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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’: NEW DELHI
Before: SHRI G.D. AGRAWAL, HON’BLE & SHRI KULDIP SINGH
12.02.2016 qua Assessment Year 2011-12 passed by Ld. CIT(A)-3, Delhi- 110092 on the grounds that:-
“1. That on the facts and circumstance sof the case, the impugned order of Ld. Commissioner of Income-tax(Appeals) in confirming disallowance of expenses u/s 14A read with Rule 8D(2) to the extent of Rs. 1128.93 lacs out of total disallowance of Rs. 8066.72 lacs made by the Assessing Officer, is bad in law being contrary to stipulation laid in sub-rule (2) of Rule 8D.
That the appellant craves leave to add, alter, amend, substitute, withdraw and/or vary any grounds of appeal at or before the time of hearing.”
The Appellant, DCIT, Circle 7(1), New Delhi. (hereinafter referred 2. to as ‘the Revenue’) by filing the present appeal i.e. sought to set aside the impugned order dated 12.02.2016 qua Assessment Year 2011-12 passed by Ld. CIT(A)-3, Delhi-110092 on the grounds that:-
“1. Ld. CIT(A) erred in law and on facts of the case deleting the addition of Rs. 6,19,050/- made by the AO on account of Prior Period Expenses. 2. Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs. 27,00,000/- made by the AO on account of School Running Expenses.
3. Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs. 3,46,46,421/- made by the AO on account of Club Membership Fees.
4. Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs. 69,46,01,000/- made by the AO on account of interest u/s 14A r.w. Rule 8D(2)(iii) of the Income Tax Act, 1961. 5. The appellant craves leave, modify, add or forego any grounds (s) or appeal at any time before or during the hearing of this appeal.”
Since both the aforesaid Cross Appeals have been emanated from the single order passed by the Ld. CIT(A)-3, impugned by Assessee as well as Revenue, the same are being disposed of by way of consolidated order to avoid repetition of discussion.
Briefly stated the facts necessary for adjudication of the controversy at hand are:- the Assessee is into the business of Real Estate Development, Power Generation and Golf Course Operation.
As per the scheme of amalgamation approved by Hon’ble High Court of Delhi vide order dated January 11, 2012, 15 companies have been amalgamated into the DLF Home Developers Ltd. The Assessing Officer noticed that the assessee company has debited an amount of Rs. 6,19,050/- as prior period expenses, which has been disallowed by the AO, on the ground that the same pertains to previous Financial Year. AO further noticed that the assessee has debited an expenses of Rs. 27,00,000/- as school running expenses, which has been disallowed by the AO, on the ground that school running expenses relates to welfare/charity purposes. AO further noticed that the assessee has received an amount of Rs. 16,30,28,264/- on account of Membership Fee. Out of which the assessee has recognized Rs. 12,83,81,843/- as income in the P&L Account. Declining the contentions raised by the Assessee, AO made addition of balance amount of non-refundable membership fee of Rs. 3,46,46,421/-, following the orders of Assessment Years 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11. The AO further made addition of Rs. 80,66,72,117/- by invoking the provision contained u/s 14A read with Rule 8D of the Income-tax Rules, 1962 (for short ‘the Rules’).
The assessee carried the matter before the Ld. CIT(A) by filing the appeal, who has partly allowed the appeal and deleted the addition on account of prior period expenses of Rs. 6,19,050/-, deleted the addition on account of school running expenses of Rs. 27,00,000/- and also deleted the addition on account of Club membership fee of Rs. 3,46,46,421/- and restricted the addition to Rs. 80,74,94,000/- from Rs. 80,66,72,117/- made by the AO u/s 14A of the Act.
Feeling aggrieved, both Revenue as well as Assessee have come up before the Tribunal by way of filing appeal by challenging the impugned order passed by the Ld. CIT(A).
We have heard the Ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and order passed by the revenue authorities below in the light of the facts and circumstances of the case.
Ground no. 1
So far as the question of addition of Rs. 6,19,050/- as Prior Period Expenses made by the AO is concerned. Undisputedly, the assessee company has been following mercantile system of accounting, which is allowable only when the liability to pay the same stands crystallized. Moreover, when the assessee has not claimed the expenses in question while computing the total income, the same cannot be disallowed by the AO. So, when the assessee has not claimed deduction on account of prior period expenses, the same cannot be disallowed by the AO, hence, Ld. CIT(A) has rightly deleted the same. So, Ground no. 1 determines against the Revenue.
Ground no. 2
So far as the question of deletion of addition of Rs. 27,00,000/- made by the AO on account of School Running Expenses is concerned, undisputedly, the children of employees of the assessee are studying in the school situated on the land purchased by the assessee company. When we examine school running expenses, in the light of the global concept of business it includes care and concern for the society at large, particularly for the people of the locality where business is located. Moreover, AO has not disputed the genuineness of the expenses nor it is the case of the AO that the expenses used by the assessee are for its personal purposes.
9.1 In these circumstances, we are of the considered view that expenditure made by the assessee for running the school for the employees of a company as well as residence of vicinity, the same are integrally related to the business activities of the assessee and have rightly been treated by Ld. CIT(A) having been incurred wholly and exclusively for the purpose of business, hence, Ground no. 2 determines against the Revenue.
Ground no. 3
In so far as the question of deleting the addition of Rs. 3,46,46,421/- made by the AO on account of Club Membership Fee is concerned, the same has been deleted by the Ld. CIT(A) by following the order passed by the Tribunal in assessee’s own case for Assessment Year 2009-10 in the facts of the year under assessment being identical. It is also brought on record by the Ld. AR that appeal filed by the Revenue against the order passed by the Tribunal in favour of the assessee on this issue has been dismissed by the Hon’ble High Court of Delhi and thereafter SLP filed by the assessee has also been dismissed by the Hon’ble Supreme Court of India.
For ready perusal operative part of the order passed by the Tribunal in assessee’s own case for AY 2008-09 is extracted for ready perusal as under:-
“25.3 We find that identical issue had come up for consideration before Hon’ble .Jurisdictional High Court in the case of sister concern of the assessee M/s. DLF Commercial Developers Ltd in ITA 180/2012, wherein the Hon’ble High Court upheld the accounting treatment of the assessee in spreading the membership fee receipts proportionately over the period for which it is received. The relevant observation of Hon’ble High Court is extracted hereunder:-
“ The Tribunal in the impugned order has referred to the factual matrix and that the tenure membership of a club- was granted to the persons /individual. The membership fee consisted of two parts. Non-refundable fee; which was paid upfront and then periodical monthly payment Membership fee paid upfront was not refundable. The Tribunal referring to the nature and character of payment and terms of membership, has come to the conclusion that there was a fixed, tenure or a period during which the said members were permitted and allowed to enjoy the benefits and facilities. As regards the non-refundable upfront payment it was observed and held that it entailed and secured use of facilities for the period specified. The assessee, therefore, had to provide and incur expenses for providing the said facilities. The Tribunal has followed the decision of this Court in CIT Vs. Dinesh Kumar Goel (2011) 331 ITR 10. In the said case, this High Court has referred to the concept of income, and the principles of accountancy. In the said case, the respondent- assessee was running a coaching institute and was receiving upfront fee for providing coaching, which was spread over one year or two years. Keeping in view the factual position, Tribunal has rightly appreciated and applied the law as elucidated in the case of Dinesh Kumar Goel (supra). We do not think any substantial question of law arises.” 25.4 It is further noted that SLP of Revenue against order of Ho'n'ble High Court has been dismissed by Hon’ble Supreme Court as per copy of order placed on record. Keeping in mind the facts of the case and respectfully following the ratio laid down by Hon'ble Delhi High Court in the case M/s. DLF Commercial Developers Ltd (Supra), we are of the opinion that the approach of the assessee in spreading out the membership fee receipts over the period of membership cannot be faulted and as such the Ld. CIT (Appeals) was justified in deleting the addition made by Assessing Officer. Accordingly, this ground of Revenue is rejected.”
So, in view of the matter, we find no illegality or perversity in the findings of the Ld. CIT(A) in deleting the addition of Rs. 3,46,46,421/- on account of non-refundable Golf Global Membership Fee. So, Ground no. 3 is determined against the Revenue.
Ground no. 4 of Revenue’s appeal in and Ground no. 1 of Assessee’s appeal in ITA No. 2209/Del/2016.
AO made addition of Rs. 80,66,72,112/- by invoking the provisions u/s 14A read with Rule 8D which has been restricted to Rs. 694101000/- by Ld. CIT(A). In appeal, AO has worked out disallowance u/s 14A read with Rule 8D as under:-
i) Expenditure directly related to Nil exempt income ii) Disallowance of interest expenses A- Interest expenditure incurred A- Interest : Rs. 36,150.41 during the year. B- Average Value of Investment. B- Average Investment: C- Average of total assets (Rs.2,73,331.69+Rs.1,78,239.36)/2= Disallowance +A X B/C 2,25,785.53 C- (Rs.12,48,368+Rs.11,01,824)/2=
Rs. 11,75,096 36,150.41*2,25,785.53/11,75,096 =6,946.01 iii) Aggregate of opening and 2,73,331.69+ closing value of investment 1,78,239.36/2=1,128.93 (Average value of investment)1/2 % of above as per Rule 8D Total disallowance [Aggregate 8,074.94 of (i),(ii) & (iii)
7.2 The disallowance as worked u/s 14A r.w. Rule 8D comes to Rs. 80,74,94,000/- however, the assessee has already disallowed Rs. 8,21,883/- as expenditure u/s 14A r.w. Rule 8D. Therefore, an amount of Rs. 80,66,72,117/- (Rs. 80,74,94,000-Rs. 8,21,883) is being disallowed.”
It is the case of the assessee that it was having interest free funds available to the tune of Rs. 2,95,937/- lacs and has made investment in the shares to the tune of Rs. 2,73,326.57/- lacs which is less than own funds available with the assessee. Undisputedly, the assessee has suo moto disallowed expenses of Rs. 8,21,883/- expended to earn the exempt income.
In the given circumstances in order to invoke the provisions contained under section 14A read with Rule 8D, the Assessing Officer was required to record his dissatisfaction that the computation made by the assessee u/s 14A is not correct, however, when we examine the Assessment Order, nowhere dissatisfaction has been recorded by the AO nor any reason have been given as to how the computation made by the assessee, making suo moto disallowance of expenses of Rs. 8,21,883/-, is not correct nor the AO has disputed the fact that the assessee was having own sufficient interest free funds available with it to make the investment in the year under assessment.
When the assessee was having sufficient interest free own funds to the tune of Rs. 2,95,937/- lacs no disallowance can be made under Rule 8D(2)(ii) as the assessee has not incurred any expenses on account of payment of interest.
Hon’ble High Court of Bombay in case cited as CIT-2, Mumbai vs. HDFC Bank Ltd. - (2014) 49 taxmann.com 335 (Bombay) while dealing with the identical issue held that when the assessee’s own funds and other non-interest bearing funds were more than investment in tax free securities, no disallowance on account of interest payment under section 14A can be made.
Furthermore, the AO has not recorded his dissatisfaction as to the computation made by the assessee company that no expenditure has been made by the assessee company during the year under assessment to earn the interest free income rather proceeded mechanically by extracting the bare language of Rule 8D.
Hon’ble Apex Court in Godrej & Boyce Manufacture Company Ltd. vs. DCIT - 394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing as under “37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”
Hon’ble Delhi High Court in HT Media Limited vs. Pr. CIT in dated 23.08.2017 decided the issue in controversy in favour of the assessee by returning the following findings:-
“39. Turning now to the order of the ITAT in para 33, it recorded the submission of the AR that the AO did l) 0t record any satisfaction about the Assessee not properly offering expenditure incurred in relation to the exempt income at Rs.3 lakhs. The ITAT reproduced the contents of para 3.3.1 of the assessment order, which has been extracted by this Court hereinbefore, which contains general observations regarding earning of exempt income. This cannot be accepted as a recording by the AO of satisfaction regarding the claim of the Assessee after examining its accounts. Again, in para 34 of its order, the ITAT simply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was "satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses."
Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly.”
Following the decision rendered by Hon’ble Apex Court in Godrej & Boyce Manufacture Company Ltd. (supra) and Hon’ble Delhi High Court in ITT Media Ltd. (supra), we are of the considered view that the finding returned by AO as well as Ld. CIT(A) that some kind of expenditure necessarily has to be incurred who earned the dividend income are not sustainable when the AO/ CIT(A) are required to bring on record that such and such disallowance have been made under Rule 8D(2)(ii) & (iii) particularly when the assessee has sou moto made disallowance of expenses of Rs. 8,21,883/- which has not been found incorrect by the AO as well as Ld. CIT(A) by returning specific findings.
Moreover, when the assessee has come up with categoric plea that the entire investment have been made out of its own interest free funds available and the incurred expenses have been suo moto disallowed and the AO has not pointed out any defect in the computation made by the assessee company, provisions contained u/s 14A read with Rule 8D are not attracted which can only be invoked if the AO is not satisfied with the claim of the assessee.
So far question of sustaining the addition of Rs. 1128.93 lacs under Rule 8D(2)(iii) by Ld. CIT(A) on account of administrative expenses to earn the exempt income is concerned, again, we are of the considered view that when the AO as well as Ld. CIT(A) have not recorded their dissatisfaction that the computation of expenses disallowed by the assessee are not correct nor has pointed out any specific computation defects, the same cannot be sustained as Rule 8D(2) has only prescribed a formula to determine expenditure incurred to earn the exempt income which does not form part of the total income under the Act, which cannot be invoked unless AO has not come up with specific dissatisfaction with the claim of the assessee. So, in these circumstances addition sustained by Ld. CIT(A) under Rule 8D(2)(iii) is not sustainable, consequently, Ground no. 4 raised by Revenue is determined against the Revenue and Ground no. 1 raised by the assessee is determined in favour of assessee.
Order pronounced in the open court on 19/6/2018