FINE ESTATES P.LTD,MUMBAI vs. DCIT CIR 2(1)(2), MUMBAI

The assessee, in its memorandum of appeal has filed the following grounds of appeal:-

The Revenue,in its appeal has taken the following grounds of appeal:-

The first issue that came up for consideration before us from the assessee as well as the Revenue appeal is disallowance of interest expenditure under section 14A read with Rule 8(2)(D)(ii) of the Income Tax Rules, 1962. The facts with regard to impugned dispute are that the assessee has earned dividend income and claimed exempt under section 10(34) of the Income Tax Act, 1961.

The ld. AR for the assessee, referring to the decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited vs. CIT (2018) 91 taxmann.com 154 (SC) submitted that before invoking Rule 8D(2), the AO is required to record satisfaction that having regard to the kind of the assesseesuo moto disallowances under section 14A was not correct, therefore in absence of any satisfaction, the AO cannot simply invoke Rule 8D(2) to determine disallowances. The ld AR further submitted that the Hon’ble High Court of Bombay in the case of Godrej and Boyce Manufacturing Company Limited vs. CIT (Supra)had considered identical issue and held that before invoking provisions of section 14A read with Rule 8D(2), the AO shall record satisfaction having regard to the books of accounts of the assessee that suo moto disallowances worked out by the assesseeis incorrect. In this case, the AO failed to record satisfaction that suomoto disallowances worked out by the assessee is incorrect, therefore further disallowances of expenses over and above su-moto disallowances determined by the assessee cannot be made.

The ld. DR, on the other hand, strongly supported the orders of the CIT(A) in respect of satisfaction as required under section 14A(2) and submitted that although the CIT(A)was right in upholding the action of the AO in disallowance of interest expenses,but erred in taking net interest expenses, when no such netting offof interest is permissible as per provisions of section 14A of the I.T. Act, 1961.

We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. There is no dispute with regard to applicability of provisions of section 14A read with Rule 8D(2) of the I.T. Rules, 1962. Infact, the assessee itself has determined suo moto disallowance to expenses under Rule 8D(2)(i) and (iii) of I.T. Rules, 1962. The only dispute is with regard to disallowance of interest expenditure, under Rule 8D(2)(ii) of the I.T. Rules, 1962. According to the assessee, provisions of rule 8D(2)(ii) is not applicable,because no interest- bearing funds has been used for making investments in shares and securities. The AO has disregarded explanation offered by the assesseeand invoked Rule 8D(2)(ii) and determine interest disallowance of Rs. 80,66,204/-. The main contention of the assessee in the light of decision of Hon’ble Supreme Court in the case of Maxopp Investment vs. CIT (supra) that in absence of any satisfaction as required under section 14A(2) that having regard to the kind of the assessee, suo moto disallowances under section 14A was not correct, and it will be in those cases where the assessee in his return of income has himself apportioned, but the AO has not accepting such apportionment, in that eventuality, it will have to record its satisfaction to this effect, the AO cannot determine disallowance by applying rule 8D of IT, Rules 1962. In this case, there is no dispute with regard suo moto disallowances worked out by the assessee. It is also an admitted fact that the AO did not accepted disallowances worked out by the assessee,but while rejecting suo moto disallowances worked by the assessee, the AO has failed to record satisfaction as required under section 14A(2), that having regard to the kind of the assesseesuo moto disallowances under section 14A was not correct. Unless, the AO records a clear satisfaction as required under section 14A(2), he cannot proceed to determination of disallowance under Rule 8D(2), of IT Rules, 1962. This legal proposition is supported by the decision of Hon’ble Supreme Court in the case of Maxopp Investment vs. CIT (supra) where in paragraph 41, the Court held as under:-

In this view of the matte and respectfully following the decision of Hon’ble Supreme Court in the case of Maxopp Investment vs. CIT (supra), we are of the considered view that the AO was erred in invoking Rule 8D(2)(ii) to determine interest expenses disallowances without recording satisfaction as required under section 14A(2) of the Income Tax Act, 1961.Hence,we direct the AO to delete additions made towards interest expenses under Rule 8D(2)(ii) of Income Tax Rules, 1962.

The next issue that came up for our consideration from ground no. 2 of Revenue appeal is re-computation of book profit under section 115JB of Income Tax Act, 1961 in respect of disallowance of expenses under section 14A read with Rule 8D(2) of the I.T. Rules, 1962. We, find that the ld. CIT(A) has deleted adjustment made by the AO to book profit by following the special Bench decision of ITAT, in case of ACIT vs.Vareet Investment Pvt. Ltd., 2017 82 taxmann.com 415 (Del) (Tri) (SB),where it was held that computation under Clause (f)of explanation 1 to section 115JB(2) is tobe made without resorting to the computation as contemplated under section 14A read with Rule 8D(2) of Income Tax Rules, 1962.

The next issue that came up for our consideration from assessee appeal is disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961. The AO has disallowed interest expenses of Rs. 6,57,609/- for the reason that the assesseehas borrowed funds and the same has been used for giving loans and advances to group concerns without charging any interest and accordingly, determined disallowance of Rs. 6,57,609/-, but did not made any addition towards income for the reason that interest expenditure has already been disallowed under section 14A of the Act, and hence no further disallowance is being made. On appeal, ld. CIT(A) concurred with findings of the ld. CIT(A) and rejected arguments of the assessee.

The ld. AR for the assessee submitted that the ld. CIT(A) failed to appreciate the facts in right perspective in light of decision of Hon’ble Supreme Court in the case of S.A. Builders vs. CIT(288 ITR 1)where it was categorically held that if loans and advances for subsidiaries are for business purpose or there is an element of commercial expediency, no disallowance could be made under section 36(1)(iii) of the Income Tax Act, 1961.

We have considered rival contentions of both parties and find that the assessee has taken a plea in the light of decision of Hon’ble Supreme Court in the case of S.A. Builders vs. CIT(supra) and argued that loans and advances given to subsidiaries / group companies are strategic investments for the purposes of business of assessee and there is a direct nexus between loans and advances and business of the assessee therefore, no interest expenses could be disallowed under section 36(1)(iii) of the Income Tax Act, 1961.

The next issue that came up for our consideration fromassessee appeal is estimation of notional ALV of the properties maintenance charges. The brief facts of the impugned dispute are that the assessee is in the business of renting of property. The assessee ownedvarious properties and out of which two properties i.e. flat at Gul Palace and flat at Meera Road, have neither given on rent nor any notional income from the same have been offered for taxation. The AO determined ALV of two properties on the ground that although the assessee claims to have used both properties for the purpose of its own business,but failed to substantiate its arguments with evidences therefore, he came to the conclusion that ALV of two properties needs to be determined accordingly, estimated ALV of Rs. 2,50,205/- from both properties. On appeal, the ld. CTI(A) concurred with findings of the ld. AO and rejected arguments of the assessee.

The ld. AR for the assessee submitted that the ld. CIT(A) was erred in not considering facts in right perspective although the assessee has filed various details to prove that those properties were used as Godowns in its business. The ld. AR further submitted that it is for the assessee to decide whether particular place is required for business or not, but the AO has no role to play once relevant details have been filed to prove that the properties are infact, used for own business. The AO cannot question the decision of assessee merely for the reason that the nature of business carried by the assessee does not require so much space. The ld. AR further submitted that the assessee has filed various details and also clarified with evidences before the AO that above two properties are used as godowns to keep necessary documents and other related books of accounts of the assessee,but the AO disregarded all evidences and estimated notional rent.

The ld. DR, on the other hand, strongly supported the order of the ld. CIT(A).

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below.The solitary dispute is with regard to determination of ALV of two flats owned by the assessee. It was the claim of the assesseebefore the AO that those two properties are used in its own business for the purpose of keeping necessary records and documents, therefore the same cannot be considered as properties for the purpose of determination of ALV as required under section 23 of the Income Tax Act, 1961. The AO has determined notional rent on the ground that although assessee claims to have used properties for its own business,but failed to file necessary evidences. Having heard both the sides and considered material on record, we do not find any merits in the order of the AO for the reason that it is for the assesseeto decide whether particular properties are required for his business or not. Once assessee claims that the properties are used in its business and also filed necessary evidences to prove its claim,the AO simply cannot disbelieve the claim of the assesseefor the simple reason that nature of business carried on by the assesseedoes not require so much space. The AO cannot decide whether particular place is required for the purpose of business of the assessee. In this case, the assessee has filed all details to prove that those two flats have been used as office as well as godowns place to carry out its business activity and also to keep necessary records and books of accounts. Therefore, we are of the considered view that the AO as well as ld. CIT(A) were erred in estimating notional rental income from two properties,and hence we direct the AO to delete the additions made towards ALV of two properties.

Coming to disallowance of society expenses, the AO never disputed the fact that the assessee has paid maintenance charges to the societies in respect of two properties.The AO disallowed expenses incurred under the head society charges on the ground that once income from property is assessed under the head income from house properties on which standard deduction is allowed, then no further deduction towards any expenditure including society charges cannot be allowed as deduction. We have already stated that the assesseehas used those premises for the purpose of his own business, consequently any expenditure incurred in relation to said property including society charges can be considered as expenses incurred wholly and exclusively for the purpose of business of assessee and hence, we are of the considered view that the AO was erred in disallowing society charges paid in respect of above two properties. Hence, we direct the AO to delete disallowance of society charge.

In the result,both the appeal filed by the Revenue and assessee are dismissed.