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DCIT, Cir-4, Ahmedabad Versus Galaxy Real Estate Developers (Guj) P. Ltd.

2016 (8) TMI 603 - ITAT AHMEDABAD

Disallowance u/s 14A - amount of expenditure directly relating to income which does not form part of total income - Held that:- We observe that assessee has voluntarily made disallowance of ₹ 65,753/- u/s 14A of the Act and to examine this fact we refer to the computation of income available at pages 21 to 24 of the paper book and find that assessee has made specific disallowance u/s 14A at ₹ 65,753/-. We further observe that before lower authorities assessee has submitted that disal .....

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lower authorities. - Disallowance is called for towards interest expenditure - Held that:- As per audited profit and loss account for the year under appeal, the gross interest income earned by the assessee is shown at ₹ 1,60,47,758/- and expenditure under the head interest and financial charges have been claimed at ₹ 1,19,95,664/- therefore, the net interest income earned by the respondent during the financial year 2009-10 is at ₹ 40,52,094/-. There is no dispute from the s .....

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categories investments in immovable property, movable property and partnership firm are certainly not eligible to form part of average investment for the purpose of Rule 8-D. As far as investment in share is concerned, assessee has submitted that these investments were made in equity shares of Kalupur Commercial Coop. Bank Ltd. is held since last year at ₹ 54,37,500/- and assessee earns taxable dividend income and, therefore, the same should not be considered for calculation of average inv .....

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unt of admissible expenditure voluntarily disclosed by assessee and accepted by us. So no disallowance is called for. In part (ii) we have observed above that no disallowance is called for on the interest expenditure and in part (iii) we observe that 0.5% of average investment will be calculated at ₹ 1,50,120/-. Therefore, we are of the view that a disallowance of ₹ 1,50,120/- in the case of assessee is sustainable on account of disallowance u/s 14A of the Act. - Decided partly in fa .....

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nst order u/s 143(3) of the IT Act, 1961 for Asst. Year 2010-11 on 28.5.2012 by ACIT, Circle-4, Ahmedabad. 2. Briefly stated facts as culled out from the records are that assessee is a private limited company engaged in the business of builders and developers. Return of income was filed on 12.10.2010 declaring total income at ₹ 1,43,59,520/-. Case was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 26.09.2011. Necessary reply was submitted by the assessee in .....

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ssessee. By applying Rule 8D r.w.s. section 14A of the Act the disallowance of expenditure comes to ₹ 28,43,777/- out of which assessee company had itself disallowed ₹ 65,753/- in its computation of income and therefore, remaining amount of ₹ 27,78,024/- was disallowed u/s 14A by ld. Assessing Officer. 3. Aggrieved, assessee went in appeal before ld. CIT(A). Ld. CIT(A) partly allowed assessee s appeal by restricting the disallowance to ₹ 6,18,396/- out of the total disall .....

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penditure being 0.5% of average investments 5,01,661 Total disallowance 28,43,777 Less: Amount already disallowed in return of income 65,753 Total disallowance 27,28,024 It is undisputed fact that appellant has made investments in shares and partnership firm therefore, the Assessing Officer has made disallowance u/s 14A on the ground that appellant has utilized interest bearing funds for making investments on which tax free income is earned. On the other hand, the appellant has argued that Asses .....

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s been earned and therefore disallowance u/s 14A is not required to be made. Further, the appellant has argued that profits of partnership firm are first taxed in the hands of firm and thereafter divided among the partners; therefore such income cannot be treated as exempt income for the purpose of making disallowance u/s14A of the act. In his submission, the learned AR of the appellant mainly argued as under:- (i) Investments made in Kalupur Commercial Co-operative bank limited has resulted int .....

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or the purpose of working out disallowance u/s 14A. The disallowance if any is required to be restricted after considering net interest expenditure and in present case, there is net interest income. (iv) For the purpose of working out disallowance, the balance in Orchid Developers is inclusive of profit element which was transferred on the last day of the concerned financial year hence same is required to be reduced. (v) The appellant has sufficient interest free funds in form of share capital a .....

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g Officer was partly confirmed in said order. Following the observations made in said order and considering the facts of appellant's case for present assessment year, grounds of appeal filed by appellant is adjudicated as under (A) The argument of appellant that profit earned from partnership firm is not tax free in hands of appellant company as such firms have already paid taxes on such income hence balances in partnership firm cannot be accepted as both firm and partners are separate ident .....

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estment, 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 relevant accounting year which means that even if there is no exempt income from investment in current year, disallowance is required to be made. (B) Appellant has made investments in partnership firms and mutual funds but has not established any nexus between utilization of interest free funds and such investments. The appell .....

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of Income is as per rule 8D hence argument that no further disallowance is called for cannot be accepted. (C) However, the argument of appellant that disallowance u/s 14A cannot be made on investments in partnership firm from which taxable interest income has been earned is acceptable as appellant has earned taxable interest income on day to day balance of investment made in such firms. Considering the same, Assessing Officer is directed to reduce investment made in partnership firms being M/s D .....

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ance u/s 14A hence Assessing Officer is directed to exclude opening balance of investments in shares of KCCB for the purpose of disallowance u/s 14A of the Act. (E) The appellant has also argued that for the purpose of computing disallowance u/s 14A of the Act closing balance of investment of partnership firm is required to be reduced by share of profit received from firm on last day of financial year is also accepted as such amount has been received on last date and there is no actual utilizati .....

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in mutual funds for ₹ 6.01 crore was sold on 8th April, 2009 which means that investments were held for only eight days and considering the same, it has already made proportionate disallowance of ₹ 65,753 while filing Return of Income. This argument of Appellant is found correct and as Appellant has already made disallowance in Return of Income on investment in mutual funds, no separate disallowance is called for. (G) Further, the appellant has argued that it has not incurred any ot .....

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filed by appellant, it is seen .that appellant has made specific disallowance u/s 14A for ₹ 65,753 only and remaining disallowance of ₹ 1,50,000 is not with specific reference of 14A hence Assessing Officer was justified in giving credit of disallowance made in return of income at ₹ 65,753 only. (H) In view of discussion made herein above, disallowance under Section 14A made by Assessing Officer is restricted as under:- Particulars of investments Amount as on 31/03/2010 Amount .....

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8377; 6.01 crores hence no disallowance is required. Total 3,79,85,955 Average investment 1,89,92,978 Amount in Rs. Particulars Amount as on 1.4.2009 Amount as on 31.3.2010 Average Average assets (A) 31,91,21,902 55,11,26,953 43,51,24,427 Interest expenditure (C) 1,19,91,671 (A) Direct Expenses 1,19,91,671 (A) Direct Expenses (B)Disallowance out of interest (C+B)/A 5,23,431 (C)Half Parcentage of average investment ().5% *B 94,955 Total 6,18,396 In view of aforesaid finding, disallowance under Se .....

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and thereby deleting the addition of ₹ 21,59,628/- out of total addition of ₹ 27,78,024/-, without appreciating the fact that the assessee has made investment in shares and others of ₹ 43,93,062/- for which it could not justify the investment made in shares is from its own fund or from the funds on which no interest payment is made by the assessee. 2. On the facts and in the circumstances of the case, the Ld, C1T(A) ought to have upheld the order of the Assessing Officer. 3. I .....

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s made on account of disallowance u/s 14A of the Act whereas ld. Assessing Officer calculated the disallowance u/s 14A at ₹ 28,43,777/- without satisfying with the correctness of the claim of assessee with regard to the account of books of account and nor recorded any such satisfaction to prove the incorrectness of the disallowance suo motto made by the assessee. Ld. AR further referring to the audited profit and loss account submitted that total interest income earned by the company for F .....

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eld by the company against the total assets of the company and as there is no interest expenditure incurred by the company ld. Assessing Officer was not justified in making any such disallowance on account of interest expenditure u/s 14A of the Act. Ld. AR further referred and relied on the decision of the co-ordinate bench in assessee s own case in ITA No.2313 & 2429/Ahd/2012 for Asst. Year 2009-10 pronounced on 4.5.2016 and in the case of Safal Realty P. Ltd. vs. ACIT (OSD), Circle-8, Ahme .....

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owance u/s 14A of the Act in assessee s own case in Asst. Year 2009-10 came up before the co-ordinate bench wherein following decision was taken:- 10. We have heard the rival contentions and have carefully perused the orders of the authorities below. We have also gone through the relevant documentary evidences brought to the notice by the ld. counsel. The undisputed fact is that the investments of the assessee have been taken at ₹ 17.02 crore, assessee's own funds are at ₹ 17.60 .....

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llowed by the Hon'ble High Court of Bombay in the case of HDFC Bank 366 ITR 505. Respectfully following the ratio laid down by the Hon'ble High Court of Bombay, no disallowance is to be made in so far as interest is concerned. 11. In so far as disallowance relating to administrative expense is concerned, we find that the assessee has suo motu disallowed ₹ 3.50 lacs while computing the income for the year under consideration. In our considered opinion, this disallowance of ₹ 3 .....

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ct of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of suc .....

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g a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 2. New Rule 8D : 2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a "Method for determining amount of expenditure in relation to income not includible .....

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diture incurred for earning the exempt income made by the assessee or (b) The claim made by the assessee that no expenditure has been incurred for earning exempt income. (ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts : (a) The amount of expenditure directly relating to income which does not form part of total income. (b) In the case of interest on borrowed funds .....

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ar. C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term Total Assets means 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. (c) An amount equal to ½ % of the average of the value of investment, income from which does not or shall not form part of the total income, .....

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ded under Rule 8D(2) as referred above which has got three parts. We will analyze each part separately. 13. (i) part -relates to amount of expenditure directly relating to income which does not form part of total income. We observe that assessee has voluntarily made disallowance of ₹ 65,753/- u/s 14A of the Act and to examine this fact we refer to the computation of income available at pages 21 to 24 of the paper book and find that assessee has made specific disallowance u/s 14A at ₹ .....

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which does not form part of the total income and there is no dispute to the same by both the lower authorities. 14. Now we take (ii) part Rule 8D (2) which deals with disallowance of interest which is not directly attributable to any particular income or receipt and some portion of it is deemed to have been used on the funds used for the purposes of investments. To examine this aspect, we observe that as per audited profit and loss account for the year under appeal, the gross interest income ear .....

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OSD), Circle-8, Ahmedabad (supra) has dealt with similar issue in which disallowance u/s 14A r.w.rule 8-D was held to be not justified when the interest expenditure was more than the interest income and while deciding so the co-ordinate bench observed as under :- 5. We have heard both the sides at some length. We have also carefully perused the orders of the authorities below in the light of the above compilation filed. Once, the factual position is that the assessee was having sufficient own fu .....

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s not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or www.taxguru.in ITA Nos.2334/ Ahd/2012 and 1842/Ahd/2013 Safal Reality P. Ltd. Ahmedabad Vs. ACIT (OSD) Cir-8, Ahmedabad . For A.Ys. 2009-10 & 2010-11 - 7 - (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such i .....

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re in relation to such exempted income. We have also noted that even for A.Y. 2008-09 the Respected Coordinate Bench D ITAT Ahmedabad in the case of Karnavati Petrochem Pvt. Ltd. (supra) has held as under: We have heard the rival submissions and perused the material on record. We find that CIT(A) while granting relief to the Assessee has given a finding that no nexus has been established by the AO which the amount incurred by the Assessee for earning the tax free income. He has further noted tha .....

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the same. 5.2 To complete this order, we deem it proper to reproduce a portion of the order of Hon ble Delhi High Court pronounced in the case of Maxopp Investment Ltd. and Others Vs. CIT as follows: Subs. (2) of s. 14A provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if one examines the provision carefully, one would find that the AO is required to determine the amount of such exp .....

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f expenditure incurred in relation to exempt income would be triggered only if AO returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-s. (3) is nothing but an offshoot of sub-s. (2) of s. 14A. Sub-s. (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the Act. In other words, sub-s. (2) deals with cases where the as .....

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prescribed method, as mentioned in sub-s. (2) of s. 14A. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with the prescribed method, the prescribed method being the method stipulated in r. 8D. While rejecting the claim of the assessee with regard to the expenditure .....

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t is the amount of expenditure directly relating to income which does not form part of the total income. The second is being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i) incurred during the previous year in the ratio .....

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he expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of the Act. It is, therefore, clear that in terms of the rule, the amount of expenditure in relation to exempt income has two aspects- (a) www.taxguru.in ITA Nos.2334/ Ahd/2012 and 1842/Ahd/2013 Safal Reality P. Ltd. Ahmedabad Vs. ACIT (OSD) Cir-8, Ahmedabad . For A.Ys. 2009-10 & 2010-11 - 9 - direct, and (b) indirect. The direct expenditure is straightaway taken into .....

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ng Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessee was free to adopt any reasonable and acceptable method. So, even for the pre-rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income w .....

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of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A (1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will .....

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ereby reverse the findings of the authorities below and direct to delete the disallowance. 15. Respectfully following the decision of co-ordinate bench in the case of Safal Realty P. Ltd. vs. ACIT (OSD), Circle-8, Ahmedabad (supra) and in view of our above discussion, with reference to part (ii) of Rule 8D(2) we are of the view that no disallowance is called for towards interest expenditure as the assessee has a net interest income during the year i.e. interest received is more than interest exp .....

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to ₹ 94,965/- by ld. CIT(A) on the basis of his observation that investments held by the assessee company includes investment in partnership firm which fetches taxable income to the assessee, investments in shares on which taxable dividend income is earned and a few other investments which have been made at the end of the year and were made in the course of business which do not give any tax free return to the assessee. Ld. CIT(A) accordingly calculated average investment at ₹ 1,89,9 .....

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ategories investments in immovable property, movable property and partnership firm are certainly not eligible to form part of average investment for the purpose of Rule 8-D. As far as investment in share is concerned, assessee has submitted that these investments were made in equity shares of Kalupur Commercial Coop. Bank Ltd. is held since last year at ₹ 54,37,500/- and assessee earns taxable dividend income and, therefore, the same should not be considered for calculation of average inve .....

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is the amount of admissible expenditure voluntarily disclosed by assessee and accepted by us. So no disallowance is called for. In part (ii) we have observed above that no disallowance is called for on the interest expenditure and in part (iii) we observe that 0.5% of average investment will be calculated at ₹ 1,50,120/-. Therefore, we are of the view that a disallowance of ₹ 1,50,120/- in the case of assessee is sustainable on account of disallowance u/s 14A of the Act. We hold so. .....

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