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Rns Infrastructure Ltd. v. Deputy Commissioner Of Income Tax, Central Circle-2(3) Bengaluru .

Income Tax Appellate Tribunal

Sep 8, 2021

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Structured Summary of Tribunal Opinion (Assessment Year 2014-15)

Factual and Procedural Background

This matter relates to appeals against the order dated 16.11.2017 passed by the learned CIT(A)-11, Bangalore concerning assessment year 2014-15. The assessee, engaged in civil contract works, faced several disallowances/additions in the assessment order passed by the Assessing Officer (AO). The AO made the following principal disallowances/additions:

Interest paid to NBFCs disallowed under section 40(a)(ia) — Rs. 41,47,301
Ad hoc disallowance of wages — Rs. 5,23,79,379 (10% of wage expenditure)
Disallowance under section 14A (Rule 8D) — Rs. 2,29,39,153
Disallowance of interest relating to an interest-free advance given (tied to purchase of land) — Rs. 2,14,35,676
Addition under section 56(viia) — Rs. 26,58,789

The learned CIT(A) confirmed some disallowances (including the section 40(a)(ia) and section 56(viia) items), deleted others (wages and interest-relating-to-advance issue), and gave partial relief on the section 14A disallowance. Both the assessee and the revenue filed cross-appeals to the Tribunal challenging various parts of the CIT(A)'s order.

Legal Issues Presented

Whether interest payments made to various Non-Banking Financial Companies (NBFCs) without deduction of tax at source can be disallowed under section 40(a)(ia) where the assessee fails to demonstrate that the payees have included such interest in their taxable income (and whether additional evidence from the assessee can prompt fresh examination under the second proviso to section 40(a)(ia)).
Whether an ad hoc 10% disallowance of wage expenditure is permissible where many vouchers are self-made, and whether deletion is warranted where books of account were not rejected and similar expenses were allowed consistently in prior scrutiny assessments.
Whether disallowance under section 14A (and Rule 8D) can exceed the amount of exempt income (specifically exempt dividend income) received in the relevant year.
Whether interest expenditure attributable to loan/overdraft funds used in relation to an advance for purchase of land must be capitalised or disallowed under the proviso to section 36(1)(iii), and how to determine the period and quantum of any such disallowance.
Whether grounds relating to addition under section 56(viia) (grounds 4 to 6) are pressed by the assessee (the assessee elected not to press these grounds).

Arguments of the Parties

Assessee's Arguments

The assessee did not press grounds relating to the addition under section 56(viia) (grounds 4 to 6 were dismissed as not pressed).
With respect to the section 40(a)(ia) disallowance, the assessee produced a Chartered Accountant's certificate stating that M/s Tata Capital Financial Services Ltd. had offered the relevant interest income (Rs. 13,76,627) to tax, and requested that this additional evidence be admitted and the matter remitted to the AO for fresh examination under the second proviso to section 40(a)(ia).
On the wage disallowance, the assessee relied on earlier coordinate-bench Tribunal decisions in the assessee's own case (AY 2013-14, ITA Nos. 290 & 318/Bang/2018) and earlier (AY 2004-05, ITA Nos. 929 & 930/B/2009) that had deleted identical disallowances.
On the interest-relating-to-advance issue (proviso to section 36(1)(iii)), the assessee and its counsel supported the CIT(A)'s approach that compared "own funds available" and relied on the coordinate-bench decision in DCIT v. IDEB Projects Ltd. (ITA No. 1531/Bang/2012 dated 28-04-2017) to entertain a presumption of utilisation of own funds for interest-free advances in some circumstances.

Revenue's (Department's) Arguments

On the section 40(a)(ia) disallowance, the AO's view was that interest payments were made to various NBFCs without TDS being deducted and the assessee failed to prove that the payees included the interest in their taxable income; the CIT(A) had confirmed the disallowance for most payees.
On wages, the revenue contended that most of the wage vouchers were self-made and supported the AO's ad hoc 10% disallowance.
On the section 36(1)(iii) proviso issue, the revenue argued that the assessee was compelled to utilise overdraft facilities because it had diverted own funds to other business uses; therefore the AO was correct to treat interest as attributable to capital expenditure for the land-advance and to disallow interest under the proviso. The revenue submitted that the CIT(A) did not examine the necessary nexus between own funds and the advance and had incorrectly compared overall fund position, necessitating reversal of the CIT(A)'s deletion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd. (2018) (99 taxmann.com 283) (Delhi)	Used as a coordinate-bench authority in the assessee's own case supporting deletion of ad hoc wage disallowance where books not rejected and expenses allowed consistently.	The Tribunal followed the coordinate-bench decisions (including this one) to confirm deletion of the ad hoc 10% wage disallowance because the AO had given vague reasons and had not rejected the books of account.
Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd. (2018) (99 taxmann.com 84) (SC)	Referenced alongside other coordinate-bench decisions in support of deleting adhoc disallowances of wages where records were not rejected and prior acceptances existed.	Relied upon (as part of the body of precedents) to support the Tribunal's confirmation of the CIT(A)'s deletion of the wage disallowance.
Joint Investment Private Limited v. CIT, 372 ITR 694 (Delhi High Court)	Held that disallowance under section 14A should not exceed the amount of exempt income in that year.	The Tribunal applied this principle to uphold the CIT(A)'s restriction of the section 14A disallowance to the exempt dividend income (Rs. 11,600) received by the assessee in the year.
Future Corporate Resources Limited v. DCIT (ITA No. 4658/Mum/2015 dated 26.7.2017) (Mumbai Tribunal)	Expressed a view identical to the above Delhi High Court authority that disallowance under section 14A should be constrained by the amount of exempt income.	The Tribunal cited this decision as consistent authority supporting restriction of the Rule 8D/section 14A disallowance to the quantum of exempt income.
PCIT v. Caraf Builders & Construction (P) Ltd. (2019) (101 taxmann.com 167) (Delhi High Court)	Discussed the principle that upper disallowance under section 14A cannot exceed the exempt income of that year (quotation reproduced in the opinion).	The Tribunal relied on this authority among others to find no infirmity in the CIT(A)'s approach of restricting disallowance to exempt dividend income.
Pr. CIT v. McDonalds India (P.) Ltd. (ITA 725/2018 decided on 22nd October, 2018)	Cited for the proposition (as quoted in other authorities) that an upper disallowance under section 14A cannot exceed exempt income for that year.	Referred to as part of the jurisprudence limiting section 14A disallowances; used to support the Tribunal's conclusion accepting the CIT(A)'s restriction.
DCIT v. IDEB Projects Ltd. (ITA No. 1531/Bang/2012 dated 28-04-2017)	Coordinate-bench decision concerning interest-free advances to sister concerns, wherein a presumption of utilisation of own funds was entertained in appropriate circumstances.	The Tribunal noted this decision was relied upon by the assessee in support of the CIT(A)'s conclusion on own funds; however, the Tribunal still directed fresh consideration of the proviso to section 36(1)(iii) by the CIT(A) because the specific nexus and period of usage had not been examined.
Coordinate-bench decision in the assessee's own case (AY 2004-05, ITA Nos. 929 & 930/B/2009 dated 11.09.2009)	Earlier Tribunal decision in the assessee's own case deleting a similar adhoc wage disallowance, relied upon in subsequent years.	The Tribunal relied on the pattern of earlier decisions (including this one) to confirm deletion of the wage disallowance in the instant year.

Court's Reasoning and Analysis

The Tribunal dealt with each contested item sequentially, applying the facts of the assessment and the CIT(A)'s findings against relevant legal principles and precedents:

Section 40(a)(ia) — Interest paid to NBFCs:
AO's finding:

The AO disallowed interest expenditure of Rs. 41,47,301 because tax was not deducted at source on payments to various NBFCs and the assessee failed to demonstrate that the payees included the interest in their total income. The CIT(A) had confirmed the disallowance.

Tribunal's analysis and action:

The assessee produced a Chartered Accountant certificate only from M/s Tata Capital Ltd. showing receipt and taxation of interest amounting to Rs. 13,76,627. No certificates were produced from the other payees. On the available record the Tribunal confirmed disallowance in respect of payments to all NBFCs other than M/s Tata Capital Ltd. As regards Tata Capital, the Tribunal accepted the tendered additional evidence in principle and restored the matter to the file of the AO for fresh examination under the second proviso to section 40(a)(ia) in light of that evidence. The Tribunal thus modified the CIT(A)'s order narrowly: confirmation for other payees and remand for the Tata Capital portion.
Ad hoc wage disallowance (10%) — Rs. 5,23,79,379:
AO's finding:

The AO observed many wage vouchers were self-made and made an adhoc 10% disallowance. The CIT(A) deleted this disallowance.

Tribunal's analysis and action:

The Tribunal reviewed earlier coordinate-bench decisions in the assessee's own case and other cases (including R.G. Buildwell Engineers Ltd.) where similar ad hoc disallowances had been deleted for two principal reasons: (a) books of account were not rejected, and (b) the expenditures were consistently allowed in past scrutiny assessments. The Tribunal found that the AO's reasons in the instant year were vague and that the AO had not rejected the books of account. Following the coordinate-bench precedents and the CIT(A)'s findings, the Tribunal confirmed the deletion of the ad hoc wage disallowance.
Section 14A / Rule 8D disallowance — Rs. 2,29,39,153:
AO's finding:

The AO applied Rule 8D to compute a large disallowance. The CIT(A) restricted the disallowance to the amount of exempt dividend income for the year (Rs. 11,600) and deleted the remainder.

Tribunal's analysis and action:

The Tribunal relied on binding/leading authorities cited in the record (including Joint Investment Private Limited v. CIT (372 ITR 694) and PCIT v. Caraf Builders & Construction (2019)) and consistent Tribunal decisions (e.g., Future Corporate Resources Ltd.) holding that disallowance under section 14A should not exceed exempt income in the year. Applying this principle, the Tribunal found no infirmity in the CIT(A)'s restriction of the disallowance to Rs. 11,600.
Interest attributable to advance for purchase of land — proviso to section 36(1)(iii):
AO's finding:

The AO regarded the advance to M/s Naveen Hotel (Rs. 24.13 crores) as capital in nature and held that overdraft withdrawals financing the advance resulted in interest expenditure that must be capitalised/disallowed under the proviso to section 36(1)(iii), disallowing Rs. 2,14,35,676.

CIT(A)'s approach:

The CIT(A) deleted the disallowance on the basis that the assessee's own funds available were more than the advance amount (the CIT(A) compared opening and closing own funds positions).

Tribunal's analysis and action:

The Tribunal observed that the critical question is whether any portion of interest expenditure is attributable to capital expenditure incurred in respect of the land advance and whether the proviso to section 36(1)(iii) applies. The Tribunal found that the CIT(A) had not examined the necessary factual nexus (i.e., whether loan funds were in fact used for the advance) or the period of actual usage of loan funds. Although the assessee relied on IDEB Projects Ltd. (coordinate bench) to support a presumption of utilisation of own funds in certain contexts, the Tribunal concluded that the matter required fresh examination. It directed that the CIT(A) re-examine the applicability of the proviso to section 36(1)(iii) to the facts, determine any nexus and the period of attributable interest (if any), and take a decision in accordance with law after affording the assessee an opportunity to be heard. The Tribunal indicated that any disallowance, if found appropriate, should be restricted to the period of actual usage of loan funds.

Holding and Implications

Core Ruling: The Tribunal rendered a mixed outcome: the assessee's appeal was partly allowed and the revenue's appeal was treated as partly allowed.

Direct consequences and operative directions that flow from the decision (as recorded in the opinion):

The Tribunal confirmed the AO's disallowance under section 40(a)(ia) for payments to NBFCs other than M/s Tata Capital Ltd.
The Tribunal remanded the Tata Capital Ltd. portion (Rs. 13,76,627) to the AO for fresh examination in light of the Chartered Accountant's certificate tendered by the assessee, under the second proviso to section 40(a)(ia).
The Tribunal confirmed the deletion by the CIT(A) of the ad hoc 10% wage disallowance (Rs. 5,23,79,379), following coordinate-bench precedent and the absence of book-rejection or specific voucher defects identified by the AO.
The Tribunal upheld the CIT(A)'s restriction of the section 14A disallowance to the exempt dividend income received in the year (Rs. 11,600), applying the principle from authorities that disallowance under section 14A should not exceed exempt income.
The Tribunal set aside the CIT(A)'s deletion of the interest disallowance under the proviso to section 36(1)(iii) and remitted that issue to the CIT(A) for fresh consideration. The CIT(A) was directed to examine the nexus between loan funds/overdraft usage and the land advance, determine any attributable interest and its period, and decide in accordance with law after affording the assessee an opportunity to be heard. The Tribunal indicated any disallowance should be limited to the period of actual usage of loan funds, if disallowance is found appropriate.
No novel legal principle was formulated by the Tribunal in this opinion; the Tribunal applied existing coordinate-bench and High Court authorities to the facts and remitted issues for further factual/legal examination where necessary.

Final procedural outcome: The Tribunal pronounced the order in open court on 8 September 2021 and disposed the cross-appeals as indicated above.

Show all summary ...

B.R. Baskaran, A.M.:— These cross appeals are directed against the order dated 16.11.2017 passed by Ld CIT(A)-11, Bangalore and they relate to the assessment year 2014-15.

2. The assessee is engaged in the business of undertaking civil contract works. The assessing officer completed the assessment making following disallowances/additions:—

(a) Interest paid to NBFC u/s 40(a)(ia) - 41,47,301 (b) Disallowance of wages - 5,23,79.379 (c) Disallowance made u/s 14A - 2,29,39,153 (d) Disallowance of interest relating to Interest free advance given - 2,14,35,676 (e) Addition made u/s 56(viia) of the Act 26,58,789

3. The Ld CIT(A) confirmed the disallowance of item (a) and (e) above. He deleted the disallowance of item (b) and (d) above. He gave partial relief in respect of disallowance made under (c) above. Aggrieved, both the parties have filed appeals challenging the decision taken by Ld CIT(A) against each of them.

4. We shall take up the appeal filed by the assessee. The Ld A.R assessee submitted that the assessee is not pressing grounds relating to addition made u/s 56(viia) of the Income-tax Act,1961 ['the Act’ for short]. Accordingly, the grounds 4 to 6 relating to this issue are dismissed as not pressed.

5. Ground no. 2 and 3 urged by the assessee relates to the disallowance of Rs. 41,47,301/- made by the AO u/s 40(a)(ia) of the Act. The AO noticed that the assessee has paid interest to various Non Banking Financial Companies without deducting tax at source. Before AO, the assessee also failed to demonstrate that the above said interest formed part of total income of the payee companies. Accordingly, the AO disallowed the interest expenditure u/s 40(a)(ia) of the Act. The Ld CIT(A) also confirmed the same.

6. The Ld A.R submitted that the assessee could obtain a certificate from Chartered Accountant with regard to the payment of Rs. 13,76,627/- made to M/s Tata Capital Financial Services Ltd. to the effect that the above said income was offered to tax by the above said company. He submitted that the assessee has furnished a copy of certificate at pages 61 to 62 of the paper book along with an affidavit requesting for admission of the same. Accordingly, he prayed that this additional evidence may be accepted and the matter may be sent to the file of AO for examining the disallowance in terms of second proviso to sec.40(a)(ia) of the Act.

7. We heard Ld D.R and perused the record. We notice that the total amount of disallowance made by the AO was Rs. 41,47,301/-. In the assessment order, it is mentioned that the above said payments have been made to various NBFCs like L & T Finance Ltd, Bajaj Finance Ltd, Reliance Capital Ltd, India Bulls Ltd, Daimler Finance Ltd, Kotak Mahindra Bank Ltd, LIC India Ltd. and Tata Capital Ltd. However, the assessee has obtained certificate only from one company named M/s Tata Capital Ltd, which has claimed to have received interest income of Rs. 13,76,627/-. The assessee has not furnished any certificate from any of other payees for the remaining amount.

8. In view of the above, we confirm the disallowance of interest expenditure paid to NBFCs other than M/s Tata Capital Ltd. With regard to the payment made to M/s Tata Capital Ltd, we restore the same to the file of the AO for examining the same afresh in the light of additional evidence furnished by the assessee. Accordingly, the order passed by Ld CIT(A) on this issue would stand modified.

9. We shall now take up the appeal filed by the revenue. The first issue urged by the revenue relates to the disallowance of wages expenditure. The AO examined the vouchers relating to wage payments and noticed that most of them are self made. Accordingly he made adhoc disallowance of 10% of wage expenditure. The disallowance worked out to Rs. 5,23,79,379/-. The Ld CIT(A) deleted the same.

10. We heard the parties on this issue and perused the record. The Ld D.R supported the order passed by the AO and also pointed out that most of the vouchers are self made. The Ld A.R. on the contrary, placed his reliance on the order passed by the co-ordinate bench in the assessee's own case relating to AY 2013-14 in ITA No. 290 & 318/Bang/2018 dated 20.12.2019, wherein the Tribunal had deleted identical disallowance made by the AO in that year.

11. We noticed from the order passed by the co-ordinate bench that the Tribunal had followed the decision rendered by another coordinate bench in the assessee's own case in AY 2004-05 passed in ITA No. 929 & 930/B/2009 dated 11.09.2009 and also the decision rendered in the following cases:—

(a) Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd., (2018) (99 taxmann.com 283) (Delhi)

(b) Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd., (2018) (99 taxmann.com 84) (SC)

12. The tribunal has also observed that an identical disallowance was deleted in the above said cases for two reasons, viz., (a) that the books of accounts were not rejected and (b) that expenses were allowed consistently in the past in scrutiny assessments. The tribunal has also noticed that the Ld CIT(A) has observed that the AO has not pointed any specific defects in any of the vouchers. In the instant year also, the Ld CIT(A) has observed that the AO has given vague reasons for making the disallowance. Further the AO has not rejected the books of accounts. Accordingly, following the decisions rendered by the co-ordinate benches, we confirm the orders passed by LD CIT(A) on this issue.

13. The next issue urged by the revenue relates to the disallowance made u/s 14A of the Act. The assessee has received exempt dividend income of Rs. 11,600/- during the year under consideration. The AO worked out the disallowance applying the provisions of Rule 8D at Rs. 2,29,39,153/-, which consisted of interest disallowance of Rs. 2,17,84,744/- u/s 8D(2)(ii) and expenditure disallowance of Rs. 11,54,409/- u/r 8D(2)(iii). The Ld CIT(A) restricted the disallowance to exempt income of Rs. 11,600/- and deleted the remaining amount of disallowance.

14. We heard the parties on this issue and perused the record. We notice that identical disallowance was made by the AO u/s 14A of the Act in AY 2013-14 also and the Tribunal, in its order referred supra, has confirmed the order passed by LD CIT(A) in restricting the disallowance to the amount of exempt dividend income. We notice that the Hon'ble High Court of Delhi in the case of Joint Investment Private Limited v. CIT, 372 ITR 694 has held that the disallowance u/s 14A should not exceed exempt income. The Mumbai bench of Tribunal in the case of Future Corporate Resources Limited v. DCIT (ITA No. 4658/Mum/2015 dated 26.7.20 17) has expressed an identical view. The Hon'ble Delhi High Court has considered an identical issue in the case of PCIT v. Caraf Builders & Construction (P) Ltd., (2019) (101 taxmann.com 167) and has held as under:—

“25. Total exempt this year was Rs. 19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from Rs. 75.89 crores to Rs. 144.52 crores. Upper disallowance as held in Pr. CIT v. McDonalds India (P.) Ltd. ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt income of that year.”

15. In view of the above said decisions, we do not find any infirmity in the decision of Ld CIT(A) in restricting the disallowance u/s 14A to the amount of exempt income.

16. The next issue urged by the revenue relates to the disallowance of interest expenditure relatable to advance given for acquisition of land. The AO noticed that the assessee has given advance of Rs. 24.13 crores towards purchase of land to a concern named M/s Naveen Hotel. The AO also noticed that the assessee has paid interest on the Overdraft account to the tune of Rs. 2,41,35,676/-. The AO took the view that the above said advance given towards purchase of land is a capital expenditure and the same has been met out of overdraft withdrawals, which resulted in incurring of interest expenditure. Accordingly the AO took the view that the corresponding interest expenditure should be capitalised in terms of proviso to sec.36(1)(iii) of the Act. Accordingly, he disallowed a sum of Rs. 2,14,35,676/- in terms of the proviso to sec.36(1)(iii) of the Act. The Ld CIT(A) deleted the disallowance on the reasoning that the own funds available with the assessee is more than the advance amount. The revenue is aggrieved.

17. The Ld D.R submitted that the assessee has used its own funds to other purposes of business, which is evidenced by the fact that the assessee was constrained to use the overdraft facilities for the purpose of giving advance for land purchase. She submitted that it is for the assessee to prove the nexus between own funds and the advance given for purchase of land. She submitted that the Ld CIT(A) has not examined the nexus mentioned above. She submitted that the Ld CIT(A) has compared over all fund position and that principle could not be applied to the instant facts. Accordingly, the Ld CIT-DR submitted that the order passed by Ld CIT(A) should be reversed.

18. The Ld A.R supported the orders passed by Ld CIT(A) on this issue. He further relied upon the order passed by co-ordinate bench in the case of DCIT v. IDEB Projects Ltd. (ITA No. 1531/Bang/2012 dated 28-04-2017).

19. We heard rival contentions and perused the record. We notice that the Ld CIT(A) has given decision by considering the own funds available with the assessee as the beginning and end of the year. The decision rendered in the case of IDEB Projects ltd. (supra) is also related to interest free advances given to sister concerns, wherein a presumption of utilisation of own funds was entertained.

20. However, the issue here is about the applicability of the “proviso to sec.36(1)(iii) of the Act”, i.e., whether any portion of interest expenditure is attributable to capital expenditure incurred in purchase of land and in that case, whether a disallowance is called for as per proviso to sec.36(1)(iii) of the Act. The AO has invoked the above said proviso and we notice that the Ld CIT(A) has not examined the said aspect at all. According to Ld D.R, the assessee was constrained to utilise overdraft facilities and incurred interest expenditure consequently, only on account of the reason that the assessee has given huge advance for purchase of land. We notice that none of these factual aspects have been examined by LD CIT(A). In our view, it is the duty of the assessee to prove that the loan funds were not used for giving advance for purchase of land. Further it is necessary for the assessee to address on applicability or otherwise of proviso to sec.36(1)(iii) to the facts of the present case and it is for the Ld CIT(A) to take a decision on it. Accordingly, we are of the view that this issue requires fresh examination at the end of Ld CIT(A). We have noticed that the AO has estimated the interest expenditure to be disallowed for the whole year. In our view, if it is decided that the interest expenditure attributable to advance given for land purchase, then the disallowance should be restricted to the period of actual usage of loan funds. Accordingly, we set aside the order passed by LD CIT(A) on this issue and restore the same to his file with the direction to examine the applicability of proviso to sec.36(1)(iii) to the facts of the present case and its effect on the interest expenditure claimed by the assessee. The Ld CIT(A) may take decision in accordance with law, after affording adequate opportunity to the assessee.

21. In the result the appeals of assessee is partly allowed and the appeal of the revenue is treated as partly allowed. Order pronounced in the open court on 8 Sept, 2021.