M/s. Unitech Limited, New Delhi V. DCIT, New Delhi

ITA 6585/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4366 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 11-12-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A S WELL AS
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Share purchase agreement; International transaction; Earning of tax free income; Proportionate interest; Wholly owned subsidiary; Notional interest; Capital receipt; Commercial expediency; TDS
• Section: 92B; 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES I-2: DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA.NO.6585/DEL/2015 ASSESSMENT YEAR 2011-12 UNITECH LIMITED 6, COMMUNITY CENTRE, SAKET NEW DELHI 110 017 PAN AAACU1482H VS. DCIT CIRCLE- 27(1) C.R. BUILDING, ITO NEW DELHI. (APPELLANT) (RESPONDENT) ITA NO. 311 DEL 2016 ASSESSMENT YEAR 2011-12 DCIT, CIRCLE-27(1), ROOM NO. 193 C.R. BUILDING NEW DELHI VS. UNITECH LIMITED 6, COMMUNITY CENTRE, SAKET NEW DELHI 110 017 PAN AAACU1482H (APPELLANT) (RESPONDENT) DATE OF HEARING : 03.12 .201 8 DATE OF PRONOUNCEMENT : 12 .02 .201 9 ORDER PER AMIT SHUKLA, J.M.:- THE AFORESAID CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST DRPS DIRECTION U/S 144C (5) VIDE ORDER DATED 27.10.2015, CULMINATING INTO FINAL ASSESSMENT ORDER DATED 27.10.2015. FOR ASSESSEE : SHRI SHA ILESH GUPTA, ADVOCATE FOR REVENUE : SHRI H.K. CHOUDHARY CIT-D.R. 2. WE WILL FIRST TAKE UP REVENUES APPEAL WHEREIN THE ONLY GROUND RAISED IS, DELETION OF ADDITION OF RS. 7,24,88,104/- PROPOSED BY THE AO ON ACCOUNT OF INTEREST PAID TO TATA REALTY INFRASTRUCTURE LIMITED. THE FACTS IN BRIEF ARE THAT ASSESSEE COMPANY HAD ENTERED INTO A MOU WITH TATA REALTY INFRASTRUCTURE LIMITED (TRIL) ON 5.10.2007 FOR PURCHASE OF LAND, BY VIRTUE OF WHICH, TRIL WAS TO PAY RS. 2,500 CRORES TO M/S. UNITECH LTD. FOR A LAND PURCHASE PERTAINING TO 517 ACRES, AGAINST WHICH SUM OF RS. 1700 CRORES WERE PAID AS ADVANCE. LATER ON, THE SAID DEAL WAS REVISED AND AREA OF LAND TO BE PURCHASED WAS REDUCED IN ACRES WHICH WERE PURCHASED THROUGH ACQUISITION OF 6 COMPANIES; AND NOW THE REDUCED AMOUNT PAYABLE TO UNITECH LTD. WAS AGREED FOR RS. 601 CRORES. THE BALANCE AMOUNT REFUNDABLE TO TRIL AMOUNTED TO RS.1,59,39,46,799/-. IN THIS YEAR ASSESSEE HAS CLAIMED THE INTEREST PAYMENT IN VIEW OF SETTLEMENT WITH TRIL, AMOUNTING TO RS. 7,24,88,104/- WHICH HAS BEEN DEBITED AS EXPENDITURE. LD. AO HELD THAT THERE WAS NO ENABLING CLAUSE IN THE MOU FOR THE INTEREST PAYMENT WHICH WARRANT A SITUATION, WHERE INTEREST WAS TO BE PAID TO TRIAL. HE OBSERVED THAT, THIS ISSUE WAS RAISED BY THE SPECIAL AUDITOR IN ASSTT. YEAR 2009-10 THAT THE INTEREST PAID TO TRIL WAS NOT PAID IN VIEW OF THE MOU. HE HAS ALSO QUOTED CLAUSE 4 OF THE MOU DATED 5.10.2007 AND ALSO AMENDED MOU LATER ON, WHICH HAS BEEN INCORPORATED AT PAGE 13 TO 14 OF THE ASSESSMENT ORDER. THEREAFTER, LD. AO PROCEEDED TO DISALLOW THE CLAIM OF EXPENDITURE CLAIMED AFTER OBSERVING AS UNDER:- 6.2. IN THE ASSESSMENT ORDER FOR THE A.Y. 2009-10, THE AO FOUND THAT: 1. NO CLAUSES ENABLING INTEREST PAYMENT ARE APPLICABLE TO SITUATION WARRANTING INTEREST PAYMENT TO TRIL WHICH IS ELABORATED AS UNDER: 2. CLAUSE 4 OF MOU DATED 5-10-2007 IS NOT APPLICABLE AS NO EVIDENCE PRODUCED FOR VERIFICATION THAT THE DUE DILIGENCE REPORT ARE NOT TO THE SATISFACTION OF THE PURCHASER I.E. TRIL AS SUCH INTEREST IS NOT PAYABLE UNDER THIS CLAUSE. 3. CLAUSE 5.2.3 OF MOU DATED 26-04-2008 IS ALSO NOT APPLICABLE FOR PAYMENT OF INTEREST AS THERE IS NO TERMINATION OF MOU IN TERMS OF CLAUSE 5 OF THIS MOU. AND ACCORDINGLY, THE ADDITION OF RS.159,39,46,799/- WAS MADE IN THE ASSESSMENT ORDER KEEPING IN VIEW THE MOUS. SIMILAR ADDITION WAS MADE TO THE INCOME OF THE ASSESSEE IN THE A.Y. 2010-11. 3. FOLLOWING THE EARLIER YEARS, AO HELD THAT THERE IS NO CHANGE IN THE FACT, THEREFORE, INTEREST PAID FOR SUMS AMOUNTING TO RS. 7,24,88,104/- TO TRIL AS FULL AND FINAL SETTLEMENT DURING THE RELEVANT YEAR WHICH IS TO BE DISALLOWED U/S 36(1)(III). 4. THE DRP ALSO FOLLOWING THE CIT (APPEAL)S ORDER FOR THE ASSESSMENT YEAR 2009-10 HAS DIRECTED FOR DELETION OF SUCH DISALLOWANCE. 5. BEFORE US LD. COUNSEL, SUBMITTED THAT AO HAS NOT DOUBTED THE GENUINENESS OF THE PURPOSE OF THE TRANSACTION; AND MOU SPECIFICALLY PROVIDED FOR CHARGE OF INTEREST WHICH IS EVIDENT FROM CLAUSE 4 OF THE MOU DATED 5.10.2007, WHEREIN THERE WAS A CLAUSE OF INTEREST PAYMENT @ 12% PER ANNUM ON THE REFUND OF THE DEPOSIT OF RS. 1700 CRORES. EVEN UNDER THE MOU DATED 9.1.2007, ASSESSEE AND TRIL AS AGREED TO A SIMILAR CLAUSE. THE DEPARTMENT HAS NEITHER CONDUCTED ANY INQUIRY OR THE INVESTIGATION WHATSOEVER FROM TRIL TO CONTROVERT THE CLAIM OF THE ASSESSEE AND ACCORDINGLY SUCH A DISALLOWANCE OF INTEREST IS PURELY BASED ON SUSPICION AND SURMISES. FURTHER, THE ASSESSEE HAS ACTUALLY PAID INTEREST AS PER THE MOUS RECIPIENT OF INTEREST, I.E., AND TRIAL HAS OFFERED THIS INCOME FOR TAXATION AND HAS ALSO CONFIRMED THAT SUCH INTEREST WAS RECEIVED DURING THE YEAR. NOT ONLY THAT, TDS WAS ALSO DEDUCTED ON INTEREST PAYMENT BY THE ASSESSEE. ONCE INTEREST IS PAID IN ACCORDANCE WITH THE TERMS OF CONTRACT AND FOR COMMERCIAL EXPEDIENCY AGREED BETWEEN THE PARTIES, THEN NO DISALLOWANCE CAN BE MADE WHEN NOTHING HAS BEEN BROUGHT ON RECORD THAT ADVANCE RECEIVED BY THE ASSESSEE FROM TRIL DOES NOT ENTAIL ANY INTEREST IN CASE OF EVENTUALITY MENTIONED THEREIN. FURTHER, IT WAS SUBMITTED THAT ASSESSEE HAS ALSO EARNED INTEREST INCOME ON THE ADVANCES MADE TO SUBSIDIARIES FROM SUCH ADVANCE AND SUCH INTEREST INCOME HAS BEEN OFFERED TO TAX, THUS THERE IS DIRECT NEXUS ALSO. LD. AO WHILE MAKING THE ABOVE DISALLOWANCE HAS FAILED TO APPRECIATE AND CONSIDER THAT; (I) DOCUMENTATION ON RECORD CLEARLY SHOWS THAT CONDUCT IS BETWEEN TWO UNRELATED PARTIES AND DOCUMENT HAS TO BE AS A WHOLE AND SELECTIVE INFERENCES FROM THE DOCUMENT SHOULD BE SEEN TO CONCLUDE ADVERSELY; (II) ONLY QUESTION TO WHICH IS TO BE SEEN IS THAT, WHETHER THE EXPENDITURE FOR THE BUSINESS PURPOSE WAS INCURRED IN THE ASSESSMENT YEAR OR NOT. IF IT WAS EXPENDITURE ACTUALLY MADE FOR THE PURPOSE OF THE BUSINESS, THEN LEGITIMATE DEDUCTION IS PERMISSIBLE UNDER SS. 30 TO 37 OF THE ACT. IT MATTERS LITTLE WHETHER EXPENDITURE HAS BEEN INCURRED ON THE BASIS OF A VALID OR INVALID DOCUMENT. LD. COUNSEL FURTHER RELIED UPON THE JUDGEMENT OF HONBLE HIGH COURT IN THE CASE OF CIT VS. JOLY & CO. 259 ITR 657, WHEREIN SOMEWHAT IDENTICAL ALLEGATION WAS MADE BY THE REVENUE THAT INITIAL AGREEMENT DOES NOT CONTAIN ANY INTEREST CLAUSE AND THEREFORE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER. THE TRIBUNAL HAS DELETED THE ADDITION WHICH HAS BEEN CONFIRMED BY THE HIGH COURT. 6. ON THE OTHER HAND LD. CIT(DR) STRONGLY RELIED UPON THE ORDER OF THE AO AND SUBMITTED THAT, ONCE, IT HAS BEEN FOUND BY SPECIAL AUDITOR IN EARLIER YEARS THAT SUCH PAYMENT OF INTEREST WAS NOT IN PURSUANCE OF MOU, THEN INTEREST PAID CANNOT BE HELD TO BE BUSINESS EXPENDITURE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. IT IS AN UNDISPUTED FACT THAT THERE WAS BUSINESS TRANSACTION BETWEEN THE ASSESSEE AND TRIL FOR SALE OF LAND AND MOU WAS ENTERED ON 5.10.2007, WHEREIN TRIL WAS TO PAY SUM OF RS. 2500 CRORES TO ASSESSEE FOR A LAND PURCHASE OF 517 ACRES. AGAINST WHICH, SUM OF RS. 1700 CRORES WERE PAID AS ADVANCE. LATER ON, THIS DEAL WAS REVISED AND NOW THE AREA OF LAND TO BE PURCHASED WAS REDUCED WHICH WAS TO BE PURCHASED THROUGH ACQUISITION OF 6 COMPANIES AND THE REDUCED AMOUNT PAYABLE BY TRIL TO THE ASSESSEE WAS RS. 601 CRORES AND THE BALANCE AMOUNT OUT OF RS. 1700 CRORE WAS TO BE REFUNDED TO TRAIL. THIS AMOUNT WAS PAID BY THE ASSESSEE IN VARIOUS INSTALMENTS STARTING FROM FINANCIAL YEAR 2008-09 TO THE RELEVANT ASSESSMENT YEAR ALONG WITH THE INTEREST. DURING THE YEAR FULL AND FINAL SETTLEMENT WAS MADE AND SUM OF RS. 7,24,88,104/- WAS PAID AS INTEREST. ONE OF THE MAIN GROUNDS FOR MAKING THE DISALLOWANCE BY THE ASSESSING OFFICER WAS THAT THE MOU DID NOT CONTAIN ANY CLAUSE, ENABLING INTEREST PAYMENT APPLICABLE TO A SITUATION STATED BY THE ASSESSEE WHICH WARRANTED ANY AMOUNT OF INTEREST PAYMENT. SINCE SIMILAR ADDITION WAS MADE IN THE EARLIER YEARS, THEREFORE, AO HAS MADE THE ADDITION IN THIS YEAR. ADMITTEDLY THE LD. CIT (A) IN ASSTT. YEAR 2009-10 AND 2010-11 HAS DELETED THE SAID ADDITION WHICH HAS BEEN FOLLOWED BY THE DRP. FIRST OF ALL, IT IS SEEN THAT CLAUSE 4 OF MOU DATED 5.10.2007, READS AS UNDER: - NOTWITHSTANDING WHAT IS STATED HEREIN ABOVE THE SOLICITORS FOR THE PURCHASER SHALL BE ENTITLED TO INDEPENDENTLY EXAMINE THE TITLE TO THE SAID PROPERTY AND CARRY OUT ACCOUNTING AND LEGAL DUE DILIGENCE, IN THE EVENT THE DUE DILIGENCE REPORT ARE NOT TO THE SATISFACTION OF THE PURCHASER, THEN IN SUCH EVENT THE VENDORS SHALL FORTHWITH RETURN THE ENTIRE DEPOSIT OF RS. 1700 CRORES (RUPEES ONE THOUSAND SEVEN HUNDRED CRORES ONLY) WITH INTEREST @ 12% PER ANNUM AND THE PURCHASER SHALL RETURN ALL ORIGINAL TITLE DEEDS DEPOSITED WITH THEM UNDER THE MORTGAGE BY DEPOSIT OF TITLE DEEDS REFERRED TO IN PARAGRAPH 3 AND UPON THE RECEIPT WHEREOF NEITHER PARTY SHALL HAVE ANY CLAIMS AGAINST THE OTHER FOR SPECIFIC PERFORMANCE OR OTHERWISE PROVIDED THAT THE REFUND OF THE SAID DEPOSIT OF RS. 1700 CRORES (RUPEES ONE THOUSAND SEVEN HUNDRED CRORES ONLY) SHALL REMAIN A CHARGE ON THE SAID PROPERTY 8. LD. COUNSEL HAS DRAWN OUR ATTENTION TO REVISED MOU DATED 9.10.2007, WHEREIN SIMILAR KIND OF CLAUSE 4 WAS THERE AND IT HAD BEEN CONTENTED THAT DUE TO DELAY IN TRANSACTION AND NON-PERFORMANCE OF CERTAIN CONDITIONS MENTIONED IN THE CLAUSE, THE DEAL OF PURCHASE ITSELF GOT MODIFIED AND ASSESSEE WAS REQUIRED TO REFUND THE PART OF ADVANCE. SINCE ASSESSEE COULD RETURN THE ADVANCE AT AGO HENCE AND THERE WAS DELAY IN RETURNING SUCH ADVANCE, THEREFORE, THE ADVANCE WAS RETURNED TO TRIL ALONG WITH THE MUTUALLY AGREED INTEREST RATE TO BE PAID BY THE ASSESSEE. THUS, PAYMENT OF INTEREST IN CASE OF NON-PERFORMANCE OR PART PERFORMANCE OF A CONTRACT WAS VERY MUCH FLOWING FROM THE MOU. NOT ONLY THAT, WE FIND THAT IT IS NOT IN DISPUTE THAT ASSESSEE HAS PAID INTEREST TO TRIL ON WHICH TDS HAS DULY BEEN DEDUCTED. IT IS ALSO NOT A CASE OF THE DEPARTMENT THAT TRIL HAS NOT TREATED THE INTEREST AS ITS INTEREST INCOME OR HAS NOT OFFERED IT FOR TAX. NO INQUIRY OR INVESTIGATION HAS BEEN DONE BY THE AO AT ANY STAGE FROM TRIL SEEKING THE DETAILS OF INTEREST PAYMENT. IF THE INTEREST HAS BEEN PAID DURING THE REGULAR COURSE OF BUSINESS AND UNDER COMMERCIAL EXPEDIENCY IN TERMS OF A CONTRACT AND OTHER PARTY HAS ALSO ACKNOWLEDGED THE RECEIPT OF SUCH A PAYMENT AS INTEREST, THEN REVENUE CANNOT JUDGE THE TRANSACTION SO AS TO DISALLOW PAYMENT OF INTEREST AS A NON-BUSINESS EXPENDITURE OR CAN HOLD THAT IT IS NOT FOR BUSINESS PURPOSE. THE EXPENDITURE HAS TO BE ALLOWED IF IT HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY IN THE COURSE OF BUSINESS AS LONG AS THERE IS A REASONABLE NEXUS BETWEEN THE EXPENDITURE AND BUSINESS. APART FROM THAT, HERE THE TRANSACTION IS BETWEEN TWO UNRELATED PARTIES WHO HAVE ENTERED INTO A BUSINESS TRANSACTION AND HAVE RENEGOTIATED THE TERMS AND CONDITIONS OF THE CONTRACT WHEN THE PERFORMANCE BY ONE OF THE PARTIES WAS NOT AS PER THE TERMS AGREED AND NON-PERFORMANCE ENTAILED PAYMENT OF INTEREST WHICH HAS ACTUALLY BEEN PAID WHICH FACT IS NOT IN DISPUTE. THUS, THERE COULD BE NO QUESTION OF DISALLOWANCE. THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. JOLLY & COMPANY (SUPRA) ALSO SUPPORTS THE CASE OF THE ASSESSEE. ACCORDINGLY, WE DO NOT FIND ANY REASON AS TO WHY SUCH A DISALLOWANCE COULD HAVE BEEN MADE. 9. IT HAS BEEN INFORMED BY THE LD. COUNSEL AT THE TIME OF HEARING THAT THE REVENUES APPEAL FOR THE ASSESSMENT YEARS 2009-10 AND 2010- 11, THIS TRIBUNAL HAS QUASHED THE ASSESSMENT ON THE ISSUE OF LIMITATION AND NO DECISION WAS GIVEN ON MERITS. SINCE, WE HAVE ALREADY DELETED THE DISALLOWANCE ON MERITS BASED ON MATERIAL FACTS ON RECORD, THEREFORE OUR FINDING IS INDEPENDENT OF PAST PRECEDENCE. THE ORDER OF THE LD. DRP IN DELETING THE SAID DISALLOWANCE IS THUS UPHELD. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED. 10. NOW WE COME TO THE ASSESSEES APPEAL, WHEREIN THE ASSESSEE HAS RAISED SEVERAL GROUNDS. THE MAIN ISSUE RAISED ARE: - I) TREATMENT OF CAPITAL GAIN AS BUSINESS INCOME (GROUND NO. 2 TO 2.4 & 3); II) DISALLOWANCE OF RS. 23,71,65,830/- BY CHARACTERISING SHARE APPLICATION MONEY AS INTEREST FREE ADVANCE (GROUND NO. 4 TO 4.2): III) RECHARACTERISING THE SHARE APPLICATION MONEY AS LOAN AND DISALLOWANCE OF NOTIONAL INTEREST OF RS. 10,19,55,814/- (GROUND NO. 5 TO 5.2); IV) DISALLOWANCE OF RS. 1,32,17,15,364/-OF INTEREST ON INTEREST FREE LOAN ADVANCED TO SISTER CONCERNS (GROUND NO. 6 TO 6.2); V) ADDITION OF RS. 3,92,03,610/- ON ACCOUNT OF TREATMENT OF INCOME FROM HOUSE PROPERTY AS BUSINESS INCOME (GROUND 7 TO 7.2); VI) DISALLOWANCE OF EXPENDITURE OF RS. 5,27,339/- BEING EXPENDITURE (8 TO 8.1); VII) GROUND NO. 9 AND 10 RELATES TO DISALLOWANCE U/S 40A (3) AND U/S 41, WHICH HAS NOT BEEN PRESSED BEFORE US. VIII) DISALLOWANCE OF RS. 12,37,07,018/- U/S 14A. 11. THE FACTS IN BRIEF QUA THE ISSUE OF TREATMENT OF CAPITAL GAIN AS BUSINESS INCOME ARE THAT, ASSESSEE HAS SHOWN AS CAPITAL GAIN ON SALE OF SHARES OF WHOLLY OWNED SUBSIDIARIES: - (I) DRASS PROPERTIES PVT. LTD.: RS.92,80,000 (II) ARAL PROPERTIES LTD.: RS. 51,96,62,684 (III) UNITECH SERVICE APARTMENTS LTD.: RS. 89,01,11,100 (IV) CHINTPURNI CONSTRUCTION PVT. LTD.: RS. 52,99,50,896 (VI) GREENLINE BUILDERS LTD.: RS. 9,77,00,000 (VII) SARNATH BUILDERS LTD.: RS. 6,15,20,000. 11.1 THE AO NOTED THAT ASSESSEE HAS ENTERED INTO SHARE PURCHASE AGREEMENT WITH VARIOUS BUYERS IN RESPECT OF SHARES OF ITS WHOLLY OWNED SUBSIDIARIES WHO WERE CARRYING BUSINESS OF LAND DEVELOPMENT RIGHTS WHICH HAS BEEN TRANSFERRED TO THE BUYERS. AS PER THE AO, WHAT WAS BEING TRANSFERRED THROUGH TRANSFER OF SHARES OF ALL THESE COMPANIES, IS IN FACT PROPERTIES HELD BY THEM. HE FURTHER OBSERVED THAT IN ASSTT. YEAR 2009-10, SIMILAR FACTS WERE PRESENT WHEREIN AO HAS DEMONSTRATED THAT IT IS NOT A CAPITAL GAIN BUT BUSINESS INCOME. RELEVANT OBSERVATION AND FINDING OF THE AO IN THIS REGARD READS AS UNDER: - 3.4 TO RECAPITULATE, IN THE A.Y.S 2009-10 AND 2010-11, IT HAS BEEN DEMONSTRATED THAT THE ABOVE INCOME IS NOT A CAPITAL GAIN BUT IT IS A BUSINESS INCOME AS ACCEPTED AND FOLLOWED BY THE ASSESSEE COMPANY AS PER: OBJECT CLAUSE OF MEMORANDUM OF ASSOCIATION; PROFIT AND LOSS ACCOUNT; ACCOUNTING POLICIES; CASH FLOW STATEMENT; SEGMENT REPORTING. THE MANAGEMENT HAS ALSO ACCEPTED AND FELT PROUD IN POINTING OUT IN THE MANAGEMENT DISCUSSION AND ANALYSIS OF THE ANNUAL REPORT OF 2006-07 THAT THE COMPANY HAD EARNED A SIGNIFICANT AMOUNT ON ACCOUNT OF REVENUE FROM THE REAL ESTATE THAT IS THE COMPANY'S CORE BUSINESS AS DEPICTED IN THE PROFIT AND LOSS ACCOUNT. IT IS MENTIONED HERE THAT THE PROFIT SO RESULTING CLAIMED BY ASSESSEE COMPANY AS CAPITAL GAIN IS A BUSINESS INCOME ON THREE ACCOUNT: A. IT IS A COLOURABLE DEVICE DEVISED AND PROVED FROM THE TRAIL OF TRANSACTION GIVEN; B. ASSESSEE IS ENGAGED IN AN ORGANISED MANNER TO DO BUSINESS OF REAL ESTATE THROUGH FORMING 1 ACQUIRING COMPANIES AS 100% SUBSIDIARIES AND DO BUSINESS OF FORMING / ACQUIRING COMPANIES AND HAVE LAND IN THEM AND MADE SALE OF COMPANIES THROUGH TRANSFER OF SHARES. C. WHAT WAS RECEIVED BY ASSESSEE BY SELLING SHARES WAS CONSIDERATION FOR SHARES, AND ALSO SALE OF SHARES HAD NEXUS WITH TRADING ACTIVITY OF ASSESSEE, THEREFORE IT IS JUSTIFIED TO TAX EXCESS INCOME DERIVED FROM SALE OF SHARES AS BUSINESS INCOME (N K LEASING & CONSTRUCTION P LTD V CIT 2007, 159 TAXMAN 308 AP). THIS WAS PURCHASE WITH INTENTION TO RESALE AND CONSTITUTES BUSINESS PROFIT. 3.5 IN VIEW OF THE DETAILED DISCUSSIONS ABOVE, IT IS CONCLUDED THAT CONSIDERING BOTH FACTS AND LAW, THAT THE SAID TRANSACTIONS, BEING IN THE ORDINARY LINE OF BUSINESS AS ENSHRINED IN THE MOU AND ARTICLES OF ASSOCIATION OF THE COMPANY, WERE FOR GAINS IN PROFIT MAKING, THE TRANSACTIONS HAVE BEEN CARRIED OUT IN A MANNER WHICH INDICATES SYSTEMATIC AND ORGANIZED ACTIVITY WITH PROFIT MOTIVE, AND THEREFORE, IT BECOMES BUSINESS PROFIT- NOT CAPITAL GAIN. THESE FACTS INDICATE THAT THE ONLY INTENTION OF THE ASSESSEE WAS TO NOT EARN DIVIDEND BUT TO GAIN PROFITS BY SELLING THE SHARES OF THE SUBSIDIARY COS. CONSEQUENTLY, THE INCOME FROM SALE OF SHARES IS ASSESSABLE AS 'INCOME FROM BUSINESS' AND NOT 'CAPITAL GAINS'. 3.6 HENCE, IN THE FACTS AND CIRCUMSTANCES DISCUSSED ABOVE, THE INCOME OF RS. 10,82,24,680/- {RS.. 92,80,000/- (DRASS PROPERTIES PVT. LTD.), RS. 51,96,62,684/- (ARAL PROPERTIES LTD.), RS. 89,01,11,100/- (UNITECH SERVICE APARTMENTS LTD.), RS. 52,99,50,896/- (CHINTPURNI CONSTRUCTION PVT. LTD.), RS. 9,77,00,000 (GREENLINE BUILDERS LTD.) AND RS. 6,15,20,000/- (SARNATH BUILDERS LTD.) ARISING TO THE ASSESSEE COMPANY IS BUSINESS INCOME, AND AS SUCH, IS TAXED U/S 28 OF THE ACT. 12. BEFORE US, LD. COUNSEL SUBMITTED THAT THE ASSESSEE HAD SHOWN INVESTMENT OF SHARES OF THE SUBSIDIARY COMPANIES AS INVESTMENT IN THE BALANCE SHEET IN THE PREVIOUS FINANCIAL YEARS WHICH STANDS ACCEPTED BY THE REVENUE AND IN SUPPORT HE HAS ALSO FILED CHART FROM ASSESSMENT YEAR 2002-03 TO 2011-12, WHICH FOR THE SAKE OF READY REFERENCE IS REPRODUCED AS UNDER: - UNITECH LIMITED DETAIL OF CAPITAL GAIN RECEIPT AY 2011-12 S. NO. ASSESSMENT YEAR PROFIT ON SALE OF INVESTMENT AS PER BOOKS. (RS.) CAPITAL GAIN AS PER COMPUTATION (RS.) ASSESSMENT STATUS REMARKS LTCG STCG 1. 2002 - 03 8,55 97,457 56,66,857 ASSESSED AS SUCH 2. 2003-04 89 25,766 77,24,566 10,36,933 ASSESSED AS SUCH 3. 2005-06 75 60,000 (20,79,344) - ASSESSED AS SUCH 4. 2007-08 11,10,82 73,627 3,01,54,20,707 8,09,28,52,920 U/S 148, LTCG RS. 153.98 CRORES ASSESSED AS BUSINESS INCOME PENDING IN ITAT 5. 2008-09 10,98,13 94,343 10,84,13,21,464 13,92,12,425 ASSESSED AS SUCH 6. 2009-10 9,16,99 56,304 8,73,99,32,510 41,89,33,025 U/S 143(3), LTCG ASSESSED AS BUSINESS INCOME ORDER QUASHED BY ITAT 7. 2010-11 6,96,56, 78,871 6,91,83,55,109 1,55,940 U/S 143(3), LTCG ASSESSED AS BUSINESS INCOME ORDER QUASHED BY ITAT 8. 2011-12 2,10,82 24,680 2,10,69,96,895 - U/S 143(3}, LTCG ASSESSED AS BUSINESS INCOME IMPUGNED MATTER 12.1 HE FURTHER POINTED OUT THE DETAILS OF YEARS OF PURCHASE OF THE SHARES WHICH WAS SHOWN IN THE BALANCE SHEET AND WAS HELD AS INVESTMENT: - S. NO. NAME OF COMPANY NO. OF SHARES YEAR OF PURCHASE DATE OF SHARE PURCHASE/SUBSCRIPTION 1 DRASS PROPERTIES PVT. LTD. 50,000 2006 - 07 20 - SEP - 06 2 ARAL PROPERTIES LTD. 50,000 2007 - 08 24 - MAR - 08 3 UNITECH SERVICE APARTMENTS LTD. 50,000 2005 - 06 15 - SEP - 05 4 CHINTPURNI CONSTRUCTION PVT. LTD. 8,700 2006 - 07 31 - MAR - 07 5. GREENLINE BUILDERS LTD. 50,000 2005 - 06 10 - FEB - 06 6. SARNATH BUILDERS LTD. 50,000 2007 - 08 28 - MAY - 07 12.2 HE ALSO DREW OUR ATTENTION TO THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF BHORUKA ENGINEERING INDS. LTD. VS DCIT 356 ITR 25 AND SUBMITTED THAT THE RATIO AND PRINCIPLE LAID DOWN IN THIS JUDGEMENT IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE ALSO. HE SUBMITTED THAT HERE IN THIS CASE WHAT HAS BEEN TRANSFERRED BY THE ASSESSEE IS THE SHARES HELD IN THE SUBSIDIARY AND NOT THE LAND OWNED BY THE SUBSIDIARIES AND THE SAID SHARES WERE HELD AS INVESTMENT, NOT WITH THE OBJECTIVE OF TRADING THEREIN. HE ALSO PLACED RELIANCE ON CBDT CIRCULAR NO. 6 OF 2016 AND STRESS UPON THE FACT THAT CBDT HAS LAID DOWN THAT, IF THE SHARES HELD BY THE ASSESSEE AS INVESTMENT, THEN GAIN FROM SUCH SHARES IS TO ASSESSED AS CAPITAL GAIN. HE ALSO DREW OUR ATTENTION TO FOLLOWING FACTS EMERGING FROM DOCUMENTS FURNISHED BEFORE AUTHORITIES BELOW AND ALSO IN THE PAPER BOOK BEFORE US; - THE SHARES WERE RECORDED AND CLASSIFIED SINCE THE DATE OF ACQUISITION AS INVESTMENT UNDER THE HEAD NON-CURRENT ASSETS IN THE BOOKS OF ACCOUNT AND WERE SHOWN AS SUCH IN THE AUDITED FINANCIAL STATEMENT OF THE ASSESSEE AUDITED BY A REPUTED FIRM OF CHARTERED ACCOUNTANTS FURTHER, IN THE' INVESTMENT' SCHEDULE OF THE AUDITED BALANCE SHEET OF THE ASSESSEE AS ON 31.03.2009, THE SHARES WERE GROUPED UNDER THE HEAD 'NON-TRADE' AND NOT 'TRADING' INVESTMENTS. IN TERMS OF ACCOUNTING STANDARD-I 3 ON 'ACCOUNTING FOR INVESTMENTS' ISSUED BY ICAI, THE TERM 'INVESTMENTS' HAS BEEN DEFINED AS UNDER: 'INVESTMENTS ARC ASSETS HELD BY AN ENTERPRISE FOR EARNING INCOME BY WAY OF DIVIDENDS, INTEREST, AND RENTALS, FOR CAPITAL APPRECIATION, OR FOR OTHER BENEFITS TO THE INVESTING ENTERPRISE. ASSETS HELD AS STOCK-IN-TRADE ARE NOT 'INVESTMENTS'. THE SHARES OF THE SUBSIDIARIES WERE VALUED AT COST AND NOT AT COST OF MARKET PRICE WHICHEVER IS LOWER, AS IS GENERALLY FOLLOWED IN CASE OF STOCK-IN-TRADE. 12.3 HE ALSO SUBMITTED THAT, PREDOMINANT INTENTION BETWEEN HOLDING OF SHARES SHOULD BE CONCLUSIVE OF SUCH INTENTION WHICH HAS TO BE SEEN FROM THE CONDUCT OF THE ASSESSEE, BECAUSE AT NO POINT OF TIME SHARES OF THE SUBSIDIARY WERE HELD AS STOCK-IN-TRADE AND IN SUPPORT HE RELIED UPON THE FOLLOWING JUDGMENT:- JUDGMENT IN THE CASE OF CIT VS. GOPAL PUROHIT OF BOMBAY HIGH COURT REPORTED IN 188 TAXMAN 140. JUDGMENT IN THE CASE OF CIT VS. ROHIT ANAND OF DELHI HIGH COURT REPORTED IN 327 ITR 445. CIT VS. VINAY MITTAL (DELHI HIGH COURT) REPORTED IN 208 TAXMAN 106. 13. ON THE OTHER HAND, LD. CIT(DR) STRONGLY RELIED UPON THE ORDER OF THE AO AND DRP SUBMITTED THAT ASSESSEE WAS REGULARLY SELLING AND PURCHASING THE SHARES OF ITS SUBSIDIARY COMPANIES WHICH WERE NOTHING BUT HOLDING LAND AND ASSESSEE BEING A DEVELOPER, IS FREQUENTLY ENGAGED IN SELLING SHARES OF SUBSIDIARY COMPANIES HOLDING LAND AND THEREFORE, IT HAS TO BE TREATED AS BUSINESS TRANSACTION FOR EARNING OF BUSINESS INCOME. BECAUSE OF THE PECULIAR FACTS OF THE CASE, THE RATIO AND PRINCIPLE OF HONBLE KARNATAKA HIGH COURT AS RELIED UPON BY THE LD. COUNSEL WILL NOT APPLY. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO THE MATERIAL REFERRED TO BEFORE US. THE SOLE REASON FOR TREATING THE SALE OF SHARES OF SUBSIDIARY COMPANY AS BUSINESS INCOME BY THE REVENUE IS THAT, ASSESSEE COMPANY IS ENGAGED IN AN ORGANISED MANNER TO DO BUSINESS OF REAL ESTATE AND HAVE ACQUIRED 100% SHARES IN ITS SUBSIDIARY COMPANIES WHO IN TURN WERE OWNING LAND. THUS, ASSESSEE IS SELLING LAND HELD BY THESE COMPANIES THROUGH TRANSFER OF SHARES AND WHAT HAS BEEN RECEIVED BY THE ASSESSEE COMPANY IS SALE PRICE OF LAND AND THEREFORE, THERE IS DIRECT NEXUS WITH TRADING ACTIVITY OF THE ASSESSEE COMPANY. ACCORDING TO AO, THESE TRANSACTIONS HAVE BEEN CARRIED OUT IN A MANNER WHICH INDICATES SYSTEMATIC AND ORGANISED ACTIVITY WITH PROFIT MOTIVE, THEREFORE, IT BECOMES A BUSINESS PROFIT AND NOT CAPITAL GAIN. HOWEVER, FROM THE PERUSAL OF THE DOCUMENTS REFERRED TO BY THE LD. COUNSEL, IT IS SEEN THAT SHARES OF THESE COMPANIES WERE ACQUIRED WAY BACK IN FINANCIAL YEAR 2005-06 AND 2007-08 AND THE SHARES IN THE SUBSIDIARY COMPANIES WERE ALWAYS SHOWN AS INVESTMENT IN THE BOOKS OF ACCOUNT AND IN THE BALANCE SHEETS. WHAT HAS BEEN TRANSFERRED AND SOLD BY THE ASSESSEE ARE THE SHARES HELD IN THE SUBSIDIARY COMPANIES AND NOT THE LAND OWNED BY THE SUBSIDIARIES. IT IS TRITE LAW THAT THE SHAREHOLDERS SUBSCRIBE TO THE SHARES OF THE COMPANY AND NOT THE UNDERLYING ASSET AND BY TRANSFER OF SHARES THE UNDERLYING ASSET OF THE COMPANY DOES NOT GET TRANSFERRED AS THE ASSET REMAINS WITH THE COMPANY. HERE IN THIS CASE, AT THE TIME OF PURCHASE OF SHARES THEY WERE RECORDED AND CLASSIFIED UNDER THE HEAD INVESTMENT IN THE BOOKS OF ACCOUNTS AND WAS ALSO REFLECTED AS SUCH IN THE AUDITED FINANCIAL STATEMENTS FROM YEAR TO YEAR AND NEVER THESE SHARES HAVE BEEN TREATED AS TRADABLE OR STOCK-IN-TRADE, AS THE INVESTMENT SCHEDULE WAS GROUPED UNDER THE HEAD NON-TRADE INVESTMENT. IF INVESTMENTS ARE HELD BY A COMPANY FOR EARNING INCOME BY WAY OF INTEREST, OR DIVIDEND OR FOR APPRECIATION OF CAPITAL OR FOR ANY OTHER BENEFITS THEN IT CANNOT BE TREATED AS STOCK IN TRADE. THE SHARES OF THE SUBSIDIARIES HAVE BEEN VALUED AT COST AND NOT OF THE COST OF MARKET PRICE WHICHEVER IS LOWER, WHICH IS NORMALLY DONE IN CASE OF STOCK-IN-TRADE. HERE THE DEPARTMENT HAS SOUGHT TO ADOPT LOOK THROUGH APPROACH HOLDING THAT IT IS NOT THE SUBSIDIARY BUT THE ASSESSEE WHICH IS THE OWNER OF THE LAND AND HENCE THE TRANSACTION IS OF SALE OF LAND, DISREGARDING THE SUBSTANCE OF THE TRANSACTION AS HERE WHAT HAS BEEN TRANSFERRED IS SHARES OF SUBSIDIARY COMPANY AND NOT THE LAND. FOR DISREGARDING AN APPARENT TRANSACTION THERE HAS TO BE SOME INFORMATION OR MATERIAL ON RECORD TO DIGRESS FROM LOOKING AT THE TRANSACTIONS AND SANS ANY MATERIAL, SUCH A RECHARACTERIZATION OF TRANSACTION BY LOOK THROUGH APPROACH IS PURELY HYPOTHETICAL, BASED ON SURMISE AND PRESUMPTION WHICH CANNOT BE PERMITTED. IF RIGHT FROM DAY ONE, ASSESSEE HAS CLASSIFIED THE SHARES AS INVESTMENT AND INTENTION WAS ALWAYS TO TREAT IT AS AN INVESTMENT, THEN SALE OF SUCH INVESTMENT OSTENSIBLY WOULD BE ASSESSED AS A CAPITAL GAIN AND NOT BUSINESS INCOME. 15. FURTHER THE GUIDE LINE ISSUED BY THE CBDT, CLEARLY LAYS DOWN THAT, WHAT HAS TO BE SEEN IS, FIRSTLY , THE OBJECTIVE OF ACQUIRING THE SHARES, THAT IS, WHETHER IT HAS BEEN TREATED AS INVESTMENT OR TO ENJOY INCOME THERE FROM OR TO MAKE PROFIT BY BUYING AND SELLING SHARES IN SHORT RUN; SECONDLY , THE PERIOD OF WHICH SHARES HAVE BEEN HELD, THAT IS, WHETHER THE SHARES ARE HELD FOR MORE THAN THREE YEARS; THIRDLY , WHETHER THERE IS FREQUENCY OF TRANSACTIONS IN A PARTICULAR SHARE; AND LASTLY , THE TREATMENT AND CLASSIFICATION GIVEN IN THE BOOKS OF ACCOUNTS HAS TO BE GIVEN SIGNIFICANCE. IF WE APPLY THE SAID GUIDELINES, THEN ALL THE FACTORS INDICATE THAT INTENTION WAS NEVER TO TRADE IN SHARES. HERE THE REVENUES STAND THAT THERE WAS TRADING OF UNDER LYING ASSETS OF THE SUBSIDIARY COMPANIES, CANNOT BE UPHELD IN LAW AS SHAREHOLDER DOES NOT HAVE RIGHT TO ASSETS OF THE COMPANY BUT ONLY SHARE IN PROFIT. THE COMPANY ALONE CAN WITH THE APPROVAL OF BOARD OF DIRECTORS SELL ITS ASSETS. THUS, WE DO NOT FIND ANY REASON AS TO WHY SALE OF SHARES IS TREATED AS TRADING IN LAND SO AS TO BE TAXED AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE. HENCE, IN VIEW OF OUR DISCUSSION MADE ABOVE, WE HOLD THAT INCOME FROM SALE OF SHARES CANNOT BE TAXED AS BUSINESS INCOME BUT HAS TO TAXED AS CAPITAL GAIN. IN THE RESULT, THESE GROUNDS ARE ALLOWED. 16. THE NEXT ISSUE RELATES TO DISALLOWANCE TO RS. 23,71,65,830/- BY RECHARACTERIZING THE SHARE APPLICATION MONEY AS INTEREST FREE ADVANCE. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS SHOWN SUM OF RS. 4,30,24,00,000/- AS AN OUTSTANDING BALANCE OF SHARE APPLICATION MONEY AS ON 31 ST MARCH 2011. THE DETAILS OF SUCH OUTSTANDING BALANCES WERE AS UNDER: - SHARE APPLICATION MONEY (PENDING ALLOTMENT) SR. NO. PARTICULARS OPENING BALANCE AS ON 01.04.2010 (RS.) MONEY GIVEN DURING THE YEAR (RS.) TOTAL(RS.) INTEREST @ 14% I.E. AVERAGE BORROWING RATE (RS.) 1. HSARE APP. MONEY- ARIHANT UNITECH REALLTY PROJ LTD. 238,000,000 - 238,000,000 33,320,000 2. SHARE APP. MONEY- ATEN CAPITAL PVT. LTD. 17,500,000 17,500,000 284,795 3. SHARE APP. MONEY CARMEL REALTY ESTATE 20,000,000 - 20,000,000 2,800,000 4. SHARE APP. MONEY- CARNOUSTIE MANAGEMENT PVT. LTD. 18,000,000 (18,000,000) - - 5. SHARE APP. MONEY- COLOSSAL DEVEL.P.LTD. 12,926,000 (12,926,000) - - 6. SHARE APP. MONEY GAMBELL REALTY ESTATE 400,000,000 - 400,000,000 56,000,000 7. SHARE APP. MONEY HOLYWOOD REAL ESTATE 20,000,000 1 - 20,000,000 2,800,000 8. SHARE APP. MONEY NASCENT REAL ESTATE 200,000,000 - 200,000,000 28,000,000 9. SHARE APP. MONEY NASH REAL ESTATE 50,000,000 - 50,000,000 7,000,000 10 SHARE APP. MONEY - NAGVADA REAL ESTATE 20,000,000 - 20,000,000 2,800,000 11. SHARE APP. MONEY NEELMANI REALTY PVT. LTD. 20,000,000 - 20,000,000 2,800,000 12. SHARE APP. MONEY NKID 10,000,000 (8,000,000) 2,000,000 280,000 13. SHARE APP. MONE Y OMKAR REALTORS & DEVELOPERS 500,000,000 - 500,000,000 70,000,000 14. SHARE APP. MONEY UNITECH ARDENT PROJ. PVT. LTD. 35,000,0000 (30,000,000) 5,000,000 6556,164 15. SHARE APP. MONEY- UNITECH ARDENT PROJ. PVT. LTD. 295,000,000 (295,000,000) - - 16. SHARE APP. MONEY UNITECH INFRA LTD. 2,800,000,000 2,800,000,000 29,488,219 17. SHARE APP. MONEY VIVIANA INFRA DEVELOPERS PVT. LTD. 9,900,000 9,900,000 1,036,652 TOTAL 1,838,926,000 2,463.474,000 4,302,400,000 237,165,830 17. ACCORDING TO THE AO, WHEN THE AMOUNT OF SHARE APPLICATION MONEY GIVEN BY THE ASSESSEE COMPANY HAS CROSSED REASONABLE PERIOD OF TIME THEN, IT HAS TO BE TREATED AS LOAN. HERE IN THIS CASE SHARE APPLICATION MONEY HAS EXCEEDED MORE THAN 60 DAYS AND AT THE SAME TIME ASSESSEE COMPANY HAS HUGE BORROWINGS BY WAY OF LOANS, DEBENTURES, FIXED DEPOSITS ON WHICH SUBSTANTIAL INTEREST IS BEING PAID, HENCE THE AMOUNT OF INTEREST PAID ON SUCH BORROWINGS TO THE EXTENT OF SHARE APPLICATION MONEY HAS TO BE TREATED AS LOAN. ACCORDINGLY, HE HELD THAT IN VIEW OF SECTION 36(1)(III) ONLY AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS TO BE ALLOWED AS DEDUCTION. HERE, SINCE HUGE AMOUNT HAS BEEN GIVEN AS SHARE APPLICATION MONEY, THEREFORE, INTEREST ON AMOUNT ADVANCED IN THE FORM OF SHARE APPLICATION MONEY TO THE INDIAN ENTITIES HAS TO BE IMPUTED AT AN AVERAGE BORROWING RATE AND SAME HAS TO DISALLOWED OR ADDED. ACCORDINGLY, HE WORKED OUT DISALLOWANCE OF RS. 23,71,65,830/- THE REASONING GIVEN BY HIM FOR MAKING THE DISALLOWANCE WAS AS UNDER:- THE NATURE OF THE FUNDS GIVEN BY THE ASSESSEE COMPANY HAS FOLLOWING FURTHER ISSUES TO BE SEEN FOR DISALLOWANCE U/S 36(1)(III) :- 1. ALMOST ENTIRE AMOUNTS ARE GETTING FORWARD FROM EARLIER YEARS AND SINCE HOW LONG THE SAME ARE OUTSTANDING HAVE NOT BEEN CLARIFIED BY THE ASSESSEE. 2. ASSESSEE'S CONTENTION THAT IT HAD ADEQUATE SURPLUS OWNED FUNDS THROUGH WHICH THESE INVESTMENT IN SHARE APPLICATION MONEY WERE MADE, IS UNREALISTIC, AS THE QUESTION ARISES THEN WHY ASSESSEE COMPANY HAD TO BORROW FUNDS DURING THE YEAR AND PAID INTEREST AT AVERAGE RATE OF 14% P.A. THE ISSUE INVOLVED IS USE OF BORROWED FUNDS AND OF INTEREST PAID AND WHETHER THE SAME WERE FOR BUSINESS PURPOSES. THE FACTS SHOW THAT (I) THERE WERE HUGE OPENING BALANCES OUTSTANDING, (II) BY THE ELEVEN (11) COMPANIES, THE SHARES WERE NOT ALLOTTED AND (III) MOST IMPORTANTLY THE TWO ISSUES THAT WHETHER SUCH COMPANIES HAD ADDITIONAL SHARES OR SUBSCRIPTION BASE TO ALLOT THE SHARES TO THE ASSESSEE COMPANY AND WHAT BENEFIT WOULD HAVE ACCRUED TO THE ASSESSEE COMPANY FROM SUCH TRANSACTIONS. THE REPLY OF ASSESSEE COMPANY IS SILENT ON SAME. 3. FURTHER IT IS ELABORATED FROM FOLLOWING POINTS THAT THE SHARE APPLICATION MONEY IS ONLY A DEVICE WHICH IS USED FOR THE PURPOSE OF ADVANCING FUND TO THE SUBJECTED COMPANIES: A) AS PER RULE 2( B) OF COMPANIES (ACCEPTANCE OF DEPOSIT) RULE, 1975; 'DEPOSIT' MEANS ANY DEPOSIT OF MONEY WITH, AND INCLUDES ANY AMOUNT BORROWED BY, A COMPANY, BUT DOES NOT INCLUDE - (VII) 'ANY AMOUNT RECEIVED BY WAY OF SUBSCRIPTIONS TO ANY SHARES, STOCK, BONDS OR DEBENTURES SUCH BONDS OR DEBENTURES AS ARE COVERED BY SUB-CLAUSE (X) PENDING THE ALLOTMENT OF THE SAID SHARES, STOCK, BONDS OR DEBENTURES AND ANY AMOUNT RECEIVED BY WAY OF CALLS IN ADVANCE ON SHARES, IN ACCORDANCE WITH THE ARTICLES OF ASSOCIATION OF THE COMPANY SO LONG AS SUCH AMOUNT IS NOT REPAYABLE TO THE MEMBERS UNDER THE ARTICLES OF ASSOCIATION OF THE COMPANY. AS PER THE AFORESAID RULE, IT IS VERY MUCH CLEAR THAT ANY SHARE APPLICATION MONEY WHICH IS REPAYABLE WILL BE CONSIDERED AS DEPOSIT. 4.7 IN VIEW OF THE TOTALITY OF THE FACTS AS DISCUSSED ABOVE, INTEREST SHOULD HAVE BEEN CHARGED ON THESE LOANS AS THE COMPANY IS OPERATING ON BORROWED FUNDS. FURTHER, THE' ISSUE HAS BEEN EXAMINED IN DETAIL DURING THE ASSESSMENT PROCEEDINGS FOR THE A.Y. 2009-10 AND 2010-11, AND THEREIN, IT WAS HELD THAT INTEREST (AT THE RATE OF AVERAGE RATE OF BORROWINGS) ON SHARE APPLICATION MONEY OUTSTANDING FOR MORE THAN 60 DAYS MUST BE ADDED TO THE INCOME OF THE ASSESSEE. AS SUCH, AFTER HAVING CONSIDERED ALL THE FACTS AND CIRCUMSTANCES OF THE CASE, AND PAST PRECEDENCE, IT IS CONCLUDED THAT PROPORTIONATE INTEREST SHOULD HAVE BEEN CHARGED ON THESE LOANS/ADVANCES WHICH ARE IN THE NATURE OF SHARE APPLICATION MONEY AS COMPANY IS OPERATING ON BORROWED FUNDS. AS THERE ARE NO CHANGE IN FACTS, ADDITION OF RS. 23,71,65,830/- IS BEING MADE TO THE INCOME OF THE ASSESSEE. 18. BEFORE US, THE LD. COUNSEL SUBMITTED THAT AO HAS GROSSLY ERRED IN LAW AND ON FACTS IN IMPUTING A NOTIONAL COST OF INTEREST ON THE GROUND THAT ASSESSEE COMPANY COULD HAVE EARNED INTEREST IF THIS TRANSACTION WERE TO BE REGARDED AS NATURE OF LOAN AND HENCE HE HAS DISALLOWED INTEREST PAID ON LOAN BY THE ASSESSEE. HE SUBMITTED THAT AMOUNT RECEIVED BY A COMPANY ON THOSE SHARES WHICH HAVE BEEN ALLOTTED OR HAVE BEEN SUBSCRIBED AS SHARES CANNOT FALL WITHIN THE DEFINITION OF DEPOSIT AS LONG AS THEY ARE NOT REPAYABLE TO THE MEMBERS OF THE COMPANY. EVEN OTHERWISE ALSO, ASSESSEE COMPANY HAS SUFFICIENT SURPLUS FUND AND HENCE THERE CAN ALWAYS BE PRESUMPTION THAT MONEY HAS BEEN ADVANCED OUT OF SURPLUS FUND AVAILABLE WITH THE ASSESSEE AND IN THAT CASE NO SUCH DISALLOWANCE COULD HAVE BEEN MADE HOLDING IT TO BE DIVERSION OF BORROWED FUNDS. HE POINTED OUT THAT, ASSESSEE HAS MORE THAN RS. 9281.87 CRORES OF ACCUMULATED RESERVES, WHEREAS THE LOAN FUND AMOUNTED TO RS. 4460.40 CRORE. DURING THE IMPUGNED ASSESSMENT YEAR ACCUMULATED RESERVES INCREASED BY RS. 460 CRORES, WHEREAS ASSESSEE HAS MADE FRESH INVESTMENT IN SHARE APPLICATION MONEY DURING THE ASSESSMENT YEAR AT RS. 245.34 CRORES, THUS DURING THE YEAR ALSO SURPLUS FUND EXCEEDED THE SHARE APPLICATION MONEY. FURTHER, THE LD. AO HAS TAKEN THE OUTSTANDING BALANCE OF SHARE APPLICATION MONEY AND ALSO CURRENT YEAR ADVANCES FOR THE PURPOSE OF CALCULATION OF DISALLOWANCE U/S 36(1)(III) OF THE ACT, WHICH IS NOT CORRECT. THE AO HAS NOT PROVED ANY NEXUS AND HAS DISCHARGED THE BURDEN FOR MAKING THE DISALLOWANCE U/S 36(1)(III). IN SUPPORT HE RELIED UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS BHARTI TELEVENTURES LTD. REPORTED IN 331 ITR 502. 19. ON THE OTHER HAND. LD. CIT(DR) STRONGLY RELIED UPON THE ORDER OF THE AO AND SUBMITTED THAT HERE IN THIS CASE THE SHARES HAVE BEEN ALLOTTED IN SUBSEQUENT YEARS AND AMOUNT OF SHARE APPLICATION MONEY GIVEN TO THE RELATED COMPANIES AFTER A REASONABLE TIME HAS TO BE TREATED AS IN THE NATURE OF LOAN GIVEN. THEREFORE, PROPORTIONATE INTEREST COULD HAVE BEEN CHARGED ON THESE LOANS BECAUSE ASSESSEE COMPANY OPERATING ON BORROWED FUNDS. THUS, HE STRONGLY RELIED UPON DIRECTIONS OF THE DRP. 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS. THE ASSESSEE HAS SUBSCRIBED FOR SHARE APPLICATION MONEY IN VARIOUS COMPANIES WHICH AT THE CLOSING DATE OF THE BALANCE SHEET STOOD AT RS. 430,24,00,000/-. THE LD. AO HELD THAT, SINCE THE AMOUNT WAS BLOCKED (PENDING ALLOTMENT OF SHARES) WHICH HAD EXCEEDED MORE THAN 60 DAYS, THEREFORE, SUCH AN APPLICATION MONEY HAS TO BE TREATED AS INTEREST FREE LOAN GIVEN TO THE PARTIES. HE FURTHER OBSERVED THAT, ASSESSEE HAS HUGE BORROWINGS ON WHICH SUBSTANTIAL INTEREST IS BEING PAID, THEREFORE, DISALLOWANCE OF INTEREST ON THE PAYMENT OF INTEREST ON BORROWED SHOULD BE MADE. HE HAS ALSO REFERRED TO RULE 2(B) OF COMPANIES (ACCEPTANCE OF DEPOSIT) RULE, 1975 AND OBSERVED THAT SHARE APPLICATION MONEY WHICH IS REPAYABLE HAS TO BE CONSIDERED AS DEPOSIT. FURTHER IN THE ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEARS 2009-10 AND 2010-11, SIMILAR DISALLOWANCE WAS MADE. IN NUTSHELL, HE HAS RECHARACTERIZED THE SHARE APPLICATION MONEY AS ADVANCE / LOAN GIVEN TO THE COMPANIES. FIRST OF ALL, IF ASSESSEE HAS APPLIED FOR SHARE APPLICATION MONEY PENDING ALLOTMENT OF SHARES, THEN HOW SUCH AN AMOUNT CAN BE RECHARACTERIZED AS LOAN UNLESS THE PARTIES HAVE TREATED IT AS PART OF ADVANCE OR LOAN. EVEN THE RELEVANT RULES OF COMPANIES (ACCEPTANCE OF DEPOSIT) RULE AS QUOTED BY THE AO IN THE IMPUGNED ORDER, ALSO DOES NOT SUPPORT THE ALLEGATION OF THE AO, BECAUSE AMOUNT RECEIVED WITH REGARD TO THOSE SHARES WERE FOR ALLOTMENT OR WERE SUBSCRIBED, HENCE IT DOES NOT FALL WITHIN THE DEFINITION OF DEPOSITS. THE SAID CLAUSE ONLY COMES INTO OPERATION ONLY WHEN PERSONS BECOME MEMBER OF THE SAID COMPANY EITHER BY WAY OF SUBSCRIBING TO THE MEMORANDUM OR SUBSCRIBING TO THE PARTLY PAID UP SHARES. NOWHERE IT IS BORNE OUT THAT THE AMOUNT WAS REPAYABLE TO THE MEMBERS UNDER THE ARTICLES OF THE ASSOCIATION OF THE COMPANY. IF AO IS MAKING NOTIONAL DISALLOWANCE OF THE INTEREST PAID FOR CAPITAL BORROWED FOR THE BUSINESS PURPOSE, THEN HE HAS TO PROVE THE NEXUS, THAT THE BORROWED CAPITAL HAS BEEN USED FOR INTEREST FREE ADVANCE OR LOAN AND THAT TO BE FOR NON-BUSINESS PURPOSE. IF SUCH NEXUS IS NOT PROVED THEN AO CANNOT PROCEED TO MAKE DISALLOWANCE ON THE INTEREST PAID U/S 36(1)(III). 21. FURTHER, IF AT ALL SUCH DISALLOWANCE IS BEING MADE ON NOTIONAL AND HYPOTHETICAL BASIS TREATING SHARE APPLICATION MONEY AS ADVANCE OR INTEREST FREE LOAN, THEN AO ALSO NEEDS TO TAKE INTO CONSIDERATION, WHETHER ASSESSEE COMPANY HAS SUFFICIENT SURPLUS FUND OR NOT; AND IF SURPLUS FUND EXCEEDED THE AMOUNT OF ADVANCE, THEN AGAIN, NO NOTIONAL INTEREST OR DISALLOWANCE CAN BE MADE. HERE IT IS UNDISPUTED FACT THAT ASSESSEE COMPANY HAS MORE THAN RS. 9281.87 CRORES OF ACCUMULATED RESERVES AND DURING THE YEAR ITSELF ITS RESERVES HAVE INCREASED BY RS. 1379 CRORES AND AMOUNT OF SHARE APPLICATION MONEY ADVANCE WAS ONLY RS. 245.34 CRORES. THUS, IN SUCH CIRCUMSTANCES, PRESUMPTION IS ALWAYS IN THE FAVOUR OF THE ASSESSEE THAT THESE ARE ADVANCES OUT OF SURPLUS FUNDS ONLY AND SUCH PRESUMPTION HAS BEEN LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MAX INDIA LTD. (P&H) HIGH COURT, REPORTED IN 398 ITR 209. THUS, UNDER THE FACTS AND CIRCUMSTANCES OF THIS CASE, WE HOLD THAT NO DISALLOWANCE CAN BE MADE. IN SO FAR AS RELIANCE PLACED ON EARLIER YEAR ORDERS, LD. COUNSEL HAS BROUGHT ON RECORD THAT THE REVENUES APPEALS FOR THE ASSTT. YEAR 2009- 10 AND 2010-11 HAVE BEEN DISMISSED BY THE TRIBUNAL BY QUASHING THE ASSESSMENTS ON THE GROUND OF LIMITATION. THUS, ON MERITS WE HOLD THAT NO ADDITION IS CALLED FOR AND CONSEQUENTLY THE GROUND NO. 4 TO 4.2 IS TREATED AS ALLOWED. 22. THE NEXT GROUND RELATES TO TRANSFER PRICING ADJUSTMENT MADE BY THE TPO BY RECHARACTERIZING THE SHARE APPLICATION MONEY INVESTED IN ASSOCIATE ENTERPRISES AS LOAN AND ACCORDINGLY, DISALLOWANCE OF NOTIONAL INTEREST OF RS. 10,19,55,814/- U/S 36(1(III) HAS BEEN PROPOSED. THE FACTS IN BRIEF ARE THAT ASSESSEE COMPANY HAS INVESTED SUM OF RS. 1,64,15,00,400/- (EQUIVALENT TO USD 3,63,50,000/-) BY WAY OF SUBSCRIPTION OF EQUITY SHARE CAPITAL IN ITS WHOLLY OWNED SUBSIDIARY, NUWELL LIMITED. LD. TPO HAS HELD THAT SUCH A TRANSACTION OF SUBSCRIPTION OF SHARES IN TERMS OF AMENDMENT BY FINANCE ACT 2012 IN 92B(1) READ WITH EXPLANATION (C) IS AN INTERNATIONAL TRANSACTION AS IT AMOUNTS TO CAPITAL FINANCING . THE SHARE APPLICATION MONEY WAS ADVANCED IN THE FINANCIAL YEAR 2010-11 AND DURING THE YEAR SHARES HAVE NOT BEEN ALLOTTED. ACCORDING TO THE TPO, ANY INDEPENDENT ENTITY WOULD NOT HAVE LEFT THE AMOUNT IN THE HANDS OF ANOTHER ENTITY WITHOUT THE SAME BEING CONVERTED INTO EQUITY SHARES WITHIN THE REASONABLE PERIOD OR WOULD HAVE RECEIVED INTEREST ON THE SAME. HE HELD THAT ACCORDING TO MCA NOTIFICATION DATED 14 TH DECEMBER, 2011 A REASONABLE PERIOD IS 60 DAYS AND ACCORDINGLY, HE PROPOSED TO CHARGE INTEREST @12.21% BASED ON SBI PRIME LENDING RATE. 23. BEFORE US, LD. COUNSEL SUBMITTED THAT THE TRANSACTION DOES NOT FALL WITHIN THE DEFINITION OF INTERNATIONAL TRANSACTION U/S 92B(1) AS CAPITAL FINANCING IS DIFFERENT FROM CAPITAL CONTRIBUTION. THE RECHARACTERIZATION OF TRANSACTION OF A SHARE APPLICATION MONEY AS DEEMED LOAN TRANSACTION IS NOT PERMISSIBLE UNDER THE ACT AND IN SUPPORT HE RELIED UPON THE FOLLOWING JUDGEMENTS: - (I) JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES (P.) LTD. VS UOI REPORTED IN 368 ITR 1 (II) ORDER OF HONBLE ITAT DELHI IN THE CASE OF FIRST BLUE HOME FINANCE LTD. VS. DCIT IN ITA NO. 3072/DEL/2013 (III) ORDER OF HONBLE ITAT MUMBAI AEGIS LIMITED VS. ACIT IN ITA NO. 1213/M/2014. (IV) BHARTI AIRTEL VS ACIT (ITAT DELHI) REPORTED IN 161 TTJ 428. 23.1 HE FURTHER SUBMITTED THAT THE REASONABLE PERIOD IN CASE OF SHARE APPLICATION MONEY REMITTED BY NON-RESIDENT SHAREHOLDERS AS PER THE RBI IS 180 DAYS; AND ALTERNATIVELY ALSO, FOREIGN CURRENCY DENOMINATED INVESTMENT IS TO BENCHMARK BY APPLYING LIBOR AND NOT SBI LENDING RATE. STRONGLY RELYING UPON THE AFORESAID JUDGEMENTS, HE SUBMITTED THAT SUCH TRANSACTION CANNOT RECHARACTERIZE AS LOAN OR CAPITAL FINANCING. 24. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE AO AND SUBMITTED THAT HERE IN THIS CASE, THE SHARE APPLICATION MONEY PENDING WITH THE AE WAS FOR CONSIDERATION TIME AND THEREFORE, IT HAS TO BE RECKONED AS LOAN AFTER A REASONABLE PERIOD OF TIME AND IN AN UNRELATED OR UNCONTROLLED TRANSACTION NO THIRD PARTY WOULD HAVE GIVEN SUCH SHARE APPLICATION MONEY FOR A LONG TIME, HENCE SUCH A TRANSACTION IS NOT ONLY INTERNATIONAL TRANSACTION BUT ALSO INTEREST HAS TO BE CHARGED FOR DETERMINING THE ARMS LENGTH PRICE. 25. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS. FIRST OF ALL, WE HAVE TO SEE, WHETHER ON A PLAIN READING OF SECTION 92B (1) SUCH A TRANSACTION FALLS WITHIN THE PURVIEW OF INCOME ARISING FROM INTERNATIONAL TRANSACTION WHICH IS CONDITION PRECEDENT FOR APPLICATION OF TRANSFER PRICING PROVISION UNDER CHAPTER X. THE TRANSACTION OF SUBSCRIBING OF SHARE APPLICATION MONEY IS ALWAYS ON CAPITAL ACCOUNT AND WOULD BECOME TAXABLE TO THE EXTENT IT IMPACTS THE INCOME. IT IS ONLY INCOME WHICH IS TO BE ADJUSTED TO THE ARMS LENGTH PRICE AND NOT TAX ON CAPITAL RECEIPT. AO HAS RECHARACTERIZED THE SHARE APPLICATION MONEY AS A LOAN SIMPLY BECAUSE DURING THE YEAR THE SHARES HAVE BEEN NOT ALLOTTED. SUCH RECHARACTERIZATION FIRST OF ALL, CANNOT BE MADE UNLESS THERE IS AN INTENTION OF THE PARTIES OR THERE IS ANY ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT. IF ANY MONEY HAS BEEN ADVANCED FOR ACQUISITION OF SHARES WHICH IS A CAPITAL ASSET, SAME CANNOT BE TREATED AS CAPITAL FINANCING UNLESS THE PARTIES HAVE INTENDED OR AGREED TO CONVERT THE SAME. SUCH AN INTENTION HAS TO BE GATHERED FROM ANY AGREEMENT OR ARRANGEMENT OR UNDERSTANDING. IF PARTIES HAVE TREATED IT TO BE SHARE APPLICATION MONEY FOR SUBSCRIPTION OF SHARES, THEN ONUS IS UPON THE AO TO PROVE IT CONTRARY THAT IT IS AN INTERNATIONAL TRANSACTION. HERE AO HAS DRAWN PRESUMPTION ON THE GROUND THAT THERE WAS DELAY IN ALLOTMENT OF SHARES, HENCE IT IS AN INTERNATIONAL TRANSACTION OF CAPITAL FINANCING. SUCH A PRESUMPTION CANNOT CHANGE THE CHARACTER OF TRANSACTION. 26. EVEN OTHERWISE ALSO, THE CHARGE OF INCOME HAS TO BE FIRST SEEN IN TERMS OF SECTION 4 AND 5 AND THE INCOME WHICH CAN BE BROUGHT TO TAX HAS BEEN DEFINED UNDER U/S 2(24) OF THE ACT. SHARE APPLICATION MONEY FOR SUBSCRIPTION OF SHARES IS FOR ACQUISITION OF CAPITAL ASSET AND MONEY RECEIVED BY THE COMPANY IS A CAPITAL RECEIPT. A CAPITAL RECEIPT IS NOT AN INCOME UNDER SECTION 2(24) UNLESS IT IS CHARGEABLE TO TAX AS CAPITAL GAINS UNDER SECTION 45. IT IS FOR THIS REASON THAT UNDER SECTION 2(24)(VI) THE LEGISLATURE HAS EXPRESSLY STATED, THAT INCOME SHALL INCLUDE ANY CAPITAL GAINS CHARGEABLE UNDER SECTION 45 . OTHERWISE, A CAPITAL RECEIPT IS NOT RECKONED AS INCOME. THIS ISSUE OF RECHARACTERIZATION OF SHARE APPLICATION MONEY INTO LOAN HAS BEEN CONSIDERED AT LENGTH BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES (P) LTD. VS UOI (SUPRA), WHEREIN HONBLE HIGH COURT AFTER DETAIL DISCUSSION HAS CONCLUDED THAT PROVISIONS OF CHAPTER X ARE NOT APPLICABLE TO INTERNATIONAL TRANSACTION OF ISSUANCE OF EQUITY SHARES. HERE IN THIS CASE IT HAS BEEN BROUGHT ON RECORD THAT THE SHARES HAVE BEEN ALLOTTED TO THE ASSESSEE COMPANY IN THE SUBSEQUENT YEAR; AND THEREFORE, SUCH SHARES OSTENSIBLY FALL INTO CAPITAL ACCOUNT THAT CANNOT BE TREATED AS CAPITAL FINANCING WHICH NEEDS TO BE BENCHMARKED FOR THE PURPOSE OF DETERMINING THE ALP BY IMPUTING ANY KIND OF INTEREST. TPO/ AO CANNOT DISREGARD ANY APPARENT TRANSACTION AND SUBSTITUTE IT BY RECHARACTERIZING THE SAID TRANSACTION WITHOUT ANY MATERIAL OR EXCEPTIONAL CIRCUMSTANCES THAT THE ASSESSEE HAS TRIED TO CONCEAL THE REAL TRANSACTION. INVESTMENT MADE IN SHARES OR APPLYING FOR THE SHARES CANNOT BE GIVEN DIFFERENT COLOUR SO AS TO EXPAND THE SCOPE OF TRANSFER PRICING ADJUSTMENT BY RECHARACTERIZING IT AS INTEREST FREE LOAN. THUS, WE ARE UNABLE TO UPHOLD THE CONTENTION OF THE DEPARTMENT THAT SHARE APPLICATION MONEY PENDING ALLOTMENT SHOULD BE RECHARACTERIZED AS LOAN TILL THE PERIOD IT IS ALLOTTED AFTER A REASONABLE TIME. ACCORDINGLY, THE ADJUSTMENT MADE BY THE TPO IS DIRECTED TO BE DELETED. 27. IN GROUND NO. 6 TO 7.2 ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF RS. 1,32,17,15,364/- AS INTEREST IMPUTED BY AO ON INTEREST FREE LOAN/ ADVANCE TO SISTER CONCERNS. THE FACTS IN BRIEF ARE THAT ASSESSEE COMPANY HAS GIVEN ADVANCES DURING THE YEAR TO SUBSIDIARIES/JOINT VENTURE/ASSOCIATES FOR SUM OF RS. 233.01 CRORES. THE OUTSTANDING BALANCE AS ON 31.3.2001 AGGREGATED TO RS. 986,67,87,694/-, THE DETAILS OF OUTSTANDING BALANCES HAVE BEEN INCORPORATED AT PAGE 11 OF THE ASSESSMENT ORDER. AO HAS HELD THAT THIS ISSUE HAS BEEN EXAMINED IN DETAIL DURING THE ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 2009-10 AND 2011-12, WHEREIN IT HAS BEEN HELD THAT INTEREST PAID BY THE ASSESSEE ON THIS BORROWED FUND SHOULD BE DISALLOWED @ 14%. FOLLOWING THE SAME PRECEDENT AO HAS CALCULATED THE DISALLOWANCE OF INTEREST ON BORROWED CAPITAL FUNDS TO RS. 1,32,17,15,364/- BY APPLYING THE INTEREST RATE OF 14%. 28. BEFORE US, LD. COUNSEL HAS SUBMITTED THAT THE ASSESSEE HAS HUGE SURPLUS FUNDS WHICH IS EVIDENT FROM THE FACT THAT IT HAS ACCUMULATED RESERVES OF RS. 9281.87 CRORES, THEREFORE THERE CANNOT BE ANY PRESUMPTION THAT MONEY HAS BEEN ADVANCED TO SUBSIDIARIES OUT OF BORROWED FUNDS. IN ANY CASE THE MONEY WHICH HAS BEEN ADVANCED TO THESE COMPANIES/CONCERNS WERE ALSO ENGAGED IN REAL ESTATE BUSINESS AND SUCH AN ADVANCE WAS FOR THE BUSINESS PURPOSE WHICH IS INCIDENTAL TO THE BUSINESS CARRIED OUT BY THE ASSESSEE, BECAUSE ASSESSEE HAD ENTERED INTO JOINT VENTURE ON VARIOUS PROJECTS WITH THESE COMPANIES. THUS, THERE WAS NOT ONLY COMMERCIAL EXPEDIENCY BUT BUSINESS LINK IN ADVANCING SUCH FUNDS TO THE COMPANIES. 29. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE AO. 30. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS, WE FIND THAT NOWHERE THE AO HAS REBUTTED THE CONTENTION OF THE ASSESSEE THAT THESE ADVANCES TO SISTER CONCERNS WERE FOR BUSINESS PURPOSE OR FOR COMMERCIAL EXPEDIENCY NOR HE HAS TRIED TO ESTABLISH THE NEXUS BETWEEN THE MONEY ADVANCED FROM THE BORROWED FUNDS OR HAS ASKED THE ASSESSEE TO ESTABLISH THAT SUCH ADVANCE HAS BEEN GIVEN OUT OF SURPLUS OR INTEREST THROUGH FUND. HERE IN THIS CASE THE SUBSIDIARY COMPANIES/CONCERNS TO WHOM MONEY HAVE BEEN ADVANCED WERE ALSO ENGAGED IN REAL ESTATE BUSINESS WITH WHOM ASSESSEE COMPANY HAD ENTERED INTO JOINT VENTURE FOR VARIOUS PROJECTS. ONCE SUCH A CONTENTION OF THE ASSESSEE HAS NOT BEEN REBUTTED OR REFUTED BY THE AO, THEN IT HAS TO BE ACCEPTED THAT SUCH AN ADVANCE WAS FOR THE BUSINESS PURPOSE. ACCORDINGLY, WE HOLD THAT SUCH AN ADVANCE WAS FOR COMMERCIAL EXPEDIENCY AND THEREFORE, NO DISALLOWANCE COULD HAVE BEEN MADE IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS LTD. VS CIT(A) 288 ITR 1(SC). 31. IT IS FURTHER NOTICED THAT THE ASSESSEE COMPANY HAD HUGE SURPLUS FUNDS WHICH FAR EXCEEDED THE ADVANCES; AND THEREFORE, WITHOUT THEIR BEING A NEXUS PROVED BY THE AO THAT ONLY BORROWED FUNDS WERE ADVANCED, THEN PRESUMPTION CAN BE DRAWN THAT SUCH ADVANCES HAVE BEEN GIVEN OUT OF INTEREST FREE FUNDS. THIS VIEW IS NOW WELL SUPPORTED BY VARIOUS JUDGMENTS, LIKE; CIT VS. RELIANCE UTILITIES LTD. REPORTED IN 313 ITR 340 (BOM); AND CIT VS. MAX INDIA LTD., REPORTED IN 398 ITR 209 (P&H). ACCORDINGLY, SUCH A DISALLOWANCE IS DELETED ON THIS GROUND ALSO. 32. THE NEXT ISSUE RELATES TO ADDITION OF RS. 3,92,03,610/- ON ACCOUNT OF TREATMENT OF RENTAL INCOME FROM PROPERTIES AS BUSINESS INCOME BY THE AO. THE ASSESSEE COMPANY HAS SHOWN RENTAL INCOME OF RS. 13,06,78,701/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND ACCORDINGLY HAS CLAIMED STANDARD DEDUCTION @ 30% OF A SUM OF RS. 3,92,03,610/-. THE AO ON HIS OWN HYPOTHESIS PRESUMED THAT ASSESSEE MIGHT BE CLAIMING MAINTENANCE EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT INDIRECTLY FOR WHICH IT HAS NOT GIVEN ANY SEPARATE DETAILS AND THEREFORE, THERE IS NO JUSTIFICATION TO CLAIM STANDARD DEDUCTION CLAIMED. HOWEVER, HE HAS ALLOWED DEPRECIATION AMOUNTING TO RS. 98,73,901/-. THOUGH HE HAS NOT SPECIFICALLY HELD THAT IT IS BUSINESS INCOME BUT SUCH AN ACTION OF THE AO OSTENSIBLY MEANS THAT HE HAS TREATED THE RENTAL INCOME AS BUSINESS INCOME OF THE ASSESSEE. 33. BEFORE US LD. COUNSEL SUBMITTED THAT, FIRST OF ALL, NO DEPRECIATION ON THE RENTAL INCOME HAS BEEN CLAIMED IN THE COMPUTATION OF INCOME AND RIGHT FROM THE BEGINNING THE ASSESSEE HAS LET OUT THE PROPERTY ONLY FOR THE PURPOSE OF EARNING RENTAL INCOME AS OWNER OF THE PROPERTY. ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO THE MAINTENANCE OF THE PROPERTY, AS SUCH MAINTENANCE EXPENSES HAVE BEEN BORNE BY THE TENANTS. IN SUPPORT, HE HAS STRONGLY RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CHENNAI PROPERTIES VS CIT REPORTED IN 373 ITR 673 AND RAYALA CORPORATION VS. ACIT . 34. ON THE OTHER LAND LD. CIT(DR) STRONGLY RELIED UPON THE ORDER OF THE AO. 35. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF THE IMPUGNED ORDER IT IS SEEN THAT, NOWHERE IT HAS BEEN DENIED THAT THE RENTAL INCOME BY THE ASSESSEE IS FROM LEASING OF THE PREMISES AND SUCH RENTAL INCOME HAS BEEN DECLARED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE ENTIRE FINDING OF THE AO IS BASED ON PRESUMPTION THAT ASSESSEE MUST HAVE INCURRED CERTAIN EXPENDITURE IN RELATION TO THE EARNING OF RENTAL INCOME WITHOUT IDENTIFY AS TO WHICH EXPENDITURE CAN BE SAID TO BE RELATED TO EARNING OF RENTAL INCOME OR THERE IS ANY SYSTEMATIC ACTIVITY FOR EXPLOITING THE PROPERTY FOR COMMERCIAL OR BUSINESS PURPOSE. HERE THE ENTIRE RENTAL INCOME HAS BEEN EARNED FROM LETTING OUT THE PROPERTIES OWNED BY THE ASSESSEE, HENCE WHEN INCOME HAS BEEN EARNED FROM SIMPLY LETTING OUT THE PROPERTY THEN IT HAS TO BE TAXED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. HONBLE SUPREME COURT IN THE CASE OF RAJ DADARKAR VS ACIT REPORTED IN 394 ITR 592, AFTER CONSIDERING THE EARLIER JUDGEMENTS OF THE HONBLE SUPREME COURT AS CITED BY THE LD. COUNSEL HAS HELD THAT WHEREVER THERE IS AN INCOME FROM LEASING OUT OF PREMISES AND COLLECTING RENT, NORMALLY SUCH AN INCOME IS TO BE TREATED AS INCOME FROM HOUSE PROPERTY, IF THE CONDITIONS OF PROVISIONS OF SECTION 22 OF THE ACT ARE SATISFIED. MOREOVER, IT HAS ALSO BEEN POINTED OUT BY THE LD. COUNSEL THAT ALL THROUGHOUT IN THE EARLIER YEARS ASSESSEE HAS BEEN SHOWING RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY WHICH HAS BEEN ACCEPTED BY THE REVENUE UNDER THE SCRUTINY PROCEEDINGS IN VARIOUS YEARS. THE DETAILS OF EARLIER ASSESSMENT ACCEPTING THE RENTAL INCOME AS INCOME FROM HOUSE PROPERTY HAS BEEN GIVEN IN THE CHART ENCLOSED AT PAGE 3 OF THE PAPER BOOK VOLUME V. THUS, UNDER THESE FACTS AND CIRCUMSTANCES, WE HOLD THAT RENTAL INCOME CANNOT BE TREATED AS BUSINESS INCOME AND CONSEQUENTLY, BENEFIT OF STANDARD DEDUCTION OF 30% HAS TO BE ALLOWED. 36. THE NEXT ISSUE RELATES TO DISALLOWANCE OF PRIOR PERIOD EXPENDITURE OF RS. 5,27,339/- AS PER THE DETAILS GIVEN AT PAGE 4 OF PAPER BOOK VOLUME V, WHICH HAS BEEN ADDED BACK TO THE INCOME OF THE ASSESSEE BY THE AO. 37. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER, WE FIND THAT AO HAS NOWHERE DOUBTED THE VERACITY OF THE EXPENSES THOUGH THE SAME PERTAINED TO PREVIOUS YEAR. AS POINTED OUT BY THE LD. COUNSEL THE LIABILITY HAS BEEN CRYSTALLISED DURING THE RELEVANT ASSESSMENT YEAR AND IT WAS NEVER CLAIMED IN PRECEDING ASSESSMENT YEAR. HE ALSO DREW OUR ATTENTION TO THE RELEVANT BILLS GIVEN AT PAGE 4 OF THE ADDITIONAL PAPER BOOK V TO SHOW THAT MOST OF THE BILLS RELATED TO CONSULTANCY CHARGES AND TRAVELLING EXPENSES OF THE DIRECTORS WHICH WAS SUBMITTED AND RECEIVED BY THE ASSESSEE DURING THE YEAR AND THEREFORE, BASED ON THESE BILLS ASSESSEE HAS CLAIMED EXPENDITURE. ACCORDINGLY, WHEN BILLS HAVE BEEN RECEIVED DURING THE YEAR THEN WE DO NOT FIND ANY REASON AS TO WHY SUCH EXPENDITURE IS TO BE DISALLOWED AND HENCE SAME IS DELETED. 38. LASTLY, COMING TO THE DISALLOWANCE OF RS. 12,37,07,018/- MADE U/S 14A, THE FACTS IN BRIEF ARE THAT ASSESSEE HAS EARNED EXEMPT INCOME OF RS. 97,48,142/-. ASSESSEE IN THE COMPUTATION OF INCOME HAS SUO MOTO MADE DISALLOWANCE U/S 14A AT RS. 1,65,04,335/-, WHICH FAR EXCEEDED THE EXEMPT INCOME. LD. AO WITHOUT EXAMINING THE ACCOUNTS AND NATURE OF EXPENDITURE DEBITED AND RECORDING HIS SATISFACTION HAS MECHANICALLY PROCEEDED TO MAKE DISALLOWANCE U/S 8D FOR SUM OF RS. 12,37,07,018/-. NOW IN VIEW OF THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF JOINT INVESTMENT (P) LTD. VS CIT, REPORTED IN 372 ITR 694 AND CHEMINVEST VS. CIT, REPORTED IN 378 ITR 33, IT HAS BEEN WELL SETTLED THAT DISALLOWANCE U/S 14A CANNOT EXCEED THE EXEMPT INCOME, THEREFORE, NO DISALLOWANCE COULD HAVE BEEN MADE MORE THAN THE EXEMPT INCOME. SINCE ASSESSEE HAS ALREADY DISALLOWED MORE THAN THE EXEMPT INCOME, THEREFORE, NO FURTHER DISALLOWANCE CAN BE MADE AND SAME IS DIRECTED TO BE DELETED. IN THE RESULT THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE. 39. SINCE, GROUND NOS. 9, 9.1, 10 AND 10.1 HAVE NOT BEEN PRESSED, HENCE SAME ARE DISMISSED AS NOT PRESSED. 40. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED AND APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH FEBRUARY, 2019. SD/- SD/- (L.P. SAHU) (AMIT SHUKLA) (ACCOUNTANT MEMBER) JUDICIAL MEMBER DELHI, DATED 12 TH FEBRUARY, 2019 VEENA COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT BENCH, DELHI 6. GUARD FILE.