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Income Tax Appellate Tribunal, MUMBAI BENCH “G”,MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
Date of hearing 10-01 -2018 Date of pronouncement 31-01-2018 O R D E R Per G Manjunatha, AM : These cross appeals filed by the assessee as well as the revenue are directed against the order of the CIT(A)-53, Mumbai dated 31-10-
2 ITA 2662/Mum/2017 2361/Mum/2017 2016 and they pertains to A.Y. 2009-10. Since facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this common order.
The brief facts of the case are that the assessee company engaged in the business of real estate development, filed its return of income for the AY 2009-10 on 30-09-2009 declaring total income at Nil under normal provisions of the Income-tax Act, 1961 and book profit at Rs.4,60,72,125 under the provisions of section 115JB of the Act. The assessment was completed u/s 143(3) on 29-12-2011 by accepting income declared by the assessee under normal provisions of the Act and book profit u/s 115JB of the Act. Thereafter, the case was reopened u/s 147 of the Act, on the ground that income chargeable to tax had been escaped assessment and hence, notice u/s 148 of the Act was issued on 24-12-2013. In response to the notice, assessee attended and filed written submissions on 17-09-2014 by stating that the return filed earlier on 30-09-2009 u/s 139(1) may be treated as return filed in response to notice u/s 148. The case has been selected for scrutiny and notices u/s 143(2) and 142(1) were issued. In response to the notices, the authorised representative of the assessee appeared from time to time and filed the requisite details, as called for. The assessment was completed u/s 143(3) r.w.s. 147 by making addition towards disallowance of expenditure incurred in relation to exempt income not 3 ITA 2662/Mum/2017 2361/Mum/2017 includible in total income u/s 14A @ 0.5% of average value of investments by invoking Rule 8D(2)(iii) of Income-tax Rules, 1962. 3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has challenged reopening of assessment on the ground that the AO has reopened assessment merely on the basis of change of opinion without there being any fresh tangible material which suggests escapement of income.
Insofar as disallowance of expenditure incurred in relation to exempt income, the assessee submitted that the AO has determined disallowance of Rs.1,06,56,506 disregarding all the facts and submissions that expenditure incurred by the assessee does not have any nexus between exempt income. The AO has blindly applied Rule 8D without satisfying himself about the correctness of the claim of the assessee and giving any adverse finding about the disallowance of expenditure incurred in relation to exempt income. The assessee further submitted that its investments are in group companies for the purpose of controlling interest but not for the purpose of earning any exempt income. Therefore, the AO was incorrect in disallowing expenditure by invoking Rule 8D(2)(iii) insofar as investment in group companies is concerned. In this regard he relied upon plethora of judgments. The CIT(A), after considering relevant submissions of the assesse and also relying upon certain judicial precedents including the decision of Hon’ble
4 ITA 2662/Mum/2017 2361/Mum/2017 Supreme Court in the case of CIT vs Kelvinator of India (2010) 320 ITR 561 (SC) dismissed ground raised by the assessee challenging reopening of assessment by holding that the AO has rightly reopened the assessment as there was no new material in the possession of the AO which suggests escapement of income within the meaning of section 147 of the Income-tax Act, 1961. Insofar as disallowance of expenditure incurred u/s 14A, the CIT(A) rejected the arguments of the assessee that no expenditure has been incurred in relation to exempt income by holding that the assessee has incurred various expenditure in the nature of administrative and general expenses and the possibility of certain portion of expenses attributable to investment activity of the assesse cannot be ruled out. The CIT(A) also rejected the arguments of the assessee that its investments are strategic invstments in group companies / subsidiaries for the purpose of holding controlling interest but not for the purpose of earning exempt income. However, the CIT(A) accepted alternative plea of the assessee that only those investments from which exempt income was received by the assessee should be considered for the purpose of average value of investments to determine disallowance of expenditure u/r 8D(2)(iii) by following the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT 374 ITR 272 (Del) and re-worked disallowance determined by the AO by considering only those investments which are capable of earning exempt
5 ITA 2662/Mum/2017 2361/Mum/2017 income. Accordingly, the CIT(A) has determined disallowance of Rs.51,47,177 as against Rs.1,06,56,506 worked out by the AO by considering the investments in HDIL and DHFL and long term capital gain derived from Wadhwan Food Retail Pvt Ltd during the relevant period. The relevant portion of the CIT(A)’s order is extracted below:-
6.3.4 Coming to the computation of disallowance u/s.!4A, I am inclined to accept the alternative plea of the appellant for considering only those investments from which exempt income was received by the appellant as per the ratio of judgment of Hon'ble Delhi High Court In the case of Chetninvest Ltd, v. CIT (ITA 749/2014). Accordingly, it is held that while calculating the disallowance as per Rule 8D(2)(iii), the average value of investment is to be worked out by taking into account not the entire opening and closing investments in quoted and unquoted shares of group and other companies held by the appellant but only the investments in shares which have yielded tax free income to the appellant by way of dividend (HDIL and DHFL) and LTCG (WFRPL) during the period. In this manner, the average value of investment in^ shares of these three companies comes to Rs.1,02,94,23,490/- and accordingly the disallowance under Rule 8D(2)(iii) @0.5% of average value of investment comes to Rs. 51,47,1177- as against Rs.1,06,56,506/-worked out by the A.O. Thus, the appellant gets relief ofRs.55.09,389/- on this count. The A.O. is directed to consider the quantum of disallowance u/s.14 r.w.RuIe 8D at Rs.51,47,117/- as computed above while giving effect to this order. Ground No,3 of the present appeal is allowed to the extent indicted above.
The Ld.AR for the assessee submitted that the Ld.CITA) has erred in law and in facts by partly confirming the disallowance of expenses u/s 14A r.w.r. 8D amounting to Rs.51,47,117 disregarding the fact that none of the expenses incurred by the assessee are directly attributable to the exempt income earned by the assessee. The Ld. AR further submitted that the assessee has incurred various expenditure which are directly related to its main business activity. Therefore, attributing part of 6 ITA 2662/Mum/2017 2361/Mum/2017 expenses to the investment activity without any nexus between expenditure incurred and its investment activity is totally incorrect. The AO as well as CIT(A) has blindly applied rule 8D2)(iii) without bringing on record any evidence to establish nexus between expenditure incurred by the assessee and investment activity. Therefore, the disallowance determined by the AO and confirmed by the CIT(A) should be deleted.
The Ld.AR made an alternative plea inasmuch as determination of average value of investment by the CIT(A) at Rs.102,94,23,490 for the purpose of computing the disallowance u/r 8D(2)(iii) of the Income-tax Rules, 1962 is incorrect as the CIT(A) has erroneously included investments in Wadhwa Food Retail Pvt Ltd, as investments in Wadhwa Food Retail Pvt Ltd is not yielding any exempt income in the form of dividends and also long term capital gain derived from investment in the company is taxable @ 20% which is evident from the fact that the assesse has computed long term capital gain on sale of shares.
The Ld.D, on the other hand, submitted that the Ld.CIT(A) has erred in allowing partial relief to the assessee in respect of disallowances computed by the AO u/s 14A ignoring the provisions of section 14A that as per the said provisions, even if no exempt income is actually earned or received during the year the disallowances contemplated u/s 14A should be determined by applying Rule 8D(2) of Income-tax Rules, 1962.
The Ld.DR referring to the circular issued by the CBDT in circular No.5 of 7 ITA 2662/Mum/2017 2361/Mum/2017 2014 dated 11-02-2014 submitted that as per the circular of CBDT, the disallowance provided u/s 14A has to be computed even where the assessee in a particular year has not earned any exempt income. The Ld.DR further submitted that the Ld.CIT(A) has erred in partly deleting the disallowance u/s 14A relying upon the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (supra) overlooking the fact that the above decision is not accepted by the revenue and civil appeal has been preferred before the Hon’ble Supreme Court and the same is pending.
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The AO has disallowed expenditure incurred in relation to exempt income u/s 14A by invoking Rule 8D(2)(iii) and determined disallowance of Rs.1,06,56,506 @0.5% of average value of investments. The AO has taken total investments of the assessee to determine average value of invstments. According to the AO, as per the provisions of section 14A, disallowance of expenditure incurred in relation to exempt income is mandatory even though the assessee has not earned any exempt income during the relevant period. The AO further was of the opinion that such disallowances needs to be quantified as per the prescribed formula provided u/r 8D(2) of Income-tax Rules, 1962. It is the contention of the assesse that its investments are for the purpose of 8 ITA 2662/Mum/2017 2361/Mum/2017 holding controlling interest but not for the purpose of earning any exempt income. Therefore, the question of disallowances of expenditure incurred in relation to exempt income by invoking rule 8D(2) does not arise. The assessee further contended that the AO has blindly applied Rule 8D(2) without specifying any nexus between expenditure incurred by the assessee and investment activity which generates exempt income. The assessee also questions the method of computation of average value of investments by the AO as well as the CIT(A).
According to the assessee, though the CIT(A) has allowed partial relief by following the judgment of Hon’ble Delhi High Court in the case of Cheminvest Ltd CIT (supra), the average value of investment quantified by the CIT(A) is incorrect as the CIT(A) has included investments in Wadhwa Food Retail Pvt Ltd for the purpose of determination of average value of investments. The assessee further contended that investments in Wadhwa Food Retail Pvt Ltd has not earned exempt income for the relevant period and also capital gains from such investment is taxable @20% which is evident from the fact that it has computed long term capital gain from sale of investments in Wadhwa Food Retail Pvt Ltd.
Having heard both the sides and considered material on record, we do not find any merits in the arguments of the assessee insofar as expenditure incurred by the assessee that its expenditure is not having
9 ITA 2662/Mum/2017 2361/Mum/2017 nexus with investment activity and hence, no disallowance can be computed by invoking Rule 8D(2)(iii) of Income-tax Rules, 1962. The assessee has incurred various expenditure in the nature of general administrative and other expenses which are in the nature of common expenditure. Therefore, the possibility of certain portion of expenditure attributable to its investment activity cannot be ruled out. Therefore, we are of the considered view that the AO as well as the CIT(A) were right in computing disallowance of expenditure by invoking Rule 8D2)(iii) of Income-tax Rules, 1962.
Having said so, let us examine determination of disallowances by the CIT(A). The CIT(A) has allowed partial relief to the assessee by following the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (supra) and recomputed disallowances by considering those investments which yield exempt income. The Ld.CIT(A) has considered investments in HDIL & DHFL and laso investments in shares of Wadhwa Food Retail Pvt Ltd. It is the contention of the assessee that investments in Wadhwa Food Retail Pvt Ltd did not yield any exempt income for the relevant period and also long term capital gain from sale of shares of Wadhwa Food Retail Pvt Ltd is taxable @20%, therefore, for the purpose of determining average value of investments, investments in Wadhwa Food Retail Pvt Ltd cannot be considered. We find merit in the arguments of the assessee for the 10 ITA 2662/Mum/2017 2361/Mum/2017 reason that investments in shares of Wadhwa Food Retail Pvt Ltd has not earned any exempt income during the relevant period and also the assessee has computed long term capital gain from sale of shares of Wadhwa Food Retail Pvt Ltd which is evident from the fact that during the year the assessee has computed long term capital gain of Rs.5,50,503 from sale of Wadhwa Food Retail Pvt Ltd shares. Once investments in shares has not earned any exempt income and also capital gain from such shares is taxable, then for the purpose of determination of average value of investments, investment in those shares cannot be considered. This legal proposition is further supported by the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (supra), wherein it was categorically held that the average value of investment is to be worked out by taking into account the entire opening and closing investments in quoted and unquoted shares of group and other companies, but only investment in shares which have yielded tax free income. In this case, the CIT(A) has considered investments in Wadhwa Food Retail Pvt Ltd for the purpose of average value of investments even though investment in Wadhwa Food Retail Pvt Ltd is not yielded any exempt income. Therefore, we are of the considered view that for the purpose of determination of average value of investments, investments in Wadhwa Food Retail Pvt Ltd has to be excluded. Accordingly, we direct the AO to exclude investments in 11 ITA 2662/Mum/2017 2361/Mum/2017 shares of Wadhwa Food Retail Pvt Ltd for the purpose of determination of average value of investment to compute disallowance of expenditure u/r 8D(2)(iii) of Income-tax Rules, 1962. 9. In the result, both appeals filed by the assessee and the revenue are partly allowed.
Order pronounced in the open court on 31st January, 2018.