M/S. CLASSIC CITI INVESTMENTS PRIVATE LIMITED,PUNE vs. THE INCOME TAX OFFICER, WARD-1(2), PUNE

आदेश / ORDER

PER R.S. SYAL, VP :

These two appeals by the assessee are directed against the

separate orders, both dt. 07-03-2023, passed by the CIT(A) in

National Faceless Appeal Centre (NFAC), Delhi u/s.250 of the

Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation

to the assessment years 2016-17 & 2017-18. We have clubbed these

appeals for disposal on account of some common issues.

A.Y. 2016-17 :

to confirmation of disallowance of Rs.4,38,87,662/-.

2 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

engaged in the business of hotels and earning income from leasing

of Business plaza. Return was filed declaring total income at Nil.

During the course of assessment proceedings, the Assessing Officer

(AO) observed that the assessee had claimed certain deduction

towards Repair and Maintenance in respect of capital assets. The

AO opined that such amount was required to be capitalized as it was

in respect of renovation of buildings. The assessee, on requisition,

furnished the details. The AO, on their perusal, observed that some

of such expenses claimed were not supported by any vouchers/bills.

He segregated such total of expenses into two parts, viz., one part

which he capitalized and granted depreciation and the other part was

ignored from capitalization for which no vouchers were available.

Such total disallowance worked out to Rs.4,38,87,662/- comprising

of two components, namely, Rs.3,89,70,818/- which was the net

amount capitalized by the AO after depreciation and the remaining

amount of Rs.49,16,804/- which was not capitalized for lack of

necessary evidence. The assessee remained unsuccessful before the

ld. CIT(A).

relevant material on record. It is seen that the total gross amount of

disallowance is in respect of capital expenses of buildings, which

3 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

was treated by the assessee as revenue. The AO held such gross

amount to be capital expenditure not eligible for deduction as

revenue. The assessee did not dispute the capital nature of such

expenditure as determined by the AO. This shows that the

disallowance of Rs.3.81 crore, net of depreciation from such capital

expenditure, does not require any interference. The only issue

pressed is with reference to amount of Rs.49,16,804/-, which was

not allowed by the AO to be capitalized for the lack of details. The

ld. AR submitted that necessary details were furnished before the

AO, who failed to examine the same. Similar stand was reiterated

before the ld. CIT(A) as well. It is observed from the impugned as

well as the assessment order that the AO has not specifically

referred to the detail of Rs.49,16,804/-, whose supporting bills were

not available. In contrast, the ld. AR submitted that all the bills are

available, which can be explained before the AO. Considering the

entirety of the facts and circumstances of the case, we are of the

considered opinion that it would be in the fitness of things if the

impugned order on this issue is set-aside and the matter is restored

to the file of the AO. We order accordingly and direct the AO to

first cull out the detail of Rs.49,16,804/- and then give an

opportunity to the assessee to place on record its supporting

vouchers. If the assessee succeeds in producing the necessary

4 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

evidence, then the amount should be allowed to be capitalized

subject to depreciation. In the otherwise scenario, the disallowance

should be confirmed to that extent. Needless to say, the assessee

will be allowed a reasonable opportunity of hearing.

addition of Rs.1,15,13,136/- made by the AO towards notional rent

in respect of its self-occupied units. The facts apropos this ground

are that the assessee had two units under the Business plaza, which

remained vacant throughout the year. On being called upon to explain as to why the annual rental value of such two units at 5th and 7th floor respectively should not be taxed, the assessee furnished

some explanation. After taking note of such explanation and details, the AO observed that the 5th floor was having vacant area of 5071 sq.ft. and the full 7th floor was having vacant area of 12456

sq.ft. The assessee relied on the Tribunal order in the case of Sachin R. Tendulkar Vs. DCIT (2018) 195 TTJ 241 (Bom.) to

contend that no disallowance be made as the assessee was making

attempts for letting out the property, Not convinced, the AO

computed the annual rental value from these two floors by arriving

at reasonable rent of Rs.1,64,47,337/-. After allowing standard

deduction @30%, he made the addition of Rs.1,15,13,136/-. No

relief was allowed in the first appeal.

5 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

relevant material on record. It is undisputed that the two floors of

the Business plaza were capital assets of the assessee, which

remained vacant fully/partly throughout the year. Section 23(1)(a)

provides for the determination of the Annual Value of any property,

being, the sum for which the property might reasonably be

expected to let from year to year. Clause (c) of section 23(1)

provides that where the property or any part of it is let and remains

vacant during the whole or any part of the previous year and owing

to such vacancy the actual rent received or receivable by the owner

is less than the sum referred to in clause (a), the amount so received

or receivable shall be taken as annual value of the property. This

provision mandates that, firstly, the property should have been let

out in the past and secondly, in the year under consideration it

remains fully or partly vacant. When these two conditions are

cumulatively fulfilled, then, instead of considering rent which is

expected to be realized from let out as the annual value of the

property in terms of section 23(1)(a), the amount actually received

or receivable is substituted as annual value in terms of section

23(1)(c). The ld. AR was fair enough to accept the position. 7. Reverting to the factual scenario, it is noted that the 7th floor of

the assessee having 12456 sq.ft. area remained vacant throughout

6 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

the year. The ld. AR has brought to our notice that this floor was given on rent to Kenersys India Pvt. Ltd. on 24-06-2011 and the

period of lease was three years. Such lease expired in November,

2014. Though the assessee kept on making attempts for leasing out this property, but could not find a suitable lessee. This shows that the 7th floor was fully let out in the earlier three years, but was fully vacant from November, 2014 covering the full year under consideration. In this scenario, the annual value of 7th floor in

terms of section 23(1)(c) has to be taken as Nil, provided the contention of the assessee that it was let out in the past, is correct. It

is seen that no such contention was taken before the AO. In such

circumstances, we deem it necessary to set aside the impugned order and remit the matter to the AO for examining the assesee’s contention about the 7th floor having been let out in the three earlier

years. If the contention turns out to be true, then no annual value should be computed for the year under consideration in respect of 7th floor. Needless to say, the assessee will be allowed a reasonable

opportunity of hearing for proving its case. As regards the 5th floor, the ld. AR fairly admitted that the 8.

vacant area of 5071 sq.ft., was not let out in the past. The provisions of section 23(1)(a) get triggered without recourse to section 23(1)(c)

and as such, the annual value of such property needs to be

7 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

determined. The AO computed the annual value of the 5th floor by

considering the rent realized by the assessee from other floors.

However, it is worth mentioning that the Hon’ble Bombay High

Court in Smt. Kokilaben D. Ambani vs. CIT (2014) 90 CCH 0257 MumHC vide its judgment dated 11.9.2014 has held that while

determining the annual value in respect of properties which are

subject to Rent Control Legislation and in case where the standard

rent has not been fixed, the AO shall determine the same in

accordance with the relevant Rent Control Legislation. If the fixed

rate is less than the standard rent, then the fair rent shall be taken as

Annual Letting value. Turning to the facts of the case, we find that

the necessary details as to whether the property was subject to Rent

Control Legislation or the amount of standard rent etc. are not

available on record. In such circumstances, we set-aside the

impugned order on this score and remit the matter to the file of the AO for re-computing the annual letting value of the 5th floor

u/s.23(1)(a) in the hue of the above decision of the Hon’ble Bombay

High Court. Needless to say, the assessee will be allowed

reasonable opportunity of hearing.

Rs.3,00,87,960/- made by the AO u/s.56(2)(viia) of the Act. The

facts anent to this issue are that the assessee purchased 1,00,000

8 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

Equity shares of Diana Buildwell Limited (Diana) from Indiabulls

Real Estate Pvt. Ltd. holding 66% Equity shares and ABIL

Hospitality Pvt. Ltd. (ABIL) (a related concern) holding 34%

Equity shares of Diana. Total share capital of Diana was 1,00,000

shares with face value of Rs.10/- each. The assessee entered into

MOU dt. 17-07-2015 with Indiabulls for transfer of 66000 Equity

shares of Diana for a total consideration of Rs.83.48 crore at

valuation of Rs.12,648.94 per share. Similarly, the assessee entered

into MOU dt. 21-07-2015 with ABIL for transfer of 34000 Equity

shares at value of Rs.11,764.70 per share. The assessee submitted

valuation report in respect of Equity shares to Diana having the fair

market of shares at Rs.11,680.00 per share under Discounted Cash

Flow (DCF) method. The AO held that the shares acquired by the

assessee from ABIL were undervalued at Rs.11,764.70 per share as

against the rate of Rs.12,648.94 per share charged from Indiabulls.

Invoking the provisions of section 56(2)(viia), he held that the

differential amount of Rs.884.94 per share as applied to 34000

shares, was liable to be added to the assesse’s income. That is how,

the addition of Rs.3.00 crore and odd was made by the AO, which

came to be echoed in the first appeal. Aggrieved thereby, the

assessee has come up in appeal before the Tribunal.

9 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

Equity shares of Diana from Indiabulls Rs.12,648.94 per share and

34000 shares from ABIL at Rs.11,764.70 per share. The point in

dispute is about the applicability of section 56(2)(viia) to the facts

and circumstances of the case. The assessee made out a case that

the shares acquired by it were above the fair market value, which

was determined under the DCF method. On the other hand, the AO

has went with the proposition that the amount charged from ABIL

was less than that charged from Indiabulls and hence the assessee

was liable to be visited with the provisions of section 56(2)(viia).

provides where a firm or a company, not being a company in which

the public are substantially interested, receives any shares for

consideration, which is less than its aggregate fair market of the

value by an amount exceeding Rs.50,000/-, the aggregate fair

market value of such property exceeding such consideration shall be

taken as income under this provision. Explanation given under this

clause defines the ‘fair market value’ of shares to have the same

meaning as assigned to it in Explanation to clause (vii). In turn,

clause (vii) of section 56(2) defines the ’fair market value’ of a

property other than immovable property to mean: `the value

determined in accordance with the method as may be prescribed’.

10 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

The method has been prescribed in Rules 11U and 11UA. Rule

11UA(1) deals with valuation of various types of assets. Insofar as

the valuation of unlisted equity shares and securities is concerned,

clause (c) of Rule 11UA(1) is applicable. Clause (c), in turn, has

two sub-clauses. We are concerned with the sub-clause (b) of Rule

11UA(1)(c), which deals with the fair market value of unquoted

equity shares. A mechanism has been provided in this rule to

determine the fair market value on the valuation date. The relevant

part of rule, which is applicable to the year under consideration,

provides for determining the fair market value of unquoted Equity

shares by dividing (A-L) by (PE) and then multiplying it with (PV).

The narrations have been given for the alphabets used in the rule,

namely, A, L, PE & PV. It is only the valuation as determined

under the unamended Rule 11UA(1)(c)(b), as applicable to the year

under consideration, which has to be considered for applying the

mandate of section 56(2)(viia) of the Act. In that view of the matter

it is crystal clear that the benchmark for the application of this

provision is the value so determined as per the rule and not the

value as computed by the assessee under DCF method or the value

as taken note of by the AO at Rs.12,648.92, being, higher purchase

price of shares from India bulls vis-à-vis that from ABIL. Since the

mandate of Rule 11UA, which is obligatory for section 56(2)(viia),

11 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

has not been considered, we are of the opinion that it would be just

and fair if the impugned order on this score is set-aside and the

matter is restored to the file of the AO. We order accordingly and

direct him to compute the fair market value of equity shares of

Diana under Rule 11UA(1)(c)(b) and thereafter consider the

applicability of section 56(2)(viia) to that extent. It goes without

saying that the assessee will be allowed reasonable opportunity of

hearing in such fresh application of section 56(2)(viia) of the Act.

confirmation of disallowance of Rs.1,52,29,448/- made by the AO

u/s.14A r.w. rule 8D. Succinctly, the facts of this ground are that

the assessee offered disallowance u/s.14A to the tune of Rs.69,096/.

The AO observed that the assessee had exempt income of

Rs.68,51,775/-. He took note of value of investments made by the

assessee in Equity instruments and in partnership firm as on

31-03-2015 and 31-03-2014 and proceeded to work out the amount

of disallowance under Rule 8D by taking the average value of such

investments. Under clause (ii) of Rule 8D(2), he computed the

disallowance at Rs.1,21,29,773/- and under clause (iii) being, 0.5%

of the average value of investments, at Rs.30,99,675/-, which

totaled up to Rs.1,52,29,448/-. The ld. CIT(A) sustained the

disallowance.

12 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

incurred by the assessee as relatable to the exempt income. The

disallowance was computed by multiplying the average value of

investments yielding exempt income with the amount of

expenditure by way of interest and then dividing it by the average

value of assets as appearing in the balance sheet. The average value

of investment for this purpose is required to be considered by taking

only such investments as yielded exempt income and not the

investments which did not give rise to any exempt income during

the year. The AO has taken the average value of total investments

by considering both, the investment in Equity shares of Diana that

did not yield any exempt income and also investment in partnership

firm that resulted into exempt income during the year under

consideration. The Hon'ble Delhi High Court in ACB India Ltd. vs.

CIT (2015) 374 ITR 108 (Del) has held that the average value of

investments, for the purposes of Rule 8D(2)(iii), should be confined

to those securities in respect of which exempt income is earned and

not the total investments. Similar view has been taken by the

Special Bench of the Tribunal in the case of ACIT vs. Vireet

Investments (P) Ltd. (2017) 165 ITD 27 (Del) (SB). The ratio of

these decisions apply directly to rule 8D(2)(ii) as well. In that view

of the matter, the investment in Equity shares of Diana needs to be

13 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

excluded both from the opening and closing balances of investments

for working out the average value of investments to find out the

amount of interest to be disallowed under Rule 8D(2)(ii). Similar is

the position regarding the applicability of Rule 8D(2)(iii), which

talks of making disallowance at 0.5% of the average of the value of

investments, income from which does not form part of total income.

The AO has again considered investment in shares of Diana also for

computing the average value of investments for the purpose of

making disallowance under clause (iii) of Rule 8D(2) of the Act. In

view of the afore referred precedents, we set aside the impugned

order to this extent and remit the matter to the file of the AO for re-

computing the disallowance under Rule 8D(2)(ii) and (iii) by

considering only such investments in calculating the average value

of investments, which yielded exempt income during the year.

of disallowance u/s.32 towards depreciation on the fixed assets for

the assessment year under consideration which were purchased in

assessment years 2009-10, 2010-11 and 2011-12. Both the sides are

in agreement that this is a recurring issue and the Tribunal for the

immediately preceding assessment year and earlier years has sent

the matter back to the file of the AO for deciding in conformity with

the decision taken in earlier years. We also follow the same.

14 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

2017-18 :

of addition of Rs.11,11,320/- towards notional rent in respect of one vacant unit at the 10th floor having area of 2520 sq.ft.

earlier years and hence the AO erred in determining the annual

value of this property u/s.23(1)(a). However, it was also conceded

that the factum of such unit having been let out in the earlier years

was not brought to the notice of AO, as is the case for the

immediately preceding A.Y. 2016-17. Following the view taken

hereinabove, we set-aside the impugned order on this score and

remit the matter to the file of the AO for deciding it in the light of

directions given in our above order for the A.Y. 2016-17.

the confirmation of disallowance u/s.32 with reference to certain

fixed assets purchased in A.Yrs. 2009-10, 2010-11 and 2011-12.

Again, both the sides fully concur that the facts and circumstances

of this ground are also similar to the one decided in the preceding

years including the immediate preceding assessment year.

Following the view taken hereinabove, we set-aside the impugned

order on this score and send the matter to the file of the AO for

deciding it in consonance with the direction given.

15 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

and that for the A.Y. 2017-18 is allowed for statistical purposes.

Order pronounced in the Open Court on 21st September, 2023.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 21st September, 2023 सतीश आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The respondent 2. The Pr.CIT concerned 3. 4. DR, ITAT, ‘A’ Bench, Pune गाड� फाईल / Guard file. 5. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

16 ITA Nos.435 & 436/PUN/2023 Classic Citi Investments Pvt. Ltd.

Date 1. Draft dictated on 18-09-2023 Sr.PS 2. Draft placed before author 20-09-2023 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *