DCIT, CIRCLE-20(1), NEW DELHI vs. PRIAPUS DEVELOPERS PRIVATE LIMITED, NEW DELHI
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Income Tax Appellate Tribunal, DELHI BENCH “F” DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-VII, New Delhi [‘CIT(A)’ in short] dated 27.11.2019 arising from the assessment order dated 24.12.2018 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2016-17. 2. The grounds of appeal raised by the Revenue read as under: “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was correct in deleting the disallowance of Rs. 1,26,86,514/- made by the AO u/s. 14A of the Income Tax Act, 1961?
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(ii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was correct in not upholding the action of AO in taking into account the disallowance made by the AO u/s. 14A of the Act while calculating book profit of the assessee company u/s 115JB of the Income Tax Act, 1961? (iii) The appellant craves to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of his appeal.”
Briefly stated, the assessee-company is engaged in the business development of infrastructure and to undertake infrastructure projects and also to purchase, sell, develop, construct and deal in all real estate properties, etc. The assessee filed the return for Assessment Year 2016-17 in question declaring ‘Nil’ income. The return filed by the assessee was subjected to scrutiny assessment under Section 143(3) of the Act. The Assessing Officer thus while framing the assessment inter alia recomputed the total income at Rs.25,49,77,240/- under the normal provisions of the Act. The Assessing Officer also determined the book profit under Section 115JB of the Act at Rs.25,78,38,970/-. The Assessing Officer in the course of the assessment inter alia observed that the assessee has earned dividend income of Rs.1,20,644/- from mutual fund and Rs.38,69,04,285/- from investment made by its two erstwhile subsidiary companies prior to their amalgamation with Assessee Company. On being questioned for disallowance under Section 14A of the Act, the assessee submitted that it has however suo motu disallowed an estimated amount of Rs.38,70,249/- (being 1% of dividend income) towards probable cost of earning exempt income in the form of dividend from equity shares and mutual funds. It was further submitted that the assessee has not made any fresh investment during the year under consideration, the
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investments in the shares of IHFL found its place in the financial statement due to scheme of amalgamation of the assessee with its subsidiary companies, namely, Priyapus Real Estate Pvt. Ltd. and M/s. Priyapus Properties Pvt. Ltd. Such investments were only transferred to the assessee by way of order of Hon’ble Delhi High Court and no fresh investment in its own capacity per se was made in the shares of IHFL giving rise to the exempt income in justification of the estimation disallowance of 1% of exempt. It was further contended that the investment made by the assessee company in all other securities did not yield any exempt income and there was no increase in investment of the assessee company during the year which resulted in tax free dividend income. The only increase in investment was on account of purchase of debentures of a group company which is not covered by the provisions of Section 14A of the Act. It was thus, in short, submitted that no expenditure was incurred in relation to investment yielding exempt income. The Assessing Officer however invoked the provisions of Section 14A of the Act and quantified the disallowance in terms of Rule 8D of the Income Tax Rules at Rs.1,26,86,514/-. The Assessing Officer also made another disallowance of Rs.25,72,70,727/- towards interest on borrowed funds under Section 36(1)(iii) of the Act. The Assessing Officer also increased the books profit computed under Section 115JB of the Act towards disallowance under Section 14A amounting to Rs.26,99,57,241/-. 4. Aggrieved by the disallowances made under Section 14A under normal provisions of the Act and other additions and adjustment in book profit under MAT provisions, the assessee preferred appeal before the CIT(A). The CIT(A) took note of the
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detailed submissions made on behalf of the assessee and plea of the Assessee for reversal of disallowance under Section 14A of the Act. The CIT(A) found merit under the normal provisions as well as the alternative tax mechanism provided under Section 115JB of the Act. 5. In keeping with the findings of the Co-ordinate Bench relevant to Assessment Year 2015-16 in assessee’s own case, the additional disallowance of Rs.1,26,86,514/- made under normal provisions of the Act under Section 14A over and above the suo motu disallowance made by the assessee were deleted by the assessee. The relevant operative paragraph of the order of the CIT(A) is reproduced hereunder. “I have gone through the findings of the Hon'ble ITAT in the preceding assessment year i.e. AY 2015-16. In the year under consideration it is noticed that the appellant has earned dividend income from equity shares of IHFI of Rs.38,69,04,285/- as per the submission before the AO dated 21.12.2018 (quoted by the AO at page no.7 of the assessment order), further the remaining dividend income of Rs.1,20,644/- is from mutual funds. Accordingly, it can be said that in the year under consideration also the majority of dividend income is from the shares of IHFL and there is no change in shareholding as compare to the earlier year and accordingly the findings of the Hon'ble ITAT in the assessment year 2015-16 will also apply in the year under consideration. Respectfully following the judgment of Hon’ble ITAT. It can be fairly concluded that shares of IHFL has been acquired by the assessee by the way of amalgamation and it cannot be said that assessee could have incurred any kind of indirect for earning dividend income out of the said shares held by it. Hence, the additional disallowance under Section 14A made by the Assessing Officer over and above the suo motu disallowance made by the assessee is directed to be deleted.”
Apart from reversal of disallowance under Section 14A under normal provisions, the CIT(A) also reversed the additions /
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book profit under Section 115JB amounting to Rs.26,99,57,241/- following the ratio of the Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd., 165 ITD 27 (SB). The relevant paragraph dealing with the issue is reproduced herein:
“4.4 In ground no.6 & 7 the appellant has contested the disallowance under section 14A made at Rs 261,99,57,241/- under the provisions of MAT as against suo moto disallowance made by it at Rs 38,70,249/- The AO in the assessment order has computed the disallowance of expense related to the exempt income applying the method prescribed in section 14A of the Act at Rs.26,99,57,241/-. For the said disallowance the AO has referred to the computation of disallowance as per the provisions of Rule 8D under alternative 1 while deciding the disallowance under section 14A It is noticed that while computing the book profit the AO has not made disallowance under section 14A, however, he has referred to the method computation of disallowance prescribed in the said section i.e. as per Rule 8D. The appellant has contested the said action of the AO on the ground that the AO does not have any jurisdiction to disturb book profit computed under section 115JB of the Act which has been duly verified by the management, audited by the statutory auditors and submitted before the registrar of the companies and accepted by them. In this regard, the appellant has referred to the findings of Hon'ble ITAT in its own case for the preceding assessment year i.e. AY 2015-16 wherein the Hon'ble ITAT had deleted the addition made under section 14A while computing the book profit under section 115JB on two grounds firstly the observation given by them while deciding the disallowance under section 14A and secondly the bench referred to the decision of ITAT Delhi Bench in the case of ACIT vs. Vireet Investment Pvt Ltd. I FA NO 502/De1/2012 In this regard, it is relevant to refer to the findings of the Hon'ble ITAT in the said judgment which reads as under: "6.22 In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (1) of Explanation 1 to section 115,18(2) is to be made without resorting to the computation as contemplated under section 14A read with Rule 8(D) of the IT Rules. 1962." Ongoing through the above findings of the Hon'ble ITAT in the case of the appellant as well as in the case of ACTT vs. Vireet Investments Pvt. Ltd. (Supra), it is clear that while computing book profit under section 115JB of the Act the AG cannot resort to the computation
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of disallowance prescribed in section 14A i.e. as per Rule 8D. In the year under consideration it is not in doubt that the addition of expenses related to the exempt income made in the book profit as per section 115JB. AG has resorted to the calculation /computation as prescribed in Rule 8D read with Section 14A of the Act. In the action of the AO is not justified in view of the above quoted judgments of Hon'ble I-TAT Delhi Bench. Hence, the additional disallowance as per the method prescribed in section 14A made by the AO over and above the suo moto disallowance made by the assessee is directed to be deleted.”
Aggrieved by the relief granted by CIT(A), the Revenue has presented appeal against the order of the CIT(A). 8. The ld. DR for the Revenue broadly reiterated the reasoning noted by the Assessing Officer while making the assessment under the normal provisions as well as the MAT provisions. The ld. DR for the Revenue submitted that as per Rule 8D r.w. Section 14A of the Act, the disallowances works out to Rs.26,99,57,241/-. The Assessing Officer computed the disallowance as per the alternative methods for segregation between Section 14A and Section 36(1)(iii) and thus allocated the disallowance under Section 14A at Rs.1,26,86,514/- whereas the remaining disallowance on account of interest amounting to Rs.25,72,70,727/- was made attributable to Section 36(1)(iii) of the Act. As per the MAT provisions, the Assessing Officer has rightly computed the full disallowance of Rs.26,99,57,241/- over and above the disallowances offered by the assessee while determining the book profit under Section 115JB of the Act. It was contended that the disallowance under Section 14A would be triggered once the assessee has earned exempt income regardless of the fact that the shares appeared in the books of the assessee by virtue of amalgamation or in ordinary course. The ld. DR
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submitted that the Assessing Officer has merely adopted the statutory method of quantification of estimated disallowance under Rule 8D of the Income Tax Rules which ought not to have been disturbed by the CIT(A) in a mechanical manner. 9. The ld. counsel for the assessee, on the other hand, strongly supported the order of the CIT(A) and submitted that peculiar factual matrix has been rightly kept in mind by the CIT(A) while nullifying the additions under normal provisions as well as the MAT provisions. 9.1 The ld. counsel also submitted that once a suo motu disallowance has been made by the assessee, the Assessing Officer is necessarily required to record a satisfaction having regard to the accounts of the assessee as provided under Section 14A before substituting his view on the amount of disallowance. The Assessing Officer has not done so and therefore any increase/adjustment in the disallowance offered is outside the mandate of statutory provisions of the Act. The ld. counsel submitted that without recording the satisfaction contemplated under Section 14A of the Act, the disallowance made under the normal provisions is squarely at odds with series of judicial precedents as pointed out before the CIT(A). 9.2 The ld. counsel further submitted that the upward adjustments made to the book profits by the amount computed under Rule 8D of the Income Tax Rules defies the ratio laid down by the Special Bench in Vireet Investments (supra) has been upheld by the Hon’ble Bombay High Court in the case of CIT vs. Bengal Finance & Investments Pvt. Ltd. in ITA No.337/2013 and thus rightly struck down by the CIT(A). The ld. counsel thus
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submitted that no interference with order of the CIT(A) is called for. 10. We have carefully considered the rival submissions. We have also carefully perused the first appellate order as well as the assessment order. The ld. counsel contends that the action of the Assessing Officer under Section 14A fails on both counts (i) lack of recording of satisfaction contemplated under Section 14A of the Act and (ii) absence of demonstrable cause for enhancing disallowances already offered by the Assessee. 10.1 To begin with, we shall delineate on the first limb of argument towards non recording of requisite ‘satisfaction’ for invoking Section 14A r.w. Rule 8D of the IT Rules. To address the point, we observe that what is required to trigger Section 14A among others, is that Assessing Officer should be ‘satisfied’ as to the correctness of claim made towards expenditure incurred for the purposes of Section 14A of the Act. As per the law evolved on this aspect as per the judicial dicta, the Assessing Officer cannot straightaway resort to Rule 8D for quantification of disallowance in disregard to the disallowance carried out by the Assessee. Sub section (2) of Section 14A and Rule 8D(1), both require the Assessing Officer to first consider the stance of the tax payer before resorting to Rule 8D. Admittedly, the assessee, in the instant case, has offered certain amount as suo motu disallowance. Thus, the Assessing Officer must arrive at an objective satisfaction that such claim of disallowance made by the assessee is incorrect before proceeding to re-determine the disallowance. The Assessing Officer in the instant case has not recorded any statutory satisfaction contemplated under Section 14A while disregarding the quantum of suo motu disallowance. Such view
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has been echoed by the Hon’ble Bombay High Court in Godrej & Boyce Manufacturing Company Ltd. as reported in 234 CTR 1 (Bom) and PCIT vs. Vedanta Ltd, 261 Taxman 179 (Del). Thus, in the absence of any satisfaction recorded for substitution of quantum of disallowance, the action under Section 14A runs contrary to the judicial opinion and thus cannot be countenanced. 10.2 We further observe that additional disallowance carried out by AO under Section 14A has been rightly deleted by the CIT(A) having regard to the peculiar facts, i.e., acquisition of shares owing to amalgamation and absence of incurring any expenditure under various limbs enumerated in Rule 8D of the Act. In the absence of any fallacy pointed out, we see no reason to interfere therewith. 8.3 The reversal of addition to book profits by the CIT(A) is also in tune with the decision of Special Bench in Vireet Investments (supra) affirmed in Bengal Finance (supra). 8.4 We thus see no infirmity in the order of the CIT(A) which may call for any interference. Hence, we decline to interfere. 9. In the result, the appeal of the Revenue is dismissed in all counts. Order pronounced in the open Court on 27/12/2022.
Sd/- Sd/- [CHALLA NAGENDRA PRASAD] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: /12/2022 Prabhat
