Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S Dlf Commercial Developers Ltd.,, ... on 1 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : B : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.1388/Del/2013
Assessment Year : 2008-09
DCIT, Vs. M/s DLF Commercial Developers
Circle-10(1), Ltd.,
New Delhi. 9th Floor, DLF Centre,
Sansad Marg,
New Delhi.
PAN: AABCD9619C
ITA No.960/Del/2013
Assessment Year : 2008-09
M/s DLF Commercial Vs. DCIT,
Developers Ltd., Circle-10(1),
9th Floor, DLF Centre, New Delhi.
Sansad Marg,
New Delhi.
PAN: AABCD9619C
(Appellant) (Respondent)
Assessee By : Shri R.S. Singhvi, CA
Department By : Ms Rachna Singh, CIT, DR
ITA Nos.1388 & 960/Del/2013
Date of Hearing : 28.02.2018
Date of Pronouncement : 01.03.2018
ORDER
PER R.S. SYAL, VP:
These two cross appeals - one by the assessee and the other by the Revenue - are directed against the order passed by the CIT(A) on 19.12.2012 in relation to the assessment year 2008-09.
2. The first ground of the Revenue's appeal and the first effective ground of the assessee's appeal is against disallowance u/s 14A of the Income-tax Act, 1961 (hereinafter also called `the Act').
3. Briefly stated, the facts of these grounds are that the assessee is engaged in various activities including real estate development, leasing of constructed properties, running and maintenance of golf course and power generation etc. Tax free dividend income of Rs.97,211/- was shown along with exempt profit from partnership firm amounting to Rs.51,35,895/-. The assessee was called upon to explain the reasons for not offering any disallowance u/s 14A. It was submitted on behalf of the assessee that the investments were made out of own funds and, as such, there could be no 2 ITA Nos.1388 & 960/Del/2013 disallowance of interest. The Assessing Officer did not agree with the assessee's contention and invoked the provisions of Rule 8D after recording satisfaction that: "The contention of the assessee that no expense was incurred in earning tax free income was not substantiated by any factual evidence in this regard." Applying the provisions of Rule 8D, the Assessing Officer computed disallowance u/s 14A to the tune of Rs.15,77,74,000/-. The ld. CIT(A) observed on page 14 of the impugned order that investment in shares etc. stood at Rs.46,033.76 lac as against share capital and reserve and surplus to the tune of Rs.1,64,967.58 lac. Applying certain formula, he computed disallowance of interest under Rule 8D(2)(ii) at Rs.6.33 crore. After adding 1/2% of the average value of investments under Rule 8D(2)(iii) at Rs.225.47 lac, the ld. CIT(A) computed confirmation of addition u/s 14A at Rs.858.47 lac. Both the sides are aggrieved in respect of their respective stands.
4. We have heard both the sides and perused the relevant material on record. In so far as the disallowance of interest under Rule 8D(2)(ii) is concerned, we find that the investments, yielding exempt income, are only to the tune of Rs.4603.76 lac as against share capital and reserve and 3 ITA Nos.1388 & 960/Del/2013 surplus etc. amounting to Rs.1,64,967.58 lac. Thus, it is evident that the amount of share capital along with reserve and surplus is far in excess of investment in shares etc. yielding exempt income.
5. Section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non-business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders' funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings could be disallowed on the basis that the investments were 4 ITA Nos.1388 & 960/Del/2013 made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs.213 crore was invested by the assessee out of its own funds and Rs.1.74 crore out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs.2.40 crore. The assessee argued that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs.418.04 crore and the assessee had also raised capital of Rs.7.90 crore, apart from receiving interest free deposit of Rs.10.03 crore. The assessee submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee's submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders' funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest 5 ITA Nos.1388 & 960/Del/2013 was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient funds of its own for making investment without using the interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon'ble High Court, it was contended by the Department that the shareholders' funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon'ble High Court observed that : "In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders' fund to the tune of over Rs.172 crore was utilized for the purpose of fixed assets in terms of the balance-sheet as on March 31, 1999, is fallacious." In upholding the order of the Tribunal, the Hon'ble High Court held that: "If there be interest free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available". Thereafter, the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon'ble 6 ITA Nos.1388 & 960/Del/2013 Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that: "The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment". Consequently the interest was held to be deductible in full.
6. From the above judgment, it is manifest that there can be no presumption that the shareholders' fund of a company was utilized for purchase of fixed assets. If an assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest free funds at its disposal. Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loans with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. 7
ITA Nos.1388 & 960/Del/2013
7. Applying the above proposition in the context of section 14A, the Hon'ble Karnataka High Court in CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. This view has been taken by following the judgment of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is no more res integra in view of the recent judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), in which it has been held that when interest free funds in the form of share capital and reserves are more than investments, then no disallowance of interest can be made u/s 14A.
8. Adverting to the facts of the instant case, we find that the assessee's share capital along with reserve and surplus is many times higher than the amount invested in shares etc. yielding exempt income. Applying the ratio of the above referred decisions, we are of the considered opinion that no disallowance can be sustained under Rule 8D(2)(ii).
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ITA Nos.1388 & 960/Del/2013
9. Turning to clause (iii) of Rule 8D(2), it is noted that the Assessing Officer as well as the CIT(A) computed/confirmed disallowance u/s 8D(2)(iii) @ ½% of the average value of investments. The Hon'ble jurisdictional High Court in ACB India Ltd. vs. ACIT (2015) 374 ITR 108 (Del) has held that value of tax exempt investments should be considered instead of total investments for adopting average value of investments of income which is not part of the total income. The effect of this decision is that while making disallowance under Rule 8D(2)(iii), it is only the average of those investments which have yielded exempt income are to be taken into consideration and not the average of all investments. Adverting to the facts of the instant case, it is seen that the disallowance has been made in ignorance of the above mandate of law as approved by the Hon'ble Delhi High Court. We, therefore, set aside the impugned order and direct the computation of correct amount of disallowance under clause (iii) of Rule 8D(2) accordingly.
10. It is made clear that if the disallowance under clause (iii) of Rule 8D(2) exceeds the amount of exempt income, then, the disallowance should 9 ITA Nos.1388 & 960/Del/2013 be restricted to such income alone. If, however, this exercise results in some further relief to the assessee, the same should be granted.
11. The next issue raised in the Revenue's appeal is against the deletion of addition of Rs.1,28,58,591/- made by the Assessing Officer on account of non-refundable membership fee. The assessee received Rs.9,43,17,471/- as non-refundable membership fees. However, only a sum of Rs.8,14,58,880/- was recognized as income. The Assessing Officer made addition for the remaining amount of Rs.1,28,58,591/- by relying on the view taken by him for the assessment years 2006-07 and 2007-08 in assessee's own case. The ld. CIT(A) deleted the addition by relying on the orders passed by the Tribunal in the assessee's own case for the assessment years 2006-07 and 2007-08. The Revenue is aggrieved against such deletion of addition.
12. After hearing the rival submissions and perusing the relevant material on record, it is observed that the ld. CIT(A) has deleted the addition by relying on the orders passed by the Tribunal in the assessee's own case for the assessment year 2006-07 and 2007-08. The ld. AR submitted that the 10 ITA Nos.1388 & 960/Del/2013 order passed by the Tribunal for the assessment year 2006-07 has been upheld by the Hon'ble Delhi High Court and, further, the SLP filed by the Revenue has been dismissed. This position has not been controverted by the ld. DR. In view of the fact that the ld. CIT(A) deleted the addition by relying on the Tribunal order, respectfully following the precedent, we uphold his decision on this issue. This ground is not allowed.
13. Ground No.3 is against the deletion of disallowance of Rs.28,36,740/- made by the Assessing Officer on account of disallowance of brokerage expenses. The Assessing Officer noticed that the assessee was recognizing income on the basis of `Percentage of completion method'. Invoking the matching principle, the Assessing Officer held that the brokerage paid was also to be correlated with the revenue declared from various projects. This resulted into an addition of Rs.28,36,740/-. The ld. CIT(A) deleted the addition.
14. Having heard the rival submissions and perused the relevant material on record, it is noticed that similar issue was raised in DLF Ltd.'s case, which is assessee's sister concern. Vide order dated 11.03.2016, whose 11 ITA Nos.1388 & 960/Del/2013 copy has been placed on record, the Tribunal in ITA No.2677 & 3061/Del/201 has deleted such addition by relying on the decision of the Hon'ble Delhi High Court in the case of DLF Universal Ltd. Since the facts and circumstances of the instant ground are mutatis mutandis similar to those considered and decided by the Tribunal in the case of the assessee's sister concern for the assessment year 2006-07, we hold that the addition has been rightly deleted. The impugned order is countenanced to this extent.
15. The next ground of the Revenue's appeal and the only other ground which survives in the assessee's appeal is against addition on account of brokerage/demat charges. The facts apropos this issue are that the assessee paid brokerage of Rs.5.45 lac to IL & FS Ltd. and Rs.80,030/- to M/s Zuari Investments Ltd. towards transaction charges for investment transactions. The Assessing Officer held that these two amounts totaling to Rs.6,25,299/- were not deductible as these related to sale and purchase of shares which was not the assessee's business. The ld. CIT(A) held that brokerage of Rs.5.45 lac was paid for selling the investments and, hence, the same should be reduced from the sale proceeds in terms of section 48(1) of the 12 ITA Nos.1388 & 960/Del/2013 Act. As regards transaction/demat charges of Rs.80,030/- paid to Zuari Investments Ltd., the ld. CIT(A) held that the same could not be allowed as deduction as it was for investment activity in shares. Both the sides are in appeal on their respective stands.
16. We have heard both the sides and perused the relevant material on record. It is palpable that section 48(1) of the Act provides for deducting expenditure incurred wholly and exclusively in connection with the transfer of shares from the full value of consideration received in the computation of income under the head 'Capital gains.' Since the brokerage of Rs.5.45 lac was paid in connection with shares, the same has, inter alia, to be allowed as deduction in the computation of capital gain in terms of section 48(1) of the Act. As regards the payment of demand charges of Rs.80,030/- we find that the same cannot be allowed as deduction in the computation of business income as the investment activity in shares carried on by the assessee is not of the trading nature. We, therefore, uphold the impugned order on this score. Both the grounds stand dismissed. 13
ITA Nos.1388 & 960/Del/2013
17. Ground No.5 of the Revenue's appeal is against the deletion of addition of Rs.10 lac made by the Assessing Officer on account of disallowance of expenditure on project not commenced. The assessee paid a sum of Rs.10 lac to IL & FS for pre-feasibility study for integrated Indo- Japanese Enclave Project which was claimed as deduction. The Assessing Officer held that such amount was to be treated as cost of project and, hence, capitalized. He, therefore, made disallowance of Rs.10 lac which the ld. CIT(A) deleted in the first appeal.
18. Having heard both the sides and perused the relevant material on record, we find that similar issue came up for consideration before the Tribunal in the afore-noted case of DLF Ltd. The Tribunal, after considering all the relevant arguments, has confirmed the deletion of addition in the first appeal. Relevant discussion has been made in paras 212 to 216 of the Tribunal order. Since the facts and circumstances of the instant ground are similar to those already considered and decided by the Tribunal, respectfully following the precedent, we uphold the impugned order on this score. This ground fails.
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ITA Nos.1388 & 960/Del/2013
19. Ground No.6 is against the deletion of addition of Rs.101,15,115/- made by the Assessing Officer on account of disallowance of excessive brokerage. The assessee paid brokerage of Rs.34,64,892/- to M/s Gaurav Associates for facilitating renting of premises. A further sum of Rs.75,60,312/- was paid to DTZ International Property Advisors Pvt. Ltd., for facilitating renting of premises. The Assessing Officer observed that the assessee entered into marketing and lease management service agreement with DLF Estates Pvt. Ltd., to provide marketing services and in lieu of that the assessee was entitled to receive Rs.10 per sq. ft. per year as management and consultancy charges. Considering the fact that the assessee paid brokerage @ Rs.75 per sq. ft. to M/s Gaurav Associates and Rs.76/Rs.80 per sq. ft. to M/s DTZ International Property Advisors Pvt. Ltd., the AO opined that deduction should be allowed in this year at the rate of Rs.10 per sq. ft. per annum, being the amount received as income. The balance amount was held to be allowable in the succeeding years when the income would be shown by the assessee company. This led to the making of an addition of Rs.1,01,15,115/-. The ld. CIT(A) deleted the addition.
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ITA Nos.1388 & 960/Del/2013
20. Having heard both the sides and perused relevant material on record, it is observed that the Assessing Officer has not doubted the genuineness of brokerage paid to Gaurav Associates and M/s DTZ International Property Advisors Ltd. His point of view is that the deduction on account of brokerage should be allowed only to the extent of income earned in this year and the remaining amount of brokerage should be adjusted against the income in succeeding years. We are unable to appreciate this stand point of the Assessing Officer. Obviously, when an expenditure has been incurred on account of brokerage for letting out of property, the same has to be allowed as deduction in the year of incurring/payment itself. It is not permissible to allow expense on account of brokerage to the extent of income earned during the year and then carry forward such unabsorbed expenditure to the succeeding years for set off against the future income. We, therefore, approve the view taken by the ld. CIT(A) on this score. This ground is not allowed.
21. The last ground of the Revenue's appeal is against the deletion of addition of Rs.10,99,46,632/- made by the Assessing Officer on account of partial disallowance of deduction u/s 80IAB of the Act. 16
ITA Nos.1388 & 960/Del/2013
22. Briefly stated, the facts of this ground are that the assessee claimed deduction of Rs.584.93 crore u/s 80IAB in respect of profit from Hyderabad SEZ Project. It was observed that the following expenses were debited to the Profit & Loss Account which were not fully/partly allocated in the computation of profits of Hyderabad SEZ Project:-
a. Establishment charges Rs.2712.36. lacs b. Finance charges Rs.8575.81 lacs c. Other expenses Rs.4242.01 lacs d. Depreciation Rs.753.80 lacs
23. As regards the Establishment expenses, the Assessing Officer found that there was Establishment cost of Rs.4.92 crore in respect of senior management. The same, in his opinion, was required to be allocated to the SEZ activity in the ratio of turnover of this activity to other activities. Finance charges of Rs.8575.81 lac were allocated by the assessee exclusively to non-SEZ units. Similarly, Depreciation of Rs.753.80 lacs was also claimed as deduction in respect of non-SEZ units. Only Rs.55.18 lac out of `Other expenses' of Rs.4242.01 lac was allocated to SEZ project 17 ITA Nos.1388 & 960/Del/2013 and Rs.4186.83 lac to non-SEZ activities. Applying the ratio of turnover of SEZ activity vis-à-vis other activities as 65/35, the Assessing Officer re- allocated the expenses which resulted into reduction in the amount of deduction u/s 80IAB to Rs.573.95 crore from the originally computed by the assessee at Rs.584.93 crore. The ld. CIT(A) deleted the addition by observing that the assessee had given details of head-wise expenses incurred by the SEZ and non-SEZ activities and the same was required to be accepted. That is how the disallowance of deduction of Rs.10.99 crore was deleted. The Revenue is aggrieved against such deletion.
24. We have heard both the sides and perused the relevant material on record. It can be seen from the facts narrated above that the assessee allocated major portion of the above referred expenses to non-SEZ units, which led to the increase in the amount of profit from the SEZ unit. If certain common expenses are incurred, these are required to be allocated to both SEZ and non-SEZ units on some rational basis. The ld. CIT(A) has deleted the addition by observing that the assessee gave details of head- wise expenses incurred on SEZ and non-SEZ units which could not be brushed aside. In our considered opinion, when common expenses are 18 ITA Nos.1388 & 960/Del/2013 incurred, a reasonable proportion allocable to SEZ unit is required to be debited to the Profit & Loss Account of such eligible SEZ unit, so that proper amount of profits relatable to the SEZ units and the resultant deduction could be computed. In the given circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is restored to the file of Assessing Officer for deciding this issue afresh as per law, after allowing a reasonable opportunity of being heard to the assessee. We order accordingly.
25. In the result, the appeal of the Revenue is partly allowed for statistical purposes and the appeal of the assessee is partly allowed.
The order pronounced in the open court on 01.03.2018.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 01st March, 2018.
dk
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ITA Nos.1388 & 960/Del/2013
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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