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2017 (5) TMI 839 - ITAT MUMBAI

2017 (5) TMI 839 - ITAT MUMBAI - TMI - Disallowance under Rule 8D(ii) on account of interest expenses - addition u/s 14A - primary onus/burden to prove - Held that:- As observed from the perusal of the audited financial statement of the assessee that the “investments” of ₹ 45.83 crores are held as ‘investment’ and not as ‘stock in trade’ and hence the issue of applicability of section 14A of the Act to ‘stock in trade’ do not need require adjudication by us. As per section 14A of the Act w .....

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f AO for re-computing the disallowance u/s. 14A of the 1961 Act of the expenditure incurred in relation to the earning of income which does not form part of the total income having regards to the accounts of the assessee in accordance with our above directions. The assessee is directed to produce working of disallowance of expenditure incurred in relation to the earning of income which does not form part of the total income having regards to the accounts of assessee as is contemplated u/s 14A of .....

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, JM, And Ramit Kochar, AM For The Revenue : Shri G.N. Makwana-DR For The Assessee : Shri K. Gopal & Ms. Neha Paranjape -AR ORDER Per Ramit Kochar,AM : This appeal, filed by the assessee being ITA No. 6448/Mum/2014, is directed against the appellate order dated 06th August 2014 passed by learned Commissioner of Income Tax (Appeals)- 4, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2010-11, the appellate proceedings before the learned CIT(A) arising from the assessment orde .....

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our appellants submit that no interest bearing funds have been utilized to earn exempt income and that the said disallowance is not warranted and ought to be deleted. Without prejudice to the above, your appellants submits that no interest expenses have been claimed by the appellants during the year since the entire interest expenses have been capitalized to the work in progress account. Without prejudice to the above, your appellants submits that interest if any has to be considered for disallo .....

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st of expenditure amounting to ₹ 3,75,96,844/- to work in progress and that the disallowance if any has to be out of ₹ 14,08,071/- which has been claimed by the appellants. 3. The assessee company is engaged in the business of real estate development. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act, it was observed by the Assessing Officer (A.O.) that the assessee has claimed exemption of dividend income amounting to ₹ 97,58,944/-. During th .....

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ance of ₹ 31,73,425/- u/r 8D(2)(ii) and 8D(2)(iii) of the 1962 Rules r.w.s 14A of the 1961 Act, vide assessment order dated 23-03-2013 passed by learned AO u/s 143(3) of the 1961 Act. 4.Aggrieved by the assessment order dated 23-03-2013 passed by learned AO u/s 143(3) of the 1961 Act, the assessee filed an appeal before the learned CIT(A). The assessee submitted that investments in shares and securities to the tune of ₹ 45,83,81,269/- is ancillary to the main business activities of t .....

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rest expenditure can be disallowed as investments are made out of won funds and not borrowed funds.The assessee claimed that no expenses were claimed and hence no disallowance can be made by the assessee. Thus, it was submitted that since no expenses were incurred to earn tax free income of ₹ 97,58,944/- no disallowance u/s 14A of the 1961 Act is warranted. It was submitted that the AO has disallowed the expenses without giving any reasons or explanations whatsoever. The assessee claimed t .....

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ce should be net of taxable interest income.With respect to disallowance of administrative expenses of ₹ 11,45,953/- is concerned, it was submitted that no expenses are incurred for earning exempt income. It was submitted that there are five investments made during the current year, out of which 3 are in mutual funds having a daily dividend plan. It was submitted that investments were made through brokers who were paid commission by these funds and nothing was paid by the assessee for maki .....

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count.It was submitted that the assessee is following project completion method, all project related expenses stood debited to work in progress and hence the same cannot be disallowed. The assessee submitted list of expenses of ₹ 3,75,96,844/- as expenses which were debited to WIP. It was submitted that there are expenses of ₹ 1,63,246/- which were expenses of statutory in nature such as audit fee,workers legal dues, profession tax rent, rates and taxes which are in no manner related .....

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llowance u/r 8D(2)(iii) of 1962 Rules r.w.s.14A of the 1961 Act, which included investments in equity shares, mutual funds and debentures. It was submitted that investments in debentures is yielding taxable income and the expenses cannot be disallowed to that effect as it never yielded exempt income. The learned CIT(A) rejected the contention of the assessee and observed that the assessee has invested ₹ 45,83,81,269/- in shares and securities income from which is not includible in the tota .....

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shares and securities. The learned CIT(A) also observed that it was not possible to believe that the entire capital would have been invested in shares and securities especially when the assessee itself was not sure as to how much of the sum had been invested in business of the assessee. It was also observed by the learned CIT(A) that the assessee had not given any details to work out the direct nexus of the interest expenses related to the exempt income which was not includible in the total taxa .....

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ess of the claim in respect of the expenses incurred in relation to earning of exempt income. The learned CIT(A) observed that for the purpose of disallowance u/s 14Aof the 1961 Act, the reference in Rule 8D(2)(ii) is Value of Investment and not the share held as investment and hence even shares held as stock in trade shall also be covered for disallowance. It was the contention of the assessee that it has re-paid all interest bearing loans and borrowings before the last date of the financial ye .....

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nt in shares and securities, of which the income was claimed exempt by the assessee, old interest bearing loans and borrowings stood payable in the books of account of the asssessee. The assessee could not produce any evidence to prove that the shares and securities were acquired from interest free loans was the observations of the learned CIT(A). The contention of the assessee that it had debited an expenditure of ₹ 3,75,96,844/- in its P&L account for AY 2010-11 in the form of printi .....

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AO u/s 143(3) of the 1961 Act vide appellate order dated 06-08-2014 passed by learned CIT(A). 5.Aggrieved by the appellate order dated 06-08-2014 passed by learned CIT(A) assessee filed an appeal before the tribunal. At the outset the Ld. Counsel for the assessee submitted that the assessee had debited amnd transferred an amount of ₹ 3,75,96,844/- to work in progress out of expenses incurred by the assessee which found debited in Profit and Loss Account and hence disallowance cannot be ma .....

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on account of interest and hence the order of the Assessing Officer is erroneous. It was submitted that the assessee has not raised fresh loans during the year and the loans were raised in earlier years which were repaid by the assessee during the year under consideration. Our attention was drawn to balance sheet of the assessee which is placed at page-22 of the paper book filed with the tribunal. It was submitted that the assessee has mainly raised funds as advance for booking of flats to the .....

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redeemed during the year. The Ld. Departmental Representative on the other hand relied upon the orders of the learned CIT(A). 6.We have carefully considered rival submissions and perused the material available on record before us. We have observed that the assessee is engaged in the business of real estate development. The assessee has earned dividend of ₹ 97,58,944/- which was claimed as exempt from tax u/s 10(34) of the 1961 Act. The assessee claimed that no expenditure was incurred in c .....

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es and mutual funds. We are agreeable with the proposition of the assessee that investments in Debentures cannot be considered as part of Investments for computing disallowance of expenditure u/s 14A of the 1961 Act as interest income earned from the debentures is taxable under the provisions of the 1961 Act and no exempt income arises from debentures and hence Section 14A of the 1961 Act cannot be invoked. We have observed from the balance sheet of the assessee that the assessee has aggregate o .....

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imed that advances for booking of flat being application money received to the tune of ₹ 79.30 crores was interest-free which was invested in shares and securities.This claim of the assessee that these advances of ₹ 79.30 crores was an interest free advances from booking of flats which got invested in shares and securities capable of yielding exempt income needs verification for which we are inclined to set aside and restore the matter back to the file of the Assessing Officer for de .....

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of Income tax Rules 1962 r.w.s. 14A of the 1961 Act being 0.5% of the investments. As held by us in this order earlier, that investments in debentures made by the assessee which give rise to taxable interest shall not be considered as part of Investment for making disallowance u/s 14A of the 1961 Act, which shall be considered by the AO before making disallowance. It is also observed that the assessee is claiming that the other expenses debited to P&L account are in the nature of administra .....

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er is lower and it also includes directly attributable development expenses and interest cost incurred(net of credits, if any thereon) by the company. The AS- 2 issued by ICAI governs the valuation of inventory which is mandatory and which stipulates that inventory is to be valued at cost or net realizable value which ever is lower. Even if we considered that these administrative expenses of ₹ 3.76 crores are directly attributable development expenses to bring inventory to present status w .....

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expenses are debited and transferred to work in progress, the same are to be added to work in progress on the credit side of profit and loss account which will enhance work in progress valuation which once allowed by the Revenue in the year of incurring of these expenses will entitles assessee to carried forward the enhance value of work in progress to the subsequent year as part of current assets as closing work in progress and in the immediately succeeding year it will again enter on the debi .....

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to the next year. Thus this contentions of the assessee cannot be accepted that merely because it got added to closing work in progress it has neutralized the expenses account on the debit side of Profit and Loss account. We have observed from the perusal of the audited financial statement of the assessee that the investments of ₹ 45.83 crores are held as investment and not as stock in trade and hence the issue of applicability of section 14A of the Act to stock in trade do not need requi .....

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Supreme Court in a very recent decision pronounced on 8th May, 2017 in the case of Godrej & Boyce v. DCIT (Civil appeal No.7020 of 2011) wherein the Hon ble Supreme Court has upheld the disallowance of expenditure incurred in relation to earning of income which is not includible in the total income as is contemplated u/s 14A of the 1961 Act. The primary onus is on the assessee to work out the disallowance of expenditure incurred in relation to earning of the income which is not forming part .....

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ion to earning of income which does not form part of total income, having regards to the accounts of the assessee as is contemplated u/s 14A(2) of the 1961 Act. If the Assessing Officer is not satisfied with the correctness of the disallowance of expenditure suo motu offered by the assessee being incurred in relation to earning of income which does not form part of the total income having regards to the accounts of the assessee if the same could not be worked out from the manner in which account .....

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