M/S. CENTURY REAL ESTATE HOLDINGS PRIVATE LIMITED,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE- 2(2), BANGALORE

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

This appeal and stay petition have been filed by the assessee and they relate to assessment year 2014-15. The appeal is directed against order dated 11.2.2020 passed by Ld. CIT(A)-11, Bengaluru. The grounds of appeal urged by the assessee read as under:

2. The learned CIT(A) is wrong in law by confirming the additions of the Assessing Officer and passing the order without considering the submissions of the appellant. 3. The learned CIT(A) is wrong in law in confirming the addition made by the Assessing Officer u/s 14A r.w. Rule 8D of the Act. 4. The learned CIT(A) has erred in not recording the satisfaction before proceeding to invoke the provisions of s.14A r.w. Rule 8D of the Act. 5. The learned CIT(A) ought to have appreciated that no expenditure is incurred to invoke S.14A since most of the investments are carried forward from the previous year. 6. The learned CIT(A) ought to have appreciated that the appellant had sufficient funds of its own, thereby making the disallowance u/s 14A r.w. Rule 8D unwarranted. 7. The learned CIT(A) further, failed to appreciate that the disallowance made in much more than the exempt income. 8. Without prejudice, the disallowance is excessive, arbitrary, unreasonable and ought to be deleted.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 3 of 11 9. For these and other grounds that may be urged at the time of haring of the appeal, the Appellant prays that the appeal may be allowed.

Total exempt income – Rs.1,04,05,657/- The assessee did not make any disallowance u/s 14A of the Act. The A.O. noticed that the amount to be disallowed u/s 14A of the Act as per workings given rule 8D of Income Tax Rules is Rs.20,92,40,552/-. Accordingly, the AO issued a show cause notice to the assessee to explain as to why the above said amount should not be disallowed u/s 14A of the Act. In reply thereto, the assessee submitted that it did not incur any expense during the year for earning exempt income; that most of the investments have been brought forward from earlier year; that the investments in equity and preference shares have been made out of own funds and that the investments made in associate and subsidiary companies

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 4 of 11 are strategic investments in the nature of equity and preference shares. The assessee also contended that, according its own workings, the disallowance u/s 14A of the Act works out to Rs.7,54,468/- only.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 5 of 11 5. The Ld. CIT(A) rejected the contentions of the assessee that the AO did not record dissatisfaction by observing that the AO has duly looked into the accounts of the assessee. With regard to other arguments of the assessee, the Ld CIT(A) took support of the CBDT circular No.5/2014 dated 11.2.2014, which stated that the disallowance u/s 14A of the Act should be made even if the tax payers has not earned any exempt income, and rejected all other arguments. Accordingly, he confirmed disallowance made by the A.O. Aggrieved, the assessee has filed this appeal before us.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 6 of 11 disallowance u/s 14A is not warranted. Before us, the Ld. A.R. submitted that the own funds available with the assessee is in excess of the value of investment made in shares and hence the A.O. should not have disallowed any expenditure out of interest expenses under Rule 8D(2)(ii) of I T Rules. In this connection, Ld. A.R. invited our attention to the copies of Balance Sheet placed in the paper book. On a perusal of the same, we notice that the Ld. A.R. has considered only the value of investments made in shares for advancing this argument and did not consider the value of investments made in partnership firm. We have noticed earlier that the exempt income earned by the assessee included “share income from partnership firm”, which is exempt u/s 10(2A) of the Act. Hence, we are of the view that the investments made in partnership firm are also required to be considered for comparing the value of investments with the available own funds. We notice that the value of investments held by the assessee as at the year end is Rs.1,444.46 crores, whereas the own funds available with the assessee was Rs.585.21 crores only. Hence, it cannot be said that the own funds available with the assessee was more than the value of investments. Hence, this argument of the assessee also fails on the above said facts.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 7 of 11 contention of Ld A.R was that the share income from partnership firm should not be considered as exempt income, since the profits of partnership firm have already suffered tax in the hands of the partnership firm. We notice that the very same issue was considered by Ahmedabad Special bench of ITAT in the case of Shri Vishnu Anand Mahajan (ITA No.3002/Ahd/2009 dated 25-05-2012) and identical contentions made by the assessee were rejected by holding that, once the share income is excluded from the total income u/s 10(2A) of the Act, the provisions of section 14A of the Act would apply to it. Hence, this contention of the assessee would fail.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 8 of 11 what is exempted under the Act is share income received from the partnership firm u/s 10(2A) of the Act, meaning thereby, the profit or loss received from the partnership firm does not enter into computation of income at all. Hence the question of setting off income from partnership firm inter se does not arise. Accordingly, once a particular income does not enter into the computation on the ground the same is exempt, as held by special bench in the case of Sri Vishnu Anand Mahajan (supra), provisions of section 14A of the Act would apply. In this case, there is no dispute that the share income from partnership firm to the tune of Rs.1,02,01,474/- has been claimed as exempt u/s 10(2A) of the Act. Hence the provisions of sec.14A shall apply to the above said exempt income.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 9 of 11

“10. Coming to the second argument of the assessee, the assessee argued that it had earned meager dividend income of Rs. 24,138 as against which, the assessing officer disallowed a sum of Rs. 3,36,28,000 which is more than the exempt income. The assessee further argued that dis-allowance under section 14A cannot exceed amount of exempt income. The assessee relied upon case laws in support of its arguments. We find that the Hon’ble Delhi High Court in the case of Joint Investments (P.)

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 10 of 11 Ltd. (supra) held that the window for dis allowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. We further notice that the Hon’ble Delhi High Court in the case of CIT v. Holcim India (P.) Ltd. (2014) 272 CTR 282 (Delhi) has held that there can be no dis allowance under section 14A in the absence of exempt income. The rationale behind these judgments is that the amount of dis allowance cannot exceed exempt income. In this case, on perusal of the facts, we find that the assessee has earned exempt income of Rs. 24,138, whereas the assessing officer disallowed an amount of Rs. 3,36,28,000. Therefore, considering the facts and circumstances of the case and also following the ratios of the case laws discussed above, we are of the view that dis allowance under section 14A cannot exceed the exempt income. Hence, we direct the assessing officer to restrict dis allowance under section 14A to the extent of exempt income earned by the assessee.” The above said decisions would support the contention of the assessee on this point. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/a 14A to the amount of exempt income.

S.P. No.113/Bang/2020 M/s. Century Real Estate Holdings Pvt. Ltd., Bengaluru Page 11 of 11

Order pronounced in the open court on 24.6.2020.