M/S. MAHINDRA HOMES PVT. LTD,MUMBAI vs. ADDL/JT/DY/ACIT/ITO/NFAC, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal in ITA No.2179/Mum/2021 & 1008/Mum/2021 preferred by the order against the final assessment order passed by the Assessing Officer u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel-III, Mumbai (DRP in short) u/s.144C(5) of the Act dated 30/07/2021 & 26/02/2021 respectively for the A.Y.2016-17 & 2017-18 respectively.

2 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

Based on the facts and circumstances of the case, Mahindra Homes Private Limited (hereinafter referred to as the 'Appellant) craves leave to prefer an appeal against the order passed by the Additional / Joint/ Deputy / Assistant Commissioner of Income Tax/ Income tax Officer, National e- Assessment Centre, Delhi [hereinafter referred to as the learned AO] under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the Act), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel (hereinafter referred to as the 'Hon'ble DRP). On the facts and in the circumstances of the case and in law, the learned AO/ Joint Commissioner of Income-tax (OSD)- Transfer Pricing-3(2)(1) (hereinafter referred to as the learned TPO'Y Hon'ble DRP has: Grounds: 1. Erred in assessing the total income of the Appellant at INR 16,21,68,649 as against the income of NIL declared by the Appellant under normal provisions and under MAT provisions of Rs. 2,23,26,983 as against the income of Rs.52,98,129 declared by the Appellant in the return of income. Transfer pricing General.

3 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

4 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

5 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

during the year and considering the balance amount of legal and professional expenses as part of work in progress, thereby inventorizing the same to the total project cost 17. Without prejudice to the above, erred in not allowing proportionate amount of legal and professional expenses disallowed in the assessment order passed for the earlier years (ie. AY 2014-15 and AY 2015-16) which as per the Department stand were considered as integral part of the project cost and added to the cost of work-in-progress/inventory cost; Disallowance of proportionate amount of advertisement and sales promotion expenses of Rs 5,31,49,583/- 18. Erred in not appreciating the fact that advertisement and sales promotion expenses were charged to the profit and loss account as per the accounting treatment enunciated in revised Guidance Note on accounting for real estate transactions issued by ICAI in 2012 and which has been accepted by the statutory auditor also; 19. Erred in considering the entire amount of advertisement and sales promotion expenses charged to the profit and loss account during the year amounting to Rs. 9,17,64,249/- as directly attributable to the project cost; 20. Erred in allowing only 42.08% of the advertisement and sales promotion expenses charged to the profit and loss account during the year by the Appellant as a deduction during the year and considering the balance amount of advertisement and sales promotion expenses as part of work in progress, thereby inventorizing the same to the total project cost; 21. Without prejudice to the above, erred in not allowing proportionate amount of advertisement and sales promotion expenses disallowed in the assessment order passed for the earlier years (i.e. AY 2014-15 and AY 2015-16) which as per the Department stand were considered as integral part of the project cost and added to the cost of work-in-progress/inventory cost, Disallowance of commission and brokerage expenses of Rs 4,98,96,179/- 22. Erred in not appreciating the fact that commission and brokerage expenses were charged to the profit and loss account as per the accounting treatment enunciated in revised Guidance Note on accounting for real estate transactions issued by ICAI in 2012 and which has been accepted by the statutory auditor also; 23. Erred in considering the entire amount of commission and brokerage expenses charged to the profit and loss account during the year amounting

6 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

to Rs. 8,61,46,719 as directly attributable to the project cost, 24. Erred in allowing only 42.08% of the commission and brokerage expenses charged to the profit and loss account during the year by the Appellant as a deduction during the year and considering the balance amount of commission and brokerage expenses as part of work in progress, thereby inventorizing the same to the total project cost, 25. Without prejudice to the above erred in not allowing proportionate amount of commission and brokerage expenses disallowed in the assessment order passed for the earlier years (Le. AY 2014-15 and AY 2015-16) which as per the Department stand were considered as integral part of the project cost and added to the cost of work-in progress/inventory cost Disallowance under section 14A of the Act of Rs 1,63,63,538 26. Erred in disallowing Rs 1,63,63,538 under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (Rules), without appreciating the fact that the investments yielding exempt income were made from internal accruals/ advances received from customers and not from the borrowed funds; 27. Erred in not appreciating the fact that the borrowed funds have no nexus with investment activities of the Appellant 28 Erred in making the disallowance of Rs. 1,63,63,538 under section 14A of the Act r.w. Rule 8D of the Rules, without appreciating the fact that no expenditure is incurred towards earning of exempt income. 29. Erred in not appreciating the fact that the borrowed funds (i.e. debenture proceeds) were utilized exclusively for the business purpose of the Appellant (L.e. mainly towards development of land and consequent construction activities) and not for making investments in mutual funds; 30. Erred in considering the investments made in mutual funds under growth scheme (where no exempt dividend is received) while computing disallowance under section 14A of the Act read with Rule 8D of the Rules: 31. Without prejudice to the above, the Assessing officer while computing the disallowance under section 14A of the Act read with Rule 8D erred in not appreciating the fact that out of total interest expenditure of Rs. 113,04,77,919, Rs. 111.40,37,919 was already included in the cost of the project and hence, only the balance amount of Rs. 1,64,40,000 debited to the profit and loss account, ought to have been considered while computing the disallowance under section 14A of the Act read with Rule 8D of the Rules.

7 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

Disallowance under Section 14A read with Rule 8D of Rs. 1.63.63.538 under MAT provisions 32. erred in making an addition of Rs. 1,63,63,538 to Book Profits for the purpose of section 115JB on account of disallowance u/s 14A of the Act. Double disallowance of interest paid on CCD's under TP provisions as well as under section 14A of the Act 33. Erred in making double disallowance on interest paid on CCD's to associated enterprises, firstly under the TP provisions and secondly while computing disallowance under section 14A of the Act, Short granting of credit of TDS deducted amounting to Rs. 49,10,597/- 34. Erred in short granting of credit of TDS deducted from payments received by the Appellant to the tune of Rs. 49,10,597 Non-granting of set-off of unabsorbed depreciation of Rs. 67,35,500 in the computation sheet 35. Erred in not considering the effect of unabsorbed depreciation of Rs. 67,35,500 while computing total income and tax payable in the computation sheet forming part of the assessment order despite the fact that the learned AO has considered the same while determining total income in the assessment order. Levy of interest under section 234A amounting to 9,40,050/- 36. Erred in levying interest of Rs.9,40,050 under section 234A of the Act with appreciating the fact that return of income was filed by the Appellant within the time limit as prescribed under section 139(1) of the Income-tax Act; Levy of consequential interest under section 234B amounting to Rs. 2,82,01,500/- 37. Erred in computing consequential interest of Rs.2,82,01,500 under section 234B of the Act; Initiation of Penalty under section 271(1)(c) 38. Erred in initiating penalty proceedings under section 271(1)(c) of the Act.

8 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

The Appellant craves leave to add, alter, modify or delete such other objections before or during the course of hearing before the Hon'ble Income Tax Appellate Tribunal, so as to enable the Hon'ble Tribunal to decide on the objections raised by the Appellant, as per law.

6.1. We have heard the rival submissions and perused the materials available on record. As stated supra assessee is a Joint venture (50:50) between MLDL and SCM Real Estate. We find that on 25/07/2013 the assessee raised funds from its shareholders for the land acquisition through issuance of debentures as under:

Type of Compulsory Convertible Optionally Convertible instrument Debentures ('CCDs') (Series A Debentures ('OCDs') (Series B Debentures) Debentures) MLDL Subscriber SCM Real Estate Amount INR 320 crores INR 320 crores

9 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

Date of July 2013 -Approx. 75% July 2013 -Approx. 75% November Investment November 201 3 - Approx. 10% 201 3 -Approx. 10% February 2014 February 2014 -Approx. 15% -Approx. 15% Coupon rate 17.65% gross of tax (15% net of 15% net of tax (17.65% gross of tax) tax) per annum per annum Terms of Fully, compulsorily converted Fully, optionally converted into conversion preference shares on expiry into equity shares on expiry of twelve years from the date of allotment of CCDs Quarterly Quarterly Payment terms

6.2. The nature of disputed international transaction carried out by the assessee with its AE together with Most Appropriate Method (MAM) adopted by the assessee and details of its margins are tabulated as under:- Margin of Rate/ Margin Nature of the Value of the Method Database used the international international Appellant transaction transaction (in INR)

Interest on CCD 56,48,58,349 Comparable NSE, BSE, NSDL 17.65% 35th percentile- 18.00% uncontrolled and Bloomberg (Gross of Median -18. 00% price database tax) or 65th percentile - 18.00% ('CUP') 15% (Net of tax) (Refer page 557 of the (Primary paper book) Analysis)

Other Term loan 35th percentile -16. 00% Method lending rates Median -17.25% offered by 65th percentile - 19.00% various banks in (Refer page 558 and 559 {Secondary India, as of the paper book) Analysis) published by the Reserve Bank of

10 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

6.3. It is not in dispute that Comparable Uncontrolled Price (CUP) method is MAM for the aforesaid international transaction. The assessee took comparable debt instruments for CUP and chose 14 comparables which are listed in page 5 of the order of the ld. TPO, wherein the arithmetic mean was worked out at 18% as against gross interest paid by the assessee at 17.65%. Accordingly, the assessee concluded that its interest payment on CCDs to its AE is at Arm’s Length Price (ALP). The assessee on without prejudice basis, also underwent secondary analysis by using RBI term loan lending rates on a quarterly basis in respect of advances other than export credits and concluded that even on secondary analysis, its interest payment to AE was at ALP, as the said rates were in the range of 16 to 19%.

6.4. The ld. TPO rejected the primary economic analysis of the assessee on BSE, NSE, NSDL and Bloomberg databases for the determination of ALP as well as secondary analysis done using RBI term loan lending rates. The ld. TPO arrived at the ALP interest rate of 8.61% as per Bloomberg database by chosing the same comparables as were chosen for the A.Y. 2014-15 in the case of the assessee, which were also upheld by the ld. DRP. The ld. AR submitted that the ld. TPO undertook a fresh search using Bloomberg database to benchmark the international transaction without appreciating the fact that the circumstances necessitating the determination of price by the ld. TPO as per section 92C(3) of the Act did not exist in the instant case. The ld. TPO selected SVOGL Oil & Gas Energy Ltd and Soma Enterprises Ltd as comparables and determined the ALP of the international transaction of the assessee. We find that the ld. DRP also followed its earlier order passed for the A.Y. 2014-15 vide para 6.2.2. of its directions and upheld the action of the ld. TPO. We find that this Tribunal in assessee’s own case for the A.Y. 2014-15 in ITA No.

11 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

7159/Mum/2018 dated 03/08/2022 had rejected the above two comparables chosen in A.Y. 2014-15 and deleted the entire transfer pricing adjustment made by the ld. TPO by observing as under:-

12 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

account the material factors relating to time of the transaction affecting the price. We though agree that, a high degree of comparability is required under CUP, but in absence of such a comparable data, a minor adjustment can be made to eliminate the material effect of time difference for arriving at a comparable uncontrolled price. Now before us, the assessee had filed two comparable transactions for the year 2009, that is, for the same financial year in the case of Shriram Transport Financial Company Ltd. and Tata Capital Ltd., wherein, for credit rating of AA Enterprises the coupon rate of interest per annum was between 11% to 12% for a tenor of 60 months. The yield on redemption is also around 11.25% to 12%. If for a credit rating company AA or AA(+) the interest rate is ranging between 11% to 12%, then in the case of the assessee which is admittedly BBBQ credit rating company, 11.30% interest paid by the assessee to its AE is much within the ami's length rate. This data/document from public domain now made available before us is worth reiving to benchmark and analyse the current transaction of coupon rate of interest paid/payable on CCDs issued by the assessee. Accordingly, we hold that 11.30% interest rate is at arm's length price. Thus, in our conclusion, the transfer pricing adjustment made by the TPO and as confirmed by the DRP at Rs.48,53,19,310/stands deleted, and consequently ground no. 1 is allowed." 7.1. In the TP study the assessee had taken the comparables in CUP method related to database used NSE, BSE and NSDL database margin of the appellant is 17.65% gross or 15% net of tax system whereas the rate or merging as per database 18.13%. The assessee in secondary analysis calculated the rate at the rate of 17.89% on basis of the term loan lending rates offered by various banks in India as published in the Reserve Bank of India. the learned TPO undertook a fresh search using Bloomberg database to benchmark the international transaction without appreciating that the circumstances necessitating determination of price by the TPO as mentioned in subsection 3 of section 92Cof the Act did not exist in the instant case. The arm’s length rate of interest in CCDs was arrived @8.58% asper Bloomberg database. The assessee applied the same rate of interest both in foreign AE and domestic AE. No other uncontrolled comparable is determined during the TP study under CUP method. The application of CUP method as MAM without taking care the risk adjustment in terms of Rule 10B(1)(e )(iii) of the Rules, which are generally involved in a third-party transaction visà- vis between AEs to facilitate & maintain the level and was not transaction of rendering actual service to AE. So, the benchmarking done by the appellant by way of search conducted on NSE, BSE& NSDL comprising of following comparable should be accepted in TP study by the TPO.

13 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

The revenue in TP study had considered the interest paid on loans in the oil, gas and infrastructure industries as comparable to interest on CCDs under cup method. So, the two comparables from list of comparable selected by the TPO be rejected as per the ground number 9 of the assessee. During the study the TPO should take care specific characteristics of the products being compared, functions performed, contractual terms and conditions. It is directed that the benchmarking undertaken by the assessee under CUP method using correct filter on NSE, BSE and NSDL data. We accepted, arithmetic mean of which comes 18.13%then the interest rate on CCD in respect of the impugned international transaction of 17.65% is at arm’s length. The benchmark performed on Bloomberg database by the appellant be considered, the impugned international transaction of interest on CCD paid at 17.65% is at arm’s length. Respectfully following the decision in the aforesaid Judgment of Hon’ble Bombay jurisdictional High Court and in absence of any contrary decision brought to the notice of the Bench by the Ld. D.R, we delete the T.P. adjustment addition of Rs.16,45,67,968/- proposed by the TPO and made by the A.O. in the draft assessment order.”

6.5. Respectfully following the same, we direct the ld. TPO to delete the TP adjustment made towards interest paid on CCDs to its AE. Accordingly, the Ground Nos. 3 to 13 raised by the assessee are allowed.

7.1. During the course of assessment proceedings, details were called for by the ld. AO with respect to expenses debited to profit and loss account and income credited thereon. It was noticed by the ld. AO that assessee had earned interest income of Rs 65,91,521/- which was reduced from the business income for taxing it under income from other sources. From the perusal of computation of income and breakup of expenses filed with

14 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

the office, it was noticed that the assessee company had claimed various expenses as deduction as under:-

Legal and Professional Fees – Rs 7,15,26,276/- Advertisement & Sales expenses – Rs 9,17,64,249/- Commission & Brokerage expenses - Rs 8,61,46,719/-

7.2. The assessee submitted that it had incurred certain indirect expenses debited to profit and loss account of which deduction was claimed while filing the return of income on account of the same being revenue in nature as mandated in Accounting Standard 7 (AS-7) and Guidance Note on Accounting for Real Estate Transactions issued by The Institute of Chartered Accountants of India (ICAI). The ld. AO on perusal of the details filed by the assessee in respect of the aforesaid three expenditures observed that the assessee had recognized 42.08% of sale consideration received / receivable till 31/03/2016 as revenue for the year. Accordingly, he held that allowing the entire expenditure during the year would present a distorted picture of revenue for the year. With these observations, the ld. AO concluded that only 42.08% of these expenses would be allowed to assessee as deduction and remaining portion would be capitalized to be added to construction cost of work in progress of the assessee company. The ld. DRP by following its own order for the A.Y. 2014-15 held that the said expenditures would have to be capitalized and accordingly upheld the action of the ld. AO for legal & professional charges and Advertisement & sales promotion expenses. With regard to Commission & Brokerage expenses the ld. DRP onbserved that these were incurred in connection with apartment bookings etc and hence it is project oriented. Moreover, the ld. DRP also observed that the assessee could not prove that the said expenditure is incurred for projects already completed.

15 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

With these observations, the ld. DRP upheld the action of the ld. AO with regard to Commission & Brokerage expenses also.

7.3. The ld. AR submitted that prior to 2002, real estate developers were treated at par with construction contractors and they also followed accounting treatment prescribed in AS-7 ‘Construction Contracts’ issued by ICAI. However, after revision of AS-7 in 2002, the real estate developers other than contractors, migrated to AS-9 ‘Revenue Recognition’ which typically includes enterprises engaged in sale of goods, rendering of services etc. Since this accounting standard required recognition of revenue on transfer of significant risks and reward of ownership, the real estate industry was not able to identify the transfer triggering point and thus determine recognize event. Accordingly, ICAI came out with Guidance Note on Real Estate Developers in 2006 and clarified the method of recognizing revenue under Project Completion Method proportionately over the period of the project. Since parameters under real estate developers have similar economic substance akin to construction contracts, the revised Guidance Note in 2012 prescribes application of Percentage of Completion Method. Accordingly, it was submitted that the assessee herein had adopted the Guidance Note on Accounting for Real Estate transactions issued by ICAI in 2012 for recognizing revenue and expenditure for books and tax purposes and ha been consistently following the same over the years. The assessee submitted that as per the Guidance Note on Real Estate Transactions 2012 issued by ICAI, the revenue and expenditure is to be recognized as under:-

16 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

"Project costs in relation to a project ordinarily comprise (a) Cost of land and cost of development rights- All costs related to the acquisition of land, development rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses (b) Borrowing costs- In accordance with Accounting Standard (AS) 16, Borrowing Costs which are incurred directly in relation to a project or which are apportioned to a project (c) Construction and development costs- These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project 40. Further, as per para 2.3 of the Real Estate Guidance Note: "Construction costs and development costs that relate directly to a specific project include: (a) land conversion costs, betterment charges, municipal sanction fee and other charges for obtaining building permissions. (b) site labor costs, including site supervision (c) costs of materials used in construction or development of property (d) depreciation of plant and equipment used for the project. (e) costs of moving plant, equipment and materials to and from the project site. (f) costs of hiring plant and equipment. (g) costs of design and technical assistance that is directly related to the project. (h) the estimated costs of rectification and guarantee work, including expected warranty costs; and (i) claims from third parties." 41.Further, it is categorically mentioned in Para 2.4. of the Real Estate Guidance note that "The following cost should not be considered part of construction cost and development costs if they are material: (a) General administration costs (b) Selling costs (c) Research and development costs (d) Depreciation on idle plant and equipment

17 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

(e) Cost unconsumed or uninstalled material delivered at site and (f) Payments made to sub-contractors in advance of work performed.

7.4. The ld. AR submitted that as per the Guidance Note stated supra, it provides that :- a) Direct and indirect expenditure relating to the construction activity should be inventorised / added to the project cost. b) Indirect expenses not related to the construction activity should not be inventorised/ added to the project cost and should be charged to the profit and loss account. These expenses represent general and administrative / business overheads which are not attributable but are incurred for smooth business purposes / operations.

7.5. Accordingly, the assessee pleaded that the following indirect expenses were debited to the profit and loss account by the assessee :-

Sr. No. Particulars Amount (in Rs.) Amount Advertisement & Sales Promotion 9,17,64,249 (in Rs.) Expenses 2. Commission & Brokerage 8,61,46,619 3. Legal & Professional Fees 7,15,26,276 4. Repairs & Maintenance 83,13,256 5. Payment to auditors 11,30,806 6. Rent expenses 7,52,400 7. Communication expenses 12,75,971 8. Interest others 1,198 9 Rates & taxes 1,41,17,729 10 Travelling & Conveyance 11,11,857 11 Printing & Stationery 3,02,101 12. Miscellaneous expenses 8,42,135

18 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

7.6. The ld. AR relied on the provisons of section 37(1) of the Act which states that for the purpose of availing deduction thereon, the expenses should be – (i) should be incurred in the previous year relevant to the assessment year; (ii) should not be personal in nature; (iii) should not be capital in nature; and (iv) should be incurred wholly and exclusively for the purpose of the business

7.7. Accordingly , the ld. AR submitted that the indirect revenue expenses incurred towards legal and professional charges, advertising and sales promotion and commission & brokerage expenses should be allowed as deduction u/s 37(1) of the Act once it is proved that they are incurred for the purpose of business of the assessee. In the instant case, there is absolutely no dispute that the said expenditures were incurred by the assessee wholly and exclusively for the purpose of business of the assessee.

7.8. The ld. AR also placed reliance on the decision of Co-ordinate Bench of this tribunal in assessee’s own case for the A.Y. 2014-15 in ITA No. 7159/Mum/2018 dated 03/08/2022 wherein the aforesaid expenditures were allowed as revenue expenditure.

7.9. The ld. DR vehemently supported the orders of the lower authorities and also stated that the decision rendered by this tribunal for the A.Y.

19 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

2014-15 would not apply to A.Y. 2016-17 in as much as during the year, certain revenues were indeed recognized by the assessee and expenditures to the extent of recognition of revenue in percentage terms has been allowed by the ld. AO as revenue expenditure in accordance with the matching concept of income and revenue.

7.10. It is not in dispute that the expenditures incurred by the assessee were incurred wholly and exclusively for the purpose of business only. What is required to be analysed here is as to whether they are connected with the project or to be allowed as general administrative and selling costs. In any event, allowing revenue expenditure to the extent of 42.08% of relevant expenditure is grossly incorrect. There is absolutely no basis for the ld. AO for doing this. All said and done, the relevant expenditure has already been incurred by the assessee. Restricting the business expenditure to the extent of business income is certainly not provided in the entire scheme of the Act. Considering the totality of facts and circumstances of the case, we deem it fit and appropriate, in the interest of justice and fair play, to remand this entire issue to the file of ld. AO for adjudication in the light of the following directions:-

a) Restricting the allowability of expenses to the extent of 42.08% is wrong. b) Expenses directly attributable to Pre-construction and construction period should be identified and added to the Inventory/ cost of work in progress. c) Other expenses should be allowed as revenue expenses as General Administration and Selling Expenses. The ld. AO is directed to carry out the verification in the light of aforesaid directions and then decide the issue accordingly. Hence the Ground Nos.

20 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

14 to 25 raised by the assessee before us are allowed for statistical purposes.

8.1. We have heard the rival submissions and perused the materials available on record. Before us, the ld. AR stated that if Ground No. 30 raised by the assessee alone is adjudicated, the other grounds i.e Ground 26 to 29 and 31 would become academic in nature. We find that the assessee had derived dividend income of Rs 77,77,844/- from mutual funds which were closed during the year. The remaining mutual funds invested by the assessee are only growth oriented mutual funds, on which receipt of dividend or even declaration of dividend is not possible. Moreover, from the perusal of the balance sheet, we find that all these growth oriented mutual funds were invested only during the year. Accordingly, the ld AR argued that the computation mechanism provided in Rule 8D of the Income Tax Rules fails and hence no disallowance u/s 14A of the Act could be made thereon.

8.2. The assessee had pleaded that these investments were made out of funds received as advance from customers for sale of flats and hence no expenditure has been incurred for earning the dividend income. Accordingly, no suo moto disallowance was made by the assessee in the return of income u/s 14A of the Act. The ld. AO however did not heed to these contentions of the assessee and proceeded to make disallowance u/s 14A of the Act by applying the computation mechanism provided under second and third limb of Rule 8D(2) of the Rules as under:-

21 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

Under Rule 8D(2)(ii) - Rs 1,56,66,049/- Under Rule 8D(2)(iii) - Rs 6,97,489/- ------------------------ Rs 1,63,63,538/- This action of the ld. AO was upheld by the ld. DRP.

8.3. We find that the assessee had received dividends from certain mutual funds which were duly redeemed / closed during the year itself. The balance mutual funds outstanding at the balance sheet date were only growth oriented mutual funds, which would not fetch any exempt income in the form of dividend, as growth funds are aimed at achieving capital appreciation. Hence we are in agreement with the ld. AR that the computation mechanism provided in Rule 8D(2) of the Rules fails here. For the sake of convenience, the details of mutual funds redeemed during the year on which dividends were received and mutual funds outstanding at the end of the year are as under:-

22 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

Kotak Growth - 90,00,000 - - 90,00,000 liquid scheme plan A Kotak Growth - 5,37,50,631 - - 5,37,50,631 floater short-term HDFC HDFC Dividend - 11,17,50,000 6,99,175 11,24,49,175 - Liquid fund SBI SBI Dividend - 6,50,00,000 1,43,437 6,51,43,437 - Premier Liquid Fund SBI Growth - 11,51,43,437 - - 11,51,43,437 Premier Liquid Fund DSP DSP Dividend - 3,80,00,000 38,020 3,80,38,0202 - Blackrock Blackrock Money Manager Fund DSP Growth - 3,80,38,020 - - 3,80,38,020 Blackrock Money Manager Fund - 77,77,844 27,89,95,432

8.4. We hold that the computation mechanism provided in Rule 8D(2) of the Rules fails in the instant case and hence no disallowance u/s 14A of the Act need to be done in the instant case by applying Rule 8D(2) of the Rules. However, the purpose of section 14A of the Act is only to ensure that no expenses are claimed as deduction against the exempt income. Admittedly, the assessee had earned exempt income of Rs 77,77,844/- during the year. Hence some expenditure is definitely to be disallowed

23 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

u/s 14A of the Act thereon. Accordingly, we feel that the disallowance of administrative expenses at the rate of 1% of dividend income u/s 14A of the Act would meet the ends of justice. This decision would also be in consonance with the decision of Hon’ble Calcutta High Court in the case of CIT vs R.R.Sen & Brothers (P) Ltd in G.A. No. 3019 of 2012 dated 04/01/2013 wherein it was held that 1% of dividend income would have to be disallowed u/s 14A of the Act. Though this decision was rendered for Asst Year 2006-07 (i.e pre Rule 8D time), still the analogy could be drawn for the instant case for justifying the disallowance of expenses u/s 14A of the Act. Hence we direct the ld.AO to disallow Rs 77,778/- u/s 14A of the Act under normal provisions of the Act. Accordingly, the Ground Nos. 26 to 31 are partly allowed.

9.1. We have heard the rival submissions and perused the materials available on record. We find that the ld. AO in the assessment order had disallowed a sum of Rs 1,63,63,538/- u/s 14A of the Act while computing book profits u/s 115JB of the Act. This disallowance is done as per the computation mechanism provided in Rule 8D(2) of the Rules. We have already held hereinabove the computation mechanism provided in Rule 8D(2) of the Rules fails in the instant case. In any case, no disallowance could be made in terms of clause ‘f’ of Explanation 1 to section 115JB(2) of the Act by applying the computation mechanism provided in Rule 8D(2) of the Rules as has been held by the Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27 (Del) (SB). However, as directed in Ground Nos. 26 to 31 supra, the disallowance in

24 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

terms of clause ‘f’ of Explanation 1 to section 115JB(2) of the Act should be Rs 77,778/-. Hence the Ground No. 32 raised by the assessee is partly allowed.

25 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

ITA No. 2179/Mum/2021 – Assessee Appeal – Asst Year 2017-18 17. The Ground No. 1 raised by the assessee is general in nature and does not require any specific adjudication.

26 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

the assessee by way of rectification order. Hence the Ground No. 16 is hereby dismissed.

Order pronounced on 30/09/2022 by way of proper mentioning in the notice board.

Sd/- Sd/- (SANDEEP SINGH KARHAIL) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 30/09/2022 KARUNA, sr.ps

27 ITA No.2179/Mum/2021 & 1008/Mum/2021 M/s. Mahindra Homes Pvt. Ltd.,

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Sr. Private Secretary / Asstt. Registrar) ITAT, Mumbai