TMI Blog2023 (12) TMI 759X X X X Extracts X X X X X X X X Extracts X X X X ..... to those three shareholders by the assessee on anyone on behalf of the assessee and matter being under litigation before the Hon ble Bombay High Court, no addition for unexplained investment could survive in the hands of the assessee company. In our opinion order of the Ld. CIT(A) on the issue in dispute is well reasoned and accordingly, we uphold the same. In the result, the ground Nos. 1 and 2 of the appeal of the Revenue are dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT:- We have noted that Hon ble Delhi High Court in the case of M/s Joint investment [ 2015 (3) TMI 155 - DELHI HIGH COURT] has already held that disallowance u/s 14A of the Act cannot exceed dividend income. Also no disallowance u/s 14A of the Act can be made if the assessee had not earned any exempt income during the year under consideration. Since in the case assessee has already made disallowance to the extent of exempted income, therefore, respectfully following the finding of the Hon ble Delhi High Court Era Infrastructure (India) Ltd. [ 2022 (7) TMI 1093 - DELHI HIGH COURT] , we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete the addition made by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration in the form a residential flat to each of them with car parking space, (total value of the three flats being Rs. 50,00,45,000/-) vide escrow agreement dated 06.06.2011 over and above the share purchase consideration received from the assessee company and have shown the said additional consideration as their income of the year under consideration in their return of income filed and have offered the tax thereon. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the legal sanctity of escrow agreement and allotment letter issued therewith merely being incomplete and defective despite Hon'ble High Court of Bombay upheld the substance of the commercial arrangement reflected by escrow agreement and allotment letter, thereby restraining the assessee and its sister concerns from creating any third party rights in disputed flats. 2.1 The grounds raised by the assessee are reproduced as under: 1. On the facts and circumstances of the case as well as in law, the Learned CIT (A) has erred in confirming the action of Learned Assessing Officer in making a further disallowance of expenses of Rs. 4,58,23,162/- u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that as per the escrow agreement dated 06.06.2011, the assessee paid additional consideration in the form of rights in three flats amounting to Rs. 50,00,45,000/- in addition to sum of Rs. 182 crores, but same was not reported for income-tax purpose as part of the sale consideration for acquiring the shares of the company and therefore, the Assessing Officer held the sum of Rs. 50,00,45,000/- as unexplained investment in terms of section 69B of the Act. Further, the Assessing Officer noted that the assessee company received dividend of Rs. 71,25,686/- on investment in shares and mutual funds. However no suo-moto disallowance was made by the assessee for earning the said exempted income in terms of section 14A of the Act. The Assessing Officer noted that dividend income was set off by the assessee against expenditure incurred on work in progress. The Assessing Officer invoked Rule 8D of the Income-tax Rules, 1962 (in short the Rules ) and made disallowance for direct interest expenses amounting to Rs. 185,78,555/- invoking Ruld 8D(2)(i) and 0.5% of the average investment in shares/mutual funds etc amounting to Rs. 45,70,475/- in terms of Rule 8D(2)(iii) of the Rules. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of the consideration as mentioned in the share purchase agreement, they had also received additional consideration through an Escrow agreement dated 06.06.2011 amounting to Rs. 50,00,45,000/- being the value of the flats in building named as Signature Island/Signia Isles. The Assessing Officer accordingly issued show-cause notice to the assessee as why the said additional consideration paid to three shareholders under the Escrow agreement should not be treated as undisclosed investment by the assessee u/s 69B of the Act. The assessee contested that said Escrow agreement was not acted upon and therefore no consideration was paid to the shareholders other than the consideration noted in the share purchase agreement dated 04.06.2012. The assessee submitted that as no such additional consideration was paid so the matter has been taken up by those three share holders before the Hon ble Bombay High Court and litigation is still pending. The assessee submitted that no additional consideration has been paid by the assessee therefore no addition could have been made u/s 69B of the Act. The Ld. Assessing Officer however rejected the contention of the assessee and further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up, the Assessing officer made the addition of Rs. 50 crores under section 69B of the Act stating that the consideration paid in the form of flats against sale of shares are not accounted for in the books of the appellant. 10.1 On a careful study of the Escrow agreement, it is observed that the agreement executed on 06.06.2011 is between the appellant company on the One part and thr e others, Mr. Vinay Somani, Mrs. Shreelekha Somani Balgopal Trust as the other portion and Shri Anil Harish, Senior Partner of M/s D.M. Harish Company as the solicitor. The terms of agreement are that the Solicitor is to (a) Release the letter of allotment in respect of Flat No B-504 in Signature Island to Vinay on payment of 50% of the Purchase price of the land at Oshiwara by Satguru to Somanis under the Agreement. (b) Release the letter of allotment in respect of Flat No 702 in Signia Isles to Vinay on payment of further 25% (making a total of 75%) of the Purchase price of the land at Oshiwara by Satguruto Somanis under the Agreement and (c) Release the letter of allotment in respect of Flat No 301 in Signia Isles to Vinay on payment of the final balance amount) of the Purchase price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner proposed therein. It is however, a matter of fact that these documents were not executed between the parties. These documents, at any rate, merely reflect on the particulars of the modalities and do not detract from the substance of the commercial agreement between the parties. The so called suppression of these documents, which at any rate, were admittedly not executed between the parties, is neither here nor there . 10.3 From the perusal of letter dated 07.11.2016 of Shri. Vinay Somani addressed to the ITO Ward-11(1)(3), Mumbai, under whose jurisdiction, the appellant is assessed to income tax, to the specific query raised whether the transaction with the appellant has been registered and whether the possession of the flats have been given to him and his wife and the trust, he replied that in October 2013, when communication was sent for registering the three sale deeds, the developer, M/s Starlight Systems (I) LLP to whom M/s Starlight System Stems (I) Pvt. Ltd has handed over the building assets denied the transaction. Thereafter he was constrained to file a suit before the Hor'ble Bombay High Court, Mumbai. Further it is stated that the Occupation Certificate f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors of the Company as on the date of execution of those present. The Company is ceased and possessed of pieces and parcel of land at village Goregaon, Taluka Borivali, which is referred to as the first property and of the land in village Majas, Taluka Andheri referred to as the second property. The first and second properties are collectively referred to as the said properties. The Sellers and Directors have represented to the purchaser the properties were divided into nine plots and six out of the nine plots have been conveyed and transferred to its group entities and two to co-operative housing societies and one plot is remaining with the company. The Sellers have agreed to sell to the Purchasers and the Purchasers have agreed to acquire from the Sellers 100% of the equity shares of the Company held by the Sellers free from all encumbrances and claims at or for the Lump-sum consideration of Rs. 182,00,00,000/- and on the terms and conditions mutually agreed upon by and between them. Thereafter, it is declared, confirmed and recorded that the transaction of transfer of the shares and handing over of the management of the company was completed on the said day/date and in the mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther valuable article; (ii) The amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income; (iii) The assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory. In the appellant's case, the documents do not speak about the appellant acquiring or investing in the said properties ie. the flats. Hence, the first condition is not present as the appellant company has neither made investment in acquiring or purchasing the said flats nor is the owner of the said three flats. Thus, it follows that the second and third limbs do not arise. Hence the appellant company has no legal right to transfer the said flats to the three shareholders. The flats belong to a separate entity viz. M/s. Starlight Systems Pvt Ltd/ M/s. Starlight Systems (I) LLP, who is neither a party/ signatory to the Escrow Agreement nor to the Shareholders Agreement. As the ownership is not there, the appellant is not in a position to exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lats, therefore the second option of giving these flats as additional consideration to the aforesaid parties of Somani Group for purchase of shares is neither conceivable nor feasible. 10.7 The suit pending before the Hon'ble High Court of Bombay shows that the appellant has not expended the said additional consideration during the year and so accounting for it in the books of the appellant will not arise. It is further important to note that addition u/s 69B can be made only in the year when such investment was made by expending the consideration. The appellant has not incurred expenditure on the said flats as they were not purchased by it during the current assessment year in appeal. The appellant has expended Rs. 182.82 crores, which is duly accounted in the books of accounts. Therefore in my opinion, considering the above facts, no addition can be made u/s 69B in the current assessment year. In view of the above, the Assessing Officer is directed to delete the addition of Rs. 50 crores made u/s 69B of the Act. Accordingly, the grounds of appeal at No. 5.1 to 5.3 are allowed. 7.1 Before us, the Ld. CIT-DR submitted that, firstly, the Ld. CIT(A) has read the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at assessee has paid additional consideration for purchase of the shares. In absence of any proof of payment of additional sale consideration, particularly when owner(s) of the flat i.e M/s Starlight Systems LLP has declined request of the three shareholders for allotment of flats to them. Further documents relating to allotment of those flats to three shareholders have been observed to be defective by the Ld. CIT(A) and this fact has not been controverted by the Ld. DR. Be that as it may be, it is evident that those three flats belonging to the M/s Starlight security LLP mentioned in the Escrow agreement has ultimately not been given to those three shareholders by the assessee on anyone on behalf of the assessee and matter being under litigation before the Hon ble Bombay High Court, no addition for unexplained investment could survive in the hands of the assessee company. In our opinion order of the Ld. CIT(A) on the issue in dispute is well reasoned and accordingly, we uphold the same. In the result, the ground Nos. 1 and 2 of the appeal of the Revenue are dismissed. The ground Nos. 3 and 4 being general in nature, same are also dismissed as infructuous. 8. The ground Nos. 1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 3. 0.5% of the B above 45,70,475 Total disallowance u/s 14A 5,29,49,030 8.1 Out of total disallowance of Rs. 5,29,49,030/- , the Assessing Officer reduced amount of dividend of Rs. 71,25,686/- which was set off by the assessee against work in progress and the balance amount of Rs. 4,58,23,162/- was reduced out of closing work in progress and allowed balance closing work in progress of Rs. 48,85,376/- to be carry forward in subsequent years as against claim of Rs. 46,59,08,538/- by the assessee. On further appeal, the Ld. CIT(A) rejected the claim of the assessee observing as under : 12 Decisions: I have considered the submission of the appellant as well as the contention of the AO. The Assessing Officer has invoked the provisions of section 14A and disallowed a sum of Rs. 5,29,19,030/- applying the procedure laid down in Rule 8D of the I T Rules, 1962. The main grievance of the appellant is that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and included in work in progress is Rs. 4.83 crores. Thus the appellant has utilized, borrowed funds for investment in shares and mutual funds, which are exempt income yielding assets as seen from the above financial statements. The interest expenses are therefore direct cost for computation of disallowance under section 14A. In the wake of the above facts, computation of disallowance u/s 14A has to be worked out as per the formula prescribed in Rule 8D. The Assessing officer has rightly, invoked the provisions of Section 14A and applied Rule 8D to compute the disallowance. The disallowance made u/s. 14A is herewith confirmed 12.2. With regard to the contention of the appellant that the appellant company and M/s. Somani Company Pvt Ltd has amalgamated as per the order of the Hon'ble High court of Bombay dated 17.08.2012 and due to merger of accounts, the purchase of shares cannot be construed as investment in exempt yielding assets, cannot be accepted. For the assessment year in appeal this issue has to be dealt with on the basis of the financial statements ed with the return of income under Section 139. The appellant has not filed the merged accounts with the return of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... algamation shares of the Somani and Company Pvt. Ltd. has already extinguished and therefore while considering Rule 8D , the interest paid corresponding the same cannot be disallowed and also quantum of those shares cannot be taken into account for computation of disallowance. He referred to paper book page 153 to 167 and submitted that revised financial statements were already filed before the AO. 8.3 We have noted that Hon ble Delhi High Court in the case of M/s Joint investment Company (supra) has already held that disallowance u/s 14A of the Act cannot exceed dividend income. In the case of PCIT vsc Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289 (Delhi), the Hon ble Delhi High Court considered the effect of amendment made by the Finance Act, 2022 to section 14A of the Act by insertion of a non obstante clause and explanation after the proviso, subsequent to the decision of the Hon ble Delhi High Court in the case of PCIT vs. IL FS Energy Development Co. Ltd., (2017) 84 com 186. The Hon ble High Court analysed the same in the light of the decision of the Hon ble Supreme Court in the case of Sedco Forex International Drill. Inc. vs. CIT (2005) 149 Taxman 352 rei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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