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Income Tax Appellate Tribunal, “F”, BENCH MUMBAI
Before: SHRI JASON P. BOAZ, AM & SHRI SANDEEP GOSAIN, JM
The present appeal has been filed by the assessee against the order of the learned CIT (A)-18, Mumbai dated 22-07-2014 passed in appeal No.CIT(A)-18/DCIT-8(3)/IT-265/2013-14 for assessment year 2011-12 thereby partly allowing the appeal filed by the assessee on the grounds mentioned herein below:-
“1. DISALLOWANCE OUT OF INTEREST EXPENSES [Rs.8,41,500]
1.1 The Learned Commissioner of Income Tax (Appeals) – 18, Mumbai [“Ld. CIT (A)”] erred in confirming the action of the Deputy Commissioner of Income Tax – 8 (3), Mumbai [“the A.O.”] in disallowing Rs.8,41,500/- out of the interest expenses.
1.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for.
1.3 Without prejudice to the above, assuming – but not admitting – that any disallowance was called for, it is submitted that the computation of the disallowance made by the A. O. is arbitrary, excessive and not in accordance with the law.
DISALLOWANCE U/S. 14A READ WITH RULE 8D 2. 2.1 The Ld. CIT (A) erred in confirming the action of the A. O. to the addition of Rs.11,72,828/- in making disallowance u/s. 14A of he Income – tax Act, 1961[ “the Act”] read with Rule 8 D of the Income – tax Rules, 1962. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 2.3 Without prejudice to the above, assuming – but not admitting – that any disallowance was called for, it is submitted that the computation of the disallowance made by the A. O. is arbitrary, excessive and not in accordance with the law.
The Appellant craves leave to add, amend, alter, delete or modify all or any of the above ground at the time of hearing.”
The brief facts of the case are that the assessee is engaged in the business of acquiring, developing, improving, building, selling, leasing, managing, commercially exploiting and otherwise dealing in real estate, properties of all nature and description or any rights therein including land, buildings and other estate and realty including shopping malls, commercial and residential complexes and investment in shares and securities. The assessee filed its return of income declaring business loss of Rs.9,34,489/- and short term capital gain of Rs.85,15,065/-. The short term capital gain so declared has been set off against the brought forward short term capital loss of assessment year 2009-10. The return was processed u/s 143 (1) of the IT Act. The case was selected for scrutiny and after serving statutory notices, the order of assessment u/s 143(3) of the Act was passed by the AO thereby disallowing interest attributable to advance of Rs.3,82,50,000/- towards booking of flats at lower price and disallowance u/s 14A of the Act was made. The assessee preferred appeal before the learned CIT (A) and the learned CIT (A) considering the facts of the case and the submission of the assessee before him has allowed part relief to the assessee. Aggrieved by the order of the learned CIT (A) the assessee is now in appeal before us.
3. Ground No.1 of the appeal relates to disallowance of interest attributable to advance of Rs.3,82,50,000/- towards booking of flats at lower price amounting to Rs.8,41,500/-. The learned representing on behalf of the assessee submitted that the AO as well as the learned CIT (A) has wrongly decided the said issue and wrongly mentioned that no explanation was filed before the AO or the learned CIT (A) to substantiate that the advances were made out of own funds and to prove that the interest-free advances were given out the own funds of the assessee company. The learned AR drew our attention to its written submission made before the learned CIT (A) page nos. 20 to 30 more particularly to page No.22 wherein copy of audit report, balance sheet and profit & loss account of the assessee-company for assessment year 2009-10 are mentioned. In addition, the learned AR drew our attention to page 31 of the paper book which is balance sheet narrating the unsecured loan liability of Rs.3,82,50,000/- and further referred to page Nos. 34 to 36 of the paper book which are balance sheet as on 31st March, 2008 reflecting the loans and advances. Our attention was also drawn to page 41 of the paper book which are also written submission in continuation of the earlier written submission made by the assessee. From the co-joint reading of the entire documents, we are of the considered view that the assessee has already placed on record all the documents and written submissions containing the copies of the aforementioned relevant documents. On perusal of the same, we find that the advance of Rs.3,82,50,000/- was not given in the year under appeal but was given in the assessment year 2007-08 out of interest-free funds and no interest was incurred or claimed in this year. The profit & loss account for the assessment year 2008-09 reflects this position. It is evident from the above, that the said advance is out of interest-free funds and no interest was received on the said advance. Therefore, no disallowance of interest could be made in respect of the aforementioned advance which was given out of interest-free funds.
We have also noticed that in the past assessment years there has been no disallowance of interest u/s 36(1) (iii) of the Act and therefore, there could not be any disallowance as no advance was given out of the borrowed capital. We have also perused the judgment of the Co-ordinate Bench i.e. ITAT Chandigarh Bench [ITA No.345/CHD/2013 – DCIT Vs M/s. Avon Cycles Ltd. Order dated 19-09-2014] relied upon by the learned AR, wherein the facts are quite similar to the facts of the present case.
Even, on perusal of the order of the co-ordinate Bench in the aforesaid case even shows that addition made u/s 36 (1) (iii) of the Act was deleted.
The relevant portion of the same is reproduced herein below for reference:-
“9. We have heard the rival contentions and perused the record. We find that similar issue of disallowance under section 36 (1) (iii) of the Act on the investment made in the purchase of land arose before the Tribunal in assessee’s own case relating to assessment year 2008-09 (supra) and vide order dated 17.01.2013, the Tribunal held as under:-
“9. We have heard the rival contentions and perused the record. The assessee had made investment totaling to Rs.4.75 crores in the purchase of agricultural land as under:
14/1/2006 Rs.1,50,00,000/- 9/3/2006 Rs. 20,00,000/- 15/2/2007 Rs.2,43,00,000/- 15/2/2007 Rs. 57,00,000/- 11/4/2007 Rs. 5,00,000/-
The finding of the CIT (appeals) vide para 4.1 of the appellate order is that the assessee had furnished copies of bank accounts reflecting availability of funds on the dates when earlier investments were made and also when payment of Rs. 5 lacs was made during the year. The learned D. R. for the Revenue has not controverted the factual finding of the CIT (appeals) that the total investment made by the assessee in earlier yeas and the sum of Rs.5 lacs invested during the year were out of its own funds and not out of borrowed funds.
The Hon’ble Apex Court in Munjal Sales Corporation Vs. CIT [298 ITR 298 (SC)] has reversed the findings of the Hon’ble Punjab & Haryana High Court in that assessee’s case and appeal filed by the Revenue against the assessee reported in 298 ITR 288 & 294 respectively. The Hon’ble Supreme Court have allowed the appeal of the assessee against the disallowance of interest under section 36 (1) (iii) of the Act in view of the profits earned by the assessee against which interest free loan of Rs.5 lacs being advanced to the sister concern. In view of the ratio laid down by the Hon’ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT (supra) we find no merit in the pleadings of the learned D. R. for the Revenue placing reliance on the ratio laid down by the Hon’ble Punjab & Haryana High Court, which have been reversed by the Hon’ble Supreme Court.
In the facts of the present case where loan of Rs.5 lacs has been advanced during the year under consideration and the balance loan having been advanced in the earlier years, where no disallowance was made out of interest expenditure and the assessee having established the availability of the non interest bearing funds, we are in conformity with the order of the CIT (Appeals). The ground No.1 raised by the Revenue is thus dismissed.”
10. We find that the issue before the Tribunal was in relation to the investment made in purchase of land and identical issue has been raised before us. Following the same parity of reasoning, we
uphold the order of the Commissioner of Income Tax (Appeals) in deleting the addition made under section 36(1) (iii) of the Act of Rs.57,36,000/-.”
We have considered the rival submissions and on carefully perusal the materials on record, we are of the considered view that the facts of the present case are akin to the facts of the above case viz. M/s. Avon Cycles Ltd. cited supra of the Co-ordinate Bench of the Tribunal and considering the documents as referred to by the assessee in the present case, we delete the disallowance of Rs.8,41,500/-. Accordingly, this ground of appeal of the assessee is allowed.
5. Ground No.2 of the appeal of the assessee relates to confirmation of addition of Rs.11,72,828/- in making disallowance by the AO u/s 14A of the Act read with Rule 8D of the IT Rules, 1962. The learned AR submitted that the assessee had made investment of Rs.5,97,72,908/- as on 31-03-2011 in exempt income yielding assets and that the assessee had also received dividend income of Rs.4,71,180/- and claimed the same as exempt by virtue of the provisions u/s 10(38) of the Act. In the computation of total income the assessee has suo-moto made disallowance of this amount of Rs.4,71,180/- u/s 14A of the Act. But, the AO has made total disallowance u/s 14A of the Act of Rs.20,61,478/- by applying Rule 8D of the IT Rules, and the learned CIT (A) has also wrongly upheld the disallowance made by the AO as per Rule 8D. The learned AR further submitted that the AO has not recorded any satisfaction that the disallowance made by the assessee was wrong. It was further submitted by him that applicability of Rule 8D is not automatic and that the disallowance cannot be more than the exempt income claimed by the assessee. The learned AR has also drawn our attention to page 10 of the paper book wherein details of expenditure incurred have been reflected in the profit and loss account has been mentioned. From perusal of the said chart and description given against every items of expenditure it is evident that approximately 20% of the expenses have been suo-moto assessed by the assessee while making suo-moto disallowance of Rs.4,71,180/- u/s 14A of the Act. The learned AR further submitted that the assessee has claimed before the AO as well as before the learned CIT (A) that it has not incurred any expenses but earned exempt income, therefore, requested for deleting the entire disallowance made u/s 14A of the Act.
We have heard the rival submissions. We find that from the assessment order it is clearly evident that Rule 8D has been automatically applied and no satisfaction has been recorded by the AO to the fact that the suo-moto disallowance made by the assessee was wrong. The learned AR also relied upon the decision of the Co-ordinate Bench of this Tribunal in the case of ACIT Vs Punjab State Co-op. & Marketing Ltd. [ITA No.548/Chd/2011] and the judgment rendered by the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. Vs CIT [ITA No.117/2015 Order dated 25-02-2015 wherein it has been held as under:- “8. The Court in Taikisha Engineering (supra) pertinently observed:- “Thus, section 14A (2) of the Act and Rule 8D (1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must b examined with reference to the accounts, and only and when the explanation/claim of he assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made. 13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.”
After considering the aforementioned decisions as well as the factual position in the present case we are of the considered view that the total exempt income earned by the assessee is Rs.4.70 lacs whereas the disallowance made under Rule 8D is Rs.20.6 lacs and which is much more than the amount which has been earned by the assessee.
Therefore, the disallowance made u/s 14A read with Rule 8D cannot be more than the amount which has been earned by the assessee. While relying upon the judgment passed by the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. Vs CIT, cited supra as well as by the ITAT Chandigarh Bench in for the proposition that no satisfaction has been recorded by the AO with reference to the accounts of the assessee being erroneous before applying section 14A read with rule 8D. we accept this ground and restrict the disallowance to Rs.4,71,180/- as made by the assessee suo-moto u/s 14A of the Act.
Therefore, this ground of appeal of the assessee is allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 04-05-2016.