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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “C”, MUMBAI BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER (A.Y. 2011-12) M/s Arnav Gruh Ltd. 6th Floor, Akruti Trade Centre, Road No.7, Marol, MIDC, Andheri (East), Mumbai-400093. PAN: AAACA4900E ...... Appellant Vs. ACIT, Central Circle-32, Aayakar Bhavan, M.K. Road, Mumbai-400020. ..... Respondent Appellant by : None Respondent by : Sh. R. A. Dhyani, Sr. DR Date of hearing : 12/05/2022 Date of pronouncement : 05/08/2022 ORDER PER GAGAN GOYAL, A.M:
This appeal by the assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals) -53, Mumbai [hereinafter referred to as (‘Ld. CIT(A)’) dated 31.08.2015 for the Assessment Year (AY) 2011-12. The assessee has raised the following grounds of appeal: “Being aggrieved by the order of the learned Commissioner of Income Tax (Appeals)-53, Mumbai, this appeal petition is submitted on the following grounds which it is prayed may be considered independently and without prejudice to one another:-
1.
On facts and circumstances of the case and in law, the learned CIT (A) erred in directing the Ld AO to disallow the claim of deduction of interest expenses paid for commercial property given on lease rent of Rs. 1, 76, 36,246/- against income assessable under the head "Income from House Property" by merely stating that the possession of the space is not handed over to the appellant till 31.03.2011. The directions given by the Ld CIT(A), without considering the fact that the appellant is a beneficial owner of the said property, is bad in law and needs to be dropped.
2. On facts and circumstances of the case and in law, the learned CIT(A) erred in not netting the interest received of Rs. 1,16,66,614/- & interest claimed against the "Income from House Property of Rs. 1,76,36,246/- against the total interest paid of Rs. 3,52,72,492/- while calculating the disallowance u/s. 14A Ld CIT(A) erred in not appreciating direct nexus between interest received and paid and thereby erred in not netting the interest to Rs. 59,69,632/- for consideration of disallowance u/s. 14A.
3. On facts and circumstances of the case and in law, the learned CIT(A) erred in calculating the disallowance u/s. 14A at the rate of 15% on the capital balance of Rs. 6.72 crores instead of considering the closing capital balance of Rs. 1,46,09,693/-.
4. Without prejudice to the above, on facts and circumstances of the case and in law, the learned CIT(A) erred in not considering Rs. 1,76,36,246/- as a deduction u/s. 57(iii) from the interest income of Rs. 1,16,66,614/- to be taxed as "Income from Other Sources” since Rs. 1,76,36,246/- is disallowed by the Ld CIT(A) as interest expenses paid for commercial property given on lease rent against the income assessed under the head "Income from House Property."
2. The assessee has raised following additional grounds of appeal vide letter dated 29.06.2018:
5. The appellant had suo moto disallowed interest on TDS of Rs. 2,55,738/- which is allowable in view of Hon’ble ITAT decision in the case of DCIT Cir- 3(1) vs. Narayani Ispat Kolkata AY 2010-11 date of order 30.08.2017 and in the case DCIT Vs. Techno Electronics Ltd current tax online. ITA No. 2338/M/2016 Author Shri. Saktijit Dey Hon’ble Member.
The Appellant had suo moto made disallowance under sec 14A in respect of share income from AOP, which is not disallowable as per law. Hence the appellant now claims that it should be fully allowed.” 3. Brief facts of the case are that the assessee filed its e-return on 30.09.2011 declaring a total loss of Rs. (1, 45, 88,051/-). The case was selected for scrutiny and notice under section 142(1) & 143(2) of the Income Tax Act, 1961 (for short ‘the Act’) were issued. The assessee-company engaged in the business of builder and property development. A company had 50% ownership in joint venture M/s Akruti SMC JV. 4. The Assessing Officer (AO) during the assessment proceedings, made an addition under section 14A read with Rule 8D amounting to Rs. 3,63,166/-. This amount of addition, he made in addition to Rs. 59, 69,632/- suo moto disallowed by assessee in its computation of income. Against this further addition of Rs. 3, 63,166/- assessee preferred an appeal before the Ld. CIT(A). 5. During the proceedings before Ld. CIT(A), assessee challenged the addition made by AO. Ld. CIT(A) not only confirmed the action of AO but also enhanced the income of the assessee on various grounds. 6. Being aggrieved with the order of Ld. CIT(A), the assessee is before us with its grounds of appeal
mentioned (supra).
7. Ground No.1, assessee declared income under the head “Income from House Property” amounting to Rs. 1,76,36,246/- from commercial property allocated to assessee under the Joint Venture Agreement with M/s Akruti SMC JV, the same income declared by assessee is not under challenge neither by AO nor by Ld. CIT(A). Moreover, applicable standard deduction under the head “House Property” were also claimed and allowed to the assessee. The Ld. CIT(A) disallowed interest on the ground that possession was given on the last day of the year, hence, interest was not allowable for whole year, whereas income show by assessee from lease rental was for six months.
8. In this regard, Paper Book (PB) filed by the assessee clearly demonstrates that assessee received six month rent and chargeable service tax thereon. It is only the accounting entry which was passed on the last day of the accounting year. Observation of Ld. CIT(A) “It is also observed that only on 31.03.2011, the capital contribution in JV was reduced to Rs. 1,46,09,693/- through “manual adjustment” entries in the books of the appellant after adjusting cost of lease rights of commercial premises acquired by the appellant from the JV for Rs.5,26,82,674/. In these circumstances, it is clear beyond doubt that there is no basis for the assumption that 50% of the interest paid viz. Rs.1,76,36,246/- was relatable to the lease rights of said commercial premises found to have been acquired by the appellant only on the last day of the FY., i.e. 31.03.2011. Moreover, it deserves to be noted that the appellant could not have acquired lease rights of the commercial premises from the JV under a Memorandum of Understanding dated 30.03.2011 because under the terms of clauses 28.4 and 37.2 of the "Agreement to Develop" dated 18.03.2002 executed with MSRTC, the JV (Developer) was only entitled to enter into agreement for allotment of space to prospective lessees but the possession of the space would be handed over to them only after entering into Lease Agreement between the Lesser (MSRTC) and the Lessee which had not been done in case of the appellant till 31.03.2011. Therefore, the A.O, is directed to disallow the appellant's claim for deduction of interest expenses of Rs. 1, 76, 36,246/-”.
As per assessee both the JV partners have shared constructed area of shopping complex six months ago and had started receiving lease rental separately as discussed (supra). But, accounting entry was passed on the last day of accounting period. As per assessee, the fact is that constructed areas of Mall etc. were divided amongst to JV partners six months ago.
Other than the facts of the matter, one legal issue also emanated from the order of Ld. CIT(A), that the Ld. CIT (A) had not issued any notice for enhancement of income, as per section 251 the Ld. CIT(A) is empowered to confirm, reduce, enhance or annul the assessment but enhancement can be done only after giving a reasonable opportunity to the assessee of showing cause against such enhancement. In this case while dealing with this issue, he simply directed the AO to disallow the appellant’s claim for deduction of interest expenses of Rs. 1,76,36,246/- which is bad-in-law. He can do so at his own subject to procedure for enhancement followed as discussed (supra) and there is no authority lying with him to set-aside the matter back to the file of AO with any direction. 11. We found force in the contentions of the assessee on merits that when income of commercial property they accepted and even allowed applicable standard deduction on the same, then how they can take a reverse view while dealing with allowability of interest. Secondly, legally also the action of Ld. CIT (A) is not tenable as per law. So, on both the grounds action of Ld. CIT(A) is not sustainable. In the result, ground no.1 of assessee be allowed and action of Ld. CIT (A) is reversed. 12. Ground No.2 & 3, before going into the facts and merits of both the issues, it will be more appropriate to take up and discuss about an alternate argument taken by assessee about the applicability of section 14A of the Act in the present matter. The arguments of the assessee are reproduced herein below as under: “[2. Share income of JV is not exempt hence sec. 14A is not applicable. Rely on order of assessee itself in earlier year. Get copy of ITAT order for AY 10-11 accepting our plea that sec. 14A is not applicable to share income from AOP Now argue that instead of set aside as done in earlier year, it should be allowed at this stage only because it is a pure question of law. Legal issues are not set aside in view of the following arguments: Whether share income from AOP attracts section 14A? (1) As per section 14A(1), deduction is not allowable in respect of expenditure incurred by the assessee in relation to "INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT". (2) There is chapter III in IT Act with the same title, that is incomes which do not form part of total income. In this chapter there is section 10 to 13. Share income from AOP does not come in this chapter. Hence section 14A itself is not applicable as per the plain provisions of the Act. (3) It may be noted that share income from firm falls under section 10(2A) on which section 14A can be applied but share income from AOP falls under section 66 and section 86. They form part of total income. (4) Section 66 specifically provides that "In computing total income of an assessee, there shall be included all income on which no income tax is payable under chapter VII." (5) Chapter VII contains section 86 which provides for manner of taxing income of member from AOP. Thus as per the scheme of Act, share income does form part of total income on which rebate of tax is allowable. (6) There is difference between two concepts that is income, which does not form part of total income and income on which tax rebate is allowable. Share income from AOP forms part of total income on which tax rebate is allowable. Hence section 14A cannot be invoked in respect of share income from AOP. (7) Share income from AOP is tax rebatable and not tax exempt. (8) Truly speaking, as per the scheme of assessment of AOP, tax by way of share income of member is charged from AOP and member is not charged to avoid double taxation.
(9) Sec. 80.... provides that if AOP has got deduction u/s 80HH etc. ,member would not get it again. This shows that income of member has been taxed in the hands of AOP and member is being taxed only for rate purpose. It also means that income of member is assessable in the hands of member as if it is its own income from AOP. (10) If rate of tax in the hands of member is higher, AOP is also taxed at higher rate only on the portion relatable to share of member. This proves that income of member is being taxed in the hands of AOP and it is not exempt. (11) If AOP incurs loss, set off would be allowable to member. Interest on money borrowed by members would be deducted from this loss and loss would increase s. 67A. Thus benefit of interest is allowable to member in loss case. In Profit case also, such benefit should be logically allowable. In case of taxing book profit under MAT, there is decision that 14A is not applicable on share income from AOP. [2015] 53 taxmann.com 40 (Mumbai Trib.) Goldgerg Finance (P.) Ltd. v. ACIT Thane.”
Before making disallowance, the AO has not given any cogent reasons for rejecting the disallowance under section 14A of the Act amounting to Rs. 59,69,632/- made by the appellant itself and resorting to the provisions of section 14A(2) read with Rule 8D. A perusal of the impugned order reveals that the AO has not properly examined the suo moto disallowance made by the assessee. Nor has the AO expressed any opinion on the correctness or otherwise of the appellant’s claim in respect of aforesaid expenditure.
In this regard, we follow the directions of Jurisdictional Tribunal in assessee’s own case vide & ITA No. 3841/Mum/2015 dated 15.12.2017. Jurisdictional ITAT held as under:
“Undisputedly, in the facts of the present case, the Assessing Officer has not recorded any satisfaction as per the mandate of section 14A(2) r/w rule 8D(1). It is relevant to observe that the learned Commissioner (Appeals) has accepted the aforesaid factual position by holding that the Assessing Officer has not recorded any satisfaction with regard to the correctness of assessee's claim. However, he has stepped into the shoes of the Assessing Officer for correcting the lapse committed by the Assessing Officer. As could be seen from the language of section 14A(2) r/w rule 8D(1), it is the Assessing Officer who has to record his satisfaction with regard to the correctness of assessee's claim before proceeding to disallow expenditure under section 14A. In the facts of the present case, the Assessing Officer has failed to do so. The learned Commissioner (Appeals) has given a clear and categorical finding in this regard which has not been challenged by the Department. Therefore, when the statutory provisions mandate a particular act to be done by a particular Authority in a particular manner, it has to be done by that authority in that manner only or not at all. The satisfaction to be recorded by the Assessing Officer under section 14A(2) cannot be substituted by the satisfaction recorded by the first appellate authority, even, accepting the fact that his power is co-terminus with that of the Assessing Officer. That being the case, the Assessing Officer could not have done any further disallowance under section 14A r/w rule 8D.”
Considering the decision of Jurisdictional ITAT in assessee’s own case as mentioned (supra) and argument of assessee as discussed in para-12 above. We are of the considered view that technically the action of AO was wrong and in defiance of the conditions prescribed in section 14A read with Rule 8D. Moreover, referring the decision of Jurisdictional ITAT (supra) as has been held there that Ld. CIT(A) is not empowered to remove the deficiency in the order of AO. Alternatively also we hold that section 14A is not applicable in the present case as argued by the assessee vide para-12 above. Section 14A of the Act is applicable only those income which are prescribed in chapter-III. Any income which are part of total income but ultimately not chargeable to tax by virtue of chapter 6A or as in the instant case section 67, section 86 read with section 167B of the Act.
Ground No.4, this ground of appeal filed by assessee requires no adjudication in view of our findings given (supra) vide para-11. Hence, this ground of appeal became infructuous as interest amounting to Rs. 1,776,36,246/- is already allowed.
Ground No. 5 & 6, as held (supra) section 14A is not applicable in the case of assessee, hence, there is no question of suo moto disallowance by assessee on interest on TDS of Rs. 2,55,738/- and other suo moto disallowance under section 14A made by assessee in the computation. In the result, both the grounds of appeal
raised by assessee are allowed and it is directed to the AO, for accepting revised computation to be filed by the assessee reversing suo moto disallowances made in anticipation of applicability of section 14A of the Act.
18. In the result, appeal filed by the assessee is fully allowed. Order pronounced in the open court on 5th day of August, 2022.