AMARTARA PVT. LTD.,MUMBAI vs. DCIT - 9(1)(1), MUMBAI

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

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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. 9. 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

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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. 10. In the result, appeal filed by the assessee is allowed. ITA No. 6050/Mum/2016

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

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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

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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 ITA No.110 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. 12. 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

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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. 13. 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

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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. 14. 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

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applied for disallowance of interest and expenditure u/s 14A.

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 ITA No.110 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. 17. 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.

Sd/- sd/- (Mahavir Singh) (G Manjunatha) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dt : 29th December, 2017 Pk/- Copy to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR /True copy/ By order Asstt. Registrar, ITAT, Mumbai