TMI Blog2015 (9) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... Moreover, we find that assessee had deployed its surplus funds in mutual funds and for investment in mutual funds advisors do not charge any fee and, whatever fee or charges are charged they are deducted from the amount of investment itself. Therefore, also the assessee cannot be said to have incurred any expenditure directly or indirectly for earning of exempt income. Thus we need not refer to sub Rule (2) to Rule 8D of the Rules as conditions mentioned in sub Section (2) to Section 14A of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub Rule (2) , without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation. Therefore, the respondent assessee would succeed and the appeal should be dismissed. - Decided in favour of assessee. - ITA No: 4103/Del/2013, ITA No: 4431/Del/2013 - - - Dated:- 1-9-2015 - SHRI T.S. KAPOOR AND SMT BEENA A PILLAI, JJ. For The Appellant by : Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rokerage expenses to the extent of 40.29% only and disallowed the remaining amount of ₹ 1,81,53,159/-. ii) Disallowance u/s 14A - The AO further observed that assessee had earned dividend income amounting to ₹ 3,06,88,926/- from investment made in mutual fund and has observed that assessee had not allocated any expenditure to earn exempt income. Therefore he made an addition of ₹ 46,12,728/- as disallowance u/s 14A calculated in accordance with rule 8D of the Act. 3. Aggrieved the assessee filed appeal before Ld. CIT(A) . The Ld. CIT(A) as regards brokerage expenses allowed the appeal of assessee following his earlier orders in a group company of assessee. The relevant findings of Ld. CIT(A) are reproduced as under :- 6.4 I have considered the observation of the Assessing Officer and submission of the appellant. It is noted that this issue is covered by my own order in the case of appellant group company namely DLF Home Developers Limited for the assessment year 2009-10 and in the case of DLF Limited for the assessment year 2007-08, 2008-09 and 2009-10. It is seen that the Assessing Officer has disallowed proportionate brokerage by correlating the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation of Inventory issued by ICAI, it is seen that selling and distribution cost cannot be considered as part of the cost of inventory and such expenses has to recognize in the period in which they are incurred. The cost which can be attributed/allocated over the inventory should comprise all the cost of purchase, cost of conversion and other cost incurred in bringing the inventory to their present location and condition. In the case of construction activities the cost of purchase of land and construction cost can only be attributed over the project. The brokerage expenses are purely a selling cost and cannot form a part of inventory. In view of the accounting standard, the brokerage expenses being a selling cost cannot be capitalized with the cost of inventory and cannot be allocated to the construction activity. It is also seen that this issue has been decided in favour of assessee in one of the group company named DLF Ltd. by Hon'ble ITAT in its order for A.Y. 1984-85. However, the ASSESSING OFFICER has observed that the accounting policy followed by the group company for recognition of revenue in the A.Y. 1983-84 were different from the accounting policy followed dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be postponed for the future years. Therefore, ratio of the said judgment is not applicable in the case of appellant. In support of my decision, reliance is placed on the decision of the jurisdictional High Court in the case of Nokia Corporation vs. DIT, Delhi, 2007, 162 Taxman 369 (Delhi), wherein it is held that even if the Department has filed further appeal against the last order, which is in favour of the appellant, the last order is judicially binding on the subordinate authority. Hence, respectfully following the order of the Hon'ble Income Tax appellate Tribunal for AY 1984-85 and the order of CIT(A)-XVIII for assessment year 2006-07 and my own order for the assessment year 2009-10 in the case of DLF Home Developers Limited and for the assessment year 2007-08,2008-09 and 2009-10 in the case of DLF Limited, both appellant's group companies, the addition/disallowance made by the Assessing Officer amounting to ₹ 1,81,53,159/- on account of brokerage expenses for sale of various properties cannot be sustained. Therefore, the addition/disallowance of ₹ 1,81,53,159/- is deleted. Hence, the ground of appeal No. 2 raised by the appellant is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is A.Y. 2010-11, therefore, the provision of section 14A read with Rule 8D are clearly applicable in the case of appellant. Further for applicability of the provision of section 14A read with Rule 8D, it is not necessary that dividend income has to be earned. It is so held by the Special Bench 'ITAT Delhi in the case of Cheminvest Ltd. vs. ITO (2009) 317 ITR (AT) 86 (DEL) As held above, that no interest bearing funds were utilized for making investments in the mutual funds, therefore, the Part-II of formula prescribed under Rule 8D is not applicable for working out interest attributable to investments made. However, the appellant has incurred indirect expenses for management and administration of the investments made. Therefore, a part of the indirect expenses debited to profit and loss account has to be apportioned on the investment made on which exempt income is earned by the appellant. Hence, 0.5% of the average investments of ₹ 92,25,45,692/- which comes to ₹ 46,12,728/-is taken as expenses incurred on administration and management of such investments and for earning exempt income. Therefore, disallowance of expenses of ₹ 46,12,728/- is worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the detail of expenses was placed and argued that the expenses debited in the profit and loss account do not include any expenses incurred for the purpose of earning exempt income and, therefore, the disallowance without pinpointing any expenditure related to exempt income cannot be sustained. Further advancing argument Ld. AR submitted that the treatment of dividend by reducing from cost of project was in accordance with the guidance of ICAI and also referred to Hon ble Supreme Court decision in the case of CIT vs. Bokaro Steel Ltd. 236 ITR 315. Ld. AR submitted that the Hon ble Supreme Court distinguishing the case law of Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT has held that where the funds are inextricably connected with the project the income there from is not taxable. 6. Ld. DR on the other hand invited our attention to section 56 of the Act and submitted that dividend income is taxable under the head income from other sources and accordingly the assessee cannot hide its income from other sources by reducing it from work in progress. She submitted that though dividend income was exempt in the relevant year yet it attract the disallowance u/s 14A which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 20.7.1994 of Hon ble ITAT, New Delhi for the assessment year 1983-84 of the Income-tax wherein an additional ground taken by the Deptt. For inclusion of the amount of brokerage and commission in the sales promotion expenses u/s 37(2)(a) have been dismissed. We understand that the Deptt. Has not filed any reference application in the High Court against is order. 9. It is not disputed by the Revenue that for the other years, the assessee s treatment of such expenses has been in his favour and the Revenue has not chosen to challenge it. Even otherwise, we are of the opinion that such expenditure has to be allowed. The question of law is consequently answered in favour of the assessee and against the Revenue. 8. Since the facts and circumstances in the present year are similar, therefore, respectfully following the order of Hon ble Delhi High Court we dismiss the appeal filed by the revenue. 9. Now coming to the appeal filed by the assessee. We find that AO has made the disallowance u/s 14A and has mechanically followed Rule 8D without pinpointing any expenditure relatable to earning of exempt income. From the details of disallowance made by AO, we find that AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head capital gains . Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under s. 22 as income from house property. Likewise, the company may have income from other, sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under s. 56 of the IT Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case, out of total funds available/ raised by the assessee, a substantial portion of it has been invested in Shares and Mutual Funds, therefore, it can be held that expenditure in relation to earning of exempt dividend income are embedded in indirect expenses. 5.20 The investment made by the assessee company, being a conscious decision and having deployment of funds clearly brings into picture expenditure by way of cost of funds Invested. Composite fund having cost needs to be spread so as to apportion appropriate cost of funds invested in the activity lending to earning of exempt income. 5.21 The Supreme Court in the cases of CIT vs. Maharashtra Sugar Mills Ltd reported in [1971] 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation vs. (IT reported in [2000] 242 ITR 450 (Se) having held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business would have to be allowed even if a part of the income earned from the business is exempt from tax. Section 14A of the Act was enacted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the balance sheet of the assesee, on the first day and the last day of the previous year. iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Average investments : Rs =0.5% to ₹ 922545692 = ₹ 46,12,728/- - For the purposes of this Rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. Disallowance under Rule 8 D of I. Tax Rules :- = Aggregate of (i) + (ii) + (iii) = ₹ 46,12,728/- 11. In the above findings, we do not see any satisfaction recorded by AO regarding dislodging of claim of the assessee. The Hon ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd. 370 ITR 338 (Delhi) under similar circumstances has held as under :- 18. It is in this context we feel that the find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming part of the total income and under clause (iii) an amount equal to 0.5% of the average amount of value of investment, appearing in the balance sheet on the first day and the last day of the assessee has to be disallowed. 20. However, in the present case we need not refer to sub Rule (2) to Rule 8D of the Rules as conditions mentioned in sub Section (2) to Section 14A of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub Rule (2) , without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation. Therefore, the respondent assessee would succeed and the appeal should be dismissed. 12. In view of the above facts and circumstances following the above judicial precedents we allow appeal of the assessee. In view of the above appeal of revenue is dismissed whereas appeal of the assessee is allowed. 13. In the result the appeal of the revenue is dismissed and appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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