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Income Tax Appellate Tribunal, “A” BENCH KOLKATA
Before: SHRI RAJPAL YADAV & SHRI GIRISH AGRAWAL
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH KOLKATA BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.80/Kol/2022 Assessment Year: 2013-14 M/s. H. C. Commercial Ltd. Assistant Commissioner of 5, Middleton Row, Kolkata- Vs. Income Tax, Central Circle- 700071. 2(1), Kolkata. (PAN: AABCH2665N) (Appellant) (Respondent) Present for: Appellant by : Shri Soumitra Choudhury, A.R Respondent by : Shri Biswanath Das, Addl. CIT Date of Hearing : 11.05.2022 Date of Pronouncement : 21.07.2022 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is directed against the order of ld. CIT(A)-20, Kolkata vide Order No. ITBA/APL/S/250/2021- 22/1037682272(1) dated 10.12.2021 for A.Y. 2013-14 passed against the assessment order u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by ACIT, Central Circle-2(1),Kolkata dated 28.01.2016.
The grounds of appeal taken in this appeal are reproduced as under: 1. For that on the facts of the case, the order passed by the Ld. C.I.T.(A)-20, Kolkata on 10.12.2021 is completely arbitrary, unjustified and illegal. 2. For that on the facts of the case, the Ld. C.LT.(A) was wrong in dittoing the order of the A.O. and confirming the disallowance u/s. 14A by invoking Rule 8D(2)(iii), 0.5% of average investment amounting to Rs.5,00,482/- (Rs.9,00,375/- minus Rs.4,00,563/-) which is completely arbitrary, unjustified and illegal. 3. For that on the facts of the case, the Ld. C.I.T.(A) was wrong in not considering the facts that the A.O. was not deducted the income from which is taxable during the year and the amount of Rs.400,563/- has already added back to the return income, so, Rs.5,00,482/- cannot be part for the disallowance and wrongly calculated u/s. 14A by invoking Rule 8D(2)(iii) which is completely arbitrary, unjustified and illegal.
2 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14 4. For that on the facts of the case, the Ld. C.I.T.(A) was wrong in dittoing the order of the A.O. and confirming the disallowance of Legal charges amounting to Rs.2,81,293/- which is an allowable expenditure u/s. 37 of the I.T. Act, therefore, the order passed by the Ld. CIT(A) is completely arbitrary, unjustified and illegal. 5. For that the assessee has made payment through cheque after deducting TDS which is reflected 26AS report of deductee. Therefore, the transaction is genuine and it is wholly & exclusively for the purpose of the business which is an allowable expenditure u/s. 37 of the I.T. Act, therefore, the disallowance of Rs.2,81,293/- is completely arbitrary, unjustified and illegal. 6. For that on the facts of the case, the A.O. was wrong in charging interest u/s. 2348 & 234C amounting to Rs. 1,81,748/- & Rs.2,86,033/- are mechanically wrong and illegal. 7. For that the appellant reserves the right to adduce any further ground or grounds, if necessary, at or before the hearing of the appeal.”
Brief facts as culled out from the records are that assessee filed its return of income on 25.09.2013 reporting total income of Rs.6,26,77,690/-. The assessee derived income from house property, interest, capital gain, trade in jute and income from wind power generation. In respect of disallowance of expenditure made u/s. 14A of the Act, Ld. AO noted that assessee has suo moto made a disallowance of Rs.4,00,563/- in its computation of income. However, Ld. AO raised a question on the quantum of disallowance by holding that the only basis of quantification of disallowance is the one provide in rule 8D(2)(iii) of the Income-tax Rules, 1962 (hereinafter referred to as the “Rules”) i.e. 0.5% for the average investment. The assessee was asked to provide its explanation in which it was submitted that units of mutual fund of Religare Mutual Fund and Tata Liquid High Investment Fund (Growth) with opening balance amounting to Rs.1.50 Cr. and Rs.21 Cr. were sold during the year and income therefrom was offered to tax. Therefore, this could not be considered forming part of average investments while calculating disallowance to be made u/s. 14A of the Act. However, Ld. AO noted and accepted this fact of not considering these investments for the purpose of disallowance u/s. 14A of the Act. Ld. AO computed the disallowance under Rule 8D(2)(iii) of the Rules as under:
3 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14
Accordingly, Ld. AO arrived at an amount of Rs.9,01,045/- towards disallowance u/s. 14A of the Act. Since assessee had already suo moto disallowed Rs.4,00,563/-, the balance of Rs.5,00,482/- was added back to the total income of the assessee.
3.1. In respect of the second issue relating to disallowance of Rs.2,81,293/- on account of legal and professional fees debited to the P&L Account, assessee submitted that the said amount was paid to Amarchand & Mangaldas & Suresh a. Shroff & Co. towards due diligence exercise for the property purchased by the assessee at Lodha Excelus, Mumbai, during the year. Ld. AO noted that this amount was paid as professional fees in respect of purchase of immovable property by the assessee on which income from house property has been earned and assessee has claimed standard deduction @30% towards expenses in respect of income from the said property as provided in section 24 of the Act. Ld. AO held that since the assessee is allowed deduction @ 30% as expenses from the income earned from the house property, this expense is not allowable against the income from house property. Accordingly, he held that the claim of this expense is not admissible u/s. 23 and 24 of the Act as debited in the P&L Account and thus made the addition to the total income. Aggrieved, assessee went in appeal before the Ld. CIT(A).
4 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14 4. In respect of disallowance u/s. 14A of the Act, Ld. CIT(A) confirmed the disallowance of Rs.5,00,482/- by holding that Ld. AO is justified in taking into calculation, the value of investments in the mutual funds which were sold during the year while computing the disallowance. In respect of the addition made towards legal and professional fees, Ld. CIT(A) confirmed the addition by holding that AO has not allowed this expenditure since the income from property has been offered as income from house property from which standard deduction of 30% has been claimed. Thus, this expense cannot be further allowed as business expense. Aggrieved, assessee is in appeal before this Tribunal.
Before us Shri Soumitra Choudhury, Advocate represented the assessee and Shri Biswanath Das, Addl. CIT represented the department.
Ld. Counsel for the assessee submitted that a paper book containing 84 pages is placed on record to substantiate the claims made by the assessee. Ld. Counsel pointed out that the sole issue relevant to quantification of the disallowance to be made under rule 8D(2)(iii) of the Rules, which according to him has been rightly suo moto disallowed in the sum of Rs.4,00,563/-. To this effect, he pointed out to page 35 of the paper book wherein a detailed explanation was furnished before the Ld. AO vide letter dated 24.11.2015. In the submission so made before the Ld. AO, each item of investment made by the assessee was explained for the purpose of calculating the average value of investment. The explanation so furnished is reproduced hereunder:
“That following investment is opening investment invested in bonds and debt mutual fund under growth scheme and income from which is always taxable on redemption:-
As on 31.03.2013 As on 31.03.2012 01. Tata Steel Bond Rs.50,73,466/- Rs. 50,73,466/- 02. Solaris Bonds Nil Rs.7,79,71,357/- 03. Nabard Bonds Rs.2,67,97,500/- Rs.1,30,50,000/- 04. Lodha NCB Rs.35,80,728/- Nil 05. HSBC MF Rs.99,00,000/- Rs.99,00,000/- 06. HSBC MF Rs.2,00,00,000/- Nil 07. Religare MF Nil Rs.1,50,00,000/-
5 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14 08. Tata Liquid Mutual Fund Nil Rs.21,00,00,000/- 09. Tata Short Term MF Rs.2,69,23,377/- Rs.19,23,377/- Rs.9,22,75,071/- Rs.33,29,18,200/-
It is submitted that investment in Bonds which carries interest and income from is taxable. Further it is submitted that above investment made in the debt mutual fund are of short term nature and during the year some investment has been redeemed/sold and there is a capital gain of Rs.23159198/- on redemption/ sale of bonds from above investment and due tax has been paid. Further please note that against the said investment we have not earned any tax free income i.e. dividend etc., so the opening & closing amount of investment as above should be deducted while calculating the average value of investment. The same has been held in the case of Sundaram Asset Management Co. Ltd. v. DCIT [2013] 145 ITD 17 (Chennai) (Trib.) - Held, some of the investments made by the assesses are short term. Since assessee was paying capital gains tax on above investments, Rule 8D will not apply on them and the AO was directed to recompute disallowance u/s l4A read with Rule 8D after excluding short term investments. As regards units in a mutual fund, they are normally held as investment and not stock-in- trade. Whether the provisions of section l4A can be applied in such cases would depend on the nature of mutual fund units. In case of investment in liquid fund or debt fund mutual funds and bonds, since both the gains from sale and interest are taxable, section 14A should not be applicable. We are also enclosing herewith detail calculation of disallowance u/s.l4A.”
Based on this submission, computation of disallowance u/s. 14A read with Rule 7. 8D(2)(iii) was also placed on record at page 33 of the paper book which is reproduced as under: (Page left blank intentionally)
6 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14
He strongly submitted that what is disallowable under the provisions of Rule 8D(2)(iii) of the Rules is the amount equal to 0.5% of the average value of investment, the income from which does not or shall not form part of the total income and, therefore, not all investments become subject matter for consideration when computing the disallowance u/s. 14A read with Rule 8D(2)(iii) of the rules. According to him, the disallowance has to be computed in relation to the income which does not form part of the total income which can be done by taking into consideration only those investments which give rise to income which does not form part of the total income. He emphasized
7 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14 that keeping this under consideration, the suo moto disallowance of Rs.4,00,563/- was computed and taken into consideration in the return of income. He thus submitted that the approach of Ld. AO in computing the disallowance by taking the entire investment for the purpose of disallowance is not in accordance with the mandate of law.
Per contra, Ld. Sr. DR placed reliance on the order of Ld. CIT(A).
In respect of the second issue relating to addition of Rs.2,81,293/- towards legal and professional fees incurred for the exercise of due diligence carried out in respect of purchase of an immovable property by the assessee, Ld. Counsel reiterated the submissions made before the lower authorities, narrated in the facts above. The Ld. Sr. DR placed reliance on the order of the ld. CIT(A) in this respect.
We have heard rival submissions and gone through the facts and circumstances of the case. In respect of the first issue relating to disallowance u/s. 14A of the Act, we note that the sole issue before us is on the quantification of disallowance made under rule 8D(2)(iii) of the Rules, there being no dispute as to whether the disallowance u/s. 14A of the Act has to be made or not. From the perusal of the provisions of rule 8D(2)(iii) of the rules, we note that the quantification of the disallowance @0.5% of the average value of investment has to be made by taking into consideration the investments which gives rise to the income which does not form part of the total income. From the perusal of the computation (supra) made by the assessee in arriving at the amount of suo moto disallowance and the detailed explanation (supra) given in respect of each of the investments by clarifying the nature of income which each of the investments would yield, we are inclined to accept the submissions made by the Ld. Counsel to hold that the disallowance u/s. 14A read with Rule 8D(2)(iii) of the rules be restricted to the amount of Rs.4,00,563/- as made by the assessee itself. Thus, the incremental addition made by the Ld. AO of Rs.5,00,482/- is directed to be deleted.
11.1. Further, in respect of the second issue relating to the addition of Rs.2,81,293/-, we note that assessee has made an investment in an immovable property from which income earned has been reported under the head “Income from House Property” after
8 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14 claiming standard deduction @ 30% as provided u/s. 24 of the Act. We also note that the significant portion of earning of the assessee during the year are from the rent and service charges as reported in Note No. 12 forming part of the P&L Account placed at page 31 of the paper book. We also note that the investment made in the immovable property is reported in Note No. 7 titled as “Fixed Tangible Assets” forming part of the Balance sheet, placed at page 27 of the paper book. On this factual matrix, we are of the view that the expenses of legal and professional charges incurred by the assessee for the exercise of due diligence in respect of purchase of immovable property is an expense which goes into the cost of the acquisition of the said property and is of capital in nature. It is important to note that the purchase of immovable property has been treated as an investment of the assessee and the income earned there from has been reported under the head “Income from other Sources”. While reporting income from house property a standard deduction @ 30% is allowed as a deduction u/s. 24 of the Act. Once such a deduction is allowed as per section 24 of the Act, no other deduction of the expense as claimed by the assessee can be said to be allowed in this respect. Accordingly, the claim of legal and professional expenses debited in the P&L Account is neither an admissible deduction u/s. 23 and 24 of the Act nor deductible as a business expenditure. Thus, we hold that no interference is called for in the findings given by the Ld. CIT(A) in this respect. Accordingly, this ground of appeal is dismissed.
In the result, the appeal of the assessee is partly allowed.
Order is pronounced in the open court on 21st July, 2022. Sd/- Sd/-
(RAJPAL SINGH) (GIRISH AGRAWAL) VICE PRESIDENT ACCOUNTANT MEMBER
Kolkata, Dated: 21.07.2022
JD, Sr. P.S.
9 ITA No.80/Kol/2022 M/s. H. C. Commercial Pvt. Ltd., A.Y: 2013-14
Copy to: 1. The Appellant: 2. The Respondent:. 3. CIT(A)-20 Kolkata 4. The CIT- Kolkata. 5. The DR, ITAT, Kolkata Bench, Kolkata //True Copy// [ By Order
Assistant Registrar ITAT, Kolkata Benches, Kolkata