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Facts
The assessee, Bombay Dyeing and Manufacturing Company Limited, appealed against an order upholding disallowance under Section 14A and addition under Section 43CA. The assessee's business includes manufacturing, trading of textiles, and real estate. The case was selected for scrutiny, and the Assessing Officer (AO) made various additions and disallowances.
Held
The Tribunal held that for disallowance under Section 14A, only investments yielding exempt income should be considered. Regarding the addition under Section 43CA, the Tribunal found that the lower authorities failed to consider the assessee's claim that the properties were stock-in-trade and the appropriate date for determining the stamp duty valuation was not properly examined. Consequently, the issue was remanded to the AO for re-adjudication.
Key Issues
Whether disallowance under Section 14A should consider all investments or only those yielding exempt income, and whether fair market value or cost should be used for valuation. Also, whether Section 43CA or 50C applies to 'stock-in-trade' properties and the correct date for determining stamp duty valuation.
Sections Cited
14A, 8D, 43CA, 50C, 234B, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANT, JM AND
O R D E R Per Kavitha Rajagopal, J M:
This appeal has been filed by the assessee, challenging the order of the Learned Commissioner of Income Tax (Appeals) [‘Ld. CIT(A)’ for short], National Faceless Appeal Centre (‘NFAC’ for short) passed u/s. 250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2018-19.
2. The assessee has raised the following grounds of appeal: “1. GROUND NO. 1: DISALLOWANCE OF RS. 4,65,28,171/- UNDER SECTION 14A OF THE ACT:
1.1. On the facts and in circumstances of the case and in law, the Id. CIT(A) erred in upholding the disallowance made by Id. AO of Rs.4,65,28,171/- u/s. 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ('the Rules").
1.2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) while affirming the action of the Id. AO erred in holding that: a) The AO had duly recorded his dissatisfaction with respect to the suo motu disallowance under Section 14A r.w.r 8D as computed by the Appellant; b) The Appellant had failed to establish that it possessed sufficient interest-free own funds to make the relevant investments; c) All equity instruments are capable of yielding exempt dividend income and long- term capital gains; d) For the purposes of computation of disallowance under Section 14A of the Act, the fair market value of the investment was required to be considered, as opposed to the cost of investment adopted by the Appellant.
1.3. The Appellant therefore prays that the disallowance of Rs.4,65,28,171/- u/s. 14A r.w.r. 8D be deleted.
GROUND NO. 2: ADDITION OF RS. 1,35,52,012/- MADE UNDER SECTION 43CA OF THE ACT:
2.1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding the addition of Rs.1,35,52,012/- applying provisions of s. 43CA instead of s. 50C which was previously applied by Id. AO.
2.2. The Appellant prays that the addition of Rs.1,35,52,012/- made under section 43CA of the Act be deleted.
3. GROUND NO. 3: EXCESS LEVY OF INTEREST UNDER SECTION 234B OF THE ACT AMOUNTING TO RS. 1,54,22,53,265/-:
3.1. On the facts and in circumstances of the case and in law, the Id. AO, erred in levying excess interest u/s. 234B of the Act amounting to Rs.1,54,22,53,265/-.
3.2. The Appellant prays that the interest levied under section 2348 amounting to Rs.1,54,22,53,265/- be deleted/appropriately reduced.
GENERAL:
The Appellant craves leave to add, amend, modify, rescind, supplement or alter any of the Grounds stated hereinabove, either before or at the time of hearing of this appeal.”
Brief facts of the case are that the assessee was engaged in the business of manufacturing, trading of textiles, polyester staple fiber and also engaged in the business of real estates. The assessee filed its return of income dated 30.11.2018 and had also filed its revised e-return on 31.03.2019 declaring total income at Rs.Nil and book profits at Rs.Nil u/s. 115JB of the Act. The assessee’s case was selected for complete scrutiny under the e-assessment scheme, 2019 on the following issues: S.No. Issues i. Claim of Any Other Amount Allowable as Deduction in Schedule BP Ii Stock Valuation Iii Payment of Dividend Distribution Tax Iv Default in TDS & Disallowance for such Default v Refund Claim Vi ICDS Compliance and Adjustment Vii Unsecured Loans Viii Sales Turnover/Receipts ix Expenses Incurred for Earning Exempt Income x Income from House Property 3.1 Notices u/s. 143(2) & 142(1) of the Act were issued and served upon the assessee.
The Learned Assessing Officer (“Ld. AO” for short) passed the assessment order dated 31.10.2012 u/s. 143(3) r.w.s. 144B of the Act determining the total income at Rs.970,82,91,170/- under the normal provisions as well as u/s. 115JB of the Act after making various additions/disallowances.
Aggrieved, the assessee was in appeal before the first appellate authority, who vide order dated 03.06.2025 had partly allowed the appeal filed by the assessee.
Aggrieved, the assessee is in appeal before us, challenging the order of the Ld. CIT(A) on the abovementioned grounds.
The ground No.1 pertains to disallowance of Rs.4,65,28,171/- u/s. 14A r.w.r 8D of the Act. The facts pertaining to the said ground are that the assessee company had shown non current investment of Rs.950,24,32,695/- in its balance sheet as on 31.03.2018 and had disallowed a sum of Rs.28,73,956/- towards expenditure incurred in relation to earning of the exempt income for the year under consideration. It is observed that the assessee has earned Rs.1,72,34,100/- as dividend income and Rs.98,83,00,996/- as long term capital gain where the total exempt income aggregated to Rs.100,55,35,096/- as per schedule EI of return of income. After considering the assessee’s working of the suo-moto disallowance the Ld. AO duly recorded his dissatisfaction and invoked the provisions of section 14A r.w.r 8D of the Act and made a further disallowance of Rs.4,94,02,127/- being 1% of the average value of investments yielding exempt income which amounted to Rs.494,02,12,730/-. The Ld. AO determined the total disallowance after reducing the suo- moto disallowance made by the assessee and arrived at the total disallowance of Rs.4,65,28,171/-. The Ld. CIT(A) upheld the disallowance made by the Ld. AO.
The Authorized Representative (“Ld. A.R.” for short) for the assessee commenced the arguments stating that only investments that yielded exempt income are to be considered for computing the average value of investment and not the entire investments by excluding those which have not yielded exempt income during the year under consideration. For this proposition, the Ld. A.R. relied on the decision of the Special Bench M/s. The Bombay Dyeing and Manufacturing Company Limited of the Tribunal in the case of Vireet Investments (P.) Ltd. (2017) 165 ITD 27 (Delhi Tribunal) (SB) and various other decisions which are as under:
“PCIT v. Caraf Builders & Constructions (P.) Ltd [(2019) 261 Taxman 47 (Delhi HC)]; Department's SLP Dismissed in (268 Taxman 317) (SC)
ACB India Ltd. Vs. ACIT [62 taxmann.com71 (Delhi HC)]
ACIT v. Vireet Investments (P.) Ltd. (2017) 165 ITD 27 (Delhi Tribunal) (SB)]
Godrej Agrovet Ltd. v. DCIT [ITA No.4375 of 2017 dated March 13, 2019 (Mumbai Tribunal)]
K. Raheja Corporation Pvt. Ltd. v. ACIT [ITA No.1004 of 2015 dated August 16, 2019 (Mumbai Tribunal)]
Piramal Enterprises Ltd. v. ACIT [(2018) 97 taxmann.com 352 (Mumbai Tribunal)]
Bellweather Microfinance Fund Pvt. Ltd. vs. ITO (ITA No. 1743/Hyd/2013) (Hyd. Trib.)”
The Ld. A.R. secondly contended that the assessee has prepared its financial statement as per “IND-AS” where the assessee is required to calculate the investments in equity shares at fair market value. The Ld. A.R. further relied on circular No.10/2017 dated 23.03.2017 issued by the CBDT where it has specified that Income Computation and Disclosure Standard (ICDS) shall apply for computation of income under the head “profits and gains of business or profession or income from other sources” irrespective of the accounting standards adopted by the companies whether accounting standards “AS” or “IND-AS”. The Ld. A.R. argued that since the ICDS provisions are applicable to all companies which are following mercantile system of accounting the income tax provisions are also equally applicable to these companies unless otherwise specified in the Act. The M/s. The Bombay Dyeing and Manufacturing Company Limited Ld. A.R. reiterated that for computing disallowance u/s. 14A r.w.r 8D of the Act the companies will have to follow the same principle whether it is a company following “AS” or “IND-AS” and therefore for computing 1% of the annual average of the investment made in equity shares the same has to be determined as per the actual cost of investment and not the fair market value as per the books. The Ld. A.R.s contention is that there can not be different rules for companies following “AS” or “IND-AS” for disallowing the expenses on the basis of fair market value of investment or whether the same has to be on the basis of the cost of investment for those following “AS”. The Ld. A.R. further contended that the provisions of section 14A r.w.r 8D of the Act were introduced in the Act prior to the introduction of “IND-AS” which was notified in 2015 and since “IND-AS” was not in existence at that time the companies were preparing their financial statements in accordance with the “AS” and therefore the investments were recorded at the cost and not at fair market value. To support his contention the Ld. A.R. further stated that since the concept of fair market value never existed at the time of introduction of rule 8D there cannot be any applicability of determining the fair market value of investment which was followed absurdly by the Ld. AO. The Ld. A.R. relied on the decision of the co-ordinate Bench of the Tribunal in the case of M/s. National Engineering Industries Ltd. Vs. DCIT in for A.Y. 2020-21 decided on 13.10.2025 and also the decision of the Cochi Bench in the case of M/s. Synthite Industries (P) Ltd. Vs. DCIT in IT(TP)A Nos.01 & 04/Coch/2024 decided on 13.03.2025.
The Learned Departmental Representative (“Ld. D.R.” for short), on the other hand, contradicted the argument and contended that the assessee is required to determine the fair M/s. The Bombay Dyeing and Manufacturing Company Limited market value of its investment in accordance with “IND-AS” accounting standards introduced on 01.04.2017 for equity shares and not the cost of investment as adopted by the assessee. The Ld. D.R. further contended that the assessee has adopted historical cost mandated by “IND-AS” accounting standards for valuing the open stock of work in progress as on 01.04.2017 but for disallowance u/s. 14A r.w.r 8D of the Act the assessee has failed to adopt “IND-AS” method and had claimed the historical cost which is for claiming double benefit. The Ld. D.R. argued that the Ld. AO has rightly adopted the “IND-AS” method for determining the fair market value of non current investments for making disallowance u/s. 14A r.w.r 8D of the Act. The Ld. D.R. relied on the orders of the lower authorities.
We have heard the rival submissions and perused the materials available on record.
With regard to the issue of disallowance u/s. 14A r.w.r 8D of the Act there has been two folded arguments made by the rival parties where the first argument was on the issue of determining the 1% of the average value of investments, it is observed that the Ld. AO has considered the entire investments without bifurcating only those investments which have yielded exempt income. The lower authorities had rejected the assessee’s contention by holding that all equity instruments are for earning exempt income and relied on the decision of Maxopp Investment Ltd. vs. CIT [(2018) 402 ITR 640 (SC)] stating that all investments are to be considered whether it has earned dividend income or not. This, in our view, is faulted for the reason that it is now a settled proposition of law that only investment which has yielded exempt income is to be considered for the purpose of determining the average M/s. The Bombay Dyeing and Manufacturing Company Limited investments prior to the amendment in Finance Act, 2022 and it has further been held that the same applies prospectively only to assessment years 2022-23 onwards and not for the impugned year. We also draw support from the decision of the Special Bench of the Tribunal in the case of Vireet Investments (P.) Ltd. (supra) where it is now a settled proposition of law that only investments which have yielded exempt income are to be considered for computing average investments for making disallowance u/s. 14A r.w.r 8D of the Act. We, therefore, direct the Ld. AO to restrict the disallowance only to the extent of those investments which have yielded exempt income during the year under consideration.
The second issue raised by the assessee is that for the purpose of determining the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, whether the value of investment would be at fair market value of its investment in equity shares as per “IND-AS” accounting standards or the cost of investment method adopted by the assessee. For this, the Revenue contends that it has to be the fair market value as per “IND- AS” accounting standard which was introduced from 01.04.2017 and not as per the AS which is the actual cost of investment. The Revenue relied on the “IND-AS” accounting method which provides for fair market value of non current investment for the purpose of making disallowance u/s. 14A r.w.r 8D of the Act which was also adopted by the Ld. AO and upheld by the Ld. CIT(A) on the ground that the assessee itself has valued the opening stock of work in progress as on 01.04.2017 applying the historical cost mandated by the M/s. The Bombay Dyeing and Manufacturing Company Limited “IND-AS” accounting system and had rejected the assessee’s method of valuation on the basis of the cost of investments which is in accordance with AS accounting standard. It is pertinent to consider the provisions of Rule 8D(2)(ii) of the IT Rules which is worded as below:
“An amount equal to 1% of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income”
On a perusal of the said Rules the expression “value of investment” cannot be interpreted as “fair market value” for the purpose of computing disallowance u/s 14A r.w.r.
8D. At the outset, it is observed that Rule 8D in itself is a self-contained computational mechanism prescribing the method for determining the disallowance where there is no substitution of the value of investment to be “fair market value”. The term “value of investment” ought to be construed as actual investment and not the value of investment appearing in the books, in the absence of any explicit provision. We are conscious of the fact that the accounting standards adopted for financial reporting cannot override specific provisions of the Act where the concept of fair valuation cannot be read into the Rule. The Ld. A.R. extensively relied on the decision of the co-ordinate Bench of the Tribunal in the case of M/s. National Engineering Industries Ltd. (supra) which held that for the purpose of computing the disallowance u/s. 14A of the Act the cost price or acquisition cost in accordance with ICDS is to be considered and not the fair market value. We, therefore, direct the Ld. AO to recompute the disallowance in accordance with the above observations.
Accordingly, ground No.1 raised by the assessee is allowed on the above terms.
Ground No.2 pertains to addition of Rs.1,35,52,012/- made u/s 43CA of the Act.
The facts pertaining to this addition are that the assessee company had entered into the sale transaction with regard to immovable properties for a consideration of Rs.5,01,01,516/- and another property for a consideration of Rs.4,84,61,972/- for which the State Government Authority determined jantri value at Rs.5,56,87,000/- and Rs.5,64,28,500/- respectively. The details of the said transactions are tabulated herein under for reference:
Sr. No. Transaction Transaction ID Transaction Stamp duty Difference Date Amount value U/S.50C Property -1 29.09.2017 6781/2017 5,01,01,516 5,56,87,000 55,85,484 Property -2 19.01.2018 502/2018 4,84,61,972 5,64,28,500 79,66,528 Total 9,85,63,488 11,21,15,500 1,35,52,012
During the assessment proceedings the assessee was sought for explanation as to why the assessee had not adopted the full value of sale consideration received nor the jantri value of the property assessed by the State Government for determining the Long Term Capital Gain (“LTCG” for short) which according to the Revenue resulted in understated taxable income by way of LTCG. It is further observed that since the assessee did not respond to the said query raised by the Ld. AO, Rs.1,35,52,012/- was added to the total income of the assessee u/s 50C of the Act by the Ld. AO. The Ld. CIT(A) upheld the M/s. The Bombay Dyeing and Manufacturing Company Limited addition made by the Ld. AO on the ground that the assessee has failed to substantiate its claim even before the first appellate authority.
Aggrieved, the assessee is in appeal before us challenging the action of the lower authorities.
The Ld. A.R. for the assessee commenced his argument stating that the assessee was engaged in the business of real estate development and had been following percentage completion method for computing its “business income”. The Ld. A.R. further stated that the assessee has sold 53 flats to various buyers offering the same as “business income” and the transaction in dispute pertained to property 1 and property 2 for which the Ld. AO added the difference of the sale value of the two properties u/s 50C of the Act. The Ld.
A.R’s contention was that these two properties were part of “stock in trade” of the assessee for which addition ought not to be made u/s 50C of the Act and only section 43CA is applicable in the assessee’s case. The Ld. A.R.’s second proposition was that the flats were booked and allotted in A.Y. 2014-15 and 2017-18 respectively for which the stamp duty valuation (“SDV” for short), as on the date of booking of the flat, should be taken into consideration for determining the SDV and not the date of registration of the sale agreement for the purpose of section 50C/43CA. The Ld. A.R. brought our attention to the documentary evidences pertaining to the booking of the flat with the relevant documentary evidences such as the allotment letter, the booking confirmation letter etc. and the details of the advance amount received from the buyers. The Ld. A.R. further submitted that the property 1 was allotted to Mr. Purushottam C. Mandhana vide allotment letter dated M/s. The Bombay Dyeing and Manufacturing Company Limited 02.09.2013 where the consideration was booked and an advance amount of Rs.25,00,000/- was received through account payee cheque dated 31.03.2012. Further, the said flat was transferred to Mr. Amit P. Jain at the request of Mr. Purushottam C. Mandhana vide letter dated 23.11.2016 and 13.12.2016 for which the consent for transferring was also received by Mr. Amit P. Jain vide letter dated 13.12.2016. The Ld. A.R. further stated that while registering the property to Mr. Amit P. Jain the advance amount of Rs.25,00,000/- was reduced and only the remaining was paid to the assessee which establishes the fact that the final allotment was done on 15.12.2016 which ideally has to be the date for determining the SDV u/s 43CA of the Act. The Ld. A.R. argued that with regard to the second property the booking confirmation letter was issued on 27.06.2013 when the sale consideration was also fixed and further the flat was allotted vide allotment letter dated 01.07.2013. It was further submitted that the advance amount of Rs.25,00,000/- for booking the flat was received from Mr. Shitanshu B. Vora on 02.02.2012 itself and that the allotment was subsequently done on 01.07.2013 which was to be considered as the date for determining the SDV. The Ld. A.R. reiterated that the lower authorities erred in considering the date of sale registration to be the date for determining the SDV rather than considering the allotment letter as per the provisions of law where the essential ingredient of fixing of sale consideration and receiving part consideration by way of cheque was satisfied in the present case. The Ld. A.R. relied on a catena of decisions in support of his claim.
We have heard the rival submissions and perused the materials available on record.
It is a settled principle of law that the date of sale agreement where the consideration is M/s. The Bombay Dyeing and Manufacturing Company Limited fixed and substantial amount was received towards consideration by any other mode other than cash was to be considered for determining the SDV and not the date when the sale was registered. This has been reiterated by various decisions in support of the assessee where even the date of allotments of the flats are considered to be the date when the sale consideration is fixed which is supported by payments made towards the said transaction as part consideration. There is no dispute on this proposition in the present case in hand.
But it is also noted that the assessee has not furnished the relevant documentary evidences in support of its claim during the assessment proceedings though the same was said to have been filed during the first appellate authority. We do not find any remand report being fault for from the Ld. AO. It is also observed that the assessee’s claim that the said properties were part of “stock in trade” for the purpose of attracting section 43CA of the Act was also not looked into by the lower authorities. In order to verify all these factual aspects, we deem it fit to remand this issue back to the file of the Ld. AO who is hereby directed to decide the issue in hand in light of the various judicial precedents relied upon by the Ld. AR along with the documentary evidences filed by the assessee. Accordingly, ground No.2 is allowed for statistical purposes.
Ground No.3 is consequential in nature and hence does not require any separate adjudication.
In the result, the appeal filed by the assessee is hereby allowed for statistical purposes.
Order pronounced in the open court on 18.03.2026