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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: Department against the order dated 11/12/2013 passed by the ld. CIT(A)-XIII, New Delhi for A.Y. 2010- 11, whereas is the cross appeal filed by the assessee for ITA No. 1237 & 1511/D/14 Page 1 of 15 DCM Ltd. the same year. Since, both these appeals were heard together, they are being disposed of through this common order.
The assessee company is engaged in the business of manufacturing and trading of cotton yarn, IT Infrastructure Services and development of Real Estate Projects. In this case, original return of income was filed declaring Nil income after adjusting brought forward losses against current business profits of Rs.897,15,493/-.
Subsequent to the issuance of notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) on 27/08/2011, the assessee filed the revised return of income on 26/03/2012 declaring Nil income after adjusting brought forward losses against current year business profit of Rs. 922,87,570/-. During the assessment proceedings, the assessee company again filed a revised computation of income on 22/02/2013 declaring Nil income after set off of brought forward loss of Rs. 134,445,528/-. The business income for the year was computed at Rs. 19,46,10,951/-. The assessment was finalized at Nil income after setting off from unabsorbed losses of earlier year. Total income u/s 115JB was computed at Rs. 60,01,90,619/- after making an addition of Rs. 143,39,000/- on the returned book profit of Rs. 58,58,51,619/-.
3. A perusal of the assessment order shows that during assessment year 2004- 05, the assessee company had claimed deduction for all the balance accrued liability & 1511/D/14 Page 2 of 15 DCM Ltd. relating to real estate project, including flyover cost and flyover interest payable to Municipal Corporation of Delhi (MCD). The Department in AY 2004-05 to 2009- 10 had disallowed the claim and had given the finding that such expenses will be allowable in the year of actual payment. During the year under appeal, the assessee had claimed expenses of Rs. 3,02,50,000/- on account of flyover cost/principal and Rs. 52,25,000/- as flyover interest on actual payment basis, in the alternate and without prejudice to its claim on accrual basis. Since the assessee had agitated the matter of allowing the expenses on actual payment basis before the CIT (A)/ITAT and had prayed for allowance of expenses on accrual basis, the claim of the assessee for deduction of these expenses was disallowed in AY 2009-10 and on similar footing these amounts were also disallowed in AY 2010-11 i.e. the year under appeal. Further, on similar lines, the assessee’s claim of expenses on approval/permission was disallowed on actual payment basis in AY 2009-10 and in 2010-11 also Rs. 81,19,423/-, as claimed by the assessee on actual payment basis, was added back to the income of the assessee. Further, disallowance of interest on account of interest relating to outstanding balances of advances/loans of Rs. 2.79 crores in respect of DCM Employees Welfare Trust has been made, as in earlier assessment years, by applying an interest rate of 8% and a disallowance of Rs. 22,32,000/- has been made in this respect. During the year assessee company had shown tax free dividend income of Rs. 70,088/- on long term trade investment and ITA No. 1237 & 1511/D/14 Page 3 of 15 DCM Ltd. had itself worked out a disallowance of Rs. 21,87,000/- u/s 14A of the Act as per the revised computation of income. The AO, however, by applying Rule 8D worked out the disallowance at Rs. 143,39,000/- and added the same to the income of the assessee.
Aggrieved, the assessee preferred an appeal before the First Appellate Authority in which the Ld. CIT (A) rejected the assessee’s claim regarding flyover cost/flyover interest and expenditure in respect of approvals and permissions. The disallowance u/s 14A of the Act was restricted to Rs. 12.47 lacs by the Ld. CIT (A).
Consequently, the AO was also directed to rework the disallowance under section 115JB of the Act. The Ld. CIT(A) allowed the assessee’s claim for deletion of notional interest on advances/loans to DCM Employees Welfare Trust.
Further aggrieved, the assessee has preferred an appeal before the ITAT and has raised the following grounds of appeal:
1. “That the CIT(A) erred in disallowing alternate claim made by the appellant on actual payment basis in respect of following items of expenses incurred in relation to real estate project without appreciating that claim had been made by the appellant for the reason that department has not accepted allowability of expenses on accrual basis and appeals in respect thereof are pending for adjudication before Delhi High Court. a) Flyover Cost paid to MCD – Rs. 3,02,50,000/- & 1511/D/14 Page 4 of 15 DCM Ltd.
b) Flyover Interest paid to MCD – Rs. 52,25,500/- c) Expenditure in respect of approvals and permissions – Rs. 81,19,423/- 2. That the CIT(A) erred in disallowing an amount of Rs. 12.47 lacs on account of administrative expenses u/s 14A of the Income Tax Act as against disallowance made by the appellant company of Rs. 2.50 lacs in its return of income.
That the CIT(A) erred in upholding addition on account of disallowance u/s 14A read with Rule 8D of Rs. 9.97 lacs in determination of book profit for the purpose of section 115JB of the Income Tax Act.
4. That the CIT (A) erred in upholding the initiation of penalty proceedings u/s 271(1)(c) of the Act in the facts and circumstances of the appellant.
5. That the order passed by the Assessing Officer and upheld by CIT (A) is bad in law.
That the Appellant Company craves leave to alter, amend, vary and/or add any of the grounds of appeal at any time herein after.”
6. The assessee has also filed an application for admission of addition ground.
The additional ground reads as under: “That the disallowance in the facts and circumstances of the case of the Appellant company and in accordance with legal position enunciated by decisions of jurisdictional High Court in this regard income u/s 14A of the Act is to be restricted to the amount of exempt income claimed u/s 10(34) of the Act of Rs. 70,088/- in the & 1511/D/14 Page 5 of 15 DCM Ltd. computation of taxable income as per normal provisions of Income- tax Act as well as in computation of book profit for the purpose of section 115JB of the Act notwithstanding that the company had made disallowance of Rs. 21,87,000/- in the return of income.”
The Department has also preferred an appeal and its grounds of appeal are as under:
“Whether the ld. CIT (A) on the facts and circumstances of the case and in law is correct in deleting the disallowance of Rs. 22,32,000/- made by the AO on account of interest on interest-free loans? 2. Whether the ld.CIT (A) on the facts and circumstances of the case and in law is correct in restricting the disallowance to Rs. 12.47 lacs as against Rs. 1,43,39,000/- made by the AO u/s 14A of the I.T. Act r.w.r. 8D of the Income Tax Rules, 1962? 3. Whether the ld. CIT(A) on the facts and circumstances of the case and in law is correct in restricted the adjustment u/s 115JB of the I.T. Act, 1961, to Rs. 12.47 lacs as against the adjustment of Rs. 143.39 lacs made by the Assessing Officer? 4. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing. It is prayed that the order of the CIT (A), being contrary to the facts on record and the settled position of law, be set aside and that of the Assessing Officer be restored.”
& 1511/D/14 Page 6 of 15 DCM Ltd.
The Ld. AR submitted that as far as ground no. 1 of the assessee’s appeal is concerned, the claim of the assessee has been allowed on accrual basis in AY 2004- 05 and thereafter and, therefore, the alternate ground raised
on actual payment basis was disallowed by the Ld. CIT(A) and also upheld by the ITAT. He drew attention to pages 51 to 54 of the Paper Book which contains the order of the ITAT for AY 2005-06, pages 60 to 61 for AY 2006-07, pages 66 to 73 for AY 2007-08 and pages 81 to 86 for AY 2009-10. The Ld. AR submitted that the issue was now before the Hon’ble Delhi High Court pending adjudication because the Department has preferred an appeal against the order of the ITAT. On ground no. 2 of the asessee’s appeal, the Ld. AR submitted that the assessee had suo moto made a total disallowance of Rs. 21.87 lacs consisting of Rs. 19.37 lacs on account of interest expenses and Rs. 2.50 lacs on account of administrative expenses as against exempt income of Rs. 70,088/-. The Ld. AR submitted that in AY 2009-10 the Ld. CIT (A) had deleted a similar disallowance. The Ld. AR also submitted that the assessee company has raised an additional ground to the affect that since the total exempt income was Rs. 70,088/-, disallowance is to be restricted to this amount only notwithstanding the fact that the company had made suo moto disallowance of Rs. 21.87 lacs. The Ld. AR relied on the decisions of the Hon’ble Delhi High Court in CIT vs. Holcim India P. Limited 272 CTR 282 (Del.), Joint Investment P. Ltd. vs. CIT 372 ITR 694 and Cheminvest Limited vs. CIT 378 ITR 33 for the proposition. & 1511/D/14 Page 7 of 15 DCM Ltd. On ground no. 1 of the Department’s appeal regarding deletion of disallowance of Rs. 22.32 lacs on account of notional interest on interest free advances to DCM Employees Trust, the Ld. AR submitted that the same is covered in favour of the assessee by orders for earlier assessment years 2004-05, 2005-06, 2006-07, 2007-08 and 2009-10 and drew our attention to the relevant pages in the Paper Book. On ground no. 2 of the Department’s appeal contesting the restriction of disallowance u/s 14A to Rs. 12.47 lacs as against 143.39 lacs, the Ld. AR submitted that in identical circumstances, in appeal for AY 2009-10, similar ground of the Department was dismissed, wherein exempt income was Rs. 60,088/- and the company had made suo moto disallowance of Rs. 10.23 lacs. The Ld. AR further submitted that this ground is similar to the assessee’s ground nos. 2 and 3. On ground no. 3 of the Department’s appeal, the Ld. AR submitted that the arguments has in ground no. 2 above would apply.
The Ld. CIT DR relied on the orders of the authorities below and submitted that they were passed after thoroughly examined the issues and were to be upheld.
We have heard the rival submissions and perused the material on record. We deem it appropriate to admit assessee’s additional ground of appeal
. Hence, this ground is treated as admitted. & 1511/D/14 Page 8 of 15. DCM Ltd.
11. As far as ground no. 1 of the assessee’s appeal is concerned, it is seen that the assessee had claimed deduction for the liabilities on account of flyover cost and interest payable to MCD on accrual basis in AY 2004-05. This claim of the assessee company was disallowed by the AO by observing that the deduction would be allowable on payment basis. The claim, however, had been allowed in appeals by the Ld. CIT (A) and the ITAT. The Department however, disputed the allowability of the claim before the Hon’ble High Court in AY 2004-05. Since, the Department disputed the allowability of claim on accrual basis, the assessee in alternative, raised claims in subsequent years on payment basis. This alternate claim, however, was disallowed by the AO as well as CIT (A) and ITAT for the reason that this claim had already been allowed on accrual basis in AY 2004-05.
Similarly, this ground is also an alternate claim on account of expenditure actually incurred for obtaining permissions/approvals in respect of real estate project. Claim on accrual basis has already been allowed by the CIT (A) in AY 2004-05. On an overall view of the factual matrix of the case it is our considered opinion that following the principle of consistency, it would serve the ends of justice if the ITAT’s order in AY 2004-05 is as we are informed that the issue in AY 2004-05 is still pending adjudication. The relevant paragraph of ITAT in assessee’s own case for AY 2004-05 in reads as under: & 1511/D/14 Page 9 of 15 DCM Ltd.
“5. We have considered the rival submissions. In regard to the issue of disallowance of Rs. 12.21 crores being the expenses which had been disallowed by the AO as also the issue of disallowance of flyover cost of Rs. 13.50 crores and the issue of interest payable to MCD in respect of outstanding flyover cost, it is noticed that for the AY 1993- 94 to 1996-97 the Revenue has included the income on the sale of property rights on the entering into the agreement with the buyers and the expenses on account of land and development incurred by the assessee has been allowed in proportion to the area sold by applying the matching principle. It is also noticed that in the later years, the assessee has accepted the stand of the Revenue and has also been following the same practice. For the relevant assessment year, it is noticed that the AO has changed his stand just because the assessee has transferred the complete rights in the project as a whole of M/s Purearth Infrastructure Ltd. When a particular method of computation of income of the assessee has been followed and has been accepted and is also followed by the Revenue and the assessee, just because the total rights in the project has been transferred, such method cannot be changed as by the change of the method, the expenses otherwise allowable to the assessee, is now being denied which is not a permissible act. In these circumstances, we are of the view that the action of the ld. CIT(A) in directing the AO to allow the deduction of the said expenses is on right footing and do not call for any interference.”
& 1511/D/14 Page 10 of 15 DCM Ltd.
Similarly, as regard expenditure in respect of approvals and permissions, it is seen that the ITAT in assessee’s own case for AY 2006-07 in has adjudicated the matter as under:
“3.1 In regard to the expenditure incurred on approvals and permissions, the finding of the Tribunal is as under: In respect of the claim of the deduction of expenses incurred for obtaining approval and permission for real estate project as also the expenses claimed as deduction as an estimated expenditure for the vacation of quarters, removal of squatters, it is noticed that the Ld. CIT(A) has rightly looked into the matter and has after considering the expenses which have been incurred subsequent to the claim, has granted the proportionate relief to the assessee. In these circumstances, we are of the view that the proportionate expenses as allowed to the assessee, is on a scientific and an acceptable principle after considering the expenses claimed and the possible future liability and consequently no interference is called for. In these circumstances, the findings of the Ld. CIT (A) on this issue are upheld.”
The facts and circumstances of the issue being identical, we are also inclined to follow the orders of the Tribunal in the preceding assessment years in the assessee’s own case. Accordingly, ground no.1 of the assessee’s appeal is dismissed. & 1511/D/14 Page 11 of 15 DCM Ltd.
Ground no. 1 of the Department’s appeal relates to notional disallowance made by the AO in respect of loan given to DCM Employees Welfare Trust.
Similar disallowance had been made by the AO in earlier years and was subsequently deleted by CIT (A) and ITAT. Accordingly, this ground is covered in favour of the assessee. We find that ITAT in assessee’s own case for AY 2006- 07 in had adjudicated the matter as under:
“2.2 In regard to notional interest, the finding of the Tribunal has been as under: In regard to the issue of disallowance of interest on the loans outstanding from Ms/ DCM Employees Welfare Trust, it is noticed that the issue is squarely covered by the decision of the Coordinate Bench of this Tribunal in the assessee’s own case for the AY 2003-04 referred to supra and consequently respectfully following the decision of the Coordinate Bench of this Tribunal in the assessee’s own case for the AY 2003-04, the findings of the Ld. CIT (A) on this issue stand upheld.” Accordingly, this ground of the Department’s appeal is dismissed.
As far as ground no. 2 of assessee’s appeal regarding disallowance u/s 14A of the Act is concerned, it is seen that this ground correspond to ground no. 2 of Department’s appeal. The assessee company had received dividend income of Rs. 70,088/- during the year which was claimed as exempt u/s 10(34) of the Act and it & 1511/D/14 Page 12 of 15 DCM Ltd. had suo moto made a disallowance of Rs. 21.87 lacs. It is also seen that the AO has not examined the calculation as submitted by the assessee company in this regard and has also not recorded any satisfaction to the effect that the disallowance offered was not correct. He proceeded to make a further disallowance of 143.39 lacs by applying provisions of Rule 8D. We find force in the contention of the Ld. AR that the AO has neither recorded his satisfaction nor giving any reason as to how the claim of expenditure in relation to tax free income has not been correctly made by the assessee as envisaged u/s 14A and the AO has proceeded to mechanically invoke Rule 8D. We also find that the AO has not established any nexus between the investment made and the expenditure incurred under interest expenditure and administrative expenses before disregarding the suo moto disallowance made by the assessee vis-à-vis the dividend income of Rs. 70,088/-.
The Hon’ble Delhi High Court in the case of Joint Investment P. Ltd. vs. CIT (supra) has held that disallowance u/s 14A cannot exceed the amount of exempt income. The Hon’ble Delhi High Court in the case of Holcim India P. Ltd. (supra) held that in absence of any exempt income, there can be no disallowance u/s 14A.
We also find that the ITAT in assessee’s own case for AY 2009-10, on identical set of facts, had restricted the disallowance to the extent of dividend income received during the year. Respectfully following the same, we set aside the order of the Ld. CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A to Rs. & 1511/D/14 Page 13 of 15 DCM Ltd. 70,088/-. In the result, the additional ground of the assessee is allowed and ground no. 2 of the Department is dismissed. Ground no. 2 of the assessee’s appeal needs no further adjudication.
Ground no. 3 of the assessee’s appeal and ground no. 3 of the Department’s appeal are identical and in view of our adjudication on additional ground of the assessee’s appeal and dismissal of ground no. 2 of the Department as above mentioned, we direct the AO to recompute the book profits u/s 115JB. In the result, ground no. 3 of the assessee’s appeal is allowed and ground no. 3 of Department’s appeal is dismissed.
Ground no. 4 of the assessee’s appeal is pre mature and is dismissed as such.
Ground nos. 5 and 6 of the assessee’s appeal do not need any adjudication and are dismissed.
In the final result, the appeal of the assessee is partly allowed, whereas the appeal of the Department is dismissed.
Order pronounced in the open court on 29.07.2016