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Ferani Hotels Pvt. Ltd. Construction House B, 2nd Floor, 623, Linking Road, Khar (W), Mumbai-400 052 Vs. Asst. CIT, Central Circle 23, Aayakar Bhavan, Mumbai-400 020
November, 19th 2014

          ,        ,                                    

                      ./I.T.A. No. 857/Mum/2013
                    (   / Assessment Year: 2009-10)
Ferani Hotels Pvt. Ltd.                              Asst. CIT, Central Circle 23,
Construction House `B', 2nd Floor,          /        Aayakar Bhavan,
623, Linking Road, Khar (W),                Vs.      Mumbai-400 020
Mumbai-400 052
     . /  . /PAN/GIR No. AAACF 0693 B
         ( /Appellant)                         :            (     / Respondent)

         / Appellant by                       :     Shri Sanjay B. Sawant

           /Respondent by                     :     Shri Jitendra Kumar

                         /                    :     17.09.2014
                   Date of Hearing
                                              :     17.11.2014
           Date of Pronouncement

                                       / O R D E R
Per Sanjay Arora, A. M.:
       This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-40, Mumbai (`CIT(A)' for short) dated 06.11.2012, partly
allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax
Act, 1961 (`the Act' hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated

2.     The assessee, in the business of real estate and hotels, was observed to have for the
relevant year dividend income at Rs.25,80,944/- as well as profit from partnership firm
(at Rs. 1,46,977/-), claimed exempt under difference clauses of section 10 of the Act.
Section 14A of the Act would therefore apply, even as the assessee had made no
                                                          ITA No. 857/Mum/2013 (A.Y. 2009-10)
                                                            Ferani Hotels Pvt. Ltd. vs. Asst. CIT
disallowance of any expenditure in relation to this income. The same was worked out
under Rule 8D, at Rs.35,70,437/-, as under:

a)     Qua direct expenditure (r. 8D(2)(i))                             Nil
b)     Qua indirect expenditure (r. 8D(2)(ii)                           Rs.25,60,423/-
c)     Qua indirect expenditure ­ other than interest (r. 8D(2)(iii))   Rs.10,10,014/-

       The same being confirmed in first appeal, the assessee is in second appeal.
Additional ground is also raised before us for the first time in respect of the
corresponding adjustment in computing the book profit u/s.115JB; the relevant facts
being on record. The issue being legal, we admit the said ground.
       We shall proceed issue-wise. With regard to interest, the assessee contended to
have sufficient capital of its' own, i.e., a capital base of Rs.160.98 crores, as against a
total investment of Rs.85.32 crs. as on 31.03.2009, so that investment in shares (Rs.14.79
crs.) and in partnership firm (Rs.10.39 crs.), yielding tax exempt incomes, must be
considered as out of own capital, entailing no interest expenditure and, thus, disallowance
thereof. Toward this, reliance stands placed on the decision in the case of assessee's sister
concern in Palm Grove Beach Hotels Private Limited (in ITA No. 5678/Mum/2011 dated
22.03.2013/copy on record) and Shopper's Stop Limited vs. ACIT (in ITA Nos. 1448 and
4475/Mum/2010 dated 30.08.2011), wherein this principle stands accepted following CIT
vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom).
       With regard to the expenditure other than interest, the assessee's stand is of having
incurred a lesser expenditure. Further, as regards the disallowance qua profit from
partnership firm, the matter would need to be restored back to the file of the Assessing
Officer (A.O.) to apply the ratio of the decision by the Special Bench of the tribunal in
the case of Vishnu Anand Mahajan v. CIT [2012] 147 TTJ 142 (Ahd)(SB), as directed by
the co-ordinate bench in the case of Palm Grove Beach Hotels Pvt. Ltd. (supra).

3.     We have heard the parties, and perused the material on record.
3.1    As regards the claim qua disallowance of interest expenditure, the argument of
sufficient capital, so that the same must be presumed as having been applied toward
investments yielding tax exempt income, misses the point completely. The matter has to
                                                          ITA No. 857/Mum/2013 (A.Y. 2009-10)
                                                            Ferani Hotels Pvt. Ltd. vs. Asst. CIT
be decided on the basis of facts and not presumptions. Until and unless therefore it is
shown and, again, with reference to the assessee's accounts, that the investments have
been financed from own capital, so that no part of the borrowed capital has been utilized
for the purpose, no such presumption would hold, and the rule of apportionment,
prescribed by r. 8D, mandatory w.e.f. A.Y. 2008-09, shall apply. The decision in the case
of Reliance Utilities & Power Ltd. (supra) stands rendered in the context of section
36(1)(iii), and would thus be of little relevance. It needs to be appreciated that the
disallowance u/s.14A is a statutory disallowance, constituting a complete code in itself.
The said decision was cited before, and stands discussed by the hon'ble jurisdictional
high court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom). It
stands explained that section 14A has widen the theory of apportionment, which only
seeks to effectuate the principle of only the net (i.e., net of all expenses) income, whether
positive or negative, being liable to, or not so, i.e., as the case may be, to tax. The
relevant discussion appears at paras 85-86 (pgs. 135-137 of the reports), a part of which
we consider it relevant to reproduce, as under:
       `In all these decisions, the Tribunal held that no nexus had been established
       between borrowed funds and investments by the assessee in dividend
       yielding shares/income yielding mutual funds. Now assuming that this is
       so, the only conclusion which emerges is that the assessee had utilized its
       own funds for the purpose of making the investments. The fact that the
       assessee has utilized its own funds in making the investments would not be
       dispositive of the question as to whether the assessee had incurred
       expenditure in relation to the earning of such income. Even if the assessee
       has utilized its own funds for making investments which have resulted in
       income which does not form part of the total income under the Act, the
       expenditure which is incurred in the earning of that income would have to
       be disallowed. That is exactly a matter which the Assessing Officer has to
       determine. Whether or not any expenditure was incurred by the assessee in
       relation to the earning of non-taxable income falls within the domain of the
       Assessing Officer. The basis on which the Tribunal had come to its
       decision for the assessment years 1998-99, 1999-2000 and 2001-02 would
       not conclude that question.'

       Where therefore the assessee is able to show, with reference to its accounts, of the
borrowed capital having financed a particular asset (or asset class), the interest cost
                                                           ITA No. 857/Mum/2013 (A.Y. 2009-10)
                                                             Ferani Hotels Pvt. Ltd. vs. Asst. CIT
relatable thereto would necessarily have to be consider as expended toward the same.
Upon this being conveyed by the Bench during hearing, the ld. Authorized
Representative (AR), the assessee's counsel, would submit that the borrowed capital in
the instant case is in fact wholly for business purposes, being toward the assessee's hotel
project at Kodaikanal and the real estate business at Mumbai. We observe no findings in
the matter on record. So, however, if, as claimed, the borrowed capital is in the form of
dedicated funds, i.e., specified activities and/or assets, so that the same stands utilized for
the same purpose/s, and which would be where the terms and conditions of the borrowing
have been met, there could be no presumption with regard to the borrowed funds having
been used for any purpose other than the same and, accordingly, no part of the interest
could be considered as having not been utilized for business purposes and, hence, toward
financing the investment/s. The presumption of proportionate funding, on which the
formula prescribed u/r. 8D(2)(ii) is premised, would not obtain in that case. This
represents the finding by the tribunal in several cases, applying Godrej & Boyce Mfg.
Co. Ltd. (supra), as in the case of Hercules Hoists Ltd. vs. Asst. CIT [2013] 22 ITR (Trib.)
527 (Mum); Kunal Corporation vs. Asst. CIT [2013] 28 ITR (Trib) 277 (Mum); and AFL
P. Ltd. vs. Asst. CIT [2013] 28 ITR (Trib) 263 (Mum). Under the circumstances, we only
consider fit and proper that the matter is restored back to the file of the A.O. to allow the
assessee an opportunity to present and exhibit its case as stated hereinabove, the onus for
which would only be on it, and shall stand to be decided in terms of our foregoing
observations, on the basis of definite findings of fact to be issued by the A.O.
       The other aspect of the disallowance u/s. 14A is in respect of indirect
administrative expenditure, covered under Rule 8D(2)(iii), at Rs. 10.10 lacs The same
stands made applying the said rule. While the A.O. effected the disallowance invoking
the said rule, mandatory for the current year, the ld. CIT(A), in appeal, rejected the
assessee's contention of the rule being arbitrary. Further, the A.O. having rendered his
satisfaction with reference to the facts of the case, rule 8D stood triggered and,
accordingly, the disallowance was to be, in his view, confirmed. No specific contention
in this regard stood made before us. The assessee failing to substantiate its claim of
having not incurred any expenditure in relation to income not forming part of the total
5 ITA No. 857/Mum/2013 (A.Y. 2009-10) Ferani Hotels Pvt. Ltd. vs. Asst. CIT income, we find no infirmity in the orders of the authorities below and, accordingly, confirm the disallowance of the indirect administrative expenditure, which is the subject matter of disallowance under r.8D(2)(iii), i.e., in principle. We may though further clarify that the disallowance qua investment in partnership firm, i.e., to the extent it survives our directions afore-said, shall be computed in terms of the decision by the larger bench of the tribunal in Vishnu Anand Mahajan (supra). We decide accordingly. 3.2 The only other issue arising in this appeal is with regard to the adjustment to the book profit qua the disallowance effected u/s. 14A of the Act, raised by the assessee per an additional ground. No specific arguments were raised by the assessee qua this ground, which was in fact also not a subject matter of appeal before the first appellate authority. The matter, however, being legal, we admit the same. The disallowance of expenditure, interest or administrative, is only of that incurred by the assessee. If the same is not in the books of account, where we wonder it is? Both the income and expenditure, determining the net profit, which forms the basis for computing income under the Act, are only as per the books of account. The provision of section 14A only codifies the law, which is otherwise inherent in tax jurisprudence, that only the net income (i.e., net of the expenditure), from whatever source, is to be brought to tax and, consequently, only the net income, where tax-exempt, is to be so. Further, rule 8D prescribes a method/s toward determining the said income, i.e., on net basis, providing a uniform basis for ascertaining the amount of expenditure liable to be excluded in computing the income chargeable to tax. The legal basis for the relevant adjustment, i.e., qua the expenditure relatable to the exempt income, in determining the book profit, which is an alternate method of taxation, i.e., where the income computed under the regular provisions of the Act falls below the prescribed percentage of book profit, is per clause (f) of Explanation 1 below sub-section (2) of section 115JB. We, therefore, find no reason or basis for not confirming the adjustment of the expenditure, as finally sustained for disallowance u/s. 14A(1), in computing the book 6 ITA No. 857/Mum/2013 (A.Y. 2009-10) Ferani Hotels Pvt. Ltd. vs. Asst. CIT profit u/s.115JB. We decide accordingly; our decision being supported by a host of decisions by the tribunal, viz. - Catalyst Finance Ltd. v. ITO (in ITA No. 1087/Mum/2013 dated 17/11/2014) - JSW Energy Limited v. ACIT (in ITA No. 498/Bang/2010 dated 27/12/2013) - ITO v. RBK Share Broking Pvt. Ltd. (in ITA Nos.7546 & 6678/Mum/2011 dated 24.07.2013); - Esquire Private Limited vs. DCIT (in ITA No.5688/Mum/2011 dated 29.08.2012); - ITO vs. Sea Wind Investment & Trdg. Co. Ltd. (in ITA No.6320/Mum/2004 dated 17.10.2007). 4. In the result, the assessee's partly allowed for statistical purposes. Order pronounced in the open court on November 17, 2014 Sd/- Sd/- (Joginder Singh) (Sanjay Arora) / Judicial Member / Accountant Member Mumbai; Dated : 17.11.2014 . ../Roshani, Sr. PS /Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent 3. () / The CIT(A) 4. / CIT - concerned 5. , , / DR, ITAT, Mumbai 6. / Guard File / BY ORDER, / (Dy./Asstt. Registrar) , / ITAT, Mumbai
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