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2015 (9) TMI 1113 - ITAT DELHI

2015 (9) TMI 1113 - ITAT DELHI - [2015] 43 ITR (Trib) 611 (ITAT [Del]) - Disallowance u/s 14A read with rule 8D - Held 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 not made any disallowance on account of interest. We find that Hon’ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles (2009 (11) TMI 33 - PUNJA .....

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ccount as placed in paper book page 8 do not reflect any expenditure relatable to earning of exempt income. 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 n .....

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le 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 : Shri R.S. Singhvi, CA For The Respondent by :Smt. Parwinder Kaur, Sr.DR ORDER PER T.S. KAPOOR, ACCOUNTANT MEMBER These are cross appeals filed by the revenue as well as by assessee against the order .....

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pany in the return of income. 1.1 That the appellant, had reduced the exempt dividend income from the value of work-in-progress, in term of Accounting Standard 16 issued by the ICAI 1.2 That on the facts the exempt income had been offered to tax and therefore, provisions of section 14A of the Income Tax Act, 1961 are not applicable. ITA No. 4431/Del/2013 (revenue s appeal) 1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of  .....

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te project. The case of the assesee was selected for scrutiny. During assessment proceedings, the AO made the following two additions :- i) disallowance of proportionate brokerage expenses - the AO observed that assessee was following Percentage of Completion Method in recognising its revenue and had recognised only 40.29% as revenue out of the total revenue. The AO observed that assessee had claimed entire brokerage expenses amounting to ₹ 3,04,02,210/- whereas in his opinion the expenses .....

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herefore 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 th .....

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52/86-87 for A.V. 1983-84 in case of one of group company & also covered by the Order of CIT(Appeals)-XVIII passed for the A.V. 2006-07 in M/s DLF Limited and the same is allowable as per AS-7 as well. The Assessing Officer has contended in Assessment Order that perusal of the AS-7Clause 19 reveals that it applies to construction contract and not to the development project undertaken by the appellant. The Assessing Officer has held that brokerage is one of the most important direct expenditu .....

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under consideration On the other hand, Appellant has submitted before me that even if these brokerage expenses are being incurred for selling the specific project, these are not considered as part of inventory cost since these are incurred to sell the inventory and accordingly debited in Profit & loss account in the year in which they are incurred in terms of both AS-2 (para -13) and AS-7 (Para-19). Further Appellant submitted that the brokerage does not in any way increase the cost of proj .....

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it cannot be capitalized. It is seen that as per para-19 of AS-7, it is mentioned that the selling cost cannot be attributed to contract activity or cannot be allocated to a contract under construction. Even as per AS-2 Valuation 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 s .....

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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 during the year under consideration. It is seen that in A.Y. 1983-84 also the selling .....

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nnot be accepted, as brokerage and commission are related to the sale of flats and properties. By incurring the same the appellant has not derived any enduring advantage in subsequent years. It is also seen that Appellant's claim is also covered by the Order of CIT (Appeals)-XVIII, New Delhi in one of group company named M/s DLF Ltd. passed for the A.Y. 2006-07. It has been verified that accounting policies of the Appellant for the year under consideration is same as that of DLF Ltd. in A.Y. .....

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addition of ₹ 1,81,53,159/- is deleted. The ASSESSING OFFICER has relied upon the Supreme Court judgment in the case of Madras Industrial Investment Corp. 225 ITR 802. (SC), and has held that the expenses has to be spread over in several years if the benefit of such expenditure is continuing in the ensuing years. The facts of this judgment cannot be applied to the appellant's case as Brokerage and Commission linked with the services rendered by the broker to the appellant for selling t .....

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dictional 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 ye .....

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vour of the appellant. 4. As regards disallowance u/s 14A the Ld. CIT(A) upheld the addition holding that the disallowance was mandatory. The relevant findings as contained in para 7.4 are reproduced below :- 7.4 I have considered the submission of appellant, observation of assessing officer, various judicial pronouncements relied upon by the appellant on this issue and other material on record. The Assessing Officer has made an addition of RS.46,12,728/- u/s 14A of the Income-tax Act, 1961 read .....

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or the execution of the project are required to be reduced from the cost of the Projects in progress. Accordingly, the cost of Project in Progress has been reduced by the income from investment in Mutual Funds and the same has been offered for tax. It is seen from the working that there was no interest expenditure incurred for earning this exempt income, therefore, there can be no disallowance on account of interest expenditure as per Rule 8D(2)(ii) of the IT Rule 1962. However, it is observed t .....

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ision involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, cost is inbuilt even in so called passive investments. There are incidental expenditure of collection, telephone and follow up etc. Therefore, expenses relating to earning of exempt income are embedded in the expenses debited to profit & loss account. This is A.Y. 2010-11, therefore, the provision of section 14A read with Rule 8D are clearly applicable in the case of appellant. .....

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. 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 .....

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of DLF Universal Ltd. which was a group company of assessee wherein the Hon ble Court vide order dated 16.4.2015 had dismissed the appeal filed by the revenue on similar facts and circumstances. And in this respect our attention is invited to question No. 4 framed by Hon ble Court. Ld. DR fairly agreed that the issue is squarely covered in favour of assessee. As regards assessee s appeal, Ld. AR submitted that assessee was setting up a real estate project which fact is apparent from the finding .....

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ect with the dividend income had offered tax on this income as taxable profits will be more to the extent of dividend income reduced from cost of project. Inviting our attention to paper book page 12, the Ld. AR invited our attention to schedule VII placed at paper book at page 12 and invited our attention to the expenses incurred on work in progress which included finance cost (net of finance income). The Ld. AR submitted that the dividend income earned from mutual fund was reduced from finance .....

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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 .....

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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 AO has rightly done. She heavily relied upon the notification dated 31.3.2015 issued by CBDT and invited our attention to Income computation & Disclosure Standard III relating to construction contracts. Similarly she took us to the heading The use of resources by others yielding interest, royalties & dividends and argued that a .....

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ed in favour of the assessee by the order of Hon ble Delhi High Court dated 16.4.2014 in the case of CIT vs. DLF Universal Ltd. wherein the Hon ble court has decided similar issue in question No. 4 the relevant finding of Hon ble Court as contained in para 8 and 9 reproduced below:- 8. The assessee had claimed ₹ 61,78,414/- as expenditure towards brokerage and commission. The amount was paid to its brokers for booking and sale of certain properties during the assessment year. The Assessing .....

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in the year in which the same is incurred. The property brokers who have rendered their services to obtain advances on booking of properties are entitled to the payment of commission in terms of agreement entered into with them. Therefore, the expenses incurred on brokerage and commission on booking of properties being a finance/selling expenses are allowable in full. In this connection your attention is invited to the various orders of CIT(A) on this point wherein the addition on account has be .....

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eatment 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 as .....

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r earning exempt income no expenditure was incurred disallowance cannot be made. We find that assessee had debited all expenses related to project under the head work in progress and had reduced dividend income from work in progress which means that assessee had not claimed in the P & L account any expenditure for earning of exempt income. The profit and loss account as placed in paper book page 8 do not reflect any expenditure relatable to earning of exempt income. Moreover, we find that as .....

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any amount from funds which are inextricably linked with the process of setting up of the project the income will go to reduce the cost of its project and the receipts are of a capital nature and cannot be taxed as income. The relevant finding of the Hon ble Court are contained in para 7 are reproduced below :- 7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT (supra). That case dealt with the question whether investme .....

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ncome as a capital receipt. The Department relied upon the observations made in that judgment (at p. 179) to the effect that if the company, 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 .....

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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 activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the asses .....

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in s. 10(5) of the Indian IT Act, 1922, and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interes .....

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sfaction as to why he was not satisfied with the claim of assessee that no expenditure was incurred for earning exempt income. The relevant findings of AO as contained in Para 5.19 onwards are reproduced below :- 5.19 The earning of exempt income is not in nature of passive activity having no input. In fact in present situation making of Investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions involving not only .....

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irect 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 Warehou .....

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t of section 14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. 5.22 There is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. In our opinion, the authorities below rightly held that proportionate amount .....

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dicial pronouncement in the case of M/s. Dhanuka and Sons vs. Commissioner of Income Tax (2011) 339 ITR 0319 (Cal. High Court). 5.24 As per Rule 8D, the expenditure in relation to income which does not form part of the total income shall be aggregate of following amounts :- i) the amount of expenditure directly relating to income which does not form part of total income Nil ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly .....

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e balance sheet of the assesee, on the first day and the last day of the previous year; =Rs. NIL C- The average of total assets as appearing 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. Ave .....

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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 findings recorded by the CIT(A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record h .....

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reference to the accounts. 19. However, the decisions relied upon by the Tribunal in the case of Tin Box Co. (supra) , Reliance Utilities and Power Ltd. (supra) , Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute the disallowance under Rule 8D of the Rules. The said Rule in sub Rule (2) specifically prescribes the mode and method for computing the disallowance under Section 14A of the Act. Thus, the interpretation of .....

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