BHISMA REALTY LTD,MUMBAI vs. DCIT CIR 2(1), MUMBAI

Assessee by: Shri K. Gopal Department by: Shri Suman Kumar (DR) Date of Hearing: 05.04.2018 Date of Pronouncement: 29.06.2018 O R D E R

PER AMARJIT SINGH, JM:

1. The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of Rs. 1,73,71,68s/- under Rule SO (11} on account of interest expenses.Your appellants submit that no interest bearing funds have been utilized to earn exempt income and that the said disallowance is not warranted and ought to be deleted Without prejudice to the above, your appellants submit that no interest expenses have been claimed by the appellants during the year since the entire interest expenses have been capitalized to the work in progress account. Without prejudice to the above, your appellants submit that interest if any has to be considered for disallowance should be net of the interest income earned during the year and offered to tax,

2. The learned Commissioner of Income tax (Appeals) has erred in confirming disallowance of Rs. 12,19,154/- on account of expenses under Rule 3D (iii) being 0.5% of the average investments. Your appellants submit that the disallowance 15 not warranted and ought to be deleted. Without prejudice to the above, your appellants submit that have claimed only Rs. 5,65,45,353/- 35 business expenditure and have taken rest of expenditure amounting to Rs. 6,62,55,507/- to work in progress and that the disallowance if any has to be out of Rs. 5,65,45f353/- which has been claimed by the appellants,

3. Your appellants further reserve the rights to add, amend or after the aforesaid grounds of appeal as they may think fit by themselves or by their representatives.”

4. The brief facts of the case are that the assessee filed its return of income on 21.09.2010 declaring total income to the tune of Rs.49,42,40,073/-. The case was selected for scrutiny and notice u/s 143(2) of the Act dated 02.09.2011 was issued and served upon the assessee. Further notice u/s 142(1) of the Act was also issued and served upon the assessee. The assessee claimed the dividend income to the tune of Rs.1,36,57,812/-. The Assessing Officer disallowed the expenses incurred to earn the exempt income u/s 14A r.w. Rule 8D of the I.T. Act, 1962 and assessed the expenditure to incurred to earn A.Y. 2010-11 & 2011-12 the the exempt income to the tune of Rs.1,85,90,842/- and the total income of the assessee was assessed to the tune of Rs.51,43,60,709/-. Thereafter, the assessee filed an appeal before the CIT(A) who disallowed the claim of the assessee, therefore, the assessee has filed the present appeal before us. ISSUE NO. 1:- 5. Under this issue the assessee has challenged the confirmation of the disallowance of Rs.1,73,71,688/- under Rule 8D(ii) of the Act on account of interest expenses. The plea of the assessee is that the assessee was having more funds than investment, therefore, no disallowance is required in view of the provision Rule 8D(ii) of the Act. Hence the addition is required to be deleted in view of the law settled in CIT Vs.HDFC Bank Limited (2014) 366 ITR 505 (Bom). However, on the other hand, the Ld. Representative of the Department has refuted the said contention. The Assessing Officer disallowed the expenses incurred to earn the exempt income to the tune of Rs.1,36,57,812/- in view of the provision of Section 14A r.w. Rule 8D(2)(ii) of the Act. The said addition was confirmed by the CIT(A). The plea of the assessee is that the assessee was having own funds more than investment, therefore, no disallowance is required in view of the provision of Section 14A r.w. Rule 8D(2)(ii) of the Act in view of the law settled in CIT Vs.HDFC Bank Limited (2014) 366 ITR 505 (Bom).The assessee was having funds to the tune of A.Y. 2010-11 & 2011-12 Rs.27,51,56,640/- against the share capital and reserves and surplus. In this regard the balance-sheet lies at page no. 22 of the paper book. The total investment of the assessee was to the tune of Rs.48,76,61,709/- which also lies at page no. 22 of the paper book. The assessee also received the application money to the tune of Rs.71,23,84,573/- and refundable deposit received from developer of Rs.100,00,00,000/-. The appellant also received the business income in the form of sales of flats amounting to Rs.76,44,00,000/-. The details have been given at page no. 22 to 28 of the paper book. The assessee was having sufficient own funds more than investment. Therefore, no doubt, no disallowance is required on account of interest expenses in view of law settled in CIT vs. HDFC Bank Limited (2014) 366 ITR 505 (Bom) wherein the Hon’ble Bombay High Court has held as under: -

We find that the facts of the present case are squarely covered by the judgement in the case of Reliance Uitlities and Power Ltd (supra). The finding of fact given by the Income Tax Appellate Tribunal in the present case is that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax free securities. This factual position is not one that is disputed. In the present case, undisputedly the assessee’s capital profit reserves, surplus and current account deposits were higher than the investment in the tax free securities. In view of the this factual position as per the judgement of this court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee. We, therefore, are unable to agree with the submissions of Mr. Suresh Kumar that the Tribunal had erred in dismissing the appeal of the revenue on A.Y. 2010-11 & 2011-12 this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.

6. In view of the said circumstances, we delete the addition raised in view of the provision of Section 14A r.w. Rule 8D(2)(ii) of the Act. Accordingly, this issue is decided in favour of the assessee against the revenue. ISSUE NO. 2:- 7. Under this issue the assessee has challenged the confirmation of the addition of Rs.12,19,154/- raised u/s 14A r.w. Rule 8D(2)(iii) of the Act. the Ld. Representative of the assessee has argued that the assessee did not incur any administrative expenses to earn the exempt income, therefore, the disallowance of Rs.12,19,154/- being 0.5% of the average investment by invoking the provision Rule 8D(2)(iii) of the Act is wrong hence is liable to be set aside. It is contended that the business of the assessee is of the builder and developer and the assessee was following project competition method and his expenses were not incurred during the course of business activities and capitalized as WIP. Hence in the said circumstances, no administrative expenses is required to be assessed in the interest of justice. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. It is not in dispute that the assessee is in the business of Real Estate and is carrying the business activity of builder and developer. The assessee was following the A.Y. 2010-11 & 2011-12 project competition method. The expense incurred during the course of business activity capitalized in work in progress which was not claimed. The assessee has given the WIP for the A.Y. 2010-11 lies at page no. 43 to 44 of the paper book in which the details of expenses have been reflected which has been incurred to earn the exempt income in view of the provision of Section 14A r.w. Rule 8D(2)(iii) of the Act. Since the expenses which have been incurred for administrative purpose is required to be assessed at the end of the AO. Therefore, in the said circumstances, we set aside the finding of the CIT(A) on this issue and remand this issue before the AO to verify the claim in accordance with law for assessing the expenses on account of administrative in view of the provision Rule 8D (2)(iii) of the Act. Accordingly, this issue has to be decided in favour of the assessee against the revenue.

8. The assessee has filed the present appeal against the order dated 18.09.2015 passed by the Commissioner of Income Tax (Appeals)-4, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year2011-12.