THE DY. CIT, CIRCLE -1(1)(1),, AHMEDABAD vs. M/S. ADANI INFRASTRUCTURE & DEVELOPERS PVT. LTD., AHMEDABAD

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2.1 The assessee also submitted that the disallowance of administrative expenses cannot be made on an estimated basis. It is because it has not incurred any administrative expenses for the earning of such exempt income.

2.2 However, the AO dis-agreed with the contention of the assessee by observing that the assessee must have incurred some expenses by way of interest and administrative expenses for the earning of such exempt income. Therefore, he invoked the provision of section 14A r.w.Rule 8D of the Rules and made the disallowance as under:

Sr. Particular Amount 1. Direct expenditure u/s.Rule 8D (i) Nil 2. Interest Expenditure u/s.Rule 8D (ii) 4,01,30,089/- 3. Administrative Expenses u/s. Rule 8D (iii) 50,42,189/- Total 4,51,72,278/-

The aforesaid amount was disallowed and added to the total income of the assessee.

Aggrieved assessee preferred an appeal to the ''Ld.CIT (A)''.

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3.1 The assessee regarding the administrative expenses submitted that it has received the amount of dividend through ECS without incurring any administrative expenses for the earning of such dividend income. The assessee also claimed that if any expenditure needs to be disallowed in connection with the exempted income, then it would be of very nominal value.

3.2 However, the ''Ld.CIT (A)'' dis-regarded the contention of the assessee and confirmed the order of the AO in part by observing as under:

(B)5.3 These facts clearly reflect that interest bearing funds were utilized both for its business including investment as well as for advancing loan to subsidiaries companies. The appellant claimed interest payment but reflected interest interest receipt from such loan & advances. It is therefore I am partly inclined with appellant’s contention as well as ratio of my predecessor that netting of interest has to be considered for disallowances under rule 8D(2)(ii). But, such netting of interest cannot be made in a general manner. The A.O. white computing such interest disallowances of Rs. 4,01,30,0897- on gross interest expenses of Rs. 312321261/-considered average investment including investment in partnership firm M/s. ATREG and average of total assets. As against this appellant claimed that in view of netting of interest and there being effectively no net interest claim, there should not be any disallowances under rule 8D(2)(ii). It is in this regard, as discussed above, the investment in shares & securities by appellant in F.Y. 09-10 of Rs. 4.26 crore remained at Rs. 4.21 crore in F.Y. 10-11 but such investment cannot be held as that of made with interest free fund. On the other hand, appellant made investment in partnership firm M/s. ATREC which has increased from Rs. 59.94 crore to Rs. 133.76 crore but appellant received interest of Rs. 3.40 crore. It is therefore, such investment and allocation of interest be excluded from rule 8D(2)(ii). This left with the status of interest (gross) income of Rs. 32.06 crore against the claim of interest of Rs. 31.23 crore. It is therefore considering the mixed fund, interest disallowances has to be made in respect of investment in shares & securities, the income in the form of dividend is exempt. The same can & 2173/AHD/2015 Asstt. Year 2011-12 5 appropriately done by adopting the ratio of such investment with that of total assets out of total interest claim as follows: Rs. (i) The interest claimed 312321261 (ii) Av. Investment in share & securities (investment in prop. 42392410 Concern M/s. ATREC excluded from total investment) [1/2 (42142410 + 42642419)] (iii) Av. Of total assets [as per A.O taken in working of disallowance in rule 7848390042 8D(2)(ii)]

It is therefore disallowable interest = 42392410 X 312321262 7848390042 = 1686977 It is therefore as against the disallowance of Rs.40130089 by A.O., such disallowance is restricted to Rs.1686977 under rule 8D(2)(ii) or interest relatable to investment in shares & securities. 3.3 The ld. CIT-A regarding the administrative expenses confirmed the order of the AO by observing that the assessee has not justified its is stand based on documentary evidence that it has not incurred any expense in the earning of such exempt income.

1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance u/s.14A of the I.T. Act, to the extent of Rs.67,29,166/- while computing total income of the appellant-company under the normal provisions of the I.T. Act.

7. We have heard the rival contentions of both the parties and perused the materials available on records. The assessee in the instant case has earned dividend income of Rs. 30,03,63,727/- which was received from its subsidiary company namely Adani Mundra SEZ Infrastructure Pvt. Ltd. and from the mutual fund. The assessee against such income has not made any disallowance of the expenses. Therefore the AO made the disallowance of the expenses amounting to Rs. 4,51,72,278/- in pursuance to the provision of section 14A r.w. Rule 8D fo the Act.

7.1 On appeal the ''Ld.CIT (A)'' was pleased to delete the addition made by the AO for Rs. 3,84,43,112/- in part on account of interest expenses. Thus the ''Ld.CIT (A)'' restricted the addition on account of interest expenses amounting to Rs. 16,86,977/- only. The ''Ld.CIT (A)'' also upheld the addition made by the AO on account of administrative expenses amounting to Rs. 50,42,189/-.

7.2 Regarding the disallowance of the interest expenses, admittedly the interest income exceeds interest expenditure claimed in the profit and loss accounts. In fact there was no interest expenditure claim by the assessee in the profit and loss account. The disallowance of the interest income and interest expenditure stands as under: & 2173/AHD/2015 Asstt. Year 2011-12 7

Particulars Amount Rs. Interest income 32,05,71,036/- Interest income from partnership firm 3,40,45,823 Less: Interest expenses 31,51,07,023 Net interest income/(expenses) 3,95,09,836 7.3 We further note that the ITAT in the own case of the assessee bearing no.1623/Ahd/2013 vide order dated 06/09/2018 has deleted the addition made by the AO on account of interest expenses by observing that the interest income exceeds interest expenses. The relevant extract of the order is reproduced as under: 10. In the course of scrutiny proceedings, the AO inter alia noticed that the assessee has earned dividend income to the tune of Rs.30,42,833/- which is exempt from tax. The AO accordingly invoked the provisions of Section 14A of the Act and computed disallowance of expenditure attributable to such exempt income by resorting to formula provided in the Rule 8D of the Income Tax Rules, 1962. The disallowance under Rule 8D also included disallowance of interest amounting to Rs.28,38,6477- in terms of Rule 8D(2)(ii) of the IT Rules which is subject matter of controversy.

11. In first appeal, the CIT(A) granted relief to the assessee against the aforesaid action of proportionate disallowance of interest of the AO and deleted such disallowance.

12. Aggrieved, the Revenue preferred appeal before the Tribunal.

Court, we decline to interfere with the conclusion drawn by the CIT(A) on the issue in favour of the assessee.

7.4 Respectfully following the same we delete the addition confirm by the ''Ld.CIT (A)'' on account of interest expense of Rs. 16,86,977/- 7.5 Regarding the administrative expenses, we note that the assessee claimed that it has not incurred any expenses. However, the learned AR for the assessee before us has not demonstrated based on the documentary evidence that the assessee has not incurred any expenses in connection with the exempted income. Accordingly, we do not find any reason to interfere in the finding of the authorities below. Hence, the ground of appeal of the Revenue is dismissed and ground of appeal of the assessee is partly allowed.

The next issue raised by the Revenue is that the ''Ld.CIT (A)'' erred in deleting the addition made by the AO in part u/s 14A r.w. Rule 8D while determining the book profit u/s.115JB of the Act.

13. We have heard the rival contentions of both the parties and perused the material available on records.

13.1 At the outset we note that the identical issue in the own case of the assessee bearing for the AY 2010-11 vide order dated 06/09/2018 (supra) has been decided in its favor by the ITAT. The relevant extract of the order is reproduced as under:

26. The CIT(A) in first appeal however did not agree with the adjustments so made by the AO. We find that identical issue came up for consideration before the co-ordinate bench in case of Arvind Ltd. vs. DCIT order dated 08.03.2018 cited on behalf of the assessee. The relevant operative part of the aforesaid decision of the co-ordinate bench is reproduced hereunder: "5. We have carefully considered the rival submissions and perused the orders of the authorities below and also several judicial precedents cited. In the present case, we are concerned with the limited controversy as to whether, for the purposes of computation of 'book profit' under s.IISJB, the AO is entitled to increase 'book profit' by the equivalent amount of disallowances as found attributable to exempt income under normal provisions or not. While it is the case of the assessee that in view of long line of judicial precedents, such adjustment in 'book profit' is not permissible, it is the case of revenue that in view of codified law in this regard, the 'book profit' under 115JB has been rightly increased by the revenue.

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6. We notice that issue is evolved and developed by certain judicial precedents. We find at the first instance that the identical issue came up for consideration before the Hon'ble Gujarat High Court in the case of Alembic Ltd. (supra) where the substantial question of law on the point as to whether adjustment made on account of disallowance under S.14A of the can be similarly made for the purposes of computation of 'book profit' under s.IISJB of the Act was answered against the Revenue and in favour of the assessee. We also lake note of decision of the Special Bench rendered in ACIT vs. Vireet Investment Pvt.Ltd. & Anr. !65 ITD 27 lDelhi)[SB] where it was held that the AO was not entitled to tinker with book profits contemplated under s.IISJB towards disallowance made under S.I4A of the Act. We similarly find that judgement of Hon'ble Bombay High Court in C/T vs. Bengal Finance and Investments Pvt.Ltd. in of 2013 order dated 10/02/2015 also complements the issue. Thus, seen on the anvil of the judicial fiat available squarely on the issue, we are disposed to assign merits to the contentions on behalf of the assessee. At this juncture, we pause to note the concern of revenue seeking to plead possible redundancy of clause(f) to Explanation to S.II5JB in the event of disagreement with the action of AO. We are alive to such concerns. However, as noted, we are governed by the superior wisdom available in this regard. Hence, remedy to revenue, if any, perhaps lies elsewhere. Accordingly, respectfully following the decisions governing the field, we direct the AO to delete the adjustments made on account of estimated disallowance determined under S.14A of the Act while computing 'book profit' under u/s.ll5JB of the Act.

13.2 However, we note that admittedly the amount disallowed under section 14A r.w. Rule 8D under normal computation of income cannot be imported while calculating the book profit u/s 115JB of the Act as held in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (supra).

13.3 However, it is also clear that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the clause (f) to Explanation-1 & 2173/AHD/2015 Asstt. Year 2011-12 11 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.” Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).

13.4 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts & circumstances, we feel that ad-hoc disallowance will service the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for & 2173/AHD/2015 Asstt. Year 2011-12 12 restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the Revenue and the assessee are partly allowed.

In the result, the appeal filed by the Revenue is partly allowed.

Coming to the for A.Y. 2011-12. The assessee has raised following grounds of appeal.

1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance u/s.14A of the I.T. Act, to the extent of Rs.67,29,166 while computing total income of the appellant-compnay under the provisions of the I.T. Act.

2. On the facts and in the circumstnaces of the case, the learned CIT(A) erred in confirming disallowance u/s.14A of the I.T. Act, to the extent of Rs.67,29,166 while computing book profit u/s.115JB of the I.T. Act. 3.(A) On the facts and in the circumstances of the case, the learned CITfA} erred in confirming addition made by the Assessing Officer in respect of Professional Fees of Rs.25,04,970, subject to verification of the correct amount to be added as directed by the learned C.I.T. (Appeals). (B) Alternatively and without prejudice to the above ground, the learned C.I.T. (Appeals) ought to have directed the Assessing Officer to exclude the Professional Fees from the total income for the immediately succeeding Assessment Year 2012-13, as otherwise it would amount to double addition of the same income. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming addition to the extent of Rs.2,35,338 out of total development expenses of Rs.12,89,839 in spite of the fact that these expenses were neither debited to the Profit and Loss Account nor claimed by the appellant company by way of deduction while computing total income. 5. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or luring the course of hearing of the appeal.

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The first issue raised by the assessee in grounds no.1 is that ''Ld.CIT (A)'' erred in confirming the disallowance u/s 14A r.w. Rule 8D of the Act in part amounting to Rs.67,29,166/- only.

The next issue raised by the assessee is that the ''Ld.CIT (A)'' erred in confirming the disallowance of Rs.67,29,166/- while determining the book profit u/s.115JB of the Act.

The next issue raised by the assessee is that the ''Ld.CIT (A)'' erred in confirming the addition of Rs. 25,04,970/- on account of Professional Fees.

16.1 However, the assessee claim that the said income has been shown in the subsequent assessment year. But, the AO dis-regarded the contentions of the assessee by holding that the impugned income pertains to the year under consideration and accordingly the same is liable to tax in the year under consideration. Thus, the AO added the sum of Rs. 25,04,970/- to the total income of the assessee.

17.1 The assessee without prejudice to the above also submitted that in case the addition is confirmed on account of impugned income then the same should be reduced from the income of the subsequent year in which such income was offered to tax.

17.2 However, ''Ld.CIT (A)'' dis-regarded the contention of the assessee by observing that the income is to be offered in the year under consideration as per the matching principle. Once the assessee has taken the benefit of TDS amount then the corresponding income should also be offered to tax.

17.3 The ''Ld.CIT (A)'' also rejected the plea of the assessee by observing that the case of the subsequent assessment year 2012-13 is not before him. & 2173/AHD/2015 Asstt. Year 2011-12 15 Therefore he cannot give such direction to the AO to exclude the impugned income from the Professional Fees in the subsequent assessment year.

19.1 The Ld.AR, also submitted that the assessee had paid taxes for the year under consideration under MAT and therefore even the impugned income is added to the total income of the assessee, there will not be any impact on the amount of tax. Therefore adding the professional receipts to the income of the year under consideration will be tax neutral exercise.

21.2 There is no dispute that the impugned income is taxable under the Act, and therefore the same has been offered to tax in the subsequent assessment year. Thus there cannot be any benefit to the Revenue by adding the impugned income to the total income of the assessee in the year under consideration. Hence we are not inclined to uphold the findings of the authorities below. Accordingly we set aside the order of the ''Ld.CIT (A)'' and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

The next issue raised by the assessee is that the ''Ld.CIT (A)'' erred in confirming the addition of Rs. 2,35,338/- out of the total development expenses of Rs.12,89,839/- despite the fact the same was not debited in the profit and loss accounts.

Aggrieved assessee preferred an appeal to the ''Ld.CIT (A)''.

Being aggrieved by the order of the ''Ld.CIT (A)'' the assessee is in appeal before us.

27.1 Admittedly, the assessee did not claim the deduction of such expenditure in its profit and loss account in the year under consideration. As such the impugned expenditure was shown as part of work-in-progress on revenue account. There is no dispute regarding the facts as under: i. The impugned expenses were not claimed in the profit and loss account as a deduction. Thus, the profit shown by the assessee cannot be enhanced by disallowing such expenditure. ii. The impugned expenses being revenue in nature would be claimed as a deduction in the future year by the assessee in which such work in progress will be sold by it. 27.2 Now, the question arises whether the amount of profit declared by the assessee can be enhanced by the amount of expenditure incurred by it which were not claimed as deduction being part of closing inventory. To our mind, the answer stands in favour of assessee i.e. the impugned expenses were never claimed as deduction. Therefore, there is no reason to enhance the profit & 2173/AHD/2015 Asstt. Year 2011-12 19 declared by the assessee. At most, the Revenue can reduce the amount from the closing inventory and disallowed the corresponding expenses.

27.3 For example, the assessee has claimed an expense of ₹ 100 in connection with the inventory by debiting the profit and loss account and simultaneously, adding the same to the closing inventory. As a result, there cannot be any impact on the profit declared by the assessee. Thus in case, the revenue is not satisfied with the value of the closing inventory on account of such expenses, then it can reduce the same from the value of the closing inventory as well as it can disallow the impugned expenses debited in the profit and loss account. In effect, the entire exercise will be tax neutral, having no impact on the profit declared by the assessee.

27.4 To our mind, the analogy as discussed above applies to the case on hand. Therefore, in our considered view, the AO should reduce the impugned expenses from the amount of closing inventory and disallow the corresponding expenses debited in the profit and loss account, leaving the profit as declared by the assessee intact.

27.5 In the backdrop of the above discussion, we proceed to adjudicate the issue on merit whether the impugned expenses needs to be added as a part of the closing inventory. There is no ambiguity that the expenditures incurred by the assessee in connection with the inventories needs to be added in its value. But such expenditure must be based on the documentary evidence. In the case on hand, the learned CIT (A) has given very clear finding that the assessee has not produced the documentary evidence in support of such expenses except a ledger which is not sufficient enough to justify the genuineness of the expenses. The learned AR for the assessee has also not produced any & 2173/AHD/2015 Asstt. Year 2011-12 20 supporting document in connection with such expenses. Therefore, in the absence of documentary evidence, we concur with the finding of the learned CIT (A).

27.6 However, before parting we make it clear that there cannot be any addition to the total income of the assessee on account of such expenses for the reasons as discussed in the preceding paragraph. Accordingly, we direct the AO to reduce the value of the inventory for the work in progress as well as disallow the corresponding expenses debited by the assessee in the profit and loss account. Hence, the ground of appeal of the assessee is allowed in terms of the above.

In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Court on 16/10/2019 at Ahmedabad.