2025 (7) TMI 378 - HC - Income Tax

Deduction u/s 80IB(10) - fulfillment of conditions prescribed or not? - According to the Assessing Officer the construction had started prior to 1st October 1998 and therefore the Assessee could not claim the deduction u/s 80IB(10) - HELD THAT - Having perused the Order of the CIT (A) as well as the impugned order we note that the findings given by the ITAT as well as the CIT (A) are wholly factual in nature. They have come to a factual finding that in fact the construction commenced after 1st October 1998. Once this is the factual finding there cannot be any dispute that the Assessee would be entitled to claim a deduction u/s 80IB (10) subject to fulfilling other conditions as set out in the said Section. Since the findings given by the ITAT are wholly factual in nature we are of the view that no substantial Questions of Law arises. Disallowance u/s 14A r.w.r.8D - Assessee had received exempt income on account of share in the profits from a partnership firm (of which it was a partner) and Dividend Income - CIT(A) reversed by the CIT (A) on the ground that Rule 8D was brought into force on 24th March 2008 and therefore applied only for A.Y. 2008-09 onwards - ITAT held Rule 8D would apply only from Assessment Year 2008-09 onwards therefore came to a conclusion that the CIT (A) restricting the disallowance to 10% of the exempt income was on the basis of his discretion and did not suffer from any infirmity - HELD THAT - We find that the Tribunal has correctly relied upon the decision of this Court in Godrej and Boyce Manufacturing Company Ltd. (Supra) to uphold the Order passed by the CIT (Appeals). In fact we find that even after passing of the impugned order this issue came up in Essar Teleholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT . In this decision the Hon ble Supreme Court has clearly held that Rule 8D is prospective in operation and cannot be applied to any AY prior to Assessment Year 2008-09. No substantial Question of Law that requires determination by this Court.

Summary

The core legal questions considered by the Court arise from the Revenue's appeal challenging the ITAT's order regarding the Assessment Year 2007-08. These questions are:

(i) Whether the ITAT was justified in allowing the assessee the deduction under Section 80IB(10) of the Income Tax Act, 1961, despite the contention that the original project plan was approved and construction commenced before 1st October 1998, which would disqualify the assessee from claiming the deduction.

(ii) Whether the ITAT was justified in accepting the assessee's claim that construction began on 18th April 1999, relying on a self-serving document allegedly produced before 1st January 1998, which was prior to the prescribed date under the relevant provisions.

(iii) Whether the ITAT was justified in not upholding the Assessing Officer's application of Rule 8D for disallowance under Section 14A of the Income Tax Act, given that the Bombay High Court had previously held Rule 8D to be reasonable and applicable.

Issue-wise Detailed Analysis

Issues (i) and (ii): Deduction under Section 80IB(10) and the date of commencement of construction

The legal framework centers on Section 80IB(10) of the Income Tax Act, which grants a deduction for profits derived from certain housing projects, subject to conditions including that construction must commence after 1st October 1998. The Revenue's contention was that since the original plan was approved on 24th April 1998 and construction started prior to 1st October 1998, the assessee was ineligible for the deduction.

The Assessing Officer (AO) relied on expenditure details to conclude construction started before the prescribed date. However, the Commissioner of Income Tax (Appeals) (CIT(A)) reversed this finding, concluding construction began on 18th April 1999, supported by the assessee's intimation to the Municipal Corporation on 5th May 1999.

On appeal, the ITAT upheld the CIT(A)'s finding, noting that the same issue had been adjudicated in the assessee's favor for Assessment Year 2001-02, and no contradictory evidence was presented. The ITAT emphasized that the finding was factual, based on documentary and procedural evidence, and not a matter of law.

The Court examined the orders of the CIT(A) and ITAT and found their conclusions to be factual and supported by the record. Since the deduction under Section 80IB(10) depends on the factual determination of the construction start date, and the ITAT's finding was that construction commenced after 1st October 1998, the assessee was entitled to the deduction subject to other conditions.

The Court rejected the Revenue's contention that the document relied upon by the assessee was self-serving and inadmissible, noting that the factual findings were consistent and corroborated by procedural steps taken by the assessee.

Issue (iii): Application of Rule 8D in computing disallowance under Section 14A

Section 14A of the Income Tax Act provides for disallowance of expenditure incurred to earn exempt income. Rule 8D prescribes a method for computing such disallowance. The AO applied Rule 8D to disallow Rs. 2.28 crores from the assessee's income, which included exempt income from partnership profits and dividends.

The CIT(A) reversed this, holding that Rule 8D was introduced on 24th March 2008 and applied only from Assessment Year 2008-09 onwards, rendering it inapplicable to AY 2007-08. Consequently, the CIT(A) restricted the disallowance to 10% of exempt income, exercising discretion under the Act.

The ITAT concurred with the CIT(A), relying on the Bombay High Court decision in Godrej and Boyce Manufacturing Co. Ltd., which held Rule 8D to be prospective in operation. The ITAT also referenced the Supreme Court's decision in Commissioner of Income Tax, Mumbai vs. Essar Teleholdings Ltd., which affirmed the prospective application of Rule 8D.

The Court agreed with the ITAT's reasoning, noting that Rule 8D could not be applied retroactively to AY 2007-08. The disallowance under Section 14A had to be computed without Rule 8D for that year, and the CIT(A)'s discretionary limitation to 10% of exempt income was valid.

Significant Holdings

The Court held that the factual findings by the CIT(A) and ITAT regarding the commencement of construction after 1st October 1998 were unimpeachable and entitled the assessee to claim deduction under Section 80IB(10). The Court stated:

"Having perused the Order of the CIT (A) as well as the impugned order, we note that the findings given by the ITAT as well as the CIT (A) are wholly factual in nature. They have come to a factual finding that in fact, the construction commenced after 1st October 1998. Once this is the factual finding, there cannot be any dispute that the Assessee would be entitled to claim a deduction under Section 80IB (10), subject to fulfilling other conditions as set out in the said Section."

Regarding Rule 8D, the Court reinforced the principle of prospective operation of tax rules, stating:

"Rule 8D is prospective in operation and cannot be applied to any Assessment Year prior to Assessment Year 2008-09."

The Court affirmed the CIT(A)'s discretion in limiting the disallowance under Section 14A to 10% of exempt income for AY 2007-08.

Ultimately, the Court dismissed the Revenue's appeal, holding that none of the questions raised constituted substantial questions of law warranting interference with the ITAT's order.