Ita/373/2014 Of The Commissioner Of Income Tax v. M/S Brigade Enterprises Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 22 DAY OF OCTOBER 2020.PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADLT.A. NOCO.373 OF 201 BETWEEN: 1.|THE COMMISSIONER OF INCOME TAX C.R.BUILDING QUEENS ROAD BANGALORE. 2 |THE DEPUTY COMMISSIONER OF INCOME-TAX.CIRCLE - 11(2)CIRCLE - 11(2) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE. .., APPELLANTS~ (BY Mr.K.V.ARAVIND, ADV.,) AND* M/S. BRIGADE ENTERPRISES LTD.29 & 3OTH FLOORS,WORLD TRADE CENTREBRIGADE GATEWAY,CAMPUS 26/1.DR,.RAJIKUMAR ROAMALLESHWARAM|BANGALORE - 560 0055. (BY Mr.CHYTHANYA K.K., ADV.) ~. RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 21.03.2014 PASSED IN ITA.NO.236/BANG/2013 FOR THE ASSESSMENT YEAR 2009-2010,PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER.PASSSED BY THE ITAT, BANGALORE IN ITA NO.236/BANG/2013—DATED 21.03.2014 CONFIRMING THE ORDER OF THE PASSED BY.THE DEPUTY COMMISSIIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 11°(2), BANGALORE. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matter|of the appeal pertains to the Assessment year 2009-10.The appeal was admitted by a bench of this Court videorder dated 06.04.2015 on the following substantial|questions of law:| (i) Whether the tribunal ts correct in|deleting the disallowance of Rs.15,27,310/-|underRule 8D(2)(II) whilemakingthedisallowance under Section 14A of the Act|without appreciating that, when the interest. expenses|incurredcannotbe.directly attributed to any particular income or receipt, Drovisionofrule8D(2)(I1)automaticallybecomes applicable? (ii) Whether the tribunal ts correct indeletingthedisallowanceUnderSection36(1)(1i1) holding that the advances to its.subsidiaries were In the normel course Of|business, for.businessDUFDOSeS withoutappreciating that as the funas from the.overdraft account were utilized to meke|interest - free advances for acquiring lands,property advances? (iit) Whether the tribunal was right in)holding that the assessee is eligible for|deductionUnderSectionJOB.withoutappreciating that the assessee have not.satisfied the requirements as laid down in.clause (a) to (d) of Section 80IB(10)? (iv) Whether the tribunal was correct in|allowing|proportionate|deductionUnder|Section 80IB(10) in respect of the individualunits measuring 1500 sq.ft. or less without appreciating that the decision was contrary tothe provision of Section 80IB(10) as the.section contemplates fulfillment of conaition|of area of 1500 sq.ft. or less in respect of allunits in a project are not in respect of|individual units under the same project? (v) The tribunal committed an error in|holding that the Assessing Officer has notsatisfied himself in invoking the provisions ofSection 14A of the Act, wnen the Assessing|Officer as clearly mentioned in his order that.the company had availed overdraft facility in.earlier years which continued in the current.year also and therefore had correctly made.disallowance under Section 14A? 2 |Facts leading to filing of this appeal brieflystated are that the assessee is engaged in the business.of real estate development. The assessee filed theOriginal return of income for Assessment Year 2009-10|on 30.09.2009. Thnereafter, the assessee filed a revised.return on 09.10.2009, in which income was declared as)Rs.46,49,19,837/-.afterclaiming|deduction|under. (v) The tribunal committed an error in|holding that the Assessing Officer has notsatisfied himself in invoking the provisions ofSection 14A of the Act, wnen the Assessing|Officer as clearly mentioned in his order that.the company had availed overdraft facility in.earlier years which continued in the current.year also and therefore had correctly made.disallowance under Section 14A? 2 |Facts leading to filing of this appeal brieflystated are that the assessee is engaged in the business.of real estate development. The assessee filed theOriginal return of income for Assessment Year 2009-10|on 30.09.2009. Thnereafter, the assessee filed a revised.return on 09.10.2009, in which income was declared as)Rs.46,49,19,837/-.afterclaiming|deduction|under. SectionS8OIB(10)OF theAct CO theextentofRs.25,08,21,669/- in respect of profits of two projectsviz., Brigade Gateway and Brigade Metropolis. The caseof the assessee was taken up for scrutiny andassessment was completed under Section 143(3) of theAct by an order dated 28.12.2011 by which income of.the assessee was determined at Rs./3,61,05,941/- asagainst the income of Rs.46,49,19,837/- declared by the.assessee. The Assessing Officer made disallowance ofthe claims of the assessee under Section 80IB(10), 14A,36(1)(iii) and claim towards bad debts, for an amount ofRs.25,08,21,669/-,.Rs.1,25,27,2/2/-,.Rs. /6,66,638/-and Rs.1,/0,525/- respectively. 3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 14.11.2012 allowed the claim of the.assessee for deduction under Section 80IB(10) of theAct and disallowance of interest under Section 36(1)(iii).for an amount of Rs./6,16,638/- was also deleted. However, the interest disallowed under Section14A read|withRule.8DWaSsustainedTO.theextent.ofRs.1,09,99,962/-as|perSection14AreadwithRule8D(2)(iii) and interest disallowed as per Section 41A.read with Rule 8D(2)(ii) to the extent of Rs.15,27,310/-.was’ deleted. The disallowance of bad debts was/sustained to the extent of Rs./70,525/- and the relief ofRs.1,00,000/- was granted to the assessee. Thus, theappeal preferred by the assessee was partly allowed. 4Being aggrieved, the revenue filed an appealbefore the Income Tax Appellate Tribunal (hereinafterreferred to as the tribunal’ for short), whereas theassessee filed cross objections. The tribunal by an order|dated 21.03.7014 inter alia held that there Is no'material on record to substantiate that overdraft account.was utilized for making tax free investments and the.investment proceeds are from public issue of shares.Therefore, it cannot be held that funds from overdraftaccount from which interest has been paid has been. invested in mutual funds which yields income which is.exempt from tax. Thus, deletion of disallowance under.Section 14A read with Rule 8D(2)(ii) of the Rules to thetune of Rs.15,27,310/- was upheld. The disallowance of.interest expenditure under Section 36(1)(ilil) was madeon the ground that advances and deposits have been.made from the bank overdraft facilities and the.advances and deposits were non business advances and.capital advances. Tnus, it was neld that disallowance ofinterest amounting to Rs./6,638/- was rightly deleted bythe Commissioner of Income Tax (Appeals). Accordingly, the appeal preferred by the revenue was dismissed and.the cross objections filed by the assessee were partly|allowed. In the aforesaid factual bDackground, tnerevenue Nas filed this appeal. 5.|Learned counsel for the revenue submittedthat the tribunal grossly erred in holding that theAssessing Officer did not record satisfaction with regard|to incorrectness of the claim of the assessee that tax| 5.|Learned counsel for the revenue submittedthat the tribunal grossly erred in holding that theAssessing Officer did not record satisfaction with regard|to incorrectness of the claim of the assessee that tax| free investments were not out of borrowed funds. Evenotherwise, the tribunal should have remanded the.aforesaid issue to the Assessing Officer aS was done in.the case of cross objection filed by the assessee. It is further submitted that in similar fact situation, thematter was remitted by the Bombay High Court. InSupport of aforesaid submission, reliance has been.placed on decision of the Bombay High Court in 320 ITR.81. It is also urged that the tribunal ought to haveappreciated that the burden is on the assessee to.establisn that interest bearing funds were not used in.tax free investments and the tribunal committed an-error in shifting the burden on the Assessing Officer to establisn tnat| out of interest Dorrowing funds. It is also.pointed out that the tribunal has taken a contrary standwith regard to requirement of recording satisfaction. 6.|It is also argued that the assessee has notestablisned that interest Dearing / overdraft funds were. not utilized for advances to subsidiaries and the interest.of commercial expediency has not been proved by the.assessee. It is also contended that the assessee has not|established the fact that subsidiary has used the funds.provided by the assessee for business purposes. It isalso contended that the tribunal ought to haveappreciated that the advances made to subsidiaries was.investment in capital field and the interest on theoverdraft facility was used to fund the needs ofsubsidiaries to be capitalized. In support of aforesaidsubmissions, rellance has also Deen placed on decision.of the Supreme Court in.'S_A.BUILDERS LTD. VS,COMMISSIONER OF INCOME TAX (APPEALS) &ANR., (2007) Z88 ITR 1 (SC). 7On the other hand, learned counsel for theassessee submitted that substantial question of law No.3.and 4 nave already been against the revenue in the caseof the assessee by this court vide orders dated22.09.2020 passed in Commissioner of Income Tax vs. Brigade Enterprises Ltd., in I.T.A.Nos.54/2013 and|55/2013. It is further submitted that where investments|are made out of common funds and non interest bearing.fundsexceeds|theinterest|bearingfunds,No|disallowance under Section 14A of the Act can be made.It is also argued that disallowance under Section 14A.cannot be made by the Assessing Officer in the absence|of recording the satisfaction and the Commissioner of.Income Tax (Appeals) as well as the tridunal naving—found that assessee had sufficient funds as well as'covering loans and advances made to its Directors andsister concerns rightly allowed deduction of interest on loan. It is also pointed out that the Assessing Officer Nasfailed to establish the nexus of interest bearing fundswith interest free advances. In support of aforesaidsubmissions, reliance has been placed on decisions in."GOLDMAN SACHS SERVICES 409 ITR 268 KAR,"MAXOPP INVESTMENT LTD. VS. CIT’, (2018) 402ITR 640 and‘CIT VS. BRINDAVAN BEVERAGES (P.) LTD (2017) 393 ITR 261 (KARNTAKA). 8.|We have considered the SUDMISSIONS made.by learned counsel for the parties and have perused therecord. For the reasons assigned by us in the judgment|dated 22.09.2020 in Commissioner of Income Tax. Vs.|M/s|BrigadeEnterprisesInI.T.A.No.54/2013and55/2013, the substantial question of law Nos.3 and 4.are answered against the revenue and in favour of theassessee. Now we may deal with the substantialquestion of law No.5. The Assessing Officer in his order|dated 28.12.2011 while dealing with the claim of theassessee under Section 14A of the Act after recording|the submission made by the assessee in para 12 hasrecorded its satisfaction in para 13, which reads as.under:| The submissions of the assessee I[Sconcerned and it Is seen that the disallowance|under Section 14A is mandatory and has to.be worked out with respect to the tax exempt|investments. The tax exempt investments| The submissions of the assessee I[Sconcerned and it Is seen that the disallowance|under Section 14A is mandatory and has to.be worked out with respect to the tax exempt|investments. The tax exempt investments| have been held to be inclusive of [Investmentsmade in subsidiary companies also. This hasbeen upneid in tne case of M/s Maxopp.[nvestments Ltd. Vs.Cit(TS-668-HC-2011(HC)/ by the Hon'ble Delhi High Courtfollowing the decision of Hon'ble Bombay High courting the case of M/s Godre] & Boyce.Manufacturing Company Ltd. oiThe tribunal has taken note of the claim.made by the assessee before the Assessing Officer tnatno expenditure Nad been incurred to earn exemptincome. However, it has been held that the Assessing|Officer has not rendered any finding with regard toincorrectness of the claim of the assessee either with.regard to its accounts or with regard to the fact that he|is not satisfied with the claim of the assessee in respect.of such expenditure in relation to exempt income as is.required in accordance with Section 14A(2) of the Actfor making a disallowance under Rule 8D. Thus, from.perusal of the relevant extract of the order passed bythe Assessing Officer, the tribunal has rightly concluded that the Assessing Officer has not recorded the|satisfaction with regard to the claim of the assessee fordisallowance under Section 14A read with Rule 8D(2) ofthe Act. For the aforementioned reasons, the substantialquestion of law No.5 is also answered against therevenue and in favour of the assessee. 10. Before dealing with first substantial questionof law, it is apposite to take note of Section 14A(2) and.Rule 8D(2) as it existed prior to its substitution byincome tax 14th amendment Rules, 2016 with effect.from 02.06.2016, which will apply to the facts of thecase as the Assessment Year is 2009-10, which read as.under:| 14A.(2) The Assessing Officer shall|determine the amount of expenditure incurred|in relation to such Income which does not§form part of the total income under this Act in|accordance with such method as may be.prescribed, if the Assessing Officer, having|regard to the accounts of the assessee, is not| Satisfied with the correctness of the claim of|the assessee in respect of such expenditure in|relation to income which does not form part.of the total Income under this Act. (3) The provisions of sub-section (2)|snall also apply in relation to a case where an.assessee claims that no expenditure has been incurred by him in relation to income which|does not form part of the total income under|this Act : Provided that nothing contained in this|section shall empower the Assessing Officer|either to reassess under section 14/7 or passal)orderenhancing.theassessmentOrreducing a refund already made or otherwise|increasingtheliability.oftheaSSCSSCECunder section 154, for any assessment year.beginning on or before the ist day of April, POO]. Rule 8D(2) Tne expenditure in relation|to income whicn does not form part of the.total income shall be the aggregate of|following amounts, namely:-_ (i) the amount of expenditure directly|relating to income wnicn does not form part|of the total income; (ii) in a case where the assessee has|incurred expenaiture by way of interest|during the Previous Year which is_ notdirectlyattributableTo dhhyparticular|income or receipt, an amount computedinaccordance with the _ following’ formulnamely:-- Ax B/C Where A = amount of expenditure by way|of interest other than theamount of interest [Includedin clause (f) incurred during|the Previous Year;of interest other than theamount of interest [Includedin clause (f) incurred during|the Previous Year; B = the average of value ofinvestment, Income.fromwhich does not or shell! notform.partofthetotal!income, as appearing in the.balanceSheet|Of|theassessee, on the first day.investment, Income.fromwhich does not or shell! notform.partofthetotal!income, as appearing in the.balanceSheet|Of|theassessee, on the first day. and the last day of the.Previous Year; C = tne average of total assets as Ax B/C Where A = amount of expenditure by way|of interest other than theamount of interest [Includedin clause (f) incurred during|the Previous Year;of interest other than theamount of interest [Includedin clause (f) incurred during|the Previous Year; B = the average of value ofinvestment, Income.fromwhich does not or shell! notform.partofthetotal!income, as appearing in the.balanceSheet|Of|theassessee, on the first day.investment, Income.fromwhich does not or shell! notform.partofthetotal!income, as appearing in the.balanceSheet|Of|theassessee, on the first day. and the last day of the.Previous Year; C = tne average of total assets as appearing in the’ balancesheet of the assessee, on|the first day and the last day of the Previous Yeer. (iii) an amount equal to one-halfpercent of the average of the value ofinvestment, income from which does not or|Shall not form part of the total income, as|appearing in the balance sheet of theassessee, on the first day and the last day|of the Previous Yeer. 11. The|‘CIT VS. RELIANCE UTILITIES AND| POWER LTD.', 313 ITR 340 (Bom),the Bombay High|Court nas neld tnat wnere interest free funds exceed tne|value of investments, it can safely be inferred thatinvestments nave peen made out of interest free funds.and no disallowance under Section 14A towards anyinterest expenditure can be made. Similar view was taken in CIT VS. HDFC BANK LTD., 366 ITR 505 (Bom).The aforesaid decisions were followed by a bench of this.court In!"PRINCIPAL COMMISSINOER OF INCOME|TAXANDANOTHERVS,GOLDMENSACHSSERVICES P. LTD.', 409 ITR 268 (KARN).In the light.of the aforesaid legal position, we may advert to thefindings recorded by the Commissioner of Income Tax|(Appeals). In para 4.5, the Commissioner of Income Tax.(Appeals) nas neild that there is no material on record toshow that overdraft amount has directly been used for.tax exempt investments. It has also noted that in fact,taxfree.Investmentshave|ComedownCO Rs.34,78,31,000/-—as|On|31.03.7009|from.Rs.405,21,54,000/- as on 31.03.2008. On perusal ofthe balance sheet the finding has been recorded thatassessee has received an amount of Rs.146.52 Crores|as advances from customers, which are interest free and.the reserves and surpluses are to the tune of Rs.882,67.Crores. Thus, it has been held that all the aforesaid amounts are interest free funds and are sufficient to|make tax free investments and therefore, the finding ofthe Assessing Officer that overdraft facility was directly|used for making tax exempt investments have been.reversed. The tribunal has affirmed the aforesaid findingin para 8.4.3 of its order. Thus, concurrent findings offact have been recorded on the aforesaid issue, which.could not be demonstrated to be perverse. Therefore,no interference is called witn tne aforesaid concurrent.findings of fact in this appeal under Section 260A of the|Act. [SEE: SYEDA RAHIMUNNISA VS. MALAN BI BYL.RS. AND ORS. (2016)10 SCC 315and|PRINCIPALCOMMISSIONER OF INCOME TAX, BANGALORE &ORS. VS. SOFTBRANDS INDIA P. LTD., (2018) 406ITR 513|. 12. Thus, the first substantial question of law is.also answered against the revenue and in favour of theaSSe@SSAEC 12. Thus, the first substantial question of law is.also answered against the revenue and in favour of theaSSe@SSAEC 13. This takes us to the second substantialquestion of law. The Supreme Court in MUNJAL SALES)Corpn.VS.COMMISSIONER.OF|INCOME-TAX,LUDHIANA, has held that where the assessee hadsufficient funds and has given loan to sister concern outof its own funds, the assessee is entitled to deduction ofinterest on loan. Similar view has been taken by this.court in BRINDAVAN BEVERAGES PVT. LTD. Supra. Tne.Commissioner of Income Tax (Appeals) in para 5.6 has.held that the subsidiaries of the assessee are specialpurpose vehicle companies and as the assessee is.involved in the real estate business, the advances were|paid in the normal course of business. The assessee had.to pay advances to the land owner for the purposes ofenteringINtOJointDevelopment|Agreement.for.development of real estate projects, therefore, the|advances are DuSINeSS advances and cannot be treated|as non business or capital advances. The tribunal in para.10.5.1 has held that reserves and surplus earned by| assessee company is approximately to the extent ofRs.994.92 Crores as against total advances and deposits| of Rs.248.24 Crores. Thus, the tribunal has found thatthe assessee's own fund are far In excess of advances|and deposits made during the year and has held thatCommissioner of Income Tax (Appeals) has_ rightlydeleted the disallowance of interest to the extent of Rs./6,66,638/-. The aforesaid concurrent findings offact are based on meticulous appreciation of evidenceon record and by no stretch of imagination can be Said|to be perverse. In view of preceding analysis, the second|substantial question of law is also answered in favour of.the assessee and against the revenue. 1����������������������������������������������������������������������������������������������� ������������ ��� �����������