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TMI Blog2015 (7) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... year with a builder, the assessee has transferred this land and was thus liable to capital gains during the year under consideration. 2. The C1T(A) has also erred in in law and also in facts of he case in failing to appreciate that as per agreement with the builder the consideration for the transfer of the land had also been settled being a certain area of constructed property. As such capital gains has already arisen during the year order consideration, since section 2(47) defines 'transfer' as including 'exchange'. In the present case the assessee has exchanged unbuilt land for built up area. 3. Through the cross objection, the assessee has supported the order of the ld. CIT(A) by raising the following grounds:- 1. Because the First Appellate authority had decided the appeal on merit within the four corners of the law. 2. Because It is settled law that once the capital asset is converted its into stock in trade provisions of section 2(47)(iv) read with section 45(2) the Income Tax Act 1961 were applicable and the capital gain is taxable in the year such stock is sold or transferred. 3. Because the Project development agreement dated 26.06.2003, does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer examined the transactions of transfer of land into stock-in-trade with reference to provisions of section 2(47) of the Income-tax Act, 1961 (hereinafter called in short "the Act") and held the same to be a transfer within the meaning of section 2(47)(v) and 2(47)(vi) of the Act. Accordingly, the Assessing Officer worked out the long term capital gains at Rs. 37,31,686/-. The Assessing Officer, on the basis of certain advances received by the assessee from M/s Arif Industries Ltd., concluded that conversion of the company's land into stock-in-trade and agreement with the said company constituted transfer under section 2(47) of the Act and assessed the long term capital gains as above. 6. The assessee preferred an appeal before the ld. CIT(A) with the submission that out of the advance of Rs. 1.98 crores received by the assessee during the period 19.5.2003 to 31.7.2005, an amount of Rs. 1.87 crores has been refunded on 2.6.2007 and only an amount of Rs. 11 lakhs is available with the company as security deposit. It was contended on behalf of the assessee that there was no transfer within the provisions of section 2(47) of the Act and provisions of section 45(2) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year relevant to the impugned assessment year i.e. 2004-05 is chargeable to tax in the year in which it is sold and not in the year under consideration. Accordingly the capital gain computed by the Assessing Officer was deleted. It was also held by the ld. CIT(A) that as a corollary, the long term capital loss shown by the assessee at Rs. 68,42,57,966.30 shall also not arise in the year under consideration. The relevant observations of the ld. CIT(A) are extracted hereunder for the sake of reference:- "6(1) I have examined the facts and circumstances of the case. The Assessing Officer assessed the long term capital gains by taking recourse to provisions of clauses (iv), (v) and (vi) of sub-section 47 of section 2 of the Act. The relevant provisions of the Act are - (47) transfer", in relation to a capital asset, includes,- (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock- in- trade of a business carried on by him, such conversion or treatment; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossession of the premises without the consent of the lessor because lease rights are expiring on 31.03.2032 and this has been clearly mentioned in the clause 2 and 3 of the project development agreement. It is further provided in clause 6 that the appellant shall get the said land converted into freehold as per government policy at cost and expenses subject to clause 17 of the project development agreement. From the development agreement aforesaid it is evident that the assessee handed over the possession of the property for construction of project by the developer. The assessee did not receive any consideration for handing over the possession of the property to the developer but as per the agreement the assessee got the right to get the built-up area. From the development agreement, the possession was handed over for carrying out the construction work by the developer and there is no other document except the development agreement which transfers the title of the property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure for carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer of the capital asset. 6(5) Section 45(2) of the Act provides that capital gain arising on account of conversion of capital asset into or its treatment as stockin- trade shall be chargeable to tax in the previous year in which such stock-in-trade sold or otherwise transferred. The Assessing Officer treated the transaction of handing over the possession of the land and building to the developer as transfer under section 2(47) of the Act read with section 53A of Transfer of Property Act. The provisions of Section 2(47) of the Act is applicable only in case of capital asset. As per Section 2(14) of the Act, capital asset does not include stockin- trade. Therefore, once capital asset is converted into stock-in-trade provisions of section 2(47) of the Act becomes irrelevant and does not apply. Section 45(2) of the Act starts with a non obstante clause. Therefore, the provision of Section 45(2) of the Act supersedes all the other provisions. Under this Sub-section (2) of Section 45 of the Act, it is clear that capital gain shall be charged in the previous year in which such stock-in-trade which is known to be so only after conversion, is sold or otherwise transferred. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80 (Chennai - ITAT). 6(7) It suffices to say therefore that as per section 45(2) if a capital asset is converted into stock-in-trade, the capital gain is taxable in the year such stock is sold, and the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of the transfer. Thus capital gain gets computed by taxability is postponed to the year of sale of such converted capital asset i.e., stock-in - trade. The provisions of section 45(2) of the Act have been given effect by the Assessing Officer in the assessment proceedings for the assessment year 2008-2009 when in the order dated 30.12.2010 passed under section 143(3) of the Act, the capital gains arising on transfer of land as stock in trade have been considered as taxable in that assessment year. 6(8) The issue regarding capital gains on conversion of land to stock in trade was considered in the Circular: No. 791, dated 2-6-2000 which considered the question Whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.6.2003 with the submission that the assessee has entered into an agreement with M/s Arif Industries Ltd. to develop a major part of the land into a township as per terms of lease deed together with the Lucknow Master Plan. The Building Plan was submitted by the assessee to the Lucknow Development Authority (LDA) for sanction to construct residential towers and the sanctioned plans were released by the LDA on 8.1.2002 in respect of the residential towers. Accordingly the project development agreement was executed, in which proper description of the land was made. Since the land was obtained on lease by the assessee, it has undertaken the responsibilities to get the title cleared and make it marketable title free from all encumbrances, attachments, etc. and as per clause 6, the assessee shall get the said land converted into freehold as per the Government policy at their cost and expenses within a reasonable time required by the authorities subject to clause 17 and any unexplained delay in getting the land converted into freehold may result in suppressing the sales in turn affecting the timely completion of the project which shall be attributable to the assessee and not to the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of signing of the agreement for project development work. The second party shall commence the construction of the building as soon as the revised plans are sanctioned by the LDA. The first party has also agreed to get the balance part of the said land vacated at the cost and expenses within one year or so from the date of this agreement and simultaneously handover the possession to the second party. In case of delay in getting the said land vacated by the first party and for handing of over the possession of the same to the second party, the resultant delay in construction and development would be solely attributable to the first party i.e. the assessee. Therefore, there is no absolute transfer of possession to the second party i.e. M/s Arif Industries Ltd. as per clause 18 of the project development agreement. The ld. counsel for the assessee has further contended that in the light of this project development agreement, the impugned land was never transferred in view of the provisions of section 2(47)(v) of the Act. Therefore, the capital gain cannot be computed in the impugned assessment year i.e. 2004-05. It can only be assessed in the year in which constructed portion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g various charges etc. to the concerned authorities as per clause 7 of the project development agreement. No doubt, the assessee has received a sum of Rs. 51 lakhs from the second party i.e. M/s Arif Industries Ltd., but as per clause 17, this amount was received as interest free refundable amount through cheque from the first party. Thereafter the assessee was to receive certain more amount as per clause 1 of the supplementary agreement. But as per clause 2 of the supplementary agreement, the entire amount of advance of Rs. 300 lakhs is to be refunded at different stages specified in clause 18 of the project development agreement. Therefore, it is clear from the different clauses of the agreement that whatever amount was received by the assessee from M/s Arif Industries Ltd., it was simply interest free advance to meet certain expenses to be incurred in getting the land converted into freehold and also for construction of building for the religious purposes. It is also evident from this agreement that possession of the entire land was not given to the developer, M/s Arif Industries Ltd. for construction, as some portion of the land was occupied by different persons and the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction cost, shall be entitled to as under and on the pattern as appearing in the Agreement. 1. FIRST PARTY - 1/3rd portion (one third portion) in each of the Residential Towers (Floor wise), commercial shopping, garages, parking stilts, open parkings, value added facilities, educational school building, clubs, swimming pool etc. 2. SECOND PARTY - 2/3rd portion (two third portion) in each of the Residential Towers (Floor wise), commercial shopping, garages, parking stilts, open parkings, value added facilities, educational school building, clubs, swimming pool etc. 3. The ten (10) shops already constructed by THE FIRST PARTY would exclusively belong to THE FIRST PARTY However, all the Towers and Buildings etc. as per sanctioned plans or the revised plans shall be demarcated and identified through a separate Memorandum of Understanding. 16. THAT the portion allocated for religious purposes would exclusively belong to THE FIRST PARTY and the construction, development, disposal and management of this part would be the exclusive liability of THE FIRST PARTY and THE SECOND PARTY would have no say or portion in the same. 17. THAT THE SECOND PARTY has given a sum of Rs. 11.00 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; c) On final completion and handing over 25% of the total amount deposited the balance l/3rdbuilt up area by THE including amounts if any through SECOND PARTY to THE FIRST PARTY Supplementary Agreement The word "final completion" occurring in Clause 18 (c) above shall mean that upon the completion of construction and receipt of the completion certificate from the LDA/Competent Authority by 'THE SECOND PARTY'. 27. THAT certain part of THE SAID LAND is occupied with buildings thereon as some staff members of THE FIRST PARTY are living in the same. A major part of THE SAID LAND is absolutely vacant and is in complete possession of THE FIRST PARTY. THE FIRST PARTY has handed over the possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 40.00 Lacs c) Within 30 days of receiving demand note for freehold Rs. 150.00 Lacs d) Within 30 days of depositing freehold charges by THE FIRST PARTY with the Authorities Rs. 49.00 Lacs e) Amount for payment of charges as per clause 9 of THE PROJECT DEVELOPMENT AGREEMENT to the concerned authorities as and when demands are raised. Rs. 50.00 Lacs 2. THAT it is further confirmed by THE FIRST PARTY and THE SECOND PARTY to refund the entire sum of advance amounting to Rs. 300 Lacs(Rupees Three Hundred Lacs) as per para 18 on page 17 as appearing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer has not been completed in the manner prescribed therefore by law, the transferor is barred from enforcing against the transferee any right in respect of the property other than the right expressly provided by the terms of the contract. The Tribunal further held that under the I.T Act, 1961 by inserting clause (v) and (vi) of section 2(47), the definition of the term transfer includes the transaction which fulfils the conditions provided under s. 53A of Transfer of Property Act. Therefore, section 53A of the I. T Act, 1961 is borrowed only with respect to the transfer of capital asset as provided under s. 2(47) of the IT Act, 1961 and the same is not applicable in other cases which do not fall under s. 2(47) of the IT Act, 1961. In that case, facts are almost similar to the present case and the Tribunal has held that where the assessee has converted its land into stock-in-trade and thereafter a development agreement was entered into by the assessee with the developer, whereby the assessee provided his land measuring 44,000 sq. ft. to the developer for construction of residential apartments and the assessee was to get constructed an area of 21,130 sq. ft.. the capital gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly dealt with the issue. Accordingly we confirm the same. 20. Since we have confirmed the order of the ld. CIT(A), the cross objection of the assessee has become infructuous and we accordingly dismiss the same. I.T.A. No. 62/LKW/2012 & C.O. No.19/LKW/2012: 21. In the Revenue's appeal, the Revenue has assailed the order of the ld. CIT(A), inter alia, on the following grounds:- 1. The CIT(A) has erred in law and on facts of the case in failing to appreciate that the AO has correctly adopted the cost price of the land in question as on 01.04.81 to be the circle rate fixed by the DM for stamp duty purposes; 2. The CIT(A) has erred in law and on facts of the case in calculating the value of the land in question as on 01.04.81 by considering the Valuation Report of the approved valuer. He overlooked the fact that the valuer's report is based on the value of a very small piece of land which was sold by auction in 1985. The valuer has projected this value backwards to obtain a hypothetical value as on 1.4.81. This is not an accepted method of valuation and is variance with the circle rate fixed by DM and also of the comparable sale instances of that year; 3. The CIT(A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land adopted by the assessee as on 1.4.1981. The Assessing Officer has adopted the deemed cost as on 1.4.1981 at Rs. 15 per sq. mtr. and recomputed the capital gain for the purpose of section 45(2) of the Act and accordingly the capital gain at Rs. 84,27,065/- was computed against the claim of capital loss of the assessee resulting into an addition of Rs. 84,27,065/-. 25. The assessee preferred an appeal before the ld. CIT(A) with the submission that the assessee has taken the deemed cost of land as on 1.4.1981 at Rs. 95/- per sq. ft. on the basis of the report of the Government approved Registered Valuer. With respect to the valuation report of the valuer, it was contended that the valuation report is based on the lawfully recognized comparable sale method and the assessee has calculated the capital gain as per provisions of section 45(2) of the Act by adopting the fair market value as per said valuation report on the basis of the land sold through public auction in the year 1985 which is very close to the land of the assessee. The ld. CIT(A) has re-examined the claim of the assessee in the light of the written submission and the computation of long term capital loss furnished b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty of the assessee before 01.04.1981, the cost of acquisition for the purpose of section 48 and section 49 of the Act means cost of acquisition of the property to the assessee or the fair market value of the asset as on 01.04.1981 at the option of the assessee. In the impugned case the assessee chose to exercise its option in favour of market value of the asset as on 01.04.1981. Now the term 'Fair Market Value' is defined in section 2(22B) of the Act as under - Section 2(22B)"fair market value", in relation to a capital asset, means- (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date ; and (ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act ; It is evident that circle rate fixed by the District Authorities is not a prescribed method for valuation of fair market value of an asset under the section 2(22B) of the Act. Although section 50C of the Act prescribes for substitution of value fixed by stamp valuation authority for the purpose of stamp duty i.e. the circle rate as deemed consideration of sale of a capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that must be taken into consideration. The Privy Council further observed that there is not in general any market for land in the sense that one speaks of the market for shares or commercial goods. The value of the any such article at any particular time can really be ascertained by the price being obtained for similar articles in the market. In the case of land, its value can also be measured by a consideration of the prices that have been obtained in the past for lands of the similar quality and in similar positions, and that is what must be meant in general by the "market value" in s. 23. The function of the court in awarding compensation under the Act is to ascertain the market value of the land at the date of the notification under s. 4(1) of the Act and the methods of valuation may be : (1) opinion of experts, (2) the prices paid within a reasonable time in bonafide transactions of purchase or sale of the lands acquired on of the lands adjacent to those acquired and possessing similar advantages, and (3) a number of years' purchase of the actual or immediately prospective profits from the lands acquired. Normally, the method of capitalizing the actual or immediately pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the foregoing definitions as well as from numerous other definitions which may be cited, that the fair market value of the property taken by eminent domain is the price that the property will being when offered for sale by one desiring, but not obliged, to sell; and purchased by one desiring to purchase but under no necessity of buying. It is the price which a piece of property will bring in the market when offered for sale and purchased by another, taking into consideration all the elements of the availability of the property, its use, potential or prospective, and all other elements which combine to give of property a market value." Hon'ble Allahabad High Court also considered the issue in the case of Commissioner Of Income-tax V. Jumramal Son. (1985) 154 ITR 689 (All) and laid down that Rates of auction sales of properties in neighborhood should be considered while ascertaining the market value of an asset on a particular date. 4(7) The aforesaid decisions give credence to the view that the fair market value of a property could be taken as the rate of auction of a property in the vicinity of the impugned land. The registered valuer whose report forms the basis of val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Valuation Officer under section 55A(b)(ii) of the Act on recording an opinion that having regard to the nature of the asset and other relevant circumstances, it is necessary to make such a reference. In the instant case, the assessee had claimed the fair market value of property as per the Government approved registered valuer's report. Therefore, under sub clause (ii) of clause (b) of section 55A of the Act, the Assessing Officer was required to form an opinion as mentioned and refer the property for ascertain the fair market value on the relevant date. Further, the valuation report of the registered valuer relied upon by the assessee has been accepted in the assessment proceedings for the assessment years 2004-05 and assessment year 2007-2008 when the assessment order have been passed under section 143(3) of the Act. Since the impugned valuation report has been accepted by the Assessing Officer in the earlier years, there is no occasion to reject the same report without any basis and without taking the opinion of the departmental valuation officer on the fair market value of the property under the powers granted under the provisions of the Act. 4(9) In view of the discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer is not sustainable in the eyes of law. 28. Having carefully examined the orders of the lower authorities and the documents placed on record in the light of the rival submissions, we find that the assessee has adopted the deemed value as on 1.4.1981 of the land on the basis of the registered valuer's report which was prepared on the basis of the land sold through public auction in the year 1985 which is very close to the land of the assessee. We also find force in the contentions that if the Assessing Officer has any doubt with regard to the valuation adopted by the assessee as on 1.4.1981, he could have made reference to the DVO either in those years in which the land was converted into stock-in-trade or in those years when the capital gain is to be worked out, but the Assessing Officer has not made any effort to make reference to the DVO. On perusal of the Valuation report of the Registered Valuer filed by the assessee, it is noticed that the Registered Valuer has determined the value on the basis of land sold through public auction in the year 1985 which was claimed to be close to the land of the assessee. While determining the market value of the impugned land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the ld. CIT(A) that before invoking the provisions of section 14A of the Act, the Assessing Officer has to record an objective satisfaction that the accounts prepared by the assessee with respect to the provisions of section 14A of the Act are incorrect. The ld. CIT(A) has examined these aspects in the light of the assessee's contentions and was of the view that the Assessing Officer has not identified any expenditure in relation to the income which does not form part of the total income of the assessee. He was also of the view that the provisions of section 14A of the Act are not attracted in the case of the assessee. He accordingly deleted the addition. The relevant observations of the ld. CIT(A) are extracted hereunder for the sake of reference:- "5(4) I have examined the facts and circumstances of the case. I have considered the findings of the Assessing Officer and the submissions made by the appellant in writing and before me during the course of the appellate proceedings. Section 14A of the Act reads as under: 14A (1) For the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andStock Brokers Ltd. Vs. ITO (2009) 310 ITR 421 (Bom) Hon'ble High Court held that section 14A contemplates the expenditure actually incurred for earning tax free income and not assumed expenditure or deemed expenditure. The aforesaid judgment of Bombay High Court has been affirmed by the Hon'ble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers (P) Ltd. reported in (2010) 326 ITR 1, wherein their Lordships after analyzing the scope and purpose of section 14A of the Act held that there has to be proximate cause for disallowance which is its relationships with the tax exempt income. 5(6) I find that in the case of the appellant the AO has not identified any expenditure incurred in relation to income which does not form part of total income. The expenditure of Rs. 13,99,150/- disallowed by the AO was incurred by the appellant in relation to his business activities. In the calculations made by the AO the direct expenditure on exempted income has been shown as NIL in the assessment order. The provisions of section 14A of the Act are not attracted in the case of the appellant. I therefore delete the addition of Rs. 13,99,150/- made by the AO by taking recours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)(iii) of the rules straightaway without recording any objective satisfaction or otherwise with respect to the correctness of the accounts relating to dividend income. We have also carefully examined the balance sheet filed before us wherefrom no interest expenditures are booked on the investment in shares wherefrom dividend income was earned. We do not find much force in the argument of the ld. counsel for the assessee that where no expenditures are booked under the head of payment of interest on the investment, no disallowance can be made under section 14A of the Act. For computing the disallowance under rule 8D of the rules a procedure has been provided which takes care of every situation. If no expenditure is booked on account of payment of interest on investment, disallowance can be made while computing the same as per rule 8D(2)(iii) of the rules. 33. But we find force in the second limb of argument of the assessee that the Assessing Officer has straightaway computed the disallowance under section 14A of the Act read with rule 8D(2) of the rules without recording any objective satisfaction with respect to the correctness of the accounts relating to the dividend income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies, the Tribunal has also held that in the absence of any finding that any expenditure has been incurred for earning exempted income, the disallowance made by the Assessing Officer is not justified. The relevant observations of the Tribunal in the case of M/s JM Financial Limited vs. Addl. CIT (supra) are extracted hereunder for the sake of reference:- "7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- "We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the only dispute is regarding determination of disallowance of expenditure for earning tax free dividend income of Rs. 18,17,68,458/- the assessee disallowed on its own Rs. 16.50 lakhs u/s 14A. Despite being asked by the AO to furnish the disallowance under rule 8D, the assessee did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In the case of Godrej & Boyce Mfg. Co. Ltd. (supra) Hon'ble Jurisdictional High Court while dealing with the issue of disallowance u/s 14A and application of Rule 8D has recorded the principles as laid down by the Hon'ble Supreme Court in the case of WalfortShare and Stock Brokers P. Ltd. [2010] (326 ITR 1,) in para 31 as under:- (a) "The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must-be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merit and substance in the contention of the assessee on this point because the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The Assessing Officer has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment of Rs. 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs. 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same." 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 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 satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection (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). [under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prerequisite 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 cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be worked out unless and until it is established that certain expenditures are incurred by the assessee in these investments. 15. Keeping in view the totality of the facts and circumstances of the case, we are of the considered opinion that invocation of rule 8D without recording objective satisfaction by the Assessing Officer is not proper and we accordingly set aside the order of the ld. CIT(A) on this issue and delete the addition made in this regard." 34. Undisputedly, in the instant case, the Assessing Officer has not recorded any objective satisfaction with regard to the correctness of the accounts relating to dividend income of the assessee. He straightaway computed the disallowance as per provisions of section 14A of the Act read with per ruled 8D of the rules. Therefore, in view of the aforesaid order of the Tribunal, we are of the view that invocation of provisions of section 14A of the Act without recording an objective satisfaction is not proper, therefore, we set aside the order of the ld. CIT(A) in this regard and delete the addition of the disallowance made under section 14A of the Act. 35. The cross objection is preferred by the assessee in support of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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