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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
The captioned appeal by the assessee is directed against the order of the CIT(A)-24, Mumbai dated 5.1.2015, pertaining to the Assessment Year 2010-11, which in turn has arisen from the order passed by the Assessing Officer dated 4.3.2013 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In its appeal, the assessee has raised the following Grounds of appeal :-
“I. About the determination of total income
The learned (Id) CIT(A) erred in confirming the assessment order passed by the Assessing Officer (AO), determining the total income of the appellant for the AY 2010-11, at Rs.61,32,050, as against the loss of Rs.3,31,04,249, disclosed by the appellant for the current AY.
2. The Id CIT(A) grossly erred in holding that the appellant did not carry on any business during the FY relevant to AY 2010-11, in spite of the fact that for the AY 2007-08, the Hon. Tribunal clearly held in the case of the appellant that the business was very much in existence and therefore, it could not be said that there was no business activity carried on by the appellant and thereafter, the AO accepted the aforesaid fact in his order under section 143(3), r.w.s. 254 of the Income-Tax Act, 1961 (the Act), for the AY 2007-08, in the case of the appellant.
3. The Id CIT(A) grossly erred in not following the aforesaid appellate order of the ITAT for the AY 2007-08 by erroneously interpreting and distinguishing the same and thereby violating the judicial discipline, wherein an appellate order passed by the Tribunal is clearly binding on the CIT(A).
4. The Id CIT(A) erred in upholding the action of the AO, making a disallowance of Rs.3,92,36,297, being the expenditure incurred for the purposes of business of the appellant company during the current FY.
II. Disallowance under section 14A of the Act
1. The Id CIT(A) erred in confirming the order of the AO, making a disallowance of Rs.3,92,36,297, under section 14A of the Act, without first satisfying himself with the correctness of the claim of the appellant that no expenditure could be attributed to the earning of the exempt income from dividends.
2. The Id CIT(A) grossly erred in not following the direct judgement of Punjab and Haryana High Court on the issue in the case of CIT Vs Deepak Mittal [2014] 361 ITR 131 (P&H).
3. The Id CIT(A) erred in not following the direct judgement of Karnataka High Court on the issue in the case of Canara Bank Vs ACIT [2014] 99 DTR 36 (Karn).
The Id CIT(A) grossly erred in totally ignoring almost all the detailed submission made by the appellant against the disallowance under section 14A of the Act to the extent of Rs.3,92,36,297.
The Id CIT(A) grossly erred in confirming the disallowance of Rs.3,92,36,297, under section 14A of the Act, in relation to dividend income of Rs.13.58 lakhs.”
As the aforesaid Grounds of appeal reveal, the grievance of assessee is on two issues which we shall deal in seriatim. Firstly, the grievance of assessee is that the Assessing Officer has erred in determining the total income of assessee at Rs.61,32,050/- as against loss of Rs.3,31,04,249/- primarily by disallowing various expenditures incurred of Rs.3,92,36,297/- on the plea that the assessee had not yet started any business activity.
4. In this context, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the activity of real estate development. The Assessing Officer noted that during the year under consideration assessee had derived income by way of interest and dividend from subsidiary companies and mutual funds and that it had not started any business activity other than the activity of advancing surplus funds. Therefore, the Assessing Officer held that expenditures by way of Employees remuneration and benefits – Rs. 1,28,02,000/-; Administration cost – Rs.1,54,03,000/-; Depreciation – Rs.21,11,297/-; and, Finance cost – Rs.89,20,000/- are disallowed. The Assessing Officer noted in the assessment order that in the Assessment Years 2007-08, 2008-09 and 2009-10 also the respective assessing authorities had taken a similar view. Accordingly, the expenses amounting to Rs.3,92,36,297/- were disallowed. The CIT(A) has also affirmed the stand of Assessing Officer by noticing that in the case of assessee for Assessment Years 2006-07 and 2009-10, the predecessor CIT(A) had affirmed the disallowance of expenditure under similar circumstances. In this background, assessee is in appeal before us.
5. Before us, the learned representative for the assessee pointed out that in the Assessment Year 2007-08, the Tribunal vide order in dated 4.1.2013 had negated the plea of Assessing Officer and it has been held that the business of the assessee was very much in existence. It was pointed out that according to the Tribunal, the Assessing Officer was wrong in concluding that there was no business activity carried on by the assessee. Further, it has been pointed out that in Assessment Years 2006-07 and 2009-10 also, the Tribunal vide orders in ITA No. 2550-51/Mum/2014 dated 29.2.2016 followed the earlier decision of the Tribunal for Assessment Year 2007- 08 and remanded the matter back to the file of Assessing Officer to decide the issue afresh. In this background, it has been contended that the stand of Assessing Officer in the instant assessment year is unsustainable.
The ld. DR appearing for the Revenue has not disputed the factual matrix brought out by the learned representative, though he canvassed support for the stand of Assessing Officer.
Having considered the rival stands, we find that in terms of the Memorandum and Articles of Association of the assessee-company, a copy of which has been placed in the Paper Book, the main object of the assessee is to undertake business of construction and development of buildings, houses, halls, flats, office premises, shops & residential/commercial complexes, shopping malls, etc. In other words, the business of the assessee is stated to be real estate development. Whether or not the business activity has started is a question of fact. In the instant year, the Assessing Officer has concluded that assessee has not yet started any business activity and it is further noticed that such finding is based on his stand for the earlier Assessment Years of 2007- 08, 2008-09 and 2009-10. Insofar as the Assessment Year 2006-07 and 2009-10 are concerned, the Tribunal vide order dated 29.2.2016 (supra) has remanded the issue back to the file of Assessing Officer following the decision of the Tribunal for Assessment Year 2007-08 vide order dated 4.1.2013 (supra). Therefore, in the above fact-situation where the orders of the Tribunal in the earlier years continue to hold the field, we deem it fit and proper to remand the matter back to the file of Assessing Officer for adjudication afresh in the light of the decision of Tribunal in assessee’s own case. Needless to mention, the assessee should be allowed an opportunity of being heard and only thereafter the Assessing Officer shall decide the issue in accordance with law. Thus, on this issue assessee succeeds for statistical purposes.
The last Ground in the appeal is with regard to disallowance of Rs.3,92,36,297/- made u/s 14A of the Act. In this context, the brief facts are that the Assessing Officer noted that the assessee had earned dividend income of Rs.5,64,25,500/-, which was claimed as exempt u/s 10(34) and/or 10(35) of the Act. On being show-caused as to why the expenses related to such income be not disallowed u/s 14A of the Act, assessee contended that no expenses were incurred to earn the exempt income and that the dividends were self-generating income. The Assessing Officer considered the explanation furnished by the assessee and observed that the administration and other expenses incurred by the assessee facilitated earning of the impugned exempt income and also observed on the basis of the Balance-sheet and Profit & Loss Account that apart from the exempt income in question, the only other income credited to the Profit & Loss Account was Rs.1,63,000/- being interest received from bank; that the interest income from bank was on account of bank balances and that it was to be inferred that the expenditure debited to the Profit & Loss Account was related to earning of exempt income. Accordingly, the Assessing Officer applied the formula contained in Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’) and computed the disallowance u/s 14A of the Act at Rs.5,69,39,932/-, but since the total expenditure debited to the Profit & Loss Account was Rs.3,92,36,297/-, he restricted the disallowance to Rs.3,92,36,297/- only. The said action of the Assessing Officer has since been affirmed by the CIT(A) also.
Before us, the learned representative for the assessee pointed out that the Assessing Officer has erred in making the disallowance on the basis of Rule 8D of the Rules inasmuch as the Assessing Officer has not recorded any satisfaction that the claim of assessee that no expenditure was incurred to earn the exempt income was incorrect. In this context, the learned representative has relied upon the following decisions :- i) CIT vs Deepak Mittal [2014] 361 ITR 131 (P&H); ii) Canara Bank vs ACIT [2014] 99 DTR 36 (Karn); iii) CIT vs Walfort Share & Stock Brokers (P.) Ltd. [2010] 192 Taxman 211 (SC); and iv) Godrej & Boyce Mfg. Co. Ltd. vs DCIT [2010] 328 ITR 81 (Bom).
It is further pointed out that no disallowance out of interest expenditure is called for as assessee had sufficient funds to make the investments and, therefore, the disallowance made out of interest is untenable. In any case, it is sought to be pointed out that before any disallowance u/s 14A of the Act is made, the Assessing Officer has to satisfy the pre-condition that expenditure has been incurred to earn such exempt income and in this context relied on the following judgments :- i) CIT vs Consolidated Photo & Finvest Ltd [2012] 211 Taxman 184 (Del); and ii) CIT vs Hero Cycles Ltd [2010] 323 ITR 518 (P&H).
On the other hand, the ld. DR defended the orders of the authorities below by placing reliance on the same.
We have carefully considered the rival submissions. Notably, in the present case, the Assessing Officer has computed the disallowance u/s 14A of the Act by applying formula contained Rule 8D of the Rules, i.e. Rule 8D(2)(i) – Rs.3,92,36,297/-; in Rule 8(D)(ii) – Rs.39,78,655/-; and, Rule 8D(2)(iii) – Rs.1,37,24,980/- totalling to Rs.5,69,39,932/-. It is also clear that the assessee had contended before the Assessing Officer that no expenditure has been incurred in relation to earning of exempt income. Another plea which has been raised before us is to the effect that there was no justification to have disallowed the interest expenditure of Rs.39,87,655/- as per Rule 8D(2)(ii) of the Rules since the investment in shares and mutual fund units, which have generated the exempt income, were fully covered by the non-interest bearing funds available in the shape of Share capital and Reserves. In support, our attention has been drawn to page 104 of the Paper Book wherein it is pointed out that the investments are to the tune of Rs.274.32 crores as against available Share capital & Reserves of Rs.304.46 crores. Quite clearly, in such a situation, the ratio of judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd., 313 ITR 340 (Bom) is applicable and even in the context of Sec.14A of the Act, the Hon'ble Bombay High Court in the case of HDFC Bank Ltd., 366 ITR 505 (Bom) has held that it is to be presumed that the investments are out of non-interest bearing funds. Be that as it may, in our view, it would be in the fitness of things that the aforesaid aspect is verified by the Assessing Officer before straightaway concluding to disallow interest expenditure in terms of Rule 8D(2)(ii) of the Rules.
Similarly, we find that by applying Rule 8D(2)(i) of the Rules, the Assessing Officer has disallowed a sum of Rs.3,92,36,297/- as expenditure directly related to the income which does not form part of the total income. Notably, the aforesaid amount of expenditure is an amount which was disallowed by the Assessing Officer while computing business income on the ground that the assessee has not commenced its business activity. In the earlier Ground, we have already remanded the said issue back to the file of Assessing Officer noticing that in the earlier assessment years, the Tribunal has observed that the business activity had already started. The matter has been remanded back to the file of Assessing Officer by us, which implies that the issue as to whether the expenditure of Rs.3,92,36,297/- is related to the business activity or not is yet to achieve finality in the hands of the Assessing Officer. Therefore, it would be inappropriate to straightaway consider the said expenditure as falling within the purview of Rule 8D(2)(i) of the Rules so as to treat it as an expenditure directly relatable to exempt income. Therefore, on this aspect also, we deem it fit and proper to restore the issue back to the file of Assessing Officer for a decision afresh.
Even with regard to the third limb of the disallowance under Rule 8D(2)(iii) of the Rules, we are satisfied that the matter is required to be re-visited by the Assessing Officer inasmuch as there cannot be a presumption that certain expenditure is bound to be incurred to earn the exempt income. Notably, assessee had pleaded before the Assessing Officer that it had earned the dividend income of Rs.5,56,22,901/-, being a single payment from its subsidiary, and the balance of Rs.8,02,599/- from mutual fund. Therefore, the entire conspectus of facts is required to be objectively appreciated by the Assessing Officer before proceeding to disallow the expenditure u/s 14A of the Act by applying Rule 8D(2)(iii) of the Rules on a thumb rule basis. Therefore, in the final analysis, we restore the issue relating to disallowance u/s 14A of the Act back to the file of Assessing Officer who shall pass an order afresh on this aspect keeping in view the aforesaid discussion and as per law. Needless to mention, the assessee should be allowed an opportunity of being heard before deciding the issue.
In the result, appeal of the assessee is partly allowed.