ASST CIT 14(1)(1), NAVI MUMBAI vs. ACRON DEVELOPES P.LTD, MUMBAI

This appeal has been preferred by the revenue against order dated 28/10/2014 passed by the Ld. CIT(Appeals)-21, Mumbai for the assessment year 2011-12, whereby the Ld. CIT(A) has directed the Assessing Officer to exclude the share application money of Rs. 13,73,00,000/- being part of investment made by the assessee for the purpose of computation of disallowance u/s 14A.

Brief facts of the case are that the assessee company, engaged in the business of project development and renting of properties, filed its return of income for the A.Y. 2011-12 declaring the total income of Rs. 6,56,54,270/-. The assessee also filed revised return declaring the total income of Rs. 6,82,26,590/-. The A.O completed the assessment order u/s 143 (1) of the Income Tax Act, 1961 (in short ‘the Act’) making disallowance of Rs. 42,44,405/- u/s 14A of the Act. In appeal the Ld. CIT(A) directed the Assessing Officer to exclude the share application money of Rs. 13,73,00,000/- being part of investment made by the assessee for the purpose of computation of disallowance u/s 14A of the Act applying Rule 8D.

The revenue has raised the only issue in appeal which reads as under:-

Before us the Ld. Departmental Representative (DR) submitted that the Ld. CIT(A) has passing the impugned order without appreciating the fact that the investment of Rs. 13,73,00,000/- made by the assessee would result in exempt incomes which may arise in future. Moreover the assessee has debited expenditure pertaining to the said investments is in P & L account during the financial year. Hence, the order of the Ld. CIT(A) is liable to the set aside.

On the other hand the learned Authorized Representative (AR) submitted that the share application in Acron Hotels, Acron Hospitality and Acron Infra amounting to Rs. 13,73,00,000/- should not be included while working of average value of tax free income under rule 8D(2)(iii) of the Income Tax Rules. Relying upon the decisions rendered by the ITAT Kolkata in (CO No. 29/kol/2013) dated 07/10/2015, in ITO vs. LGW Limited, decision dated 16/01/2013 passed by the ITAT, Mumbai Bench in Rainy Investments Pvt. Ltd. vs. ACIT in ITA No. 5491/Mum/2013 and decision dated 15/01/2014 passed by the ITAT Mumbai in Garware Wall Ropes Ltd. vs. ACIT submitted that the Ld. CIT(A) has passed the impugned order as per decision rendered by the ITAT Benches in the cases aforesaid.

We have heard the rival submissions and perused the record carefully including decisions relied upon by the parties. We notice that the in ITO vs. LGW Ltd. (supra), it has been held that the share application money gets converted into shares only on allotment by the company. Till such time the share application money is converted into shares, the applicant does not have any rights of a shareholder/member. Therefore, share application money cannot be considered as investment which is likely to earn tax free dividend income. Hence, there can be no disallowance u/s 14A of the Act. In Garware Wall Ropes Ltd. vs. ACIT, the Co-ordinate bench has held that where assessee made certain investment with an object of acquiring controlling stake in a group concern and not for earning any income out of investment, Assessing Officer was not justified in invoking provisions of section 14A, read with Rule 8D in order to disallow a part of incidental dividend income earned on said investment. Similarly in Rainy Investments Pvt. Ltd. vs. ACIT(supra) the Co- ordinate bench has held that share application money cannot be regarded as an investment in shares, or an asset yielding tax-free income, and neither is it capable of yielding any tax-free income, thus no disallowance can be made u/s 14A. In the present case as per the working of the average value of tax free investment under rule 8D submitted by the assessee, the assessee had made investment of Rs. 13,73,00,000/-. In view of the decision rendered by the Kolkatta ITAT and Co-ordinate benches of the ITAT, Mumbai, the Assessing Officer should not have included the share application money while working out the average value of investment under Rule 8D. Therefore, the Ld. CIT(A) has righty issued the direction to the A.O to exclude share application money of Rs. 13,73,00,000/- for the purpose of computation of disallowance of u/s 14A. We, therefore, respectfully following the view taken by the ITAT in aforesaid cases, uphold the order passed by the Ld. CIT(A) and dismiss the sole ground of appeal of the revenue.

In the result, the appeal filed by the revenue for Asst. year 2011-12 is dismissed.