DCIT, Circle-19(1), New Delhi V. Priapus Developers Private Limited, New Delhi

ITA 363/DEL/2021

AI Insights

The case involves an appeal by the Revenue against the order of the CIT (Appeals) which had deleted the disallowances made under section 14A and section 36(1)(iii) of the Income Tax Act for the assessment year 2017-18. The assessee, M/s. Priapus Developers Pvt. Ltd., had earlier successfully contested similar disallowances for the assessment years 2015-16 and 2016-17. The Tribunal, referencing its previous decisions and the consistent findings in the assessee's favor, upheld the CIT (Appeals)'s decision and dismissed the Revenue's appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113184 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 14-02-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 30-03-2021
• Other Referred Cases: ITA No. 170/Del/2019, ITA No. 310/Del/2020
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAPRA BHATIA
• Assessee Lawyers: KARAN KUMRA
• Keywords: Earning of tax free income; Proportionate interest; Capital expenditure
• Section: 14A; 119

Judgement Text

I.T.A. No. 363/Del/2021 1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “H” : DELHI ] BEFORE SHRI G. S. PANNU, PRESIDENT A N D SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं./I.T.A No. 363/Del/2021 िनधाᭅरणवषᭅ/ Assessment Years: 2017-18 DCIT, Circle : 19 (1) New Delhi. बनाम Vs. M/s. Priapus Developers Pvt. Ltd., 5 th Floor, Tower : B, Worldmark-I, Aerocity, New Delhi – 110 037. PAN No. AAFCP2747R अपीलाथᱮ / Appellant ᮧ᭜यथᱮ / Respondent िनधाᭅᳯरतीकᳱओरसे /Assessee by : Shri Karan Kumra, C. A.; राज᭭वकᳱओरसे / Department by : Ms. Sapra Bhatia, [CIT] - D. R. सुनवाईकᳱतारीख/ Date of hearing : 15/02/2023 उ᳃ोषणाकᳱतारीख/Pronouncement on : 11/04/2023 आदेश / O R D E R PER C. N. PRASAD, J. M. : 1. This appeal is filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals) Delhi-7 [hereinafter I.T.A. No. 363/Del/2021 2 referred to CIT (Appeals)] New Delhi, dated 17.09.2020 in deleting the disallowance under section 14A and disallowance under section 36(1)(iii) of the Income Tax Act, 1961 (the Act) for assessment year 2017-18. 2. The ld. Counsel for the assessee submits that both the issues are decided in favour of the assessee by the Tribunal in ITA. No. 170/Del/2019 dated 12.03.2019 for assessment year 2015-16 and ITA. No. 310/Del/2020 dated 3.09.2020 for assessment year 2016-17 and the ld. CIT (Appeals) following the orders of the Tribunal for the earlier assessment years deleted the disallowance made under section 14A and also the disallowance made under section 36(1)(iii) of the Act. 3. The ld. DR fairly submits that the Tribunal has decided the issue in favour of the assessee in earlier assessment years. 4. On hearing both the parties and perusing the orders of the authorities below, we observe that identical issue has been decided by the Tribunal in assessee’s own case for the earlier assessment years i.e. 2015-16 and 2016-17 and the ld. CIT (Appeals) following the order of the Tribunal in assessee’s own case deleted the disallowances made under section 14A and 36(1)(iii) of the Act observing as under:- “4.2 Grounds 2 to 5 relate to the disallowance u/s 14A. It is seen that during the year under consideration, the appellant had suomoto disallowed an amount of Rs. 1,10,49,579/- towards cost for earning exempt income which also include the depository charges and professional fees paid during the year. In the Assessment order u/s 143(3), this the I.T.A. No. 363/Del/2021 3 disallowance u/s 14A has been increased by the AO by an amount of Rs.3,85,44,550. During the course of appellate proceedings, the AR of the appellant, has contended that the investment which resulted in dividend income during the year under consideration were made in earlier years and that too by amalgamating two group concerns in view of direction of Hon'ble Delhi High Court and therefore, no fresh investment was made by the appellant in its own capacity towards the shares of IHFL. Accordingly, the appellant submitted that no expenditure was incurred in relation to the investment yielding exempt income. The appellant also submitted that in the earlier assessment years 2015-16 and 2016-17 similar disallowances u/s 14A were made with respect to the dividend income earned from the shares of IHFL, which was subsequently deleted by the Hon'ble ITAT vide their order dated 12.03.2019 for AY 2015-16 and also by my predecessor vide order dated 27.11.2019 for AY 2016-17. In both these orders the reason for deletion have been held to be that major exempt income was earned by the appellant from shares of IHFL which were acquired by the appellant by way of amalgamation. Hence, it cannot be said that the appellant could have incurred any kind of indirect expenses for earning of dividend income. The contentions of the AR have been considered and the order of the AO has also been perused. It is seen that similar issue has been decided by the Hon'ble ITAT (in para 20 onwards) in the case of appellant for AY 2015-16. I have also gone through the findings of the Hon'ble ITAT in AY 2015-16 and the findings of my predecessor in AY 2016-17. In the year under consideration, it is noticed that the appellant has earned dividend income from equity shares of IHFL of Rs. 22,31,42,571 and from mutual funds of Rs. 21,60,591/-. Accordingly, it can be said that in the year under consideration also, the majority of dividend income is from the shares of IHFL. Further, during the year there is no increase in such investment but instead the existing investment has been disposed off by the appellant. Accordingly, the findings of the Hon'ble ITAT in AY 2015-16 in the case of appellant itself and also of my predecessor in AY 2016-17 are also applicable in the year under consideration. Respectfully following the judgment of Hon'ble ITAT for AY 2015-16, which were also adopted and accepted by my predecessor in AY 2016-17, it can be fairly concluded that I.T.A. No. 363/Del/2021 4 shares of IHFL were acquired by the appellant by way of amalgamation and it cannot be said that appellant could have incurred any kind of indirect expenses for earning dividend income out of the said shares. Hence, by following the precedence available in the case of appellant, the extra disallowance of Rs. 3,85,44,550/- u/s 14A made by the AO over and above the suo moto disallowance made by the appellant is directed to be deleted. 4.3 Grounds No. 6 to 7 relate to the disallowance of Rs. 19,19,86,964 made by the AO under section 36(1)(iii) of the Act in the assessment order and the consequent restriction of claim of expenditure under section 57 to Rs. 20,32,76,048 as against the claim of Rs. 39,52,63,012 made by the appellant in its return of income. It is seen from the order of the AO that the above disallowance has been made by the AO by considering the figures appearing in the balance sheet of the appellant as on 31.03.2017. However, using such figures, the AO has alleged usage of interest bearing borrowed funds by the appellant towards non-current investments during the year. Thus, when the allegation pertains to the utilization of interest bearing funds during the year, it is imperative to evaluate the movement of such funds during the year instead of considering the static closing balances. It is the appellant's submission that a similar rationale was adopted by the AO while framing the assessment for the preceding year i.e. AY 2016-17 to compute the disallowance u/s 36(1)(iii) of the Act. The appellant has placed on record the decision of Hon'ble ITAT in its own case for AY 2016-17 wherein the utilization of borrowed funds as appearing in the balance sheet has been duly examined. Based on such examination, the Hon'ble ITAT had duly held that interest bearing borrowed funds were not utilized by the appellant in non- interest bearing investments during AY 2016-17. The factual findings of the Hon'ble ITAT are reproduced below:- “16. We have carefully considered the rival contention and perused the orders of the lower authorities. Only reason of disallowance given by learned lower authorities is that assessee has incurred interest cost of Rs. 376,982,874/- on unsecured loans amounting to Rs. 512 crores and assessee has earned interest of Rs. 376,951,117/- on loans and I.T.A. No. 363/Del/2021 5 advances of Rs. 344 crores, therefore, it is apparent that the difference of Rs. 512 crores of unsecured loan on which interest is paid is not commensurate in with interest received on loans and advances of Rs. 344 crores. Above finding of the learned lower authorities are not correct because of the reason that out of Rs. 512 crores, a sum of Rs. 147.37 crores is in the form of unsecured interest-free loans taken from directors and shareholders of the appellant company on which no interest is paid. Therefore, to that extent, the unsecured loan on which interest is paid taken by the lower authorities of Rs. 512 crores is required to be reduced by a sum of Rs. 147.37 crores. This fact is evident from note 5 of the balance sheet submitted before us at page number 119 of the paper book. This clearly is now to be seen with respect to interest-bearing funds of Rs. 364 crores (Rs 512 Cr- Rs 147 Crs) and is required to be compared with interest-bearing advances of Rs. 344 crores. This leaves us with the difference of Rs. 20 crores. This is also answered at same note number 5 of the balance sheet which clearly shows that at the beginning of the year the unsecured loan which does not have any interest cost of Rs 166 crores is reduced to Rs. 1 47 crores at the end of the year. Further there is in an increase of 20 crores in interest bearing advances. Therefore, it cannot be doubted that assessee has utilised the borrowings during the year in reutilizing above funds. It is further apparent that Rs. 190 crores is outstanding in last year borrowed from India Bulls and housing finance Ltd which is locked in advances of Rs. 120 crores in IIC Ltd and Rs. 70 crores in Rattan and India Power Ltd. On both these unsecured loan and unsecured advances the rate of interest paid and received is @ 13%. Further during the year assessee has borrowed Rs. 175 crores, out of which Rs. 75 crores is borrowed from STCI Ltd at 11% interest rate and further Rs 100 crores from Citibank at the rate of 10%. Out of this, assessee has granted loan of Rs 104 crores to IIC Ltd at the rate of 13%, Rs. 49.70 crores were advanced to Rattan India Power Ltd at the rate of 13% and to Ms Saroj Jain Rs. 75 lakhs at the rate of 12%. Therefore net utilisation of new loan of Rs. 175 crores is used in interest-bearing advances of Rs. 154 crores. Further, Rs. 20 crores have been advanced during the year at the rate of 13% to M/s yantra I.T.A. No. 363/Del/2021 6 energetics private limited. These above facts are traceable and can be culled out from the balance sheets and notes thereto of the assessee on the face of it. Further, the assessee has also submitted a chart of interest charged which also supports the view that advances given to the sister concern or associated concerns at interest are sourced from interest-bearing loans obtained by the assessee. It is also undisputed fact that the total interest received by the assessee of Rs. 376,982,874/- is taxed under the head income from other sources by revenue. As assessee has utilised interest-bearing funds for the purpose of making investment/giving advances to the sister concern on interest, which is charged to taxed Under the head income from other sources, assessee is entitled to deduction u/s 57 (iii) of the act of any expenditure which is not in the nature of capital expenditure, if it is laid out and expended wholly and exclusively for the purpose of making or earning such income. Undisputedly there is no claim by the revenue that above expenditure is in the nature of capital expenditure. The interest income earned by the assessee is from loans and advances given to sister concern which is shown by the assessee to have been financed by obtaining loan on interest from other parties. Therefore, such interest paid on unsecured loan is laid out and expended wholly and exclusively for the purpose of making an earning such interest income. 17. Relevant judicial pronouncements placed before us by both the parties also canvass a view that any expenditure incurred by the assessee which is not in the nature of capital expenditure, if laid out and expended wholly and exclusively for the purpose of making or earning any income which is chargeable to tax Under head income from other sources is allowable as deduction to the assessee u/s 57 (iii) of the act. 18. In view of the above facts we allow ground number 1 - three of the appeal of the assessee and direct the lower authorities to delete the disallowance of interest expenditure of Rs.257,270,727/- made by the learned assessing officer and confirmed by the learned CIT-A." I.T.A. No. 363/Del/2021 7 The essence of the above findings are that the Hon'ble ITAT has first identified the borrowings which bore interest. The utilization of such borrowings was then determined based on analysis of the balance sheet. Pursuant to such analysis, it was held that the appellant had not utilized interest bearing borrowed funds for making non current investments during AY 2016-17. Thus, the factual position of the appellant has been duly examined and stands settled by the Hon'ble ITAT for AY 2016-17. Thus, in order to verify the utilization of interest-bearing borrowed funds during AY 2017-18 the movement and utilization of such funds during AY 2017-18 must be analysed. Vide its written submission, the appellant has explained such utilization which has been perused and examined with respect to its books of accounts. Similar to AY 2016-17, the primary assumption made by the AO is that the entire borrowings of Rs. 494,87,71,000 were interest bearing in nature and the interest cost of Rs. 39,52,63,012 was on account of such entire borrowings. It is further seen from a perusal of Note 5 - Long Term Borrowings of the balance sheet that out of Rs. 494,87,71,000 an amount of Rs.154,87,71,000 pertained to Compulsorily Convertible Debentures issued by the appellant company which did not bear any interest. Thus, the interest bearing long term borrowings were Rs. 340,00,00,000 which were first compared to the loans and advances given of Rs. 444,38,00,001. The primary basis for alleging non utilization of interest bearing borrowed funds for business purpose by the AO in the assessment order was the comparison of long term borrowings of Rs. 494.87 crore to the loans and advances of Rs. 444.38 crore. As noted above, since the interest bearing portion of borrowings was only Rs. 340 crore, it was lesser than the loans and advances of Rs. 444.38 crore. Thus, the basis of observation made by the AO is factually incorrect. Based on above said observation, the AO has found that the appellant utilized interest bearing borrowed funds for making non current investments during the year, and thus disallowed the proportionate interest cost. Besides the fact that interest bearing borrowed funds were not utilized for non current investments, a perusal of Note 8 - Non Current Investments of the Balance Sheet shows that the amount of investments reduced from Rs. 599.34 crore as on 01.04.2016 to Rs. 160.34 crore as on 31.03.2017. Thus, the value of investments during the year has reduced and not increased. Hence, the observation of source and utilization both are factually incorrect. I.T.A. No. 363/Del/2021 8 During the appellate proceedings, the AR of the appellant has contended that the detailed utilization of interest bearing and non interest bearing borrowed funds, and also the funds generated from sale/ redemption of investments during the year which clearly suffice the utilization of such funds during the year. Hence, it is safe to state that the interest bearing borrowed funds have not been utilized for making non current investments during the year. As held by Hon'ble ITAT in the appellant's own case for AY 2016-17, the appellant appears to have rightly offered its interest income and claimed corresponding interest expenditure under the head Income from Other Sources in its ITR. Thus, the disallowance of Rs. 19,19,86,964 u/s 36(1)(iii) of the Act is not sustainable and accordingly deleted hereby, and the claim of expenditure of Rs. 39,52,63,012 made by the appellant u/s 57 of the Act in its return of income is allowed. These Grounds of Appeal on this issue stand allowed.” 5. As the ld. CIT (Appeals) followed the order of the Tribunal in assessee’s own case for the earlier assessment years i.e. 2015-16 and 2016-17 in deleting the disallowance made under section 14A and 36(1)(iii) of the Act, we see no reason to interfere with the findings of the ld. CIT (Appeals). No distinguishable facts have been brought on record and, therefore, respectfully following the decision of the Tribunal in assessee’s own case for the earlier assessment years, we uphold the order of the ld. CIT (Appeals) and reject the grounds raised by the Revenue. 6. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on : 11/04/2023. Sd/- Sd/- ( G. S. PANNU ) ( C. N. PRASAD ) PRESIDENT JUDICIAL MEMBER Dated : 11/04/2023. I.T.A. No. 363/Del/2021 9 *MEHTA* आदेश कᳱ ᮧितिलिप अᮕेिषत / Copy of Order Forwarded to:- 1. आवेदक / Assessee 2. राज᭭व / Revenue 3. संबंिधत आयकर आयुᲦ / Concerned CIT 4. आयकर आयुᲦ- अपील / CIT (A) 5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, DELHI / DR, ITAT, DELHI 6. गाडᭅ फाइल / Guard file. By order ASSISTANT REGISTRAR ITAT,New Delhi. Date of dictation 24.03.2023 Date on which the typed draft is placed before the dictating Member 28.03.2023 Date on which the typed draft is placed before the Other Member 11.04.2023 Date on which the approved draft comes to the Sr. PS/PS 11.04.2023 Date on which the fair order is placed before the Dictating Member for pronouncement 11.04.2023 Date on which the fair order comes back to the Sr. PS/PS 11.04.2023 I.T.A. No. 363/Del/2021 10 Date on which the final order is uploaded on the website of ITAT 11.04.2023 Date on which the file goes to the Bench Clerk 11.04.2023 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order