MAHINDRA LIFESPACE DEVELOPERS LTD,MUMBAI vs. ASST CIT CIR 6(3), MUMBAI

As the Tribunal have consistently taken the view that income is accessible as business income and since facts and circumstances during all the three years under consideration are same, respectfully following the order of the Tribunal in assessee’s own case, we direct the AO to treat income as income from business and profession. AO is at a liberty to examine the allowability of expenditure incurred for earning business income. We direct accordingly.

Common grievance of assessee in all the assessment years also pertains to disallowance made under Section 14A read with Rule 8D. It was contended by 4 2183-2010 & 1899-2009 Mahindra Life Space Development learned AR that AO has mechanically disallowed assessee’s claim under Rule 8D. It was also the contention of learned AR that for the assessment year 2005- 2006 and 2006-2007, Rule 8D is not applicable as per the decision of Jurisdictional High Court in case of Godrej & Boyce Manufacturing Company Limited. Reliance was also placed on the decision of co-ordinate Bench in case of J.K. Investors (Bombay) Ltd., ITA No.7858/Mum/2011 order dated 13/03/2013 and also decision in case of Stock Holdings Corporation ITA No.5348/Mum/2012 order dated 10/06/2015 wherein it was held that without recording satisfaction, Rule 8D cannot be applied.

We have considered rival contentions and carefully gone through the order of the authorities below. In the following judicial pronouncements, it was held that Rule 8D cannot be applied mechanically without satisfaction having been recorded by the AO to the effect that expenditure was offered by the assessee as having been incurred for earning exempt income are not correct. i) M/s Auchtel Products Ltd Vs.AClT ,ITA No.3183/Mum/2011 A Bench Order dtd.30/04/12 "5. 14A(2) empowers the AO to determine the amount of expenditure incurred in relation to tax-free income if, "having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee". The satisfaction of the AO as to the incorrect claim made by the assessee is sine qua non for invoking the applicability of Rule BD. The satisfaction can be reached only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO is satisfied, then there is no requirement to proceed with the computation under Rule 8D. The AO wrongly proceeded on the premise that Rule 8D is automatic irrespective of the genuineness of the assessee's claim in respect of expenses incurred in relation to exempt income. The correct sequence for making any disallowance u/s14A is to, firstly, examine the 5 2183-2010 & 1899-2009 Mahindra Life Space Development assessee's claim of having incurred some expenditure or no expenditure in relation to exempt income. If the AD is satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate" ii) DClT Vs Jindal Photo Ltd Delhi ITAT ,ITA 814 (Del) 2011 it is a pre-requisite that before invoking Rule 80, the AO must record his satisfaction on how the assessee's calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax- free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions (law laid down in assessee's own case for AY 2007-08 reiterated) iii) The ITAT Pune bench in the case of Kalyani Steels Ltd., ITA No.1733/PN/2012, order dated 30-1-2014, held as under :- 8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that for the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Sub-section (2) of section 14A of the Act prescribes that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed, such prescribed method being contained in rule 8D of the Rules. However, the aforesaid empowerment of the Assessing Officer to invoke application of rule 8D of the Rules is superscribed by a condition contained in sub-section (2) of section 14A of the Act which is to the effect that the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income. The invoking of rule 8D of the Rules is permissible only when the Assessing Officer records the satisfaction in regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. In other words, section 14A(2) of the Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer 6 2183-2010 & 1899-2009 Mahindra Life Space Development records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) :- “70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill, 2006, and the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existing provisions of section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that subsection (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub-section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income.

Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the 7 2183-2010 & 1899-2009 Mahindra Life Space Development prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). [underlined for emphasis by us] 9. The aforesaid observations of the Hon’ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. At this stage, we may also touch-upon a similar view expressed by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. & Ors. vs. CIT, (2012) 247 CTR 162 (Del), wherein reference has been made to the judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). As per the Hon’ble Delhi High Court, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income in term of rule 8D of the Rules would be triggered only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. According to the Hon’ble Delhi High Court, sub-section (2) of section 14A of the Act deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the Act and sub-section (3) applies to cases where the assessee asserts that no expenditure has been incurred in relation to such exempt income. Explaining further, as per 8 2183-2010 & 1899-2009 Mahindra Life Space Development the Hon’ble High Court in both the cases the recourse to rule 8D of the Rules is possible only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

In the aforesaid background, now, we may examine the facts of the present case. In this case, assessee has earned by way of dividends a sum of Rs.5,45,58,685/-, which is exempt u/s 10(38) of the Act and thus the same does not form part of the total income under the Act. In the computation of income, assessee having regard to section 14A of the Act, determined the amount of expenditure incurred in relation to such income at Rs.5,00,000/-. The Assessing Officer has not found it acceptable and has instead determined the amount of expenditure in relation to such income by applying rule 8D of the Rules. Ostensibly, the action of the Assessing Officer cannot be upheld unless he has complied with the pre- requisite of invoking rule 8D of the Rules, namely, recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of Rs.5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre- condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that “the said disallowance was not acceptable”. In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of disallowance u/s 14A of the Act of Rs.5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is “not acceptable”. Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the disallowance u/s 14A of the Act to the extent of Rs.5,00,000/-, as returned by the assessee.

We also found that Tribunal in assessee’s own case in earlier have restored the matter back to the file of the AO for computing the disallowance afresh. Respectfully following the decision of the Tribunal in assessee’s own case vis-à- vis decision referred above ground with regard to computation of disallowance under Section 14A read with Rule 8D is restored back to the file of the AO for deciding afresh. We direct accordingly.

In the assessment year 2005-2006, assessee is aggrieved by the action of CIT(A) confirming the profit on sale of land and building of Rs.82,11,589/- as income from short term capital gains instead of long terms capital loss of Rs.47,79,037/-. 10. Rival contentions have been heard and record perused. Facts in brief are that during the year under consideration assessee has sold part of its commercial project named GE Plaza. The land on which Plaza was constructed was acquired in the year 1996-1997. Assessee constructed building thereon in the year 2001- 10 2183-2010 & 1899-2009 Mahindra Life Space Development 2002. During the year, office premises bearing nos. 5 to 8 on 5th floor along undivided proportionate interest in the Land, Electrical Installations, Parking spaces etc., was sold for a consolidated consideration of Rs.4,29,10,560/-. The AO has treated the same as business asset and computed short term capital gain of Rs.82,11,589/- on the plea that assessee has used the building as business asset on which depreciation was claimed. AO also observed that land and building was sold under single agreement. AO did not allow assessee’s claim of indexation in respect of land which was acquired at a price of Rs.1,47,04,103/-. By the impugned order CIT(A) confirmed the action of AO against which assessee is in further appeal before us.

We have considered rival contention and found from record that as far as realisation of Rs.197.34 lacs is concerned, AO has taxed it under the Short Term Capital Gain for the reason that in earlier years income from Commercial Complex was assessed under the head House Property and depreciation claim of assessee was rejected. The assessment of AO is not sustainable in so far as Tribunal in assessee’s own case for the assessment years 2001-2002 to 2004- 2005 have treated the income from operation of commercial complex under the head business income. As such realisation from sale of part of building requires to be reduced from the WDV under Building Block as done by assessee. However, in respect of profit on sale of land, we found that land was purchased with intention to build ‘commercial complex’, operate it and earn income. During construction stage, both land and expenditure on building was shown under 11 2183-2010 & 1899-2009 Mahindra Life Space Development capital work in progress. Land was acquired in 1996-97 and never shown as inventory. Since the land is capital asset, date of acquisition would be from date of purchase and not the date of construction of Building on the said land. Accordingly, we direct the AO to allow indexation in respect of the cost of land so acquired and to recompute the capital gain accordingly. In so far as assessee was in receipt of consolidated sale consideration, we direct the assessee to file sub-registrar value at which land was valued by sub-registrar for the stamp duty purposes. AO is to take register value as a sale consideration of land and after allowing indexation with reference to the year of purchase of land, capital gain so arising should be treated as long term capital gain / loss. We direct accordingly.

Assessee is aggrieved for applying explanation to Section 73 with respect to loss on sale of shares in Sembcorp Infrastructure India (Pvt.) Ltd., treating the same as speculation loss.

The facts in brief are that shares of Sembcorp were allotted to assessee company in FY 1997-98 and were always disclosed in Balance Sheet as Investments. This is the only transaction of sale of shares during the year. By selling the shares Assessee has quit from the joint venture. Buyer is co-venturer and a Singapore based company. Sale transaction subject to FIPB (Foreign Investment Promotion Board) & RBI approval. Sale is not within the Mahindra Group but to co-venturer an outside party. Shares were acquired at Rs.87.50 lacs (face value) and since this company was in loss, assessee had made

We also found that shares were allotted to assessee and not purchased by assessee. Explanation can be invoked only if shares are purchased. AO’s has commented that supporting evidence regarding valuation of shares was not given. Company was in losses and assessee had already provided for diminution in value of shares and under these circumstances, shares had to be sold at a loss.

In view of the above discussion, we restore the matter back to the file of AO for deciding afresh in terms of our above observation.