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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
आदेश / ORDER
PER ASTHA CHANDRA, JM :
The appeal filed by the Revenue is directed against the order dated 13.03.2024 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)”] pertaining to Assessment Year (“AY”) 2018-19.
2. Briefly stated, the facts of the case are that the assessee is a company engaged in the business of infrastructure construction i.e. construction of dams, roads, power house, Tunnels, electrical transmission lines subsection, switch yards, power generator and distribution and allied work bridges and lift irrigation projects etc. It e-filed its return of income on 26.09.2018 declaring total income of Rs.35,62,35,760/-. The Ld. Assessing Officer (“AO”) completed the assessment u/s 143(3) r.w.s. 143(3A) and 143(3B) of the Income Tax Act, 1961 (the “Act”) on 16.03.2021 determining total income of the assessee at Rs.46,94,97,181/- wherein he made the following additions/disallowances : (i) disallowance out of deduction claimed u/s 80IA(4) amounting to Rs.10,29,58,075/-; (ii) disallowance on helicopter expenses of Rs.47,77,646/-; (iii) disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 (“IT Rules”) of Rs.22,83,215/- and (iv) disallowance on account of depreciation on luxury cars of Rs.32,42,484/-.
In appeal, the Ld. CIT(A) gave full relief to the assessee in respect of the above additions/disallowances made by the Ld. AO on account of deduction claimed u/s 80IA(4), disallowance u/s 14A r.w. Rule 8Dand depreciation on luxury car. Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal raising the following grounds of appeal : “a) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.22,83,215/- made by the Assessing Officer u/s. 14A of the L.T. Act, 1961. c) On the facts and in the circumstances of the case and in law, the Ld.CIT (A) has erred in deleting the disallowance of depreciation on luxury car of Rs.32,42,484/- ignoring the fact that the Assessee could not furnish necessary evidence to show that the luxury car were used wholly for business purpose to rule out personal use by directors of the company. Grounds of Appeal subject to consent of the Assessee for deferment (a) Whether, the assessee fulfills the requirement stipulated in Section 80-IA(4) of the Income Tax Act, 1961 once the conclusion reached is that it is a contractor and not a developer as stated in the sub- section? (b) Whether on the facts and in the circumstances of the case, the ld.CIT(A) has erred in allowing deduction u/s 80IA(4) of the IT Act, 1961 to the assessee ignoring the fact that the assessee being a contractor, is not eligible for such deduction as pr Explanation 2 to Section 801A?”
4. Ground No. 1 relates to deletion of addition of Rs.10,29,58,075/- made by the Ld. AO u/s 14 of the Act r.w. Rule 8D of the IT Rules.
4.1 The facts pertaining to this ground are that during the course of assessment proceedings, the Ld. AO noted that the assessee has made investments in shares and mutual funds to the tune of Rs.65,09,34,047/- and earned dividend income of Rs.1,31,21,894/- which is exempt in nature. Accordingly, he asked the assessee to submit the details regarding investments made for earning exempt income and also computation as per Rule 8D of the IT Rules r.w.s. 14A of the Act. In response thereto, the assessee submitted that the investments of Rs.65,09,34,047/- are made either from own funds or out of receipts from earlier investments and hence, no disallowance u/s 14A is called for. The assessee relied upon the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. (313 ITR 340) and the decision of ITAT Pune in the case of ACIT Vs. M/s Gujrat Tea Traders Pvt. Ltd. (ITA No. 90/PN/2014) and in the case of S.M. Auto Engg. Pvt. Ltd. (ITA No. 2050 & 2051/PN/2013). The decision of the Hon’ble Supreme Court in the case of CIT Vs. Munjal Sales Corporation 298 ITR 298 (SC) was also brought to the attention to the Ld. AO wherein the Hon’ble Supreme Court held that if the assessee has huge interest free funds including the profit earned by the assessee during the year which is sufficient to cover the advancement of loan, then no interest should be disallowed. Reliance was further placed in the case of Ravindra Rajaram Patil in & 1071/PN/2014 (Pune Trib.) wherein it has been held that no disallowance of interest on advances should be made when assessee has sufficient own funds. Without prejudice to the above, the assessee also submitted before the Ld. AO that if section 14A is still applicable disallowance u/s 14A r.w. Rule 8D works out to Rs.22,83,215/-. However, the above contention of the assessee was not acceptable to the Ld. AO. The Ld. AO on verification of accounts of the assessee recorded his dissatisfaction as to the correctness of the claim of the assessee that no expenses were incurred to earn exempt income under the Act for the following reasons : “1. The earning of exempt income is not in the nature of a passive activity having no input. In fact in the present day financial markets scenario, decisions relating to making of investments, maintaining or continuing the investments, and the time of exit from investment are well informed and well coordinated by the management involving not only inputs from various sources but also extensive research and the acumen of senior management functionaries. Therefore a cost is inbuilt into even the so called "passive" investments. There are also incidental expenditures of collection, telephone, follow up and even the Directors' time and energy etc. Therefore expenses in relation to earning of income are embedded in the indirect expenses.
The investment made, being a conscious decision and involving deployment of funds, clearly beings into picture expenditure by way of cost of funds, "invested." A composite fund having costs needs to be spread so as to apportion appropriate cost of funds invested in the activity leading to carrying of exempt income.”
4.2 The Ld. AO therefore applying the provisions of section 14A r.w. Rule 8D and taking support from the CBDT Circular No. 5 of 2014 and certain judicial precedents on the subject made disallowance of Rs.22,83,215/-.
4.3 The Ld. CIT(A) deleted the addition of Rs.22,83,215/- made by the Ld. AO observing as under : “8.1 This issue has been discussed by the A.O in para 6 of the order. The A.O found that the assessee had made investment in shares and mutual fund and earned exempt dividend income of Rs 1,31,21,894/-. The A.O computed the expenditure incurred with respect to the exempt income on the basis of the average value of investments as per Rule 8D(2)(ii) of the IT rules at Rs 22,83,215. The detailed submissions of the assessee have been reproduced in para 5 above. 8.2 Looking at the financials of the appellant which have been submitted in these proceedings, I find that the appellant has sufficient non-interest bearing funds as on 31.07.2017 namely Share capital Rs.9,14,13,770/- and Reserves and Surplus Rs. 199,67,00,411/- totaling Rs 208,81,14,181 and hence there is merit in the contention of the appellant that the investment made of Rs 65,09,34,047are either from its own funds or from earlier investments. 8.3 The Hon'ble Jurisdictional Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 has held that if there are funds available both interest free and overdrafts/loan taken then the presumption would arise that the investment would be out of interest free fund generated or available with company. The Hon'ble Pune ITAT has followed the above decision in the case of ACIT Vs. M/s Gujrat Tea Traders Pvt Ltd. and in case of S.M. Auto Engg. Pvt. Ltd. Accordingly, respectfully following these decisions, the addition of Rs 22,83,215/- is deleted and the Ground of Appeal is Allowed.”
5. Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival arguments made by both the sides and perused the records. At the outset, the Ld. AR submitted that an identical issue came up for consideration before the Tribunal in assessee’s own case for AY 2017-18 wherein the Tribunal directed the Ld. AO to restrict the disallowance u/s 14A to Rs.23,575/- being the amount of actual dividend income received by the assessee in the relevant AY. However, for the AY 2018-19, the Ld. AR contended that the assessee is having sufficient capital and free reserves which far exceeds the investment in shares and mutual funds, the dividend income of which is exempt. Without prejudice to the above arguments, the Ld. AR drawing support from the decision of the Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. reported in 165 ITD 27 (Delhi)(SB) submitted that for disallowance u/s 14A r.w. Rule 8D only those investments should be considered which has earned exempt income. We find force in the alternate argument of the Ld. AR. In the case of Vireet Investment Pvt. Ltd. (supra) one of the issue considered by the Special Bench was “whether investment which did not yield any exempt income should enter into the computation under Rule 8D while arriving at the average value of investment, income from which does not form part of the total income”? The Special Bench of the Delhi Tribunal held that only those investments are to be considered for computing the average value of investment which yielded exempt income during the year. Following the decision of the Special Bench (supra), in our view, disallowance u/s 14A should be restricted to the extent of dividend income earned by the assessee vis-à-vis the investment in shares and mutual funds which yielded such dividend. We, therefore, direct the Ld. AO to recompute the disallowance u/s 14A r.w. Rule 8D in light of the decision of the Special Bench of the Delhi Tribunal in the case of Vireet Investment Pvt. Ltd. (supra). Accordingly, the order of the Ld. CIT(A) on the impugned issue is set aside and the ground raised by the Revenue is allowed for statistical purposes.
Ground No. 2 raised by the Revenue relates to deletion of disallowance of depreciation on luxury cars of Rs. 32,42,484/- by the Ld. CIT(A). The Ld. AR brought to our notice that an identical issue came up for consideration of the Tribunal in assessee’s own case for preceding AY 2017-18 wherein the Tribunal has decided the impugned issue in favour of the assessee and dismissed the ground raised
by the Revenue. We have perused the order of the Tribunal in assessee’s own case in ITA No. 1450/PUN/2023. The relevant observations and findings of the Tribunal on the impugned issue is reproduced below :
17. After hearing both the sides, we find the AO made disallowance of 50% of depreciation on Motor cars on the ground that personal use of the Luxury cars by family members of the assessee cannot be ruled out. We find the ld. CIT(A) deleted the disallowance by observing as under : “10.1 This issue has been discussed in detail by the A.O in para 10 of the order. From the facts narrated therein, it is seen that depreciation of Rs 65,44,820 has been claimed on the block of cars which include Bentley, and passion pro. These cars are used by the Directors. The appellant has relied on the judgement of the Hon’ble Gujarat high court in the case of Sayaji Iran and engg. Co which has been followed by the Jurisdictional Pune Bench of the ITAT in the case of Hindumal Balmukund Investment Co Pvt Ltd to support the view that there cannot be disallowance of expenses in the hands of the company on account of personal use even by its directors. Respectfully following the decision of the Jurisdictional Tribunal, the disallowance/addition made by the A.O is deleted and the Ground of Appeal is Allowed.”
18. Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before the Tribunal.
19. After hearing both the sides, we do not find any infirmity in the order of the ld. CIT(A) deleting the 50% disallowance of depreciation of Motor cars for probable personal use of the Directors and Family members by relying on the decision of Hon’ble Gujarat High Court in the case of Sayaji Iron and Engineering Company and the decision of the Pune Bench of the Tribunal in the case of Hindumal Balmukund Investment Co Pvt Ltd.. The ld. DR could not bring any material to take a contrary view than the view taken by the ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue is dismissed.”
8. We observe that in the relevant AY 2018-19, the Ld. AO has made the impugned disallowance giving the same reason as it was for AY 2017- 18 that the personal use of luxury cars by the family members of the assessee cannot be ruled out. Similarly, the Ld. CIT(A) has also deleted the said disallowance in the relevant AY 2018-19 giving the same reasoning as it was for AY 2017-18 reproduced above in para 17 of the Tribunal’s order for AY 2017-18. Following the decision of the Tribunal (supra) for AY 2017-18 and in the absence of any new fact being brought on record by either side, we dismiss ground No. 2 raised by the Revenue.
9. The Revenue is also aggrieved by the order of the Ld. CIT(A) in deleting the disallowance u/s 80IA(4) of the Act. It was brought to our notice by the Ld. AR that this is a recurring issue which has arisen in the earlier assessment year(s) in the assessee’s own case and has consistently been decided in favour of the assessee by the Ld. CIT(A) and Tribunal. Referring to para 21 to 23 of the Tribunal’s order for immediately preceding AY 2017-18, in the Ld. AR submitted that the Tribunal has dismissed this ground of the Revenue holding that the assessee is eligible to claim deduction u/s 80IA(4) of the Act. We have perused the order of the Tribunal for AY 2017-18 (supra). The relevant findings and observations of the Tribunal in para 21 to 23 of the said order is reproduced below : “21. After hearing both the sides, we find the AO disallowed the claim of deduction u/s.80IA(4) of Rs.2,66,92,291/- on the ground that the assessee was a contractor employed by the Government to execute a pre-determined work. In relation to work, the Government/Contractee continued to be the Developer which had not parted with the right to operate and maintain the facility which would come into existence after execution of contract. While doing so, the AO did not accept the contention of the assessee that similar issue has already been decided by the Tribunal in assessee’s own case for the immediately preceding assessment years on the ground that the Revenue has filed an appeal before the Hon’ble Bombay High Court against the order of the Tribunal which is pending and therefore, to keep the matter alive, the AO made the disallowance.
We find the ld. CIT(A) following the order of the Tribunal in assessee’s own case allowed the claim of deduction u/s.80IA(4) by observing as under : “7.1 This issue is a recurring issue which has arisen in the earlier assessment years in the appellants own case for AY 2004-to 2010-11 which was decided in favour of the assessee by the Hon’ble ITAT Pune in to 2577/PN/2012 vide order dated 09.12.2015. This issue had also arisen in the appellants own case in AY 2011-12 and 2012-13 which was decided in favour of the assessee by the ITAT in ITA Nos. 146 and 147/PUN/2016 on 17.01.2018 and for AY 201314 in ITA No 2169/Pun/2016 decided by the ITAT on 30.07.2018. Furthermore, my predecessor while deciding the assessee’s appeal for AY 2016-17 has decided the issue in favour of the appellant vide order dated 06.05.2019. Accordingly, following the decisions of the Hon’ble ITAT in the appellants own case for the earlier years, the addition made of Rs2,66,92,291/- on account of disallowance u/s 80IA(4) is deleted and the Ground of appeal
is Allowed.”
23. We do not find any infirmity in the order of the ld. CIT(A) on this issue. Admittedly, the Tribunal in assessee’s own case is consistently allowing the claim of deduction u/s.80IA(4) treating the assessee as a developer and is entitled to claim deduction. Merely because an appeal has been filed by the Revenue against the order of the Tribunal, the same cannot be a ground to take a contrary view than the view taken by the Tribunal in assessee’s own case in the preceding years, in absence of any contrary decision of the Hon’ble Jurisdictional High Court. In this view of the matter, we do not find any infirmity in the order of the ld. CIT(A) on this issue. The ground raised by the Revenue is, therefore, dismissed.”
10. Following the decision of the Tribunal (supra) and in the absence of any change in the facts of the case brought on record before us, we do not find any infirmity in the order of the Ld. CIT(A) on this issue and therefore dismiss this ground raised by the Revenue.
In the result, the appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced in the open court on 15th January, 2025.