORS WHICH WAS UTILISE D FOR ADVANCING MONEY TO DDPL. THIS PLEA WAS ALSO NOT SUBSTANTIATED WITH SUFFICIENT EVIDENCE. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 6 OF 32 THEREFORE, THE CLAIM OF THE ASSESSEE ON THIS BASIS WAS ALSO REJECTED BY THE CIT(APPEALS). AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 11. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO THE BALANCE SHEET & P&L ACCOUNT OF ASSESSEE AS ON 31.3.2007 AND NOTE 16 OF THE NOTES TO ACCOUNTS, WHEREIN THERE IS A REFERENCE TO THE ASSESSEE HAVING PAID A SUM OF RS.99,87,30,918 AS BUSINESS CONSULTAN CY SERVICES REMUNERATION TO DDPL. OUR ATTENTION WAS ALSO DRAWN TO THE FACT THAT THE ASSESSEE HAD INCURRED CERTAIN EXPENSES ON BEHALF OF DDPL AND THOSE WERE REIMBURSED TO THE EXTENT OF RS.20,41,328. IN THE ABOVE CIRCUMSTANCES, IT WAS SUBMITTED THAT THERE WAS A BU SINESS CONNECTION BETWEEN THE ASSESSEE AND DDPL. THEREFORE, IT SHOUL D BE PRESUMED THAT INTEREST FREE LOAN WAS GIVEN OWING TO COMMERCIAL EX PEDIENCY. IT WAS ALSO SUBMITTED THAT THE CIT(APPEALS) IN CONFIRMING THE O RDER OF THE AO, HAS MADE A REFERENCE TO THE DECISION OF THE HONBLE HIG H COURT OF KARNATAKA IN THE CASE OF EMBASSY DEVELOPMENT CORPORATION V. ACIT [ 2015] 52 TAXMANN.COM 234 , WHEREIN IT WAS HELD THAT THERE WAS NO BUSINESS EXPEDIENCY IN ADVANCING LOANS TO SISTER CONCERN ON IDENTICAL FACTS AS IN THE CASE OF THE ASSESSEE IN THIS APPEAL. IN THE AFORES AID CASE, THE ASSESSEE AS WELL AS ITS SISTER CONCERN WERE ENGAGED IN REAL ESTATE BUSINESS. MONEY WAS ADVANCED TO THE SISTER CONCERN OUT OF BORROWED FUNDS FOR THE PURPOSE OF ACQUIRING PART OF PROPERTY WHICH WAS TO BE DEVEL OPED BY THE SISTER CONCERN. EVEN AFTER 3 YEARS, NO SUCH PURCHASE WAS MADE. IN THESE CIRCUMSTANCES, IT WAS HELD THAT THE AMOUNTS BORROWE D WERE NOT UTILISED FOR THE PURPOSE OF BUSINESS OF ASSESSEE. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, THE AFORESAID DECISION IS DISTINGUISHABLE FOR THE REASON THAT THERE WAS NO EVIDENCE OF PROPERTY NOT HAVING BEEN PURCHAS ED BY THE SISTER CONCERN I.E., DDPL IN THE PRESENT CASE. 12. THE LD. DR RELIED ON THE ORDER OF CIT(APPEALS). ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 7 OF 32 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AR E OF THE VIEW THAT THE PLEA PUT FORTH BY THE LD. COUNSEL FOR THE ASSES SEE CANNOT BE ACCEPTED. AS RIGHTLY HELD BY THE CIT(APPEALS), THERE WAS NO B USINESS PURPOSE ESTABLISHED BY THE ASSESSEE FOR WHICH ADVANCES WERE GIVEN TO DDPL. THE CLAIM OF ASSESSEE THAT ADVANCES WERE GIVEN FOR PURC HASE OF PROPERTY BY THE SISTER CONCERN HAS NOT BEEN ESTABLISHED. MOREO VER, FROM THE FACT THAT ASSESSEE AND SISTER CONCERN WERE BOTH IN REAL ESTAT E BUSINESS, ADVANCES GIVEN BY ONE TO THE OTHER CANNOT BE TREATED AS FOR BUSINESS PURPOSE, UNLESS EVIDENCE IS LET IN TO SHOW EXPENSES OF BUSINESS PUR POSE. EVEN BEFORE US, THE PLEA OF EXISTENCE OF OWN FUNDS OUT OF WHICH INT EREST FREE ADVANCES WERE GIVEN TO SISTER CONCERN HAS ALSO NOT BEEN ESTABLISH ED. THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE PRESEN T CASE THERE IS NO EVIDENCE TO SHOW THAT PROPERTIES WERE NOT PURCHASED BY DDPL IN THE PRESENT CASE CANNOT BE THE BASIS TO DISTINGUISH THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF EMBASSY DEVELOP MENT CORPORATION (SUPRA). THE ASSESSEE IS CLAIMING DEDUCTION OF INT EREST EXPENDITURE AND IT IS FOR THE ASSESSEE TO ESTABLISH THAT BORROWED FUND S ON WHICH INTEREST WAS PAID AND WHICH IS CLAIMED AS DEDUCTION IN COMPUTING INCOME FROM BUSINESS IS IN FACT USED FOR THE PURPOSE OF BUSINESS. IN TH ESE CIRCUMSTANCES, WE UPHOLD THE ORDER OF CIT(APPEALS) AND FIND NO MERITS IN THE FIRST ISSUE RAISED BY THE ASSESSEE. 14. THE SECOND ISSUE THAT ARISES FOR CONSIDERATION IS WITH REGARD TO ADDITION OF RS.1,00,20,000/- ON ACCOUNT OF INTEREST RECEIVABLE FROM RPG. THE FACTS IN THIS REGARD ARE THAT THE ASSESSEE HAD GIVEN AN ADVANCE OF RS.16 CRORES TO RPG BY WAY OF INTER-CORPORATE DEPOS ITS [ ICDS ]. ON SUCH DEPOSIT, INTEREST WAS PAYABLE BY RPG. RPG HAD IN ITS BOOKS OF ACCOUNT DEBITED INTEREST EXPENSES PAYABLE TO ASSESS EE AND HAD ALSO MADE DEDUCTION OF TAX AT SOURCE (TDS). THOUGH RPG HAD N OT PAID INTEREST TO THE ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 8 OF 32 ASSESSEE, YET IT HAD IN ITS BOOKS RECOGNIZED LIABIL ITY. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE, RIGH T TO RECEIVE INCOME WILL BE SUFFICIENT TO CONSTRUE ACCRUAL OF INCOME. IN TH ESE CIRCUMSTANCES, THE INTEREST INCOME THAT ACCRUED TO THE ASSESSEE WHICH OUGHT TO HAVE BEEN DECLARED BY THE ASSESSEE AND WHICH WAS NOT DECLARED IN THE RETURN OF INCOME BY THE ASSESSEE WAS BROUGHT TO TAX BY THE AO . THE ABOVE INFORMATION OF CREDIT OF INTEREST BY RPG CAME TO TH E KNOWLEDGE OF AO THROUGH AIR INFORMATION. 15. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT THE AFORESAID AIR INFORMATION WAS NOT BROUGHT TO THE NOTICE OF AS SESSEE BY THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS. HOWEVER, THE ASS ESSEE DID NOT FURNISH ANY SPECIFIC EXPLANATION AS TO WHY THE INTEREST INC OME SHOULD NOT BE BROUGHT TO TAX ON ACCRUAL BASIS IN THE HANDS OF ASS ESSEE. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE T HE TRIBUNAL. 16. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT THE SUM OF RS.16 CRORES DUE AND PAYABLE BY RPG HAD BEEN ASSIGN ED TO M/S. MORE FINANCE SHARE INVESTMENTS PVT. LTD. AS EARLY AS IN AY 2005-06 AND IN SUCH CIRCUMSTANCES, THE INTEREST INCOME IN QUESTION CANN OT BE BROUGHT TO TAX IN THE HANDS OF ASSESSEE. WE HAVE CONSIDERED THE SUBM ISSIONS AND ARE OF THE VIEW THAT NO SUCH PLEA WAS PUT FORTH BEFORE THE LOWER AUTHORITIES. EVEN BEFORE US, NO EVIDENCE HAS BEEN LET IN TO SUBSTANTI ATE THE CLAIM OF ASSESSEE WITH REGARD TO ASSIGNMENT OF ICDS BY THE A SSESSEE TO A THIRD PARTY. IN THESE CIRCUMSTANCES, WE FIND NO MERIT IN THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE. ACCORDINGLY, THE SECOND ISS UE IS ALSO DECIDED AGAINST THE ASSESSEE. 17. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISS ED. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 9 OF 32 ITA NO.334/BANG/2017 18. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 30.11.2016 OF THE CIT(APPEALS)-3, BENGALURU RELATING TO ASSESS MENT YEAR 2008-09. 19. IN THIS APPEAL, TWO ISSUES ARISE FOR CONS IDERATION VIZ., (1) DISALLOWANCE OF INTEREST ON ADVANCES MADE TO DD PL OF RS.3,50,42,297 AND DISALLOWANCE OF INTEREST ON INTEREST-FREE LOANS TO TOPAZ INVESTMENTS PVT. LTD. [ TIPL ] OF RS.72,36,903. BOTH THE AFORESAID DISALLOWANC E OF INTEREST ARE US.36(1)(III) OF THE ACT AND (2) DISAL LOWANCE U/S. 14A OF THE ACT OF RS.2,32,511. 20. THE SECOND ISSUE WAS NOT PRESSED FOR ADJUDICATI ON AND THE SAME IS DISMISSED AS NOT PRESSED. 21. ON THE FIRST ISSUE, AS FAR AS DISALLOWANCE U/S. 36(1)(III) OF THE ACT ON ACCOUNT OF BORROWED FUNDS WHICH WERE DIVERTED AS IN TEREST-FREE LOANS TO DDPL IS CONCERNED, THE FACTS ARE IDENTICAL TO THE F ACTS AS IT PREVAILED FOR AY 2007-08. EVEN IN THIS ASSESSMENT YEAR, THE ASSESSE E HAS NOT BEEN ABLE TO ESTABLISH THAT INTEREST-FREE LOANS TO SISTER CONCER N WAS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE OR OWING TO COMMERCIAL EXP EDIENCY. IN THESE CIRCUMSTANCES, WE FIND NO MERIT IN THE GROUNDS OF A PPEAL RAISED BY THE ASSESSEE. 22. AS REGARDS DISALLOWANCE OF INTEREST U/S. 36(1)( III) OF THE ACT ON THE GROUND THAT INTEREST BEARING LOANS WERE USED TO GIV E INTEREST-FREE FUNDS TO TIPL OF RS.72,36,903, THE FACTS ARE IDENTICAL TO TH E FACTS AS IT PREVAILED FOR THE AY 2007-08 WHEREIN A SIMILAR DISALLOWANCE WAS M ADE IN THE CASE OF ASSESSEE, IN PROCEEDINGS U/S. 148 OF THE ACT. THE DISALLOWANCE FOR INTEREST PAID TO DDPL WHICH WAS SUBJECT MATTER OF DISCUSSION IN ITA NO.333/BANG/2017 WAS ALSO MADE FOR THE SAME AY 2007 -08 BUT THAT WAS IN ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 10 OF 32 THE PROCEEDINGS U/S. 143(3) OF THE ACT. THE DISALL OWANCE OF INTEREST PAID TO TIPL WAS SUBJECT MATTER OF AN APPEAL BY THE ASSESSE E BEFORE THE TRIBUNAL IN ITA NO.332/BANG/2017 FOR THE AY 2007-08 AND THIS TRIBUNAL BY ITS ORDER DATED 15.02.2019 CAME TO THE CONCLUSION THAT THE MA TTER HAS TO BE REMANDED TO THE CIT(APPEALS) FOR FRESH CONSIDERATIO N. BEFORE THE TRIBUNAL, THE ASSESSEE HAS SUBMITTED RENTAL INCOME DUE TO THE ASSESSEE EVERY MONTH WAS TRANSFERRED AS ADVANCE TO TIPL AND BORROW ED FUNDS ON WHICH INTEREST WAS PAID WAS NOT UTILIZED TO GIVE INTEREST FREE LOANS TO TIPL. THE FURTHER SUBMISSION WAS THAT ADVANCES WERE GIVEN FOR PURCHASE OF LAND. THE TRIBUNAL, AFTER TAKING NOTE OF THE ABOVE SUBMIS SIONS CAME TO THE FOLLOWING CONCLUSION:- 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RECORD. WE NOTICE THAT THE LD CIT(A) HAS TAKEN SUP PORT OF THE DECISION RENDERED BY THE HONBLE KARNATAKA HIGH COU RT IN THE CASE OF EMBASSY DEVELOPMENT CORPORATION (SUPRA) TO UPHOLD THE ADDITION MADE BY THE AO, SINCE, ACCORDING TO LD CIT (A), THE ASSESSEE HAS FAILED TO PROVE COMMERCIAL CONSIDERATI ONS INVOLVED IN GIVING SUCH ADVANCES. BY ANALYZING THE FINANCIAL STATEMENTS, THE LD CIT(A) HAS TAKEN THE VIEW THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS FOR GIVING THE IMPUGNED ADVA NCES TO M/S TIPL. HENCE HE HAS HELD THAT THE INTEREST ATTRIBUTA BLE TO THE ADVANCES SO GIVEN IS NOT ALLOWABLE AS DEDUCTION. HE NCE, IN OUR VIEW, IT IS NOT A CASE OF ADDITION OF NOTIONAL INTE REST INCOME. BEFORE US, THE ASSESSEE HAS NOT FURNISHED THE COPIE S OF FINANCIAL STATEMENTS AND HENCE WE ARE UNABLE TO APPRECIATE TH E CONTENTION OF THE ASSESSEE. IN ADDITION TO THE ABOVE, THE ASSE SSEE HAS ALSO FURNISHED A COPY OF LEDGER ACCOUNT TO SUBMIT THAT T HERE ARE BUSINESS DEALINGS BETWEEN THE ASSESSEE AND M/S TIPL . A PERUSAL OF THE SAME WOULD SHOW THAT THE ASSESSEE APPEARS TO HAVE SOLD SOME PROPERTIES TO M/S TIPL AND RECEIVED MONEY IN I NSTALMENTS, WHILE THE ISSUE BEFORE US IS WITH REGARD TO THE ADV ANCES GIVEN BY THE ASSESSEE TO M/S TIPL. IN ANY CASE, THIS LEDGER ACCOUNT COPY AND THE NATURE OF BUSINESS TRANSACTIONS HAVE NOT BE EN EXAMINED BY LD CIT(A). ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 11 OF 32 12. WE ALSO NOTICE THAT THERE IS LACK OF CLARITY ON THE FACTS SURROUNDING THE ISSUE. THE ASSESSEE CLAIMS THAT IT HAS NOT DIVERTED ANY LOAN FUNDS FOR GIVING IMPUGNED ADVANCES AND IT HAS USED ONLY ITS RENTAL INCOME PROCEEDS FOR GIVING THE ADVA NCES. HOWEVER, THE LD CIT(A), AFTER ANALYZING THE FINANCI AL STATEMENTS OF THE ASSESSEE, HAS GIVEN A FINDING THAT THE ASSES SEE DOES NOT POSSESS INTEREST FREE FUNDS EQUIVALENT TO OR IN EXC ESS OF THE ADVANCE GIVEN. THE LD A.R ALSO SUBMITTED THAT THE Q UANTUM OF ADVANCE MENTIONED BY THE TAX AUTHORITIES IS NOT COR RECT. 13. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THA T THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF LD CIT(A) BY PROVIDING ONE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTANTIAT E ITS CASE. ACCORDINGLY WE SET ASIDE THE ORDERS PASSED BY LD CI T(A) ON THIS ISSUE IN ALL THE THREE YEARS UNDER CONSIDERATION AN D RESTORE THE SAME TO THE FILE OF LD CIT(A) FOR EXAMINING IT AFRE SH IN ACCORDANCE WITH LAW, AFTER AFFORDING ADEQUATE OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. 23. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNA L, WE REMAND THE ISSUE TO THE AO FOR FRESH CONSIDERATION AS PER THE DIRECTIONS OF THE TRIBUNAL REFERRED TO ABOVE AND IN THE LIGHT OF THE CONCLUSIO NS THAT MAY BE DRAWN IN AY 2007-08. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.335/BANG/2017 25. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 30.11.2016 OF THE CIT(APPEALS)-3, BENGALURU RELATING TO ASSESS MENT YEAR 2009-10. 26. THERE ARE BASICALLY TWO ISSUES THAT ARISE FOR C ONSIDERATION IN THIS APPEAL VIZ., DISALLOWANCE OF INTEREST U/S. 36(1)(II I) OF THE ACT ON THE GROUND THAT INTEREST BEARING FUNDS WERE DIVERTED TO DDPL A ND TIPL BEING FOR NON- BUSINESS PURPOSES AND NOT HAVING ANY COMMERCIAL EXP EDIENCY. THE FACTS ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 12 OF 32 IN CONNECTION WITH THE AFORESAID ISSUE ARE IDENTICA L TO THE FACTS AS IT PREVAILED IN THE CASE OF ASSESSEE FOR AY 2007-08. FOR THE REASONS STATED WHILE DECIDING THE ISSUE OF DISALLOWANCE OF INTERES T U/S. 36(1)(III) ON LOANS ADVANCED TO DDPL, WE CONFIRM THE ORDER OF CIT(APPEA LS). 27. IN RESPECT OF DISALLOWANCE OF INTEREST OF ADVAN CE TO TIPL, THE ISSUE IS REMANDED TO THE AO FOR FRESH CONSIDERATION AS DIREC TED BY THE TRIBUNAL FOR THE AY 2007-08, WHICH WE HAVE REFERRED TO IN THE EA RLIER PART OF THIS ORDER. 28. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.336/BANG/2017 29. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 30.11.2016 OF THE CIT(APPEALS)-3, BENGALURU RELATING TO ASSESS MENT YEAR 2010-11. 30. AS FAR AS THIS APPEAL IS CONCERNED, THERE ARE B ASICALLY THREE ISSUES THAT ARISE FOR CONSIDERATION. (I) THE FIRST ISSUE I S WITH REGARD TO THE COMPUTATION OF DISALLOWANCE U/S. 14A OF THE ACT R.W .S. RULE 8D(2)(III) OF THE I.T. RULES WHILE DETERMINING TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT. (II) THE SECOND ISSUE IS WITH REGARD TO D ISALLOWANCE OF EXPENSES INCURRED FOR THE PURPOSE OF EARNING INCOME WHICH DO ES NOT FORM PART OF TOTAL INCOME UNDER THE ACT UNDER CHAPTER III OF THE ACT W HILE COMPUTING BOOK PROFITS FOR THE PURPOSE OF LEVY OF TAX ON BOOK PROF ITS U/S.115JB OF THE ACT. (III) THE THIRD ISSUE IS WITH REGARD TO DEDUCTION C LAIMED BY THE ASSESSEE ON ACCOUNT OF CAPITAL ADVANCES WRITTEN OFF OF RS.9,64, 74,211 WHICH WAS NOT ALLOWED BY THE REVENUE AUTHORITIES. 31. AS FAR AS THE FIRST AND THE SECOND ISSUE ARE CONCER NED, THE FACTS ARE THAT THE ASSESSEE EARNED EXEMPT INCOME AND THEREFOR E EXPENDITURE ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 13 OF 32 INCURRED IN EARNING EXEMPT INCOME SHOULD BE DISALLO WED AND ADDED TO THE TOTAL INCOME OF ASSESSEE AS PROVIDED IN SECTION 14A OF THE ACT. THE EXPENDITURE TO BE DISALLOWED U/S.14A OF THE ACT IN THIS CASE HAD TO BE WORKED OUT ON THE BASIS OF RULE 8D(2)(II) & (III) O F THE INCOME TAX ACT RULES, 1962 (RULES). THERE IS NO DISPUTE ON THIS A SPECT. SECTION 115JB OF THE ACT PROVIDES THAT NOTWITHSTANDING ANYTHING CONT AINED IN ANY OTHER PROVISION OF THE ACT, WHERE IN THE CASE OF AN ASSES SEE, BEING A COMPANY, THE INCOME-TAX, PAYABLE ON THE TOTAL INCOME AS COMP UTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESS MENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL,2007, IS LESS THAN TEN PER CENT OF ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE BY THE ASSESSEE ON SUC H TOTAL INCOME SHALL BE THE AMOUNT OF INCOME-TAX AT THE RATE OF TEN PER CENT. THE ASSESSEE BEING A COMPANY THE PROVISIONS OF SEC.115JB OF THE ACT WERE APPLICABLE. EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PUR POSES OF THIS SECTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVAN T PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956). IN SO PREPARING I TS BOOK OF ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT, THE COMPANY SHA LL ADOPT THE SAME ACCOUNTING POLICIES, ACCOUNTING STAND AND METHOD AN D RATES FOR CALCULATING DEPRECIATION AS IS ADOPTED WHILE PREPARING ITS ACCO UNTS THAT ARE LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORD ANCE WITH PROVISIONS OF SEC.210 OF THE COMPANIES ACT. EXPLANATION BELOW SEC.115JB OF THE ACT PROVIDES THAT FOR THE PURPOSES OF SECTION 115JB OF THE ACT, 'BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS IN CREASED BY CERTAIN ITEMS DEBITED IN THE PROFIT AND LOSS ACCOUNT IN ARR IVING AT THE NET PROFIT AND AS REDUCED BY- CERTAIN ITEMS THAT ARE CREDITED IN T HE PROFIT AND LOSS ACCOUNT. IN OTHER WORDS, ALL THAT ONE HAS TO DO, WHILE COMPU TING BOOK PROFITS IS TO ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 14 OF 32 TAKE THE PROFIT AS PER PROFIT AND LOSS ACCOUNT PREP ARED IN ACCORDANCE WITH COMPANIES ACT, 1956 AND MAKE ADDITIONS OR SUBTRACTI ON AS IS GIVEN IN THE EXPLANATION TO SEC.115JB(2) OF THE ACT. ONE SUCH AD DITION TO THE PROFIT AS PER PROFIT AND LOSS ACCOUNT PROVIDED IN EXPLANATION TO 115JB(2) IS EXPENSES INCURRED TO EARN INCOME WHICH IS EXEMPT UNDER CHAPT ER III OF THE ACT. THE AO ADDED THE SUM DETERMINED AS EXPENSES TO BE DISAL LOWED U/S.14A OF THE ACT WHILE DETERMINING TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT ALSO WHILE DETERMINING THE BOOK PROFITS U/S. 115JB OF THE ACT WHICH WAS A SUM OF RS.45,46,667. 32. THE DISALLOWED U/S. 14A OF THE ACT WAS ARRIVED AT BY THE AO IN THE FOLLOWING MANNER:- A. TOTAL AMOUNT OF DIRECT INT EREST NIL B. TOTAL AMOUNT OF INDIRECT INTEREST PERTAINING TO TAX EXEMPT INVESTMENTS 99,81,70,460 A Y 09 - 10 AY 10 - 11 AVERAGE C. AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 5,71,53,625 1,12,13,375 3,41,83,500 D. AVERAGE AMOUNT OF TOTAL ASSETS 736,14.28.691 823,40,50,992 779,77,39,341 E. PROPORTIONATE INDIRECT INTEREST TO BE DISALLOWED B X C D . 3,41,83,500 X 99,81,70,460 779,77,39,341 = 43,75,750 F. 0.5% OF AVERAGE AMOUNT OF TAX EXE MPT INVEST MENTS 1,70,917 G TOTAL DISALLOWANCE ATTRACTED U/S. 14A READ WITH R ULE 8D A + E + F 45,46,667 33. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CON FIRMED THE ORDER OF AO. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 15 OF 32 34. IT IS THE PLEA OF THE ASSESSEE BEFORE US THAT W HILE APPLYING THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) AND (III) A ND WHILE COMPUTING THE DISALLOWANCE U/S. 14A OF THE ACT AND WHILE DETERMIN ING TOTAL INCOME OF ASSESSEE UNDER THE NORMAL PROVISIONS OF THE ACT, TH E AVERAGE VALUE OF INVESTMENTS SHOULD BE WORKED OUT WITHOUT INCLUDING THE INVESTMENTS WHICH DID NOT YIELD EXEMPT INCOME DURING THE RELEVANT PRE VIOUS YEAR. 35. AS FAR AS THE AMOUNT TO BE ADDED TO THE PROFIT AS PER P&L ACCOUNT U/S. 115JB OF THE ACT IS CONCERNED TOWARDS EXPENDIT URE INCURRED IN EARNING INCOME EXEMPT U/S. CHAPTER III OF THE ACT, THE PLEA OF THE ASSESSEE WAS THAT THE DISALLOWANCE U/S. 14A OF THE ACT MADE WHIL E COMPUTING TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT SHOUL D NOT BE AUTOMATICALLY ADDED WHILE DETERMINING THE BOOK PROFITS U/S. 115JB OF THE ACT. IN SUPPORT OF THE STAND TAKEN BY THE ASSESSEE, THE ASSESSEE HA S PLACED RELIANCE ON THE DECISION OF THE DELHI SPECIAL BENCH OF ITAT IN THE CASE OF ACIT V. VIREET INVESTMENTS PVT. LTD., 165 ITD 25 (DEL)(SB) . IN THE AFORESAID DECISION, TWO QUESTIONS WERE CONSIDERED BY THE SPEC IAL BENCH WHICH ARE AS FOLLOWS:- (I) WHETHER THE EXPENDITURE INCURRED TO EARN EXEM PT INCOME COMPUTED U/S 14A COULD NOT BE ADDED WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT? AND (II) WHETHER INVESTMENTS WHICH DID NOT YIELD ANY E XEMPT INCOME SHOULD ENTER INTO THE COMPUTATION UNDER RULE 8D WHILE ARRIVING AT THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME? 36. THE SPECIAL BENCH ANSWERED THE AFORESAID QUEST IONS AS FOLLOWS:- (I) WE ANSWER THE QUESTION REFERRED TO US IN FAVO UR OF ASSESSEE BY HOLDING THAT THE COMPUTATION UNDER CLAU SE (F) OF EXPLANATION 1 TO SECTION 115JB(2). IS TO BE MADE WI THOUT ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 16 OF 32 RESORTING TO THE COMPUTATION AS CONTEMPLATED U/S 14 A READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962. (II) ONLY THOSE INVESTMENTS ARE TO BE CONSIDERED F OR COMPUTING THE AVERAGE VALUE OF INVESTMENT WHICH YIELDED EXEMP T INCOME DURING THE YEAR. 37. IN VIEW OF THE AFORESAID DECISION OF THE SPECIA L BENCH, WE DIRECT THE AO TO COMPUTE THE DISALLOWANCE U/S. 14A OF THE ACT WHILE DETERMINING THE TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT BY TAKING INTO CONSIDERATION ONLY THE INVESTMENTS WHICH YIELDED EX EMPT INCOME FOR ARRIVING AT THE AVERAGE VALUE OF INVESTMENTS BEFORE APPLYING THE FORMULA UNDER RULE 8D OF THE RULES. 38. AS FAR AS THE AMOUNT TO BE ADDED WHILE COMPUTIN G BOOK PROFITS U/S. 115JB OF THE ACT IS CONCERNED, THE AO CANNOT ADD TH E SUM DETERMINED AS DISALLOWANCE U/S. 14A OF THE ACT WHILE COMPUTING TO TAL INCOME UNDER THE NORMAL PROVISIONS OF THE ACT AND HE HAS TO ADOPT A BASIS AS LAID DOWN BY THE SPECIAL BENCH IN THE AFORESAID DECISION VIZ., D IRECT EXPENDITURE ASSOCIATED WITH EARNING OF INCOME. WE DIRECT THE A O TO COMPUTE THE DISALLOWANCE U/S. 14A ACCORDINGLY UNDER THE NORMAL PROVISIONS OF THE ACT AS WELL AS ON THE BASIS OF BOOK PROFITS U/S.115JB O F THE ACT. 39. THE RELEVANT GROUNDS OF APPEAL OF ASSESSEE IS T REATED AS ALLOWED FOR STATISTICAL PURPOSES. ISSUE NOS.1 & 2 ARE DECIDED ACCORDINGLY. 40. AS FAR AS THE THIRD ISSUE IS CONCERNED, THE ASS ESSEE CLAIMED DEDUCTION OF A SUM OF RS.9,64,74,211 AS IMPAIRMENT OF CAPITAL ADVANCES. THE CLAIM OF ASSESSEE IN THIS REGARD WAS THAT ADVAN CES GIVEN WERE NOT REALIZABLE AND THEREFORE IT WAS DECIDED TO WRITE OF F IN THE BOOKS OF ACCOUNT IN ACCORDANCE WITH THE ACCOUNTING STANDARDS. WHEN THE AO CALLED UPON THE ASSESSEE TO JUSTIFY THE DEDUCTION ON ACCOUNT OF IMPAIRMENT OF CAPITAL ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 17 OF 32 ADVANCES, THE ASSESSEE AGREED BEFORE THE AO THAT TH E SAID SUM CANNOT BE CLAIMED AS A DEDUCTION IN ACCORDANCE WITH LAW AND A CCORDINGLY THE CLAIM FOR DEDUCTION WAS DISALLOWED BY THE AO WITH THE FOL LOWING OBSERVATIONS:- 20. FURTHER IT IS NOTICED THAT THE ASSESSEE COMP ANY HAS DEBITED AN AMOUNT OF RS 9,64,74,211 AS IMPAIRMENT OF CAPITA L ADVANCES IN P & L ACCOUNT. WHEN THIS ISSUE WAS BROUGHT TO TH E NOTICE OF THE ASSESSEE AND ITS ALLOWABILITY UNDER THE PROVISI ONS OF INCOME TAX ACT AS ALSO THE FACT THAT IT IS WAS NOT ADDED B ACK IN THE COMPUTATION OF INCOME FILED BY ASSESSEE. I. THE ASSESSEE HAS REPLIED THAT ' WE WOULD LIKE TO BRING TO YOUR KIND ATTENTION THE FACT THAT WE HAVE COMMIT TED AN ERROR IN COMPUTING THE TOTAL INCOME AFTER IGNORANCE OF THE FACT THAT THE IMPAIRMENT OF ASSETS ARE NOT ALLOWABL E UNDER THE PROVISIONS OF I T ACT, AND ALSO WE MISSED OUT T HIS IMPAIRMENT AMOUNT OF RS 9,64,74,211 FROM OUR COMPUTATION OF INCOME AND WHEN REALIZING THIS FACT WE DECIDED TO REVISE THE RETURN, HOWEVER THE PRESCRIBE D TIME LIMIT FOR REVISING THE RETURN HAS ELAPSED, THEREFOR E WE ARE NOW BRINGING TO YOUR NOTICE THAT THE AMOUNT OF RS 9,64,74,211 TO BE ADDED BACK TO THE RETURNED INCOME ' II. THE ABOVE SUBMISSIONS HAVE BEEN PERUSED AND EXA MINED. IT IS NOTED THAT THE ASSESSEE COMPANY HAS ACCEPTED THIS FACT AND REQUESTED FOR ADDING BACK TO TOTAL INCOME, ONLY AF TER THIS LAPSE WAS POINTED OUT BY THE ASSESSING OFFICER. AFTER CON SIDERING THE ABOVE, I PROCEED TO ADD BACK THE AMOUNT OF RS 9,64, 74,211 BEING IMPAIRMENTS OF ASSETS TO THE RETURNED INCOME, AND F OR THIS REASON PENALTY PROCEEDINGS U/S 271(1)(C) ARE INITIATED. 41. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT WHILE COMPUTING BOOK PROFITS U/S. 115JB OF THE ACT, A SUM OF RS.9,64,74,211 DEBITED IN THE P& L A/C AS IMPAIRMENT OF CAPITAL AD VANCES AND THAT CANNOT BE ADDED TO THE PROFIT AS PER PROFIT AND LOSS ACCOU NT PREPARED IN ACCORDANCE WITH COMPANIES ACT, 1956, WHILE COMPUTIN G BOOK PROFIT FOR THE LEVY OF TAX ON BOOK PROFITS U/S.115JB OF THE ACT. T HE PLEA OF THE ASSESSEE ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 18 OF 32 WAS THAT AO CANNOT ADD TO THE PROFIT AS PER PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH COMPANIES ACT, 1956, AN Y SUM WHICH DOES NOT FALL WITHIN THE AMBIT OF ANY OF THE ITEMS OF AD DITIONS OR EXCLUSIONS AS PROVIDED IN EXPLANATION TO SECTION 115JB(2) OF THE ACT. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT, 255 ITR 273 (SC) WHEREIN THE HONBLE SUPREME COURT HELD THAT WHILE CALCULATING BOOK PROFITS U/S. 115JB OF THE ACT, THE AO CANNOT TINKER WITH THE P&L ACCOUNT, EXCEPT TO THE E XTENT PERMITTED BY THE EXPLANATION U/S. 115JB(2) OF THE ACT. IN OTHER WOR DS, THE PROFIT AS PER P&L ACCOUNT PREPARED IN ACCORDANCE WITH THE COMPANIES A CT, 1956 SHOULD BE THE STARTING POINT AND EXCLUSIONS & INCLUSIONS TO T HE SAID PROFIT TO ARRIVE AT THE BOOK PROFITS SHOULD BE ONLY ON THE BASIS OF PER MISSIBLE ITEMS OF INCLUSION & EXCLUSION AS PROVIDED UNDER EXPLANATION TO SECTION 115JB OF THE ACT. 42. THE CIT(APPEALS) FOUND THAT THE CLAIM OF ASSESS EE WAS NOT LEGALLY CORRECT FOR THE REASON THAT THE ASSESSEE ON ITS OWN ADMITTED THAT THIS ITEM OF EXPENDITURE IS NOT ADMISSIBLE WHILE COMPUTING IN COME UNDER THE NORMAL PROVISIONS OF THE ACT. THE FOLLOWING WERE THE RELE VANT OBSERVATIONS OF THE CIT(A):- 10.2 WITH REGARD TO THE ADDITION OF RS.9,64,74 ,211/- MADE TO THE BOOK PROFIT, IT IS RELEVANT TO NOTE THAT THE DE DUCTION OF THIS AMOUNT IN THE PROFIT A LOSS ACCOUNT WAS PATENTLY IN ADMISSIBLE. IN FACT DURING THE ASSESSMENT PROCEEDINGS, THE APPELLA NT HAS STATED BEFORE THE AO THAT IT HAD COMMITTED AN ERROR IN COM PUTING THE TOTAL INCOME DUE TO IGNORANCE OF THE FACT THAT THE IMPAIRMENT OF ASSET IS NOT ALLOWABLE AS DEDUCTION UNDER THE PROVI SIONS OF THE INCOME TAX ACT. THIS IS SPECIFICALLY DISCUSSED IN P ARA 20 OF THE ASSESSMENT ORDER. THEREFORE, IT IS VERY MUCH EVIDEN T THAT THE CLAIM OF DEDUCTION OF THIS AMOUNT IN THE PROFIT ET LOSS ACCOUNT WAS PATENTLY INADMISSIBLE AS PER THE PROVISIONS OF LAW. THEREFORE, THE PROFIT AS SHOWN IN THE P&L ACCOUNT SHOULD HAVE BEEN HIGHER ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 19 OF 32 BY RS.9,64,74,211/-, BUT FOR THE WRONG CLAIM OF DED UCTION BY THE APPELLANT. THEREFORE THE ADDITION OF THE CORRESPOND ING AMOUNT FOR COMPUTING THE BOOK PROFIT IS FOUND TO BE LEGALLY CO RRECT AND JUSTIFIED. THE CONTENTION OF THE APPELLANT AGAINST THE ADDITION OF THE SUM OF RS.9,64,74,211/- TO THE BOOK PROFIT IS R EJECTED. THE GROUNDS OF APPEAL RAISED IN THIS REGARD ARE ACCORDI NGLY, DISMISSED. 43. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE AS SESSEE IS IN APPEAL BEFORE THE TRIBUNAL. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS CLEAR FROM THE ORDER OF CIT(APPEALS) THAT HE HAS NOT ADDR ESSED THE ISSUE RAISED BY THE ASSESSEE. HE HAS PROCEEDED ON THE BASIS THA T THE DEDUCTION IS CLAIMED IN COMPUTING TOTAL INCOME AS PER THE NORMAL PROVISIONS OF THE ACT. IT IS TRUE THAT THE ASSESSEE AGREED FOR ADDITION OF THIS SUM TO THE TOTAL INCOME WHILE COMPUTING TOTAL INCOME UNDER THE NORMA L PROVISIONS OF THE ACT, BUT WHILE COMPUTING BOOK PROFITS U/S.115JB OF THE ACT, THE PLEA OF THE ASSESSEE WAS THAT THIS SUM IS NOT ONE OF THE ITEM T O THE ADDED TO THE PROFIT AS PER PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDAN CE WITH THE PROVISIONS OF COMPANIES ACT, 1956, AS PROVIDED IN EXPLANATION TO SEC.115JB(2) OF THE ACT. THEREFORE THE CONCLUSIONS OF THE CIT(A) IN TH IS REGARD IS INCORRECT BECAUSE THE CLAIM OF THE ASSESSEE IS IN THE CONTEXT OF DETERMINATION OF BOOK PROFITS U/S. 115JB OF THE ACT. IT IS CLEAR FR OM A READING OF EXPLANATION TO SECTION 115JB(2) OF THE ACT THAT THE AMOUNT DEBI TED IN THE P&L ACCOUNT TOWARDS IMPAIRMENT OF CAPITAL ADVANCES WAS NOT AN I TEM WHICH SHOULD BE ADDED BACK TO THE PROFIT AS PER P&L ACCOUNT FOR ARR IVING AT THE BOOK PROFITS. IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. (SUPRA), THE AO WAS THEREFORE NOT COMPETENT TO ADD THE AFORESAID SUM TO THE PROFIT AS PER P&L ACCOUNT WHIL E DETERMINING THE BOOK PROFITS. WE HOLD ACCORDINGLY AND ALLOW THE RELEVAN T GROUND OF APPEAL OF THE ASSESSEE. 44. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 20 OF 32 ITA NO.337/BANG/2017 45. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 30.11.2016 OF THE CIT(APPEALS)-3, BENGALURU RELATING TO ASSESS MENT YEAR 2011-12. 46. THERE ARE BASICALLY TWO ISSUES THAT ARISE FOR C ONSIDERATION IN THIS APPEAL, VIZ., DISALLOWANCE OF INTEREST U/S. 36(1)(I II) OF THE ACT OF RS.22,71,40,434 AND DISALLOWANCE OF EXPENSES U/S. 1 4A OF RS.53,553. 47. THE ISSUE WITH REGARD TO DISALLOWANCE OF INTERE ST U/S. 14A OF THE ACT WAS NOT PRESSED BEFORE US, HENCE THE SAME IS DISMIS SED AS NOT PRESSED. 48. AS FAR AS DISALLOWANCE OF INTEREST U/S. 36(1)(III) OF THE ACT IS CONCERNED, THE FACTS ARE THAT THE ASSESSEE HAD AVAI LED OF SECURED LOANS OF RS 1035,81,74,018. THE AO ALSO NOTICED THAT THE ASSESS EE HAD GIVEN THE FOLLOWING ADVANCES FOR THE FOLLOWING PURPOSES: A. A SUM OF RS. 14,70,56,552 AS LOANS TO GROUP COMP ANIES; B. A SUM OF RS 61,50,00,00 AS ADVANCE FOR NEW VENTU RES; C. A SUM OF RS 146,49,22,969 AS ADVANCE TOWARDS SHA RE APPLICATION MONEY. THE ASSESSEE HAD PAID INTEREST OF LOANS AVAILED FRO M FINANCIAL INSTITUTIONS & BANKS AND INCURRED INTEREST EXPENSES TO THE EXTENT OF RS 137,83,92,147. 49. THE AO CALLED UPON THE ASSESSEE TO WHY INTEREST EXPENDITURE DEBITED TO PROFIT AND LOSS ACCOUNT SHOULD NOT BE DI SALLOWED PROPORTIONATE TO THE EXTENT THE SAME WAS USED FOR GIVING ADVANCES TO SISTER CONCERNS AS DETAILED ABOVE, FOR THE REASON THAT INTEREST EXPEND ITURE TO THAT EXTENT CANNOT BE REGARDED AS EXPENDED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF ASSESSEE'S BUSINESS. IN RESPONSE THE ASSESSEE'S AUT HORIZED REPRESENTATIVE CLAIMED THAT THE AMOUNTS WERE GIVEN FOR BUSINESS PU RPOSES. HOWEVER, THE ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 21 OF 32 ASSESSEE DID NOT PRODUCE ANY EVIDENCE TO SHOW THE B USINESS EXPEDIENCY OR ANY DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE LOANS/ADVANCES GIVEN AS STATED ABOVE. THE AO THEREFORE DISALLOWED INTEREST EXPENDITURE TO THE EXTENT OF RS 24,11,42,713 OUT OF THE INTEREST E XPENDITURE CLAIMED AS DEDUCTION OF RS 112,16,08,065. AGAINST THE HOUSE PR OPERTY INCOME OF THE ASSESSEE FOR THE SAID A. Y. UNDER CONSIDERATION. TH E INTEREST ALLOWABLE WAS WORKED OUT BY THE AO AT RS. 88,04,65,352 (RS.112,1 6,08,065 RS.88,04,65,352) AS FOLLOWS: 112,16,08,065X 2226979521 = 24,11,42,713. 10358174018 RS.22,69,79,521 IS THE SUM TOTAL OF THE THREE ADVAN CES REFERRED TO IN PARAGRAPH-47 OF THIS ORDER. RS.1035,81,74,018 IS T HE TOTAL ADVANCES TAKEN BY THE ASSESSEE FROM BANKS ON WHICH INTEREST PAID W AS RS.112,16,08,065. 50. BEFORE THE CIT(A) THE ASSESSEE THAT IT MADE AN ADVANCE OF RS.14.70 CRORES TO GROUP COMPANIES VIZ., M/S. D M E STATES (P) LTD., AND M/S. GV PROPERTIES (P) LTD. AND AN ADVANCE OF RS.61 .50 CRORES, M/S. EMBASSY PROPERTY DEVELOPMENT (P) LIMITED (EPDPL) AN D SUBMITTED THAT THESE ADVANCES WERE MADE FOR BUSINESS VENTURES AND DEVELOPMENT OF PROPERTY. THE ASSESSEE SUBMITTED THAT ALL THE ENTIT IES TO WHICH THE ASSESSEE GAVE ADVANCES AND THE ASSESSEE WERE ENGAGE D MAINLY IN THE BUSINESS OF LAND DEVELOPMENT AND THEREFORE, THE ADV ANCES MADE TO THESE ENTITIES SHOULD BE CONSIDERED AS ADVANCE MADE FOR T HE PURPOSE OF BUSINESS. THE CIT(A) HELD THAT THE ASSESSEE HAS NOT FURNISHED ANY SPECIFIC PURPOSE FOR WHICH MONEY WAS ADVANCED TO THE GROUP C OMPANIES AS REFERRED ABOVE. HE HELD THAT THE ASSESSEE HAS NOT E XPLAINED HOW SUCH ADVANCES MADE TO THOSE COMPANIES COMPLEMENTED THE B USINESS INTEREST OF THE ASSESSEE. ACCORDING TO CIT(A) THE FACT THAT ALL GROUP COMPANIES ARE ENGAGED IN THE REAL ESTATE BUSINESS CANNOT BE THE B ASIS TO INFER THAT ANY ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 22 OF 32 AMOUNT OF MONEY WHICH IS ADVANCED TO SUCH COMPANIES WOULD PROMOTE THE INTEREST OF THE ASSESSEE. HE HELD THAT WITHOUT BRIN GING ON RECORD THE SPECIFIC PURPOSE FOR WHICH THE MONEY WAS ADVANCED T O THE GROUP COMPANIES AS REFERRED ABOVE, IT CANNOT BE AUTOMATIC ALLY ACCEPTED THAT THE MONEY WAS ADVANCED AND UTILIZED FOR THE COMPANY. HE HELD THAT SINCE IT WAS UNDISPUTED THAT ADVANCES TO SISTER CONCERNS WER E MADE OUT OF BORROWED FUNDS, THE ASSESSEE HAVING FAILED TO PROVE THAT THE AMOUNTS ADVANCED TO THE GROUP CONCERNS WERE OUT OF THE NON- INTEREST BEARING FUNDS OF THE ASSESSEE, HE HELD THAT DISALLOWANCE OF INTER EST ON THE ADVANCES TO GROUP COMPANIES WAS VALID. 51. WITH REGARD TO ADVANCE OF RS.146,49,22,969/- FO R PURCHASE OF SHARES INCLUDING SHARE APPLICATION MONEY, THE ASSES SEE SUBMITTED THAT A SUM OF RS.131,15,22,969/- WAS GIVEN TOWARDS SHARE A PPLICATION MONEY FOR ACQUIRING SHARES OF UMBEL PROPERTIES (P,) LTD (UPPL ). THE ASSESSEE CLAIMED THAT THE INVESTMENT IN UPPL WAS FOR DEVELOP ING A BIG PROJECT IN BANGALORE. THE ASSESSEE CLAIMED THAT IT WAS ONE OF THE PROMOTERS OF THE SAID PROJECT AND SHARES HAD BEEN ALLOTTED TO THE AS SESSEE IN THE SUBSEQUENT YEAR. THE CIT(A) HELD THAT SINCE THE MON EY WAS GIVEN FOR ACQUIRING SHARES OF ANOTHER COMPANY, INTEREST PAYAB LE ON SUCH ADVANCE CANNOT BE ALLOWED AS REVENUE EXPENDITURE. IN THIS R EGARD THE CIT(A) RELIED ON THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. LK TRUST (2008) 297 1TR 53, (KARNATAKA) , IN WHICH IT WAS HELD THAT INTEREST ON MONEY BORROWED FOR ACQUIRING SHARES WHE RE THE ASSESSEE HAD BORROWED MONEY FOR INVESTMENT IN SHARES WHICH WAS N OT IN LINE WITH THE BUSINESS OF THE ASSESSEE, INTEREST ON SUCH BORROWIN GS CANNOT BE ALLOWED AS DEDUCTION FROM THE BUSINESS INCOME. THE CIT(A) A LSO HELD THAT THE CLAIM OF THE ASSESSEE THAT THE AMOUNTS WERE ADVANCED FOR BUSINESS PROMOTION AND THE FUNDS HAVE BEEN FULLY UTILIZED FOR THE SPEC IFIED PROJECTS WAS NOT ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 23 OF 32 PROVED BY LETTING IN ANY EVIDENCE EXCEPT MERELY CLA IMING THAT THE MONEY WAS ADVANCED TO UPPL AS SHARE APPLICATION MONEY FOR BEING INVESTED IN A BIG PROJECT IN BANGALORE IN WHICH THE ASSESSEE WAS ONE OF THE PROMOTERS. 52. THE CIT(A) HOWEVER FOUND THAT THE ASSESSEE HAS RECEIVED INTEREST OF RS.1,75,48,359/- FROM THE GROUP COMPANIES IN RES PECT OF THE ADVANCES MADE. THE CIT(A) FOUND FROM FINANCIAL STATEMENTS TH AT A SUM OF RS.1,75,48,359/- WAS INCLUDED UNDER THE HEAD 'OTHER INCOME', WHICH WAS EVIDENT FROM NOTE 13 IN THE SCHEDULE TO THE PROFIT & LOSS ACCOUNT. HE ALSO FOUND THAT TAX WAS DEDUCTED IN RESPECT OF THE SAID INCOME. ACCORDINGLY, THE CIT(A) HELD THAT TO THE EXTENT OF INTEREST RECEIVED ON ADVANCES, THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. THE RELEVANT FINDINGS OF THE CIT(A) IN THIS REGARD WAS AS FOLLOWS:- 7.1 FROM THE FINANCIAL STATEMENTS FOR THE YEAR UND ER CONSIDERATION, IT IS OBSERVED THAT THE APPELLANT HA S RECEIVED A SUM OF RS.1,75,48,359/- TOWARDS INTEREST ON LOANS AND S ECURITIES GIVEN TO COMPANIES. THIS IS EVIDENT FROM THE DETAILS FURN ISHED UNDER 'OTHER INCOME' IN NOTE 13 TO THE SCHEDULE TO THE PR OFIT A LOSS ACCOUNT. IN THIS REGARD THE APPELLANT HAS FURNISHED THE BREAK UP AS PER WHICH IT IS OBSERVED THAT IT HAS RECEIVED A SUM OF RS.80,66,146/- AS INTEREST FROM DM ESTATES (P) LTD AND GV PROPERTIES (P) LTD AND RS.59,36,543/-AS INTEREST FR OM OTHER GROUP COMPANIES. THE APPELLANT HAS ALSO FURNISHED DETAILS OF THE TAX DEDUCTED AT SOURCE IN RESPECT OF THE INTEREST RECEI VED FROM DM ESTATES (P) LTD AND GV PROPERTIES (P) LTD. HOWEVER THE TOTAL AMOUNT OF INTEREST RECEIVED FROM THESE TWO COMPANIE S AND OTHER GROUP COMPANIES IS FOUND TO BE ONLY RS.1,40,02,689/ -. THEREFORE CONSIDERING THESE FACTS IT IS VERY MUCH EVIDENT THA T THE APPELLANT HAS RECEIVED INTEREST TO THE EXTENT OF RS.1.40 CROR ES FROM THE GROUP COMPANIES, AS STATED ABOVE. ACCORDINGLY THE A MOUNT OF INTEREST DISALLOWANCE DETERMINED BY THE AO SHOULD B E REDUCED BY THE AMOUNT OF INTEREST RECEIVED FROM THESE COMPANIE S. THE AO IS DIRECTED ACCORDINGLY. THEREFORE THE DISALLOWANCE OF BALANCE INTEREST TO THE EXTENT OF RS.22,71,40,024/- IS CONF IRMED. THE ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 24 OF 32 GROUNDS OF APPEAL RAISED IN THIS REGARD ARE ACCORDI NGLY PARTLY ALLOWED. 53. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASS ESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THE LD. CO UNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE CIT(A) WITH REGA RD TO ADVANCES MADE OF RS.14.70 CRORES TO GROUP COMPANIES VIZ., M/S. D M ESTATES (P) LTD., AND M/S. GV PROPERTIES (P) LTD. AND AN ADVANCE OF RS.61 .50 CRORES, M/S. EMBASSY PROPERTY DEVELOPMENT (P) LIMITED (EPDPL) WE HAVE ALREADY DECIDED A SIMILAR ISSUE IN THE AY 2007-08 AND WE HA VE ALSO REFERRED TO THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF EMBASSY DEVELOPMENT CORPORATION (SUPRA) WHILE DECIDING SIMILAR ISSUE FOR AY 2007-08. WE ARE OF THE VIEW THAT IN THE LIGHT OF A BSENCE OF ANY EVIDENCE TO SHOW THE PURPOSE FOR WHICH THE LOANS/ADVANCES WERE GIVEN AND THEIR UTILIZATION, THE REVENUE AUTHORITIES WERE JUSTIFIED IN DISALLOWING INTEREST U/S. 36(1)(III) OF THE ACT ON THE GROUND THAT BORROWED F UNDS ON WHICH INTEREST WAS PAID WERE GIVEN TO SISTER CONCERNS WITHOUT CHAR GING ANY INTEREST AND WERE THEREFORE NOT FOR THE PURPOSE OF BUSINESS OF A SSESSEE. 54. AS FAR AS SUM OF RS.146,49,22,969 IS CONCERNED, THE PLEA OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT A SUM OF RS.131,1 5,22,969 WAS SHARE APPLICATION MONEY TO ACQUIRE SHARES OF UPPL FOR THE PURPOSE OF DEVELOPING OF A BIG PROJECT. THE ASSESSEE CLAIMED THAT IT WAS PROMOTER OF THIS COMPANY AND WAS A MAJOR SHAREHOLDER OF THE COMPANY. THIS CLAIM OF ASSESSEE WAS ALSO RIGHTLY REJECTED BY THE REVENUE A UTHORITIES FOR THE REASON THAT NO EVIDENCE WAS LET IN TO PROVE THE COMMERCIAL ADVANTAGE THAT THE ASSESSEE WOULD RECEIVE BY SUCH INVESTMENTS OR THE B USINESS EXPEDIENCY OF MAKING THE AFORESAID INVESTMENTS. THE CIT(APPEA LS) IN THIS REGARD HAS RIGHTLY PLACED RELIANCE ON THE DECISION OF THE HON BLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. L.K. TRUST, 297 ITR 53 (KAR). ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 25 OF 32 55. THE LD. COUNSEL FOR THE ASSESSEE MADE AN ALTERN ATIVE SUBMISSION THAT IF THE INTEREST EXPENDITURE DISALLOWANCE IS UP HELD, THEN THE RATE OF INTEREST THAT SHOULD BE APPLIED SHOULD BE THE AVERA GE RATE IN RESPECT OF ALL THE BORROWINGS OF THE ASSESSEE BECAUSE MIXED FUNDS WERE USED FOR THE PURPOSE OF GIVING ADVANCES OR ACQUIRING SHARES. NO SUCH PLEA WAS PUT FORTH BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AND THEREFORE AT THIS STAGE IT IS NOT POSSIBLE TO ENTERTAIN SUCH A CLAIM. EVEN BEFORE THE TRIBUNAL, NO DETAILS HAVE BEEN FURNISHED BY THE ASSESSEE IN T HIS REGARD. THEREFORE, THE ALTERNATE PLEA OF ASSESSEE IS ALSO REJECTED. 56. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS DI SMISSED. ITA NO.387/BANG/2017 57. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 30.11.2016 OF THE CIT(APPEALS)-3, BENGALURU RELATING TO ASSESS MENT YEAR 2012-13. 58. 56. THE ONLY ISSUE THAT ARISES FOR CONSIDERATI ON IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF INTEREST EXPENSES U/S. 36 (1)(III) OF THE ACT. THE FACTS ARE IDENTICAL TO THE FACTS AS IT PREVAILED IN THE AY 2011-12. FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS MADE THE FOLLOWING ADVANCES TO VARIOUS GROUP CONCERNS. I. RS.82,00,21,765 PAID TO UMBEL PROPERTIES (P) LTD . CLAIMED TO BE FOR ALLOTMENT OF CONVERTIBLE/REDEEMABLE DEBEN TURES. II. RS.15,34,00,000/- ADVANCED TO EMBASSY REAL ESTA TE AND PROPERTIES HOLDINGS (P) LTD., CLAIMED TO BE FOR ALL OTMENT OF SHARES. III. RS.27,35,21,016/- ADVANCED TO EMBASSY PROPERTY DEVELOPMENT (P) LTD., FOR INVESTMENT IN BUSINESS VE NTURES. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 26 OF 32 IV. RS.20,81,56,253/- ADVANCED TO DM ESTATES (P) L TD., AND GV PROPERTIES (P) LTD., AS INTER CORPORATE DEPOSITS. THE TOTAL AMOUNT OF THE ADVANCES AS STATED ABOVE WA S RS.145.50 CRORES. IN ADDITION TO THE ABOVE, THE ASSESSEE HAD ALSO INV ESTED A SUM OF RS.45 CRORES IN SHARES OF GROUP COMPANY UPPL. THE AO HAD TAKEN INTO CONSIDERATION THE INTEREST FREE ADVANCES MADE TO VA RIOUS GROUP CONCERNS AND WAS OF THE VIEW THAT THE INTEREST BEARING FUNDS WHICH WERE DIVERTED TO GROUP CONCERNS WAS NOT FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, THE AO MADE DISALLOWANCE OF INTEREST AMOUNTING TO RS.31.26 CRORES ON A PROPORTIONATE BASIS TAKING INTO ACCOUNT THE TOTAL I NTEREST EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMOUNT OF INTEREST FREE ADVANCES MADE TO GROUP CONCERNS. 59. ON APPEAL, THE CIT(APPEALS) CONFIRMED THE ORDER OF AO AND HELD THAT THE ASSESSEE FAILED TO PROVE THAT THE ABOVE AD VANCES/INVESTMENTS WERE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE CIT(A) HELD THAT THE ASSESSEE DID NOT FURNISH ANY SPECIFIC DETAILS T O ESTABLISH THE EXISTENCE OF COMMERCIAL EXPEDIENCY IN RESPECT OF THE AMOUNTS ADVANCED TO EMBASSY PROPERTY DEVELOPMENT (P) LTD AND EMBASSY REAL ESTAT E AND PROPERTIES HOLDING (P) LTD. SIMILARLY WITH REGARD TO THE INTER CORPORATE DEPOSITS ADVANCED TO GV PROPERTIES (P) LTD., AND DM ESTATES (P) LTD., NO SPECIFIC INFORMATION HAS BEEN FURNISHED WITH REGARD TO THE S PECIFIC UTILIZATION OF THE MONEY ADVANCED TO THESE COMPANIES TO DEMONSTRATE TH E EXISTENCE OF BUSINESS EXPEDIENCY. THEREFORE CONSIDERING THE SPEC IFIC FACTS OF THE CASE AND IN THE ABSENCE OF SPECIFIC EVIDENCE WITH REGARD TO THE UTILIZATION OF THE MONEY BY THE GROUP COMPANIES, THE CIT(A) HELD THAT THE LOANS AND ADVANCES IN QUESTION CANNOT BE SAID TO BE FOR THE P URPOSE OF BUSINESS. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 27 OF 32 60. THE ASSESSEE CLAIMED BEFORE THE CIT(A) THE ADVA NCES MADE TO THE GROUP COMPANIES WERE NOT MADE OUT OF INTEREST BEARI NG FUNDS AND OWN FUNDS OF THE ASSESSEE. THE ASSESSEE ALSO FURNISHED A WORKING OF INTEREST WHICH CAN BE DISALLOWED U/S 36(1) (III). THE CIT(A) FOUND THAT THE CLAIM HAS NOT BEEN DEMONSTRATED WITH SPECIFIC FACTS AND FIGUR ES. HE ALSO FOUND THAT THE TOTAL AMOUNT OF SHARE CAPITAL OF THE ASSESSEE W AS ONLY RS.20 LAKHS. THE TOTAL RESERVES WAS NEGATIVE I.E., (-) RS.98.39 CRORES AS ON 31.03.2012 IN VIEW OF THE DEFICIT IN THE PROFIT & LOSS ACCOUNT . THEREFORE THE CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE THAT THE AD VANCES TO GROUP COMPANIES WERE MADE OUT OF THE OWN FUNDS OF THE COM PANY IS CONTRARY TO THE FACT PRESENTED IN THE FINANCIAL STATEMENTS. 61. THE ASSESSEE ALSO PRESENTED A STATEMENT SHOWING THE AMOUNT OF INTEREST WHICH COULD BE DISALLOWED BASED ON ITS OWN WORKING. AS PER THE STATEMENT THE TOTAL AMOUNT OF INTEREST WHICH COULD BE DISALLOWED U/S 36(1)(III) IS STATED TO BE RS. 785.73 LAKHS. HOWEVE R THE CIT(A) NOTICED THAT THE ASSESSEE HAD TAKEN INTO CONSIDERATION THE NON-I NTEREST BEARING FUNDS TO THE EXTENT OF RS.382 CRORES COMPRISING OF LONG T ERM LIABILITIES, OTHER CURRENT LIABILITIES AND DEPRECIATION WRITTEN OFF. T HE CIT(A) HELD THAT IT CANNOT BE ACCEPTED THAT THE LONG TERM AND CURRENT LIABILIT IES HAVE BEEN UTILIZED TO FINANCE THE LOANS AND ADVANCES PAID TO GROUP COMPAN IES. HENCE, THE CIT(A) HELD THAT THE ASSESSEE HAS NOT DEMONSTRATED HOW THE ADVANCES TO THE GROUP COMPANIES WERE MADE OUT OF THE CURRENT LI ABILITIES AND DEPRECIATION WRITTEN OFF. THEREFORE THE CONTENTION OF THE APPELLANT MADE IN THIS REGARD WAS ALSO NOT ACCEPTED BY THE CIT(A). ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 28 OF 32 62. THE ASSESSEE CLAIMED BEFORE THE CIT(A) THAT THE AO HAS TAKEN INTO CONSIDERATION RS.1,61,63,11,120/- AS THE ADVANCE GI VEN TO RELATED CONCERNS BUT THE CORRECT FIGURE IS RS.145,50,99,834 /-. THE CIT(A) DIRECTED THE AO TO VERIFY THE AMOUNT AND ADOPT THE CORRECT A MOUNT OF ADVANCE FOR COMPUTING THE DISALLOWANCE. 63. THE ASSESSEE CLAIMED BEFORE CIT(A) THAT IT HAD RECEIVED INTEREST OF RS.3,61,86,594/- FROM THE GROUP COMPANIES IN RESPEC T OF THE ADVANCES MADE. THE ASSESSEE FURNISHED THE FINANCIAL STATEMEN TS TO SUBSTANTIATE ITS CLAIM IN THIS REGARD. THE CIT(A) HELD THAT INTEREST OF RS.3,61,86,594/- WAS INCLUDED UNDER THE HEAD 'OTHER INCOME' AS INTEREST ON LOANS AND SECURITIES AND INTEREST ON DEPOSITS, WHICH WAS EVIDENT FROM NO TE 19 OF THE 'NOTE ON ACCOUNTS'. THE CIT(A) HELD THAT THE AMOUNT OF INTER EST DISALLOWANCE MADE BY THE AO SHOULD BE REDUCED BY THE AMOUNT OF INTERE ST RECEIVED FROM THESE COMPANIES. THE AO WAS DIRECTED TO DELETE DISALLOWAN CE OF INTEREST TO THE EXTENT INTEREST INCOME WAS RECEIVED ON ADVANCES AND OFFERED TO TAX. 64. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 65. BEFORE THE TRIBUNAL, THE LD. COUNSEL FOR THE AS SESSEE MADE A PRAYER THAT AS PER SCHEDULE 18 AND SCHEDULE 8 TO THE P&L A CCOUNT AND BALANCE SHEET, IT HAD SUFFICIENT OWN FUNDS AND THIS NEEDS T O BE LOOKED INTO BY THE AO. WE HAVE CONSIDERED THE SUBMISSION AND WE FIND THAT THE CIT(APPEALS) HAS ELABORATELY DISCUSSED THE AVAILABI LITY OF OWN FUNDS, WHICH HAS NOT BEEN SHOWN TO BE INCORRECT BY THE LD. AR BE FORE US. IN THESE CIRCUMSTANCES, WE FIND NO MERIT IN THIS APPEAL AND ACCORDINGLY THE SAME IS DISMISSED. ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 29 OF 32 ITA NO.339/BANG/2017 AND IT(TP)A NO.384/BANG/2017 66. ITA NO.339/B/17 IS AN APPEAL BY THE ASSESSEE, W HILE IT(TP)A NO.384/B/17 IS AN APPEAL BY THE REVENUE. BOTH THES E APPEALS ARE AGAINST THE ORDER OF THE CIT(APPEALS)-3, BENGALURU DATED 30 .11.2016 RELATING TO ASSESSMENT YEAR 2013-14. 67. AS FAR AS THE APPEAL OF REVENUE IS CONCERNED, T HE SAME IS IN RELATION TO DISALLOWANCE U/S. 14A OF THE ACT. THE CIT(APPEA LS) DELETED THE ADDITION MADE U/S. 14A OF THE ACT ON THE GROUND THAT THE ASS ESSEE DID NOT EARN ANY EXEMPT INCOME DURING THE PREVIOUS YEAR AND FOLLOWIN G SEVERAL DECISIONS WHEREIN IT WAS LAID DOWN THAT IF THERE WAS NO EXEMP T INCOME EARNED DURING THE PREVIOUS YEAR, THERE CAN BE NO DISALLOWANCE OF EXPENSES U/S. 14A OF THE ACT. AT THE TIME OF HEARING OF THIS APPEAL, IT WAS BROUGHT TO OUR NOTICE BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ADMITT ED FACTUAL POSITION IN THE PRESENT CASE IS THAT THERE WAS NO DIVIDEND INCOME O R OTHER EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DECISION OF THE BANGALORE BENCH OF ITAT IN THE CASE OF M/S UB INFRASTRUCTURE PROJEC TS LTD., VS. DCIT, ITA NO. 2098/BANG/2016 (ASST. YEAR 2012-13) ORDER DATED 22/12/2017, WHEREIN THIS TRIBUNAL TOOK THE VIEW THAT THERE CAN BE NO DI SALLOWANCE OF EXPENSES U/S 14A OF THE ACT, IF THERE IS NO EXEMPT INCOME EA RNED DURING THE RELEVANT PREVIOUS YEAR. THE FOLLOWING ARE THE RELEVANT OBSE RVATIONS OF THE TRIBUNAL IN THIS REGARD. 3. HAVING CAREFULLY EXAMINED THE ORDERS OF AUTHOR ITIES BELOW, WE FIND THAT UNDISPUTEDLY THE ASSESSEE HAS NOT EARN ED ANY EXEMPTED INCOME. NOW IT IS SETTLED POSITION OF LAW THAT WHEN EVER ASSESSEE DID NOT EARN ANY EXEMPT INCOME, NO DISALLOWANCE COULD B E MADE U/S. 14A OF THE ACT. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. V. CIT, 378 ITR 33 (DEL) HAS CATEGO RICALLY HELD THAT SECTION 14A ENVISAGES THAT THERE SHOULD BE ACT UAL RECEIPT OF ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 30 OF 32 INCOME WHICH WAS NOT INCLUDIBLE IN THE TOTAL INCOME DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWI NG ANY EXPENDITURE IN RELATION TO THE SAID INCOME. WHEREVE R THERE IS NO EXEMPT INCOME INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE, THE PROVISIONS OF SECTION 14A CANNOT BE INVOKED. THE RE LEVANT OBSERVATIONS OF THE JUDGMENT OF THE HONBLE DELHI H IGH COURT ARE EXTRACTED HEREUNDER:- 15. TURNING TO THE CENTRAL QUESTION THAT ARISES FO R CONSIDERATION, THE COURT FINDS THAT THE COMPLETE AN SWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HO LOLCIM INDIA (P) LTD. (DECISION DATED 5TH SEPTEMBER 2014, IN I.T. A. NO. 486 OF 2014). IN THAT CASE, A SIMILAR QUESTIO N AROSE, VIZ., WHETHER THE INCOME-TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SECTIO N 14A OF THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EARNED BY T HE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR ? THE COUR T REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD. (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL IN THIS V ERY CASE, I.E., CHEMINVEST LTD. V. CIT [2009] 317 ITR ( AT) 86 (DELHI) [SB]. THE COURT ALSO REFERRED TO THREE DECI SIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECIDED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN CIT V. LAKHANI MARKETING INCL. (DECISION DATED APRIL 2, 201 4, OF THE HIGH COURT OF PUNJAB AND HARYANA IN I. T. A. NO. 970 OF 2008)--SINCE REPORTED IN [2015] 4 ITR-OL 246 (P&H )-- WHICH IN TURN REFERRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES LTD. [2010] 323 ITR 518 (P&H) AND CIT V. WINSOME TEXTILE INDUSTRIES LTD. [20 09] 319 ITR 204 (P&H). THE SECOND WAS OF THE GUJARAT HIG H COURT IN CIT V. CORRTECH ENERGY (P.) LTD. [2014] 22 3 TAXMANN 130 (GUJ) ; [2015] 372 1TR 97 (GUJ) AND THE THIRD OF THE ALLAHABAD HIGH COURT IN CIT V. SHIVAM MOTORS (P) LTD. (DECISION DATED 5TH MAY, 2014, IN T .A. NO. 88 OF ITA NO.1 1071BANG12016 2014). THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSE SSEE HAD NOT EARNED ANY TAXABLE INCOME IN THE RELEVANT ASSESSMENT YEAR IN QUESTION 'CORRESPONDING EXPENDIT URE COULD NOT BE WORKED OUT FOR DISALLOWANCE.' ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 31 OF 32 4. THIS WAS ALSO EXAMINED BY THE TRIBUNAL IN THE AS SESSEE'S OWN CASE FOR ASSESSMENT YEAR 2010-11 AND HELD THAT WHEN THERE IS NO EXEMPT INCOME, PROVISION OF SECTION 14 OF THE AC T CANNOT BE APPLIED. 5. IN THE LIGHT OF THE AFORESAID JUDGMENT, THE PROV ISIONS OF SECTION 14A CANNOT BE INVOKED AS THERE IS NO EXEMPT INCOME IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(APPEALS) WHO HAS RIGHTLY DELET ED THE ADDITION. 68. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL, WE ARE OF THE VIEW THAT THE DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT WAS RIGHTLY DELETED BY THE CIT(A). 69. AS FAR AS THE APPEAL BY THE ASSESSEE IS CONCERN ED, THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WIT H REGARD TO DISALLOWANCE OF INTEREST U/S. 36(1)(III) OF THE ACT. THE FACTS AND CIRCUMSTANCES UNDER WHICH DISALLOWANCE OF INTEREST WAS MADE BY THE REVENUE AU THORITIES AND THE SUBMISSIONS OF THE ASSESSEE ARE IDENTICAL TO THE FA CTS AND SUBMISSIONS OF THE ASSESSEE, AS IT PREVAILED IN THE AY 2012-13. F OR REASONS GIVEN WHILE DECIDING SIMILAR ISSUE IN AY 2012-13, WE FIND NO ME RIT IN THIS APPEAL BY THE ASSESSEE. ACCORDINGLY, THE SAME IS DISMISSED. 70. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.384/BANG/2017 IS DISMISSED. 71. IN THE COMBINED RESULT, THE FOLLOWING APPEALS B Y THE ASSESSEE VIZ., ITA NO.333/BANG/2017 (FOR AY 2007-08) IS DISMISSED , ITA NOS.334, 335 & 336/BANG/2017 (FOR AY 2008-09 TO 2010-11) ARE PAR TLY ALLOWED FOR STATISTICAL PURPOSES, ITA NOS.337, 338 & 339/BANG/2 017(FOR AY 2011-12 TO ITA NOS.333 TO 339/BANG/2017 & IT(TP)A 384/BANG/2017 PAGE 32 OF 32 2013-14) AND THE FOLLOWING APPEAL BY THE REVENUE, V IZ., ITA NO.384/BANG/17 (FOR AY 2013-14) IS DISMISSED. 72. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF MAY, 2019. SD/- SD/- ( JASON P. BOAZ ) ( N.V . VASU DEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 10 TH MAY, 2019. / DESAI SMURTHY / COPY TO: 1. THE APP ELLANT 2. THE R ESPONDENT ( S) 3. THE CIT 4. THE CI T(A) 5. THE DR, ITAT, BANGALORE. 6. GUA R D F ILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.