RAJEEV S RENIWAL,MUMBAI vs. ITO CIRCLE- 3(2)(3), MUMBAI

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ITA 726/MUM/2020Status: DisposedITAT Mumbai14 February 2022AY 2013-144 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal held that for disallowance under Rule 8D(2)(iii), only investments yielding exempt income should be considered. Regarding the property income, the Tribunal noted that the municipal ratable value should generally be accepted unless cogent material suggests otherwise.

What were the facts?

The assessee's appeal concerned disallowance under Section 14A and deemed rental income from a property. The Assessing Officer (AO) made additions based on Rule 8D(2)(iii) and a 7% annual value for the property. The CIT(A) upheld these additions.

What were the issues?

Whether investments not yielding exempt income should be considered for disallowance under Section 14A, and whether the municipal ratable value of a property should be the basis for deemed rental income.

Which sections of the Income-tax Act were involved?

Section 14A

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Cases cited in this judgment(2)Show list

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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai

Before: Shri Shamim Yahya

For Appellant: Shri Abhirama Karthikeyan
For Respondent: Shri Abhirama Karthikeyan
Hearing: 15.12.2021Pronounced: 14.02.2022

This appeal by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-8 dated 27.11.2019 and pertains to assessment year 2013-14.

2.

Grounds of appeal read as under:-

1. In law and in the facts and circumstances of the appellant's case, the Hon'ble CIT(A) erred in upholding the ad-hoc addition u/s 14A read with Rule 8D(2)(iii) of the Act made by the ld. A.O.of Rs. 2,46,413/-. Hence, the addition confirmed deserves to be deleted.

2. In law and in the facts and circumstances of the appellant's case, the Hon'ble CIT(A) has heavily relied on the decision of the hon'ble Supreme Court and completely ignored the facts of the case. The observation of the Hon'ble C.I.T.(A) that disallowance of 0.5% is out of administrative expenses lead to the situation of total disallowances of expenditure under the said head and it denotes that no expenditure under administrative expenses is warranted against the business income. Thus, the order passed by the Hon'ble C.I.T.(A) unjust, unfair and unreasonable and deserves to be quashed.

3. In law and in the facts and circumstances of the appellant's case, the Hon'ble CIT(A) erred in determining the annual value of the property at 7%of the cost of the property without appreciating the fact that, the said commercial premises at Bhavnagar was used by the appellant for its business purposes as well as Inducto Steel Ltd., where appellant is director. Thus, the order passed on such ad hoc basis is bad in law and thus the pray of the appellant shall be accepted.

3.

Brief facts of the case are that in the assessment order AO noted that assessee is deriving income from business and profession and capital gains on sale of shares. It was noted that assessees business income is in nature of interest from financing business. The AO noted that assessee has earned exempt income being dividend received of Rs. 53,35,305/-. The AO’s enquired as to why disallowance u/s. 14A has not been made. The assessee responded as under:-

“In response to the same the assessee vide letter dated 20.01.2016 submitted that they have offered the direct expenses under rule 8D(2)(i) in the form of share demat charges and STT. As regards the rule 8D(2)(ii), it is submitted by the assessee that no interest expenditure was incurred to earn the interest income. In respect of rule 8D(2)(iii) it is submitted by the assessee that the major portion of the investments were made in group companies with the motive to maintain control interest and not with the purpose to earn the dividend income on this investment. The assessee has also relied upon the following decisions: i. Garware Wall Ropes Ltd. Vs. ACIT (ITAT Mumbai) ii. Daga Global Chemicals Pvt. Ltd. Vs. ACIT (1TAT Mumbai) (2012) (A.Y. 2009-10) D Bench Order dated 01.01.2015 iii. Cheminvest Ltd. Vs. CIT(Delhi High Court).”

4.

AO was not satisfied with the above. He made disallowances as per Rule 8D(2)(iii) amounting to Rs. 2,46,143/-.

5.

Upon assessees appeal, ld.CIT(A) confirmed the AO’s order. He held that as per Hon’ble Supreme Court decision in Maxopp Investments Ltd. 402 ITR 640. The argument of strategic investment as well as stock in trade is not to be considered. He also held that whether the dividend income has been earned of such investment is not relevant. Hence, he confirmed the addition by the AO.

6.

Further AO noted that assessee has a residential flat at Mumbai and office flat at Bhavnagar. Assessee was asked to explain why income from house property has not been shown. Assessee responded that property at Bhavnagar is used by Inducto Steel Ltd. That the assesse is a director in that company, theAO was not satisfied about the explanation of the Bhavnagar property. He determined the annual value of same at 7% of the property value and after allowing deduction u/s. 24 made an addition of Rs. 5,25,613/-. Ld.CIT(A) confirmed the same.

7.

Upon careful consideration, I note that assessee has submitted before the ld.CIT(A) that in assessee’s own case, ld.CIT(A) in earlier year has decided the issue in favour of the assessee. However, ld.CIT(A) distinguished the same in view of the decision of Hon’ble Supreme Court in the case of Maxopp Investments Ltd.(supra). Further, ld.CIT(A) has rejected the submissions that where investment do not yield any exempt income, the same should be excluded for the purpose of Rule 8D(iii). In my considered opinion, this limb of ld.CIT(A) decision is not sustainable. Hon’ble Special Bench of ITAT in the case of Vireet investment(P) Ltd.82 taxmann.com 415 (Delhi)(SB)…has duly held that for the purpose of disallowance u/s. 8D(2)(iii) only those investments have to be considered, which have yielded exempt income. Hence, I remit the issue to the file of AO, AO is directed to decide the issue afresh in light of the decision of Special Bench of ITAT in the case of Vireet investment(P)Ltd.(supra). As regards, the issue of deemed income from house property, ld.CIT(A) noted that AO has not called upon the municipal value of the property nor the assessee has submitted any comparable cases in the locality. Hence, he proceeded to confirm the AO ‘s order of above addition of 7% of value of the property. In my considered opinion, the orders of the authorities below are not in accordance with the decision in Hon’ble Bombay High Court in the case of Tip Top Typography 368 1TR 330. In the said case, the Hon’ble Bombay High court has expounded that unless the authorities below can bring on record cogent material that assessee is trying to unfairly reduce the value of rental income, the municipal ratable value has to be accepted. Hence, I remit this issue to the file of AO, AO is directed to consider the issue afresh in light of the aforesaid order of Hon’ble Bombay High Court.

8.

In the result, this appeal by the assessee stands partly allowed for statistical purpose.

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