DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), BENGALURU vs. MANIPAL EDUCATION AND MEDICAL GROUP INDIA PRIVATE LIMITED, BENGALURU

In response to that, the assessee submitted that “during the year under review, the company had made investment out of surplus cash in liquid mutual funds and the company had not incurred any expenditure to earn this exempted income. Therefore, no disallowance should be made”.

The learned AO, after considering the above reply vide paragraph Nos.4.2 to 4.5, has computed the disallowance under Rule 8D of the Rules of Rs.1,97,60,523/- but restricted it to exempt income of Rs.75,84,440/- which is claimed as exempt income under section 10(35) of the Act, as under:

1. Page 6 of 16 7. Based on that, the Assessment Order was passed on 27.05.2021 making the above disallowance. Restricted to the extent of exempt income u/s 10(35 ) of the Act of Rs 75,84,880 .

The assessee preferred appeal before the learned CIT(A) wherein the learned AO in paragraph No.6.3 held that assessee has not maintained segment wise books of accounts and total disallowance is restricted to the exempt income. He confirmed the same. He did not deal with the objection of the assessee that no satisfaction is recorded by the AO with respect to the books of accounts of the assessee and there is no satisfaction about the claim of the assessee that it has not incurred any expenditure.

Assessee, aggrieved with same, is in appeal before us. The only contention raised by the assessee is that if the AO fails to record a satisfaction about the correctness of the claim of the assessee which is not of incurring any expenditure for earning exempt income and such satisfaction is not with respect to books of accounts of the assessee, no disallowance can be made. The learned Authorized Representative categorically stated that satisfaction of the learned AO with regard to the correctness of the claim and on examination of the books of accounts, is a mandatory condition according to section 14A (2) of the Act. He further referred to the decision of the Hon’ble Delhi High Court in case of Vedanta Limited 102 taxmann.com 95 and further decision of Hon’ble Punjab and Haryana High Court in case of Hero Cycles Ltd., 189 Taxman 50. Therefore, its claim is that as there is no & Page 7 of 16 satisfaction recorded by the learned AO, the disallowance under section 14A of the Act is not sustainable.

The learned AR has stated that identical issues also arose in the case of the sister concern of the assessee wherein ITAT has passed an order holding that satisfaction is sine qua non for disallowance.

The learned Departmental Representative (learned DR) Shri. Subramanian, JCIT, categorically supported the orders of the learned lower authorities. He specifically referred to paragraph No.4.2 of the order of the learned AO where the assesses accounts were examined. Thus, he submitted that there is no infirmity in the order of the learned lower authorities.

We have carefully considered the rival contention and perused the orders of the learned lower authorities. The facts precisely to be stated are that the assessee company has received a dividend of Rs.1,12,66,387/-. Out of that, only a dividend to the extent of Rs.75,84,440/- is claimed as exempt under section 10(35) of the Act for the reason that dividend received from liquid mutual fund is not exempt. Thus, the exempt income earned by the assessee is only Rs.75,84,440/-. When the assessee was questioned to provide note on applicability of section 14A of the Act along with computation of disallowance under section 14A r.w.r. 8D of the Rules, the assessee categorically stated that investment is made out of surplus cash in liquid mutual fund and further the assessee has not incurred any expenditure to earn this exempted income. The learned AO, after Page 8 of 16 examining the explanation of the assessee, has held that the accounts of the assessee are not maintained in a manner to compute the income relating to income not includable in the total income. He further stated that the explanation of the assessee that it has not incurred any expenditure, then no disallowance can be made is not correct. He computed 0.5% of the average annual investment amounting to Rs.1,97,60,523/- but restricted disallowance to the extent of Rs.75,84,440/-.

The learned AR has stated that identical issue also arose in the case of the sister concern of the assessee wherein ITAT has passed an order holding that satisfaction is sine qua non for the disallowance. We are not influenced by the above decision for the reason that it is enshrined in the Act itself. The provisions of section 14A(2) of the Act gives the AO a power to make a disallowance as per the method prescribed under Rule 8D of the Rules. However, such power is circumscribed by a condition that before computing the disallowance, the AO should look into the accounts of the assessee and then he must be dissatisfied with the claim of the assessee that assessee has not incurred any expenditure in relation to the exempt income. Thus, it can be in the manner that the ld. AO points out certain expenditure claimed by the assessee as deduction are for earning exempt only and not incurred for earning of taxable income. Thus, there has to be pointed identification of such expenditure to reject the claim of the assessee. This is the mandate of section 14A (2) of The Act.

Page 9 of 16 14. Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) in paragraph No.41 has categorically held that the AO is duty bound to record its satisfaction by considering the facts as recorded in the books of accounts. The Hon’ble Supreme Court in the case of Walford Share and Stockbrokers Ltd., also has categorically held that there must be a proximate cause between the expenditure and earning of exempt income. The Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd., 278 Taxman 266 has also held so. Further, the Hon’ble Bombay High Court in PCIT Vs. Tata Capital Ltd., 475 ITR 599 is also the same view. Accordingly, the general observation made by the AO that the company deploys manpower and resources and therefore the claim of the assessee is not correct, cannot be said to be proper satisfaction in terms of the provisions of section 14A (2) of the Act.

In view of the above facts, it is clear that the claim of the assessee is that it has not incurred any expenditure and has not been refuted by the learned AO despite having the complete Income & Expenditure statement and Annual Accounts available before him. He has not pointed out single expenditure which is incurred by the assessee not for earning the taxable income but for earning exempt.

In view of this, the disallowance made by the AO is not correct.

Further The learned CIT(A) was specifically shown the above arguments with the decisions of the Hon’ble High Court but the learned CIT(A) despite recording the same, did not consider and decide that & Page 10 of 16 issue. On perusal of the Assessment Order, it is apparent that the provisions of section 14A (2) of the Act are not correctly followed by the AO. When the decisions of the Hon’ble High Court are shown to the learned CIT(A), he is duly bound to follow the same and should have decided the issue.

In view of the above facts, the disallowance made by the learned AO amounting to Rs.75,84,440/- is not sustainable. The learned AO is directed to delete the same. Accordingly, ground Nos.1 and 2 of the appeal are allowed.

In the result, the appeal of the assessee is allowed.

Coming to the appeal of the ld. AO against deleting addition of Rs 4,44,80,000/- facts shows that as per form No. 26 QB the assessee has shown value of the immovable property under a slump sale of ₹ 1,031,780,000/- however the sale consideration reported by the assessee is only ₹ 987,300,000 in the return of income filed for the impugned assessment year. Therefore the differential amount of ₹ 44,480,000 was sought for clarification.

Assessee submitted that slump sale consideration ids Rs 98.73 Crores. Slump sale also included immovable property to be registered in the name of buyer. The Stamp Duty value of such property was taken at Rs 103.78 cr. So there is difference of the above sum. Such sum is not paid by the buyer nor received by the assessee. Form No 3cEA was also & Page 11 of 16 submitted for computing the capital gain arising under slump sale agreement.

The assessee also stated that there was a project cost for completing the pending STP work was also paid as advance to Manipal education and medical group India private limited as the assessee company had understanding with the vendor to the completing the STP work.

Inadvertently this amount of ₹ 44,480,000 was included in form No. 26QB as the sale consideration and tax was deducted on the same. It was submitted that the net consideration is only ₹ 98.73 crores and Rs. 4 .44 crores is merely an advance made to Manipal education and medical group India private limited and is not part of sale consideration.

The learned assessing officer held that assessee company is not able to produce any written agreement for the above transaction and assessee has also not provided any proof or having received the above sum as advance from Woodstock ambience private limited. Therefore the learned assessing officer held that the sum of the transaction is Rs. 103,17,80,000 instead of ₹ 987,380,000 shown by the assessee and as the assessee company has shown a difference of ₹ 44,480,000 were not returned to the buyer Woodstock ambience private limited, he considered the sale consideration at Rs.103,17,80,000 instead of ₹ 987,380,000 shown by the assessee and made a consequent addition of ₹ 44,480,000.

The learned AO aggrieved with the above deletion of addition is in appeal before us. The learned CIT DR submitted that in form No. 26 QB the value of the property sold under the slump sale were shown for a total consideration of Rs. 103,17,80,000. The assessee has reported the sale consideration only of ₹ 98.73 crores and therefore the addition of ₹ 44,480,000 was made. He relied upon the assessment order.

The learned authorized representative referred to form No. 3CEA being a report of an accountant furnished in accordance with the provisions of section 50 B (3) of the act. He submitted that the date of slump sale was 30 September 2017 and the sale consideration shown in the audited accounts is ₹ 98.73 crores. It was submitted that the learned assessing officer has accepted the net worth of the undertaking as certified by the auditor. He further submitted that the slump sale agreement also speaks about the consideration of ₹ 98.73 crores. Merely because the assets transferred included land and building, the immovable properties had to be registered as per the transfer of property act in favor of the buyer. For this purpose, the transfer of the immovable properties was registered by adopting the government value of the properties at ₹ 1,031,780,000. Neither the assessee has received such consideration over and above ₹ 987,300,000 nor the buyer has paid any such consideration. The buyer has also confirmed the same. Merely for the purpose of the collection of the tax in form No. 26 QB, Page 14 of 16 the above sum was mentioned as the above sum included registered value of the immovable property transferred. He further referred to the provisions of section 50 B of the act and stated that the actual sale consideration received was ₹ 98.73 crores and therefore the addition made by the learned assessing officer of ₹ 44,480,000 is devoid of any merit which the learned CIT – A has correctly deleted.

On the specific query by bench about applicability of Provisions of section 50B (2) (ii) of The Act, it was submitted that such provisions are inserted with effect from 1/4/2021 and impugned AY is 2018-19. Therefore that amendment does not have any impact on this appeal.

We have carefully considered the rival contention and perused the orders of the learned lower authorities. The fact shows that assessee has transferred the hostel building along with the Hostel services business in a slump sale to Woodstock ambience private limited for a consideration of ₹ 98.73 crores which has resulted into a profit of ₹ 88.68 crores. The book profit on slump sale was shown at ₹ 88.68 crores. The fixed assets transferred included the land and building along with the furniture and equipment and other business assets covered in slump sale, the slump sale consideration was determined at ₹ 98.73 crores. According to the slump sale agreement it is evident that a sum of ₹ 4,629,400,000 was found to be the total value of the assets transferred along with the liabilities of ₹ 4,529,000,000 thus the net worth of the business was ₹ 100,400,000 which was sold for ₹ 98.73 crores. The difference between actual consideration of Rs. 98.73 Page 15 of 16 crores and stamp duty value of properties at Rs. 103.17 crores is on account of the stamp duty value of the immovable property being sold in slump sale transaction along with the other assets. As difference is neither received by the assessee that no such consideration is paid by the buyer, same could not have been added in the hands of the assessee. These facts were also submitted before the assessing officer however being the difference in form No. 26 QB, the addition was made. The learned CIT – A after examining the facts has deleted the addition. It is apparent that assessee has recorded the complete sale of ₹ 98.73 crores for which the consideration is received by the assessee. The balance consideration which is added by the learned assessing officer under the mistaken belief based on form No. 26 QB was neither received by the assessee nor paid by the buyer and therefore we do not find any infirmity in the order of the learned CIT – A.

In the result the solitary ground raised by the learned assessing officer is dismissed.

The appeal filed by the learned AO is dismissed.