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

IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI. G. MANJUNATHA, ACCOUNTANT MEMBER ITA No.1627/Mum./2018 (Assessment Year: 2013-14)

M/s Fine Estate Private Limited 4th Floor, ManeckjiWadiaBldg, ……………. Appellant 127 M.G. Road, Mumbai PAN-AAACF2738F

v/s

DCIT, Circle 2(1)(2), Mumbai ……………. Respondent ITA No.1979/Mum./2018 (Assessment Year: 2013-14)

ACIT, Circle 2(1)(2), Mumbai

……………. Appellant v/s

M/s Fine Estate Private Limited 4th Floor, ManeckjiWadiaBldg, ……………. Respondent 127 M.G. Road, Mumbai PAN-AAACF2738F

Assesseeby : Sh. Rakesh Mohan, AR Revenue by :Sh. Rajeev Gubgotra, DR

Date of Hearing –04.07.2019 Date of Order - 31.07.2019

O R D E R PER: MANJUNATHA G.

These cross appeals filed by the assessee, as well as the

Revenue are directed against the order of the ld. CIT(A)-4, Mumbai,

dated 31.02.2018 for the assessment year 2013-14. Since, the facts

are identical and issues are common, For the sake of convenience,

these appeals were heard together and are disposed of by this

consolidated order.

following grounds of appeal:-

Ground No. 1 On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of A.O. in concluding that additional disallowance u/s 14A r.w.r. 8D is attracted for earning exempt income. The appellant prays that the said action of the learned AO may kindly be deleted. Ground No.2: Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned A.O. in holding that the interest of Rs. 6,57,609 was not allowable as deduction u/s 36(l)(iii) of the Income Tax Act. The appellant prays that the disallowance of Rs. 6,57,609 may kindly be deleted. Ground No. 3: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in disregarding the appellant's claim that the properties were being used by the appellant for commercial purposes and in computing notional rent of Rs 2,50,205 by holding them to be deemed to be let out properties. The appellant prays that the addition of Rs. 2,50,205 may kindly be deleted. Ground No. 4: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in not accepting the appellants claim of benefit of vacancy allowance u/s 23(l)(c) of the Act.The appellant prays that the said action of the learned AO may kindly be deleted.

Ground No. 5: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in assessing the ALV of the property as per the market values, disregarding the Municipal Rateable Valuation report of the said property. The appellant prays that the said action of the learned AO may kindly be deleted. Ground No. 6: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in disallowing society expenses of Rs 54,430 by holding the properties to be deemed to be let out properties. The appellant prays that the disallowance of Rs 54,430 may kindly be deleted. Ground No. 7: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in initiating penalty u/s. 271(l)(c) of the Act.

appeal:-

engaged in the business of renting of premises and providing

professional services towards coordination and building of projects

filed its return of income for A.Y. 2013-14 on 29.9.2013 declaring

total income of Rs. 59,23,953/- under normal provisions of Income

Tax Act, 1961 and declared book profit of Rs. 19,22,650/- under

provisions of section 115JB of the Income Tax Act, 1961. The

assessment has been completed under section 143(3) of the Income

Tax Act, 1961 on 22.3.2016, determining the total income at Rs.

1,42,94,790/- under normal provisions of the Act, and book profit of

Rs. 99,88,854/- under section 115JB of the Income Tax Act, 1961,

where the AO has made additions towards disallowance of

expenditure incurred in relation to exempt income under section

14A read with Rule 8D(2) of Income Tax Rules, 1962, determination

of notional rent of two house properties, claims to have been used

for own business purpose by the assessee and also additions

towards disallowance of society charges. The AO has also made

adjustment to book profit computed under section 115JB of the

Income Tax Act, 1961 towards disallowance of expenses under

section 14A of the Act.

appeal before the CIT(A). Before the CIT(A), the assesseehad filed

elaborate written submissions on the issues which has been

reproduced at para 6.2 on pages 5 to 14 of learned CIT(A) order.

The assessee had also filed written submissions on the issue of re-

computation of book profit under section 115JB of the Income Tax

Act, 1961 which has been reproduced at para 7.2 on pages 17 to 20

of ld. CIT(A) order.Similarly, the assessee has filed written

submissions on the issue of disallowance of interest expenses under

section 36 (1)(iii) and estimation of notional rental incomeof two

properties which has been considered and reproduced by the ld.

CIT(A) in his order. The ld. CIT(A) after considering relevant

submissions of the assesseeand also taken note of various judicial

precedents, rejected legal argument taken by the assesseein

respect of strategic investment as well as satisfaction as required

under section 14A(2), of the Income Tax Act, 1961, however,

allowed partial relief to the assessee in respect of disallowance of

interest expenditure by adopting net interest expenses as against

total interest expenses considered by the AO to rework disallowance

of interest under Rule 8D(2)(ii) of the Income Tax Act, 1962. As

regards re-computation of book profits, the ld. CIT(A) by following

the decision of ITAT, Delhi Special Benchin the case of ACIT vs.

Vireet Investments Pvt. Ltd., (supra) directed the AO to delete

adjustment to book profit in respect of disallowance of expenses

under section 14A of the Act. Similarly,the ld. CIT(A) has confirmed

additions made by the AO towards disallowance of interest expenses

under section 36(1)(iii) of the Act,on the ground that although

assessee claims to have advanced loans to subsidiaries to business

purpose but, failed to establish nexus between loans and advances

and business connection. Likewise, the ld. CIT(A) confirmed the

additions made by the AO towards estimation of notional rental

income on two properties and disallowance of society charges.

Aggrieved by the ld. CIT(A) order, the assessee as well as the

Revenue are in appeal before us.

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 assessee has also made suo moto disallowance of expenses in

relation to exempt income of Rs. 18,57,056/-, however it has

disallowed direct expenses in relation to exempt income under Rule

8D(2)(i), but did not worked out interest disallowances under Rule

8D(2)(iii) of Income Tax Rules, 1962. The AO has disallowed

interest expenses on the ground that the assessee has borrowed

funds and the same has been used for investments in shares and

securities which yielded exempt income. Therefore, interest income

needs to be disallowed and accordingly, determined interest

disallowance of Rs. 80,66,204/-. On appeal, the ld. CIT(A) rejected

all arguments advanced by the assesseeand allowed partial relief in

respect of disallowances by taking net interest expenses only for the

purpose of determination of disallowances.

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.

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.

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:-

“41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the

AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

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.

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.

Therefore, we are of the considered view that there is no error in

the findings of the ld. CIT(A) and hence,we are inclined to uphold

the findings of the ld. CIT(A) and reject ground taken by the

Revenue.

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.

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.

13A. The ld. DR, on the other hand, strongly supported the orders

of the ld. CIT(A).

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.

We further noted that when there is an element of commercial

expediency in giving loans and advances to group concerns/

subsidiaries, the question of disallowance of interest expenditure

does not arise, because the assessee may get direct benefit from

loans and advances given to subsidiaries. Therefore, we are of the

considered view that the AO as well as ld. CIT(A) were erred in

disallowing interest expenses under section 36(1)(iii) of the Income

Tax Act, 1961. Hence,we delete the additions made by the AO

towards interest expenses.

fromassessee appeal is estimation of notional ALV of the properties

owned by the assesseeand consequent disallowance of society

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.

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. CIT(A).

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.

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.

assessee are dismissed.

Order pronounced in the Open Court on 31.07.2019.

Sd/- Sd/-

(PAWAN SINGH) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER

MUMBAI, DATED: 31.07.2019 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A);

(4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file.

By Order SH (Dy./Asstt.Registrar) ITAT, Mumbai