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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYASHRI SANDEEP SINGH KARHAIL
Date of Hearing – 23/04/2025 Date of Order - 25/04/2025
O R D E R PER SANDEEP SINGH KARHAIL, J.M.
The assessee has filed the present appeal against the impugned order dated 18.12.2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2018-19.
In this appeal, the assessee has raised the following grounds: - “Ground I: Not restricting the disallowance under section 14A to exempt income
1.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance u/s. 14A r.w.r. 8D amounting to Rs. 1,91,18,144 and in denying the Appellant's claim made during the assessment proceedings to restrict the disallowance to the extent of exempt income of Rs. 15,40,235. 1.2 In doing so, the Id. CIT(A) further erred in denying the Appellant's claim of restricting the s. 14A disallowance to the extent of exempt income; based on the decision of the Hon'ble Supreme Court in the case of Goetze India Ltd. and Wipro Ltd. 1.3 The Appellant prays that the disallowance under section 14A be restricted to Rs. 15,40,235 being the amount of exempt income. Ground II: Disallowance of Rs. 1,02,73,260 being Maintenance Expenses (Versova) – BSRCL 2.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the maintenance expenses related to flats in the Versova Property, allocated to the share of the land owner, although related to the Appellant's real estate business do not qualify as revenue expenses under section 37(1) on the alleged ground that they are linked to a capital asset and a legal dispute. 2.2 The CIT(A) further erred in holding that the liability, in respect of the expenses which are held to be not allowable, has not crystalised yet and that it is a contingent liability and not an ascertained one. 2.3 The Appellant prays that a sum of Rs.1,02,73,260 being Maintenance Expenses (Versova) - BSRCL be allowed as a deduction. Ground III: Denial of deduction of Rs. 85,686 being interest on delayed payment of TDS/GST: 3.1 On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in confirming the disallowance of interest of Rs. 85,686 paid on delayed payment of TDS/GST. 3.2 The Appellant prays that the interest on delayed payment of TDS/GST be allowed u/s. 37(1).”
The issue arising in ground no.1, raised in assessee’s appeal, pertains to disallowance under section 14A of the Act.
The brief facts of the case pertaining to this issue as emanating from the record are: The assessee is a builder, developer and financer. For the year under consideration, the assessee filed his return of income on 27.10.2018, declaring a total income of Rs. Nil. The return filed by the assessee was selected for complete scrutiny through CASS, and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. During the year under consideration, the assessee earned dividend income of Rs.15,40,235/- on units of mutual funds, which was claimed as exempt by the assessee. The assessee made a suo motu disallowance of Rs.1,91,18,144/- under section 14A r.w. Rule 8D of the Income Tax Rules, 1962 (“the Rules”) while filing its return of income. During the assessment proceedings, the assessee raised a specific plea that though disallowance under section 14A r.w. Rule 8 of the Rules has been computed at Rs.1,91,18,144/-, however there are certain decisions which have held that the disallowance under section 14A of the Act cannot exceed the amount of income which is claimed as exempt. Thus, the assessee during the assessment proceedings submitted that the disallowance under section 14A of the Act should be restricted to Rs.15,40,235/- being the dividend income earned by the assessee and claimed as exempt while filing the return of income. The Assessing Officer (“AO”) vide order dated 22.04.2021 passed under section 143(3) r.w. section 144B of the Act did not grant any relief to the assessee and upheld the suo motu disallowance of Rs.1,91,18,144/- made under section 14A of the Act.
The learned CIT(A), vide impugned order, dismissed the grounds raised by the assessee on this issue and held that the application of the provisions of Rule 8D of the Rules is mandatory when the AO is not satisfied with the correctness of the disallowance made by the taxpayer. The learned CIT(A) further held that the AO acted in accordance with law and correctly applied the provisions of Rule 8D of the Rules. Accordingly, the disallowance under section 14A r.w. Rule 8D of the Rules amounting to Rs.1,91,18,144/- was confirmed by the learned CIT(A). Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the fact that the assessee earned dividend income on units of mutual funds amounting to Rs.15,40,234/-, which was claimed as exempt while filing the return of income. There is further no dispute regarding the fact that the assessee suo motu computed the disallowance under section 14A r.w. Rule 8D of the Rules amounting to Rs.1,91,18,144/-. However, we find that before the lower authorities, the assessee on the basis of judicial pronouncements, raised a plea that the disallowance under section 14A of the Act should be restricted to the dividend income which was claimed as exempt by the assessee.
We find that the Hon’ble Supreme Court in Maxopp Investment Ltd. vs. CIT, reported in (2018) 402 ITR 604 (SC), upheld the disallowance under section 14A of the Act to the extent of exempt income earned by the taxpayer. We further find that the Hon’ble Jurisdictional High Court in Nirved Traders Pvt. Ltd. vs. DCIT, in of 2017, vide judgment dated 23.4.2019, held that the disallowance under section 14A of the Act cannot be more than the exempt income. Thus, respectfully following the aforesaid decisions, we find merit in the plea of the assessee that the disallowance under section 14A of the Act is to be restricted to the amount of exempt income earned by the assessee during the year under consideration.
During the hearing, the learned Departmental Representative (“learned DR”) submitted that in the present case, the suo motu disallowance made by the assessee amounts to Rs.1,91,18,144/-, however the exempt income earned by the assessee amounts to Rs.15,40,235/-, and therefore, if the disallowance under section 14A is restricted to the amount of exempt income earned by the assessee then the same will result in assessed income to be lower than the returned income, which is not permissible. However, we find that it is a settled position that there is no prohibition/restriction/mandate in law that the assessed income cannot be lower than the returned income.
We find that the Hon’ble Calcutta High Court in CIT vs. Bhaskar Mitter, reported in (1994) 73 Taxman 437 (Cal), held that the law empowers the ITO to assess the income of the assessee according to law and determine the tax payable thereon and thus, the Revenue Authorities cannot say that merely because the assessee has returned a figure which is higher than the value determined in accordance with correct legal principles, such higher amount and not the correct amount should be lawfully assessed. The relevant findings of the Hon’ble Calcutta High Court, in the aforesaid decision, are reproduced as follows: -
“The revenue authorities, in our view, cannot be heard to say that merely because the assessee has returned a figure which is higher than the annual value determined in accordance with the correct legal principles, such higher amount and not the correct amount should be lawfully assessed. An assessee is liable to pay tax only upon such income as can be in law included in his total income and which can be lawfully assessed under the Act. The law empowers the ITO to assess the income of an assessee according to law and determine the tax payable thereon. In doing so he cannot assess an assessee on an amount, which is not taxable in law, even if the same is shown by an assessee. There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law (sic). It is always open to an assessee to take the plea that the figure, though shown in his return of total income, is not taxable in law.”
We further find that the Hon’ble Jurisdictional High Court in Balmukund Acharya vs. DCIT, reported in (2009) 310 ITR 310 (Bom), held that if any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that the only legitimate taxes due are collected. The relevant findings of the Hon’ble Jurisdictional High Court, in the aforesaid decision, are reproduced as follows: - “31. Having said so, we must observe that the Apex Court and the various High Courts have ruled that the authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected (see S.R. Kosti v. CIT [2005] 276 ITR 165 (Guj.), CPA Yoosuf v. ITO [1970] 77 ITR 237 (Ker.), CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi), CIT v. Archana R. Dhanwatey [1982] 136 ITR 355(Bom.).
If particular levy is not permitted under the Act, tax cannot be levied applying the doctrine of estoppel. (See Dy. CST v. Sreeni Printers [1987] 67 SCC 279.
This Court in the case of Nirmala L. Mehta v. A. Balasubramaniam, CIT [2004] 269 ITR 1 has held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. In the case on hand, it was obligatory on the part of the Assessing Officer to apply his mind to the facts disclosed in the return and assess the assessee keeping in mind the law holding the field.”
Therefore, respectfully following the aforesaid decisions, we do not find any merit in the objections raised by the learned DR. Accordingly, the AO is directed to restrict the disallowance computed under section 14A r.w. Rule 8D of the Rules to the amount of exempt income, i.e., Rs. 15,40,235/-, earned by the assessee during the year under consideration. As a result, ground no.1 raised in assessee’s appeal is allowed.
The issue arising in ground no.2, raised in assessee’s appeal, pertains to the disallowance of maintenance expenses incurred by the assessee.
The brief facts of the case pertaining to this issue, as emanating from the record, are: In the Profit & Loss Account, the assessee debited an expenditure of Rs.1,02,73,216/- being the maintenance expenses incurred at a housing project in Versova. The assessee suo motu disallowed the said expenditure and added the same to its total income while computing the total income for the year under consideration. During the assessment proceedings, the assessee requested to allow the maintenance expenditure amounting to Rs.1,02,73,260/-, which was suo motu disallowed by the assessee. The AO, vide assessment order, rejected the submission of the assessee by placing reliance upon the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. vs. CIT, reported in (2006) 284 ITR 323 (SC).
The CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the disallowance of maintenance expenses, by observing as follows: -
“5.5 Disallowance of Maintenance Expenses (Versova) - BSRCL of Rs. 1,02,73,260 The appellant claimed a deduction of Rs. 1,02,73,260 as maintenance expenses related to the Versova property. These expenses were incurred in connection with a legal dispute involving the Bombay Slum Redevelopment Corporation Limited (BSRCL). The appellant contended that the maintenance expenses were a necessary business expenditure and should be allowed as a deduction. The Assessing Officer (AO) disallowed this amount, asserting that it was not an allowable business expense. The appellant argued that the expenses incurred were directly related to maintaining and managing the Versova property, which was integral to his real estate and development business. The appellant further contended that the legal dispute and related maintenance costs were necessary to protect his business interests and, therefore, should qualify as deductible expenses under Section 37(1) of the Income-tax Act, 1961. The AO disallowed the maintenance expenses, reasoning that they were not incurred for the purpose of earning income but rather in relation to an ongoing legal dispute. The AO classified these expenses as capital or personal in nature, rather than revenue expenses incurred wholly and exclusively for the business. The AO also noted that the expenses had no direct nexus with the income- generating activities of the appellant's business and were instead linked to property maintenance and legal issues. The expenses in question were incurred for the maintenance of the Versova property, which is involved in a legal dispute. While the appellant argued that these expenses were essential for protecting the business's interests, the AO concluded that they were not revenue expenses incurred for the normal course of business. Instead, the expenses were more closely related to the preservation of a capital asset and the legal dispute surrounding it. Moreover, the liability has not crystallised yet. It is still a contingent liability & not an ascertained one. The I.T. Act, clearly doesn't allow any expenses as a provision or a contingent one. Based on the analysis of the facts, the legal provisions, and judicial precedents, the disallowance of Rs. 1,02,73,260 as maintenance expenses related to the Versova property is upheld. The expenses, although related to the appellant's real estate business, do not qualify as revenue expenses under Section 37(1) because they are linked to a capital asset and a legal dispute. Moreover, the liability has not been as ascertained yet & still contingent. Therefore, the expenses cannot be considered as having been incurred wholly and exclusively for the purpose of generating business income. The disallowance of Rs. 1,02,73,260 towards maintenance expenses related to the Versova property is confirmed, and the appeal of the appellant on this ground is dismissed.”
Being aggrieved, the assessee is in appeal before us.
We have considered the submission of both sides and perused the material available on record. In the present case, under a Development Agreement dated 10.03.2003 entered into by the assessee with Bombay Slum Redevelopment Corporation Ltd. (“BSRCL”), the assessee constructed a building known as Bay View. The Occupancy Certificate in respect of Wings A and B of the building were received by the assessee on 09.01.2012. Under the terms of the Agreement dated 10.03.2003, 39 flats in the said building were allocated to BSRCL and 48 flats were allocated to the assessee. All the 48 flats were sold by the assessee, and the profit arising on the sale was offered for taxation in the assessment year 2013-14. However, the possession of flats allotted to BSRCL was not handed over to BSRCL due to a dispute between the assessee and BSRCL. As per the assessee, the said dispute was sent for arbitration, and an Arbitral Award was passed on 07.09.2018 by the Ld. Sole Arbitrator. In an appeal filed by the BSRCL against the aforesaid Arbitral Award, the Hon’ble Bombay High Court set aside the Arbitral Award. Aggrieved by the order passed by the Hon’ble Single Judge of the Hon’ble Bombay High Court, the assessee preferred an appeal before the Division Bench of the Hon’ble Bombay High Court, which was pending consideration. As there was no clear direction that BSRCL had to pay the assessee the maintenance expenditure amounting to Rs.1,02,73,260/- incurred by the assessee in respect of flats allotted to BSRCL, the assessee raised an additional plea before the AO for deduction of the expenditure, even though while filing the return of income, the said expenditure was suo motu disallowed by the assessee. As per the assessee, even though certain flats were allotted to BSRCL, the assessee incurred the maintenance expenditure in respect of those flats so that there is no damage to its reputation being a builder. We find that in the note attached to the computation of income, the assessee duly made a declaration regarding the aforesaid facts and also reserved the right to claim this amount as an expenditure at an appropriate time. The assessee further claimed that since the matter is sub judice, the amount, though debited to the Profit & Loss Account, is not claimed as a deduction out of abundant caution.
16. From the perusal of the orders passed by the lower authorities, we find that the AO, at the outset, dismissed the plea of the assessee by placing reliance upon the decision of the Hon’ble Supreme Court in Goetze India Ltd. (supra), without going into the merits of the claim. We further find that the learned CIT(A) has rendered certain findings and also discussed some findings of the AO, as noted in the foregoing paragraph. However, we do not find any such finding being rendered by the AO from the perusal of the assessment order. Thus, it is evident that, as regards the claim of deduction of maintenance expenditure by the assessee, there is no factual examination by either of the lower authorities. Therefore, we deem it appropriate to restore this issue to the file of the Jurisdictional AO for de novo adjudication as per law after considering the material/evidence placed on record by the assessee. Needless to mention, no order shall be passed without affording reasonable and adequate opportunity of hearing to the assessee. With the above directions, the impugned order on this issue is set aside, and ground no.2 raised in assessee’s appeal is allowed for statistical purposes.
17. The issue arising in ground no.3, raised in assessee’s appeal, pertains to the disallowance of interest on delayed payment of TDS.
Having considered the submissions of both sides and perused the material available on record, we find that the learned CIT(A), vide impugned order, upheld the disallowance of interest on delayed payment of TDS under section 37(1) of the Act on the basis that the interest paid on delayed payment of TDS arises because the assessee failed to comply with statutory requirements and it is not an expenditure incurred for the primary purpose of conducting business operations.
We find that the Hon’ble Bombay High Court in Ferro Alloys Corporation Ltd. vs. CIT, reported in (1992) 196 ITR 406 (Bom), held that the interest levied for delayed payment of TDS is not an allowable business expenditure. The relevant findings of the Hon’ble Bombay High Court, in the aforesaid decision, are reproduced as follows: -
“At the instance of the assessee, the following question of law is referred for the opinion of this court under section 256(1) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the claim for deduction of interest levied under section 220(2) of Rs. 6,03,168, interest levied under section 215 of Rs. 1,38,506 and interest levied under section 201(1A) of Rs. 66,590 was rightly rejected as not allowable under section 37 of the Income-tax Act, 1961, for the assessment year 1976-77?" The assessee was required to pay the following amounts as interest. Rs. 6,03,168 under section 220(2), Rs. 1,38,506 under section 215, and Rs. 66,590 under section 201(1A) of the Income-tax Act. These amounts were claimed as business expenditure under section 37 of the Income-tax Act. The Income-tax Officer, the Commissioner in first appeal and the Tribunal in second appeal, rejected the said claim as not allowable under section 37 and it is against the above basic undisputed background that the question has been referred. The point stands concluded against the assessee by the consistent view of this court right from Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 to CIT v. Ghatkopar Estate and Finance Corporation ( P) Ltd. [1989] 177 ITR 222 (Bom). The Delhi High Court in the case of Bharat Commerce Industries Ltd. v. CIT [1985] 153 ITR 275 and the Kerala High Court in the case of Federal Bank Ltd. v. CIT [1989] 180 ITR 37, have also taken the same view. Very fairly, Shri Bhide, learned counsel for the assessee, informs us that there is no decision which has taken a contrary view.”
We further find that the issue whether the interest under section 201(1A) of the Act paid by the assessee was an expenditure incidental to business and allowed as a deduction from the profits and gains of the business, came up for consideration before the Hon’ble Madras High Court in CIT vs. Chennai Properties & Investment Ltd., reported in [1999] 239 ITR 435 (Madras). While answering the issue in negative and in favour of the Revenue, the Hon’ble Madras High Court, after considering the decision of the Hon’ble Supreme Court in the case of Bharat Commerce & Industries Ltd. vs. CIT, reported in [1998] 230 ITR 733 (SC), observed as follows: - “14. As already noticed, the payment of interest which takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be paid but not paid in time, which rendered (sic) the assessee liable for payment of interest, was in the nature of a direct tax and in settlement of the income-tax payable under the Income-tax Act. The interest paid under section 201(1A), therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by the learned counsel for the assessee.
15. The counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Mahalakshmi Sugar Mills Co. (supra) also relied on the decisions of the Apex Court in the cases of Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR 684 / 67 Taxman 546 ; Malwa Vanaspati & Chemical Co. v. CIT[1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. v. CIT[1994] 205 ITR 163. In all those cases, the Court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further, liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure.
The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce & Industries Ltd. (supra) rejected the argument advanced by the assessee that retention of money payable to the State as tax or income-tax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention, would assume the character of business expenditure. The Court held that an assessee could not possibly claim that it was borrowing from the State the amounts payable by it as income-tax and utilising the same as capitalization in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure.
The question referred to us, therefore, is required to be and is answered in the negative, in favour of the revenue and against the assessee. The revenue shall be entitled to costs in the sum of Rs. 1,000.”
Thus, respectfully following the decisions of the Hon’ble High Courts as cited supra, we do not find any merits in the claim of the assessee in seeking deduction under section 37(1) of the Act in respect of interest on delayed payment of TDS. Accordingly, the impugned order on this issue is upheld, and ground no.3 raised in assessee’s appeal is dismissed.
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 25/04/2025