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Income Tax Appellate Tribunal, “A’’BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the order dated 10.2.2017 passed by Ld. CIT(A)-2, Bengaluru and it relates to the assessment year 2012-13. The assessee is aggrieved by the decision of Ld. CIT(A) in confirming the disallowance of Rs.42.42 lakhs made by the A.O. u/s 14A of the Income-tax Act,1961 ['the Act' for short].
The facts relating to the issue are stated in brief. The assessee is engaged in the business of development of industrial park, residential houses, buildings, apartments, etc. During the M/s. Century Joint Development Pvt. Ltd., Bangalore
Page 2 of 5 course of assessment proceedings, the A.O. noticed that the assessee has earned share income from firms aggregating to Rs.20.32 lakhs and claimed the same as exempt u/s 10(2A) of the Act. The AO noticed that the assessee did not make any disallowance u/s 14A of the Act. Hence, the A.O. proceeded to compute disallowance u/r 8D of I T Rules read with section 14A of the Act. The disallowance made by the AO consisted of interest disallowance under Rule 8D(2)(ii) amounting to Rs.8,56,691/-and expenditure disallowance of Rs.33,85,377/- under Rule 8D(2)(iii), both aggregating to Rs.42,42,668/-. The Ld. CIT(A) also confirmed the same.
The Ld. A.R. submitted that the assessee did not incur any expenditure for earning the exempt income. He further submitted that the main income of the assessee is income from property development which, during the year amounted to Rs.70.03 crores. However, the assessee has received share of profit from partnership firm to the tune of Rs.20.32 lakhs only. He submitted that major portion of the expenses are directly related to property development activity of the assessee. Only following expenses may be termed as common expenses: Rates & Taxes - Rs.24.70 lakhs Legal & Professional - Rs.21.62 lakhs Insurance - Rs.1.35 lakhs Bank charges - Rs.0.64 lakhs Miscellaneous expenses - Rs.0.21 lakhs Total - Rs.48.52 lakhs The Ld A.R further submitted that the loans taken by the assessee, on which interest expenditure was incurred, are project loans and are directly related to the projects executed by the assessee company. He also submitted that interest expense incurred by the assessee during the year was Rs.11.62 lakhs, while it has earned M/s. Century Joint Development Pvt. Ltd., Bangalore
Page 3 of 5 interest income of Rs.15.20 lakhs. Accordingly, he submitted that, in the facts & circumstances of the case, the application of rule 8D is not warranted. He submitted that the A.O. has failed to show that the claim of the assessee for not disallowing anything u/s 14A of the Act is not correct. He further submitted that though the assessee has invested in many partnership firms, yet it has earned share income only from two concerns namely M/s. Century Airport City & M/s. Century Corbel. Hence, for deciding the applicability of provisions of sec.14A, only investments made in these two concerns alone are required to be taken into consideration. Accordingly, he submitted that the disallowance u/s 14A of the Act is not warranted.
On the contrary, the Ld. D.R. supported the order passed by Ld. CIT(A).
We heard the rival contentions and perused the record. We notice that the A.O. has computed the disallowance u/s 14A of the Act at Rs.42.42 lakhs by applying provisions of rule 8D of I.T. Rules, even though the exempt income by way of share of profit from partnership firm declared by the assessee was Rs.20.32 lakhs. We also notice that the major income of the assessee is from property development amounting to Rs.70.03 crores, while the exempt income is only Rs.20.32 lakhs. Thus exempt income constitutes fraction of total revenue. With regard to the interest expenses, it is submitted that they have been incurred in respect of project specific loans and no part of the said loans have been diverted to partnership firms. It is in the common knowledge of everyone, the project specific loans can be used for the specific projects and further the usage of loans will also monitored by the bank. Accordingly, in the absence of any material to show that the project specific loan has been diverted for investment in partnership M/s. Century Joint Development Pvt. Ltd., Bangalore
Page 4 of 5 firms, in our view, the disallowance out of interest expenditure is not called for. Accordingly, considering the facts and circumstances of the case, we are of the view that there is no necessity to apply the provisions of rule 8D.
With regard to the other expenses, we notice that the assessee has claimed other expenses of Rs.14.13 crores, out of which only Rs.48.52 lakhs alone can be said to be common expenses. The Ld A.R submitted that the services and facilities used by assessee from other concerns and also by the other concerns from the assessee have been quantified and cross charged. Hence, overall supervision of the activities of partnership firms by the assessee would be relevant for sec.14A of the Act. Considering these facts and also the fact that major income of the assessee is from property development, we are of the view that the disallowance u/s 14A of the Act can be made at an adhoc figure of Rs.2.00 lakhs and the same, in our view, would meet the requirements of section 14A of the Act.
Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to restrict the disallowance to two lakhs rupees u/s 14A of the Act.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 25th June, 2021.