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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
per which where the consideration received or accrued as a result of transfer of capital asset is less than market value determined for the purpose of payment of stamp duty, then the value determined by the stamp duty authority shall be deemed to be the full value of
10 Amartara Pvt Ltd consideration as a result of transfer of capital asset. It is the contention of the assessee that both the provisions are deeming fictions created by the statute to deal with special cases of transfer of capital asset. Therefore, it is incorrect to extend one deeming fiction to another deeming fiction for the purpose of determination of consideration received as a result of transfer of capital asset. The assessee further contended that section 45(3) itself is a deeming provision. It comes into operation when the assessee transfer capital asset into capital contribution of partnership firm, then for the purpose of section 48, the amount recorded in the books of account of the firm shall be deemed to be the full value of consideration, therefore, importing another deeming fiction where it applies to general transfer of capital asset in the cases where the considered received or accrued is less than the consideration determined for the purpose of payment of stamp duty. The assessee further contended that section 50C of the Act has no application where no consideration is received or accrued and hence, computing full value of consideration by applying provisions of section 50C in a case where transfer between partners and partnership firm without there being nay actual consideration received or accrued is incorrect. The assessee further submitted that if the provisions of section 45(3) were not in the statute book, then the question of application of section 50C does not arise, therefore, section 45(3) itself
11 Amartara Pvt Ltd is a specific provision dealing with special cases of transfer of capital asset and hence, provisions of section 50C cannot be brought in the case of transfer of capital asset between partners and partnership firm.
Therefore, it can be rightly said that section 45(3)| of the Act itself is a code for computing capital gains in respect of transfer made by a partner to a firm. In the absence of section 45(3) of the Act, taxing any amount is not possible. Since the consideration cannot be determined in absence of section 45(3) of the Act as the consideration lies within womb of the law in the case of transfer of such nature.
Having heard both the sides, we find merit in the argument of the assessee for the reason that the provisions of section 45(3) deals with special cases of transfer of capital asset where the profits or gains arising from the transfer of capital asset by way of capital contribution or otherwise shall be chargeable to tax in the previous year in which such transfer takes place and for the purpose of section 48, the amount recorded in the books of account of the firm shall be deemed to be the full value of consideration received or accruing as a result of transfer.
A plain reading of provisions of section 45(3) makes it clear that it comes into operation only in special cases of transfer between partnership firm and partners and in such circumstances, a deemed full value of consideration shall be considered for the purpose of computation of capital gain as per which the amount recorded in the 12 Amartara Pvt Ltd books of account of the firm shall be taken as full value of consideration. Though the provisions of section 45(3) is not a specific provision overrides the other provisions of the Act, importing a deeming fiction provided in section 50C of the Act cannot be extended to another deeming fiction created by the statute by way of section 45(3) to deal with special cases of transfer. The purpose of insertion of section 45(3) is to deal with cases of transfer between partnership firm and partners and in such cases, the Act provides for computation mechanism of capital gain and also provides for consideration to be adopted for the purpose of determination of full value of consideration.
Since the Act itself is provided for deeming consideration to be adopted for the purpose of section 48 of the Act, another deeming fiction provided by way of section 50C cannot be extended to compute deemed full value of consideration as a result of transfer of capital asset. This legal proposition is further supported by the decision of Hon’ble Supreme Court in the case of CIT vs Moon Mills Ltd (supra) wherein it was observed that one deeming fiction cannot be extended by importing another deeming fiction. Therefore, we are of the considered view that the profits or gains arising from the transfer of a capital asset by a partner to a firm in which he is or becomes a partner by way of capital contribution, then for the purpose of section 48, the amount recorded in the books of account of the firm shall be deemed to 13 Amartara Pvt Ltd be full value of consideration received or accruing as a result of transfer of a capital asset. The AO cannot import another deeming fiction created for the purpose of determination of full value of consideration as a result of transfer of a capital asset by importing the provisions of section 50C of the Act. The CIT(A), without appreciating the facts, simply upheld addition made by the AO by following the decision of ITAT, Lucknow Bench in the case of ACIT vs Carlton Hotel Pvt Ltd (supra) where the ITAT has simply observed that the provisions of section 50C overrides the provisions of section 45(3) but not given a categorical finding. The ITAT has give its findigs under different facts considering the fact that when a document is registered under the Provisions of Registration Act, 1908, the value determined by the stamp duty authority shall be replaced to determine full value of consideration. Therefore, we reverse the finding of the CIT(A) and delete the addition made towards recomputation of long term capital gain on account of transfer of capital asset into partnership firm.
In the result, appeal filed by the assessee is allowed.
The only issue came up for our consideration from revenue appeal is disallowance of expenses incurred in relation to exempt income u/s 14A of the Act r.w.s. Rule 8D of I.T. Rules, 1962. The AO has 14 Amartara Pvt Ltd disallowed a sum of Rs.42,85,198 u/s 14A by invoking Rule 8D(2)(ii) and 8D(2)(iii) of I.T. Rules, 1962. According to the AO, the assessee has made huge investments in share of domestic companies and capital contribution to partnership firms, income from which does not or shall not form part of total income. However, the assessee has not disallowed expenditure incurred in relation to earn exempt income and hence, issued a show cause notice and asked as to why disallowance shall not be worked out by invoking Rule 8D(2)(ii). In response to show cause notice, the assessee submitted that it has not incurred any expenditure in relation to income which is exempt under the Income- tax Act, 1961 and that all its investments are made out of its own interest free funds and no part of interest bearing funds has been used to make investments. Therefore, the question of disallowance of interest expenditure and expenses by invoking Rule 8D(2)(ii) and 8D(2)(iii) does not arise. The assessee further submitted that during the year under consideration, it has not earned any exempt income in the form of dividends or share of profit from partnership firms, and therefore, in the absence of any exempt income, no disallowance could be made towards expenditure incurred in relation to earning exempt income u/s 14A of the Act. In this regard, he relied upon the decision of Hon’be Delhi High Court in the case of CIT vs Cheminvest Ltd 2015) 317 ITR 86 (Del). The assessee also relied upon the decision of 15 Amartara Pvt Ltd the Mumbai Tribunal in the case of Ousesh Mercantile Pvt Ltd vs DCIT 26 Taxman.Com 43 (Mum) and also the judgement of Hon’ble Bombay High Court in the case of CIT vs Deloitte Enterprises in of 2009. The AO, after considering relevant submissions of the assessee and also considering the relevant provisions of section 14A, observed that from AY 2008-09 onwards disallowance u/s 14A needs to be worked out as per the prescribed method provided u/r 8D of Income- tax Rules, 1962 and such disallowance does not depend upon earning of exempt income. The AO further observed that even if no exempt income is earned during the year under consideration, expenses incurred in relation to exempt income should be disallowed.
Therefore, by relying upon certain judicial precedents worked out disallowance u/s 14A by invoking Rule 8D(2)(ii) and 8D(2)(iii) and determined total disallowance ofRs.45,82,198.
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions which was reproduced by CIT(A) in his order on page 4 to 16. The sum and substance of the arguments of the assessee before the CIT(A) is that the AO has merely based on the general observations, applied Rule 8D and made disallowance u/s 14A of the Act without any nexus between expenditure incurred by the assessee to the exempt income. The assessee further submitted that in the absence
16 Amartara Pvt Ltd of any exempt income disallowance contemplated u/s 14A shall not be disallowed by invoking Rule 8D(2). The CIT(A), after considering relevant submissions of the assessee and also relying upon certain judicial precedents including the decision of Hon’ble Delhi High Court in the case of CIT vs Cheminvest Ltd (supra) and also theHon’ble Bombay High Court in the case of CIT vs Deloitte Enterprises (supra) held that where the investments have not generated any exempt income, the deduction on account of the interest component on borrowed funds which were utilised for making investments cannot be made. The CIT(A) further observed that since the assessee has not earned any exempt income during the year under consideration, the question of disallowance contemplated u/s 14A shall not be disallowed.
With these observations, the CIT(A) deleted addition made by the AO.
Aggrieved by the order of CIT(A), the revenue is in appeal before us.
The Ld.DR submitted that the Ld.CIT(A) erred in deleting disallowance u/s 14A without appreciating that Rule 8D starts with heading – “Formula for determination of expenditure” and the 3 steps prescribed under this Rule to compute the expenditure in relation to exempt income shall be applied collectively. The Ld.DR submitted that disallowance contemplated u/s 14A has to be the aggregate of the amounts determined u/r 8D. Therefore, the AO has rightly disallowed expenditure incurred in relation to exempt income as the assessee has 17 Amartara Pvt Ltd invested huge amounts in shares of companies and capital of partnership firms, the income from which shall not form part of total income. The Ld.DR referring to the CBDT circular No.5 of 2014 dated 1-02-2014 submitted that the Board has clarified that the term ‘includible’ in the heading of section 14A of the Act and the heading in Rule 8D of IT Rules, 1962 indicates that for invoking disallowance u/s 14A, it is not material that the assessee should have earned such exempt income during the financial year under consideration.
On the other hand, the Ld.AR for the assessee submitted that the CIT(A) has rightly deleted addition made by the AO by following the decision of Hon’ble Delhi High Court in the case of CIT vs Cheminvest Ltd (supra), wherein it was categorically held that where there is no exempt income, no disallowance can be made u/s 14A of the Act. The fact that the assessee has not earned any exempt income has not been disputed by the revenue. The assessee also explained before the lower authorities that it has investments in group companies and firms, which are out of its own funds and no part of interest bearing funds has been used. Therefore, the question of disallowance of interest as well as expenditure by invoking Rule 8D does not arise. The CIT(A) has rightly considered the facts of the case to delete additions made by the AO and his order should be upheld.
18 Amartara Pvt Ltd 15. We have heard both the parties and perused material available on record.
The AO disallowed expenditure incurred in relation to exempt income u/s 14A by invoking Rule 8D(2)(ii) and 8D(2)(iii) and determined disallowance of Rs.42,85,198. According to the AO, earning exempt income is not a pre-condition for disallowance of expenditure u/s 14A. Even if no exempt income is earned for the year under consideration, disallowance contemplated u/s 14A shall be worked out by applying Rule 8D(2) which provides for determination of disallowance for interest and expenses. According to the AO, the Board has clarified the term ‘includible’ in section 14A as per which there is no requirement of any exempt income to invoke the provisions of Rule 8D. If the assessee has investments in shares, income from which shall not form part of total income, then the expenditure incurred by the assessee by way of interest and other expenses shall be worked out. It is the contention of the assessee that when there is no exempt income for the year under consideration, disallowance contemplated u/s 14A shall not be made as earning exempt income is a pre-condition for disallowance of expenditure u/s 14A of the Act. The assessee further contended that the fact that the assessee has not earned any exempt income has not been disputed by the lower authorities. The assessee further contended that in the absence of any nexus between expenditure incurred and exempt income merely on the basis of general observations, Rule 8D cannot be 19 Amartara Pvt Ltd applied for disallowance of interest and expenditure u/s 14A.
Having heard both the sides and considered material available on record, we find force in the arguments of the assessee for the reason that the Hon’ble Delhi High Court in the case of CIT vs Cheminvest Ltd (supra) has held that where there is no exempt income, disallowance contemplated u/s 14A shall not be worked out. The Hon’ble jurisdictional High Court in the case of CIT vs Deloitte Enterprises in of 2009 held that where the investments have generated any exempt income, the deduction on account of interest paid on borrowed funds which were utilized for making investments cannot be disallowed. The sum and substance of the ratios laid down by the Delhi High Court are that when there is no exempt income, no disallowance can be made u/s 14A by invoking Rule 8D(2)(ii). In this case, the fact that the assessee has not earned any exempt income, has not been disputed by the revenue. Therefore, we are of the view that the AO was erred in disallowing expenditure incurred in relation to exempt income u/s 14A by invoking Rule 8D(2)(ii) & (iii) of I.T. Rules, 1962. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A); hence, we are inclined to uphold the order of the CIT(A) and dismiss the appeal filed by the revenue.
In the result, appeal filed by the assessee is allowed and appeal filed by the revenue is dismissed.
20 Amartara Pvt Ltd Order pronounced in the open court on 29th December, 2017.