FORMAX REAL ESTATE LTD,NEW DELHI vs. DCIT CIR 3(1), MUMBAI

The aforesaid appeal has been filed by the assessee against impugned order dated 18.10.2013, passed by Ld. CIT(Appeals)-6, Mumbai for the quantum of assessment passed under section 143(3) for the assessment year 2010- 11. In the grounds of appeal, the assessee has raised following grounds:- “Ground No.1. The CIT(A) has erred on facts and circumstances of the case in confirming the addition made by the Assessing Officer (herein after referred to as “AO”) to the extent of Rs.28,75,296/- u/s 14A read with Rule 8D.

Brief facts qua the issue involved are that, the assessee company is engaged in the business of real estate developer. During the year the assessee had shown dividend income of Rs.4,97,20,333/- which was claimed as exempt. The AO further noted that the assessee has made investment in shares to the tune of Rs.166,79,68,270/- as on 31st March, 2010 and the entire investment were made during the year itself. Accordingly, he held that disallowance under section 14A has to be made. After detailed discussion and referring to the decision of Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (328 ITR 81) he held that the disallowance should be worked out in accordance with the Rule 8D, which was worked out by him in the following manner:- Amount (Rs.) 1. Amount of expenses directly relating to income which does not form part of total income 845 2. Amount of the interest expenses indirectly attributable to such income, in accordance with the formula NIL 3. 0.5% of the average value of investments as computed below: Average of such investment on the first and Last day of previous year 0 + 166,79,68,270 =Rs.83,39,84,135 2 0.5% of Rs.83,39,84,135/- 41,69,921 Total disallowance u/s 14A 41,70,766 3 फोरमै�स �रयल इ�टेट �ल�मटेड Formax Real Esate Ltd ITA 219/Mum/2014 3. Before the Ld. CIT(A), the assessee’s case was that, if the entire details of expenditure incurred and debited in the profit and loss account are to be examined and analysed, then it can be seen that they were wholly connected with the business carried out by the assessee and nothing can be said to be attributable for the earning of dividend income. It was further submitted that, correctness of the claim of the assessee has not been refuted by the AO in accordance with the sub-section (2) and (3) of section 14A. The assessee’s detailed submission along with various decisions in support has been incorporated by the Ld. CIT(A) from pages 3 to 15 of the appellate order.

The Ld. CIT(A) after detailed discussion, held that the disallowance under section 14A r.w. Rule 8D has to be made in the present case. He noted that the assessee has earned huge dividend income of Rs.7.97 crores and the average value of investment works out to Rs.57,50,59,135/-. For maintaining such a huge portfolio, the assessee has merely attributed expenses of Rs.845/- which cannot be said to be adequate in any manner. He further noted that AO only after giving opportunity to the assessee had then come to the conclusion that, disallowance on account of indirect expenditure under Rule 8D(2)(iii) is to be made. However, he agreed with other contention of the assessee that AO has adopted wrong figure of average value of investment which should be Rs.57,50,59,135/- instead of Rs.83,39,84,135/- adopted by the AO. He directed the AO to delete the excess disallowance to the extent of Rs.12,94,625/-. The relevant observation and finding of Ld. CIT(A) in this regard reads as under:-

Before us, the Ld. Counsel, Mr. Jitendra Sanghvi drew our attention to the details of investment summary which was mostly in mutual funds and pointed out that the overall purchase transactions during the year were 12; redemption transaction were 19; and shifting from one plan to another were 6. Thus, in all there were only 18 transactions of purchases for carrying out such activity and for such transactions, disallowance of Rs.28,75,296/- is too high and uncalled for. He further drew our attention to the details of 5 फोरमै�स �रयल इ�टेट �ल�मटेड Formax Real Esate Ltd ITA 219/Mum/2014 total expenditure debited in the profit and loss account under the head “Administrative and Other Expenses” which is to the tune of Rs.62,66,167/-. Out of these expenditures, he submitted that professional charges itself was of Rs.54,13,423/- which was purely for real estate project. Thus, out of 62 lakhs; more than Rs.54 lakhs has nothing to do with the investment activities. From the balance amount, he stated that Rs.5,51,520/- is on account of miscellaneous expenses, besides rates and taxes of Rs.4,860/-. Thus, looking to the nature of accounts and expenditure incurred, it cannot be held that such a huge disallowance is called for. As required by the Bench, he also filed the details of professional charges and other expenses as debited in the profit and loss account to examine whether the professional charges has any linkage with the investment activities or earning of dividend income. On the basis of details furnished he submitted that, on the facts and circumstances of the case, 0.5% of the average value of investment under Rule 8D(2)(iii) cannot be made.

On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT(A) and submitted that, looking to the huge investments made and the exempt income of approximately of Rs.5 crores, the disallowance under section 14A as sustained by CIT(A) to the extent of Rs.28,75,296/- is wholly justified.

We have heard the rival submissions, perused the relevant finding given in the impugned order as well as material placed on record. It is an admitted fact that, the assessee has earned huge dividend income of Rs.4.97 crores 6 फोरमै�स �रयल इ�टेट �ल�मटेड Formax Real Esate Ltd ITA 219/Mum/2014 from average value of investment of Rs.11,50,118,270/-. Before us, the Ld. Counsel submitted that, firstly¸ the AO has not recorded his ‘satisfaction’ having regard to the accounts maintained by the assessee and, therefore, no disallowance under Rule 8D should be made; secondly, the nature of expenses debited in the profit and loss account are mainly relating to real estate business and nothing can be said to be pertaining to investment activities; and lastly, only few transactions of purchases have been made in this year. Disallowance under section 14A(1) is triggered whenever an income is shown which does not form part of the total income and any deduction in respect of expenditure is claimed / incurred in relation to such exempt income. For computing the disallowance, the mandatory requirement and conditions as provided in sub-section (2) of section 14A has to be followed, that is, the AO having regard to the accounts of the assessee has to ‘satisfy himself’ about the correctness of the claim of the assessee either in respect of such expenditure in relation to the earning of exempt income or wherever the assessee makes a claim that no expenditure has been incurred. The crucial test of determination of disallowance under this section is “the nature of claim of expenses incurred having regard the accounts maintained by the assessee”. The phrase “having regard to the accounts”, connotes, proximate relationship between the expenditure incurred for the purpose of earning of the income which do not form part of the total income. Here, the only dispute is, with regard to the administrative expenses which has been disallowed under Rule 8D(2)(iii) and not interest disallowance. On a careful perusal and analysis of the administrative expenses debited, 7 फोरमै�स �रयल इ�टेट �ल�मटेड Formax Real Esate Ltd ITA 219/Mum/2014 we find that following expenses have been claimed in the profit & loss account:

In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 10th August, 2016.