FORMAX REAL ESTATE LTD, NEW DELHI V. DCIT CIR 3(1), MUMBAI

ITA 219/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3786 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 24-08-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 08-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: E SHREEDHAR
• Keywords: Transfer pricing; Earning of tax free income
• Section: 143(3); 14A; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F , MUMBAI , , BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI ASHWANI TANEJA , ACCOUNTANT MEMBER ITA NO. : 2 19 /MUM/20 1 4 (ASSESSMENT YEAR: 20 1 0 - 1 1 ) FORMAX REAL ESATE LTD, M - 62 & 63 1 ST FLOOR, CON NAUGHT PLACE, NEW DELHI - 110 001 PAN: AA B C F 1259 Q VS DCIT - CIR - 3 ( 1 ), AAYAKAR BHAVAN, M K ROAD , MUMBAI - 400 0 20 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JITENDRA SANGHAVI RESPONDENT BY : SHRI E SHREEDHAR /DATE OF HEARING : 05 - 0 7 - 201 6 / DATE OF PRONOUNCEMENT : 10 - 0 8 - 2016 ORDER , : PER AMIT SHUKLA , J M: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST IMPUGNED ORDER DATED 1 8 . 1 0.201 3 , PASSED BY LD. CIT(A PPEALS ) - 6 , MUMBAI FOR THE QUANTU M OF ASSESSMENT PASSED UNDER SECTION 143(3) FOR THE ASSESSMENT YEAR 20 1 0 - 1 1 . IN THE GROUNDS O F APPEAL, THE ASSESSEE HAS RAISED FOLLOWING GROUNDS : - GROUND NO. 1 . THE CIT(A) HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER (HEREIN AFTER REFERRED TO AS AO) TO THE EXTENT OF RS.28,75,296/ - U/S 14A READ WITH RULE 8D. 2 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 GROUND NO. 2 . THE CIT(A) HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER U/S 14A READ WITH RULE 8D TO THE EXTENT OF RS.28,75,296/ - WITHOUT APPRECIATING THE FACT THAT THE LD. AO PROCEEDED TO APPLY RULE 8D WITHOUT GIVING DUE REGARD TO THE NATURE OF EXPENSES INCURRED BY THE APPELLANT. GROUND NO. 3 . THE APPELLANT PRAYS THAT HE MAY BE ALLOWED TO ADD, AMEND, OR FOREGO ANY OF THE ABOVE GROUNDS OF APPEAL AS THE CIRCUMSTANCES MAY WARRANT. 2. BRIEF FACTS QUA THE ISSUE INVOLVED ARE THAT, THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPER. DURING THE YEAR THE ASSESSEE HAD SHOWN DIVIDEND INCOME OF RS.4,97,20,333/ - WHICH WAS CLAIMED AS EXEMPT. THE AO FURTHER NOTED THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES TO THE TUNE OF RS.166,79,68,270/ - AS ON 31 ST MARCH, 2010 AND THE ENTIRE INVESTMENT WERE MADE DURING THE YEAR IT SELF. ACCORDINGLY, HE HELD THAT DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE. AFTER DETAILED DISCUSSION AND REFERRING TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. (328 ITR 81) HE HELD THAT THE DISALLOWANCE SH O U L D BE WORKED OUT IN ACCORDANCE WITH THE RU L E 8D, WHICH WAS WORKED OUT BY HIM IN THE FOLLOWING MANNER: - AMOUNT (RS.) 1 . AMOUNT OF EXPENSES DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME 845 2 . AMOUNT OF THE INTEREST EXPE NSES INDIRECTLY ATTRIBUTABLE TO SUCH INCOME, IN ACCORDANCE WITH THE FORMULA NIL 3 . 0.5% OF THE AVERAGE VALUE OF INVESTMENTS AS COMPUTED BELOW: AVERAGE OF SUCH INVESTMENT ON THE FIRST AND LAST DAY OF PREVIOUS YEAR 0 + 166,79,68,270 =RS.83,39,84,135 2 0.5% OF RS.83,39,84,135/ - 41,69,921 TOTAL DISALLOWANCE U/S 14A 41,70,766 3 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 3. BEFORE THE LD. CIT(A), THE ASSESSEES CASE WAS THAT, IF THE ENTIRE DETAILS OF EXPENDITURE INCUR RED AND DEBITED IN THE PROFIT AND LOSS ACCOUNT ARE TO BE EXAMINED AND ANALYSED, THEN IT CAN BE SEEN THAT THEY WERE WHOLLY CONNECTED WITH THE BUSINESS CARRIED OUT BY THE ASSESSEE AND NOTHING CAN BE SAID TO BE ATTRIBUTABLE FOR THE EARNING OF DIVIDEND INCOME. IT WAS FURTHER SUBMITTED THAT, CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAS NOT BEEN REFUTED BY THE AO IN ACCORDANCE WITH THE SUB - SECTION (2) AND (3) OF SECTION 14A. THE ASSESSEES DETAILED SUBMISSION ALONG WITH VARIOUS DECISIONS IN SUPPORT HAS BEEN INCOR PORATED BY THE LD. CIT(A) FROM PAGES 3 TO 15 OF THE APPELLATE ORDER. 4. THE LD. CIT(A) AFTER DETAILED DISCUSSION, HELD THAT THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D HAS TO BE MADE IN THE PRESENT CASE . HE NOTED THAT THE ASSESSEE HAS EARNED HUGE DIVI DEND INCOME OF RS.7.97 CRORES AND THE AVERAGE VALUE OF INVESTMENT WORKS OUT TO RS.57,50,59,135/ - . FOR MAINTAINING SUCH A HU GE PORTFOLIO, THE ASSESSEE HAS MERELY ATTRIBUTED EXPENSES OF RS.845/ - WHICH CANNOT BE SAID TO BE ADEQUATE IN ANY MANNER. HE FURTHER N OTED THAT AO ONLY AFTER GIVING OPPORTUNITY TO THE ASSESSEE H AD THEN COME TO THE CONCLUSION THAT, DISALLOWANCE ON ACCOUNT OF INDIRECT EXPENDITURE UNDER RULE 8D(2)(III) IS TO BE MADE. HOWEVER, HE AGREED WITH OTHER CONTENTION OF THE ASSESSEE THAT AO HAS ADOPT ED WRONG FIGURE OF AVERAGE VALUE OF INVESTMENT WHICH SHOULD BE RS.57,50,59,135/ - INSTEAD OF RS.83,39,84,135/ - ADOPTED BY THE AO. HE DIRECTED THE AO TO DELETE THE EXCESS DISALLOWANCE TO THE EXTENT OF RS.12,94,625/ - . THE RELEVANT OBSERVATION AND FINDING OF L D. CIT(A) IN THIS REGARD READS AS UNDER: - 4 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 IN GROUND NO.2, THE APPELLANT HAS POINTED OUT THAT THE AO, WHILE COMPUTING THE DISALLOWANCE AS PER RULE 8D, HAS ADOPTED THE WRONG FIGURE OF AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT F ORM PART OF THE TOTAL INCOME OF THE APPELLANT AND THE SAME SHOULD HAVE BEEN ADOPTED AT RS.57,50,59,135/ - (INSTEAD OF RS.83,39,84,135/ - ADOPTED BY THE AO). IT IS STATED BY THE APPELLANT THAT INVESTMENTS OF RS.50,00,00,000/ - IN UTI FIXED MATURITY PLAN (YEARL Y FMP SERIES INSTITUTIONAL GROWTH PLAN) AND RS.1,78,50,000/ - IN LIC NOMURA MF LIQUID FUND (GROWTH PLAN) ARE NOT TAX - FREE. HENCE, THESE INVESTMENTS WERE REQUIRED TO BE EXCLUDED BY THE AO WHILE WORKING OUT THE DISALLOWANCE AS PER RULE 8D(2)(III). ACCORDING LY, EXCESS DISALLOWANCE OF RS.12,94,625 - HAS BEEN MADE BY THE AO U/S 14A READ WITH RULE 8D. I HAVE GONE THROUGH THE DETAILS FURNISHED BY THE APPELLANT IN THIS REGARD AND AGREED WITH THE APPELLANT THAT THE AVERAGE VALUE OF INVESTMENTS, THE INCOME FROM WHIC H DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME OF THE APPELLANT SHOULD BE RS.57,50,59,135/ - . ACCORDINGLY, THE EXCESS DISALLOWANCE TO THE EXTENT OF RS.12,94,625/ - MADE BY THE AO IS HEREBY DIRECTED TO BE DELETED AND THE BALANCE AMOUNT IS CONFIRMED. 5 . BEFORE US, THE LD. COUNSEL , MR. J ITENDRA SANGHVI DREW OUR ATTENTION TO THE DETAILS OF INVESTMENT SUMMARY WHICH WAS MOSTLY IN MUTUAL FUNDS AND POINTED OUT THAT THE OVERALL PURCHASE TRANSACTIONS DURING THE YEAR WERE 12 ; REDEMPTION TRANSACTION WERE 19 ; AND SHIFTING FR O M ONE PLAN TO ANOTHER W ERE 6. THUS, IN ALL THERE WERE ONLY 18 TRANSACTIONS OF PURCHASES FOR CARRYING OUT SUCH ACTIVITY AND FOR SUCH TRANSACTIONS, DISALLOWANCE OF RS.28,75,296/ - IS TOO HIGH AND UNCALLED FOR. HE FURTHER DREW OUR ATTENTION TO THE DETAILS OF 5 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 TOTAL EXPENDITURE DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD ADMINISTRATIVE AND OTHER EXPENSES WHICH IS TO THE TUNE OF RS.62,66,167/ - . O UT OF THESE EXPENDITURES, HE SUBMITTED THAT PROFESSIONAL CHARGES ITSELF WAS OF RS.54,13,423/ - W HICH WAS PURELY FOR REAL ESTATE PROJECT. THUS, OUT OF 62 LAKHS ; MORE THAN RS.54 LAKHS HAS NOTHING TO DO WITH THE INVESTMENT ACTIVITIES. FROM THE BALANCE AMOUNT , HE STATED THAT RS.5,51,520/ - IS ON ACCOUNT OF MISCELLANEOUS EXPENSES, BESIDES RATES AND TAXES O F RS.4,860/ - . THUS, LOOKING TO THE NATURE OF ACCOUNTS AND EXPENDITURE INCURRED, IT CANNOT BE HELD THAT SUCH A HUGE DISALLOWANCE IS CALLED FOR. AS REQUI RED BY THE BENCH, HE ALSO FILED THE DETAILS OF PROFESSIONAL CHARGES AND OTHER EXPENSES AS DEBITED IN THE PROFIT AND LOSS ACCOUNT TO EXAMINE WHETHER THE PROFESSIONAL CHARGES HAS ANY LINKAGE WITH THE INVESTMENT ACTIVITIES OR EARNING OF DIVIDEND INCOME. ON THE BASIS OF DETAILS FURNISHED HE SUBMITTED THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, 0.5% OF THE A VERAGE VALUE OF INVESTMENT UNDER RULE 8D(2)(III) CANNOT BE MADE. 6. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT, LOOKING TO THE HUGE INVESTMENTS MADE AND TH E EXEMPT INCOME OF APPROXIMATELY OF RS.5 CRORE S , THE DISALLOWANCE UNDER SECTION 14A AS SUSTAINED BY CIT(A) TO THE EXTENT OF RS.28,75,296/ - IS WHOLLY JUSTIFIED. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WELL AS MATERIAL PLACED ON RECORD. IT IS AN ADMITTED FACT THAT, THE ASSESSEE HAS EARNED HUGE DIVIDEND INCOME OF RS.4.97 CROR E S 6 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 FROM A V ER AGE VALUE OF INVESTMENT OF RS.11,50,118,270/ - . BEFORE US, THE LD. COUNSEL SUBMITTED THAT, FIRSTLY THE AO HAS NOT RECORDED H IS SATISFACTION HAVING REGARD TO THE ACCOUNTS MAINTAINED BY THE ASSESSEE AND, THEREFORE, NO DISALLOWANCE UNDER RULE 8D SHOULD BE MADE; SECONDLY , THE NATURE OF EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT ARE MAINLY RELATING TO REAL ESTATE BUSINESS AND NOTHING CAN BE SAID TO BE PERTAINING T O INVESTMENT ACTIVITIES; AND LASTLY , ONLY FEW TRANSACTIONS OF PURCHASES HAVE BEEN MADE IN THIS YEAR. DISALLOWANCE UNDER S ECTION 14A(1) IS TRIGGERED WHENEVER AN INCOME IS SHOWN WH I CH DOES NOT FORM PART OF THE TOTAL INCOME AND ANY DEDUCTION IN RESPECT OF EXP ENDITURE IS CLAIMED / INCURRED IN RELATION TO SUCH EXEMPT INCOME. FOR COMPUTING THE DISALLOWANCE, THE MANDATORY REQUIREMENT AND CONDITI O NS AS PROVIDED IN SUB - SECTION (2) OF SECTION 14A HAS TO BE FOLLOWED, THAT IS, THE AO HAVING REGARD TO THE ACCOUNTS OF TH E ASSESSEE HAS TO SATISFY HIMSELF ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE EITHER IN RESPECT OF SUCH EXPENDITURE IN RELATION TO THE EARNING OF EXEMPT INCOME OR WHEREVER THE ASSESSEE MAKES A CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED. THE C RUCI AL T E ST OF DETERMINATION OF DISALLOWANCE UNDER THIS SECTION IS THE NATURE OF CLAIM OF EXPENSES INCURRED HAVING REGARD THE ACCOUNTS MAINTAINED BY THE ASSESSEE . THE PHRASE HAVING REGARD TO THE ACCOUNTS, CONNOTES , PROXIMATE RELATIONSHIP BETWEEN THE EXPEND ITURE INCURRED FOR THE PURPOSE OF EARNING OF THE INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME. HERE, THE ONLY DISPUTE IS , WITH REGARD TO THE ADMINISTRATIVE EXPENSES WHICH HAS BEEN DISALLOWED UNDER RULE 8D(2)(III) AND NOT INTEREST DISALLOWANCE . ON A CA REFUL PERUSAL AND ANALYSIS OF THE ADMINISTRATIVE EXPENSES DEBITED, 7 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 WE FIND THAT FOLLOWING EXPENSES HAVE BEEN CLAIMED IN THE PROFIT & LOSS ACCOUNT : ADMINISTRATIVE AND OTHER EXPENSES TOTAL RATES AND TAXES - COMPANY LAW FILING FEES 4,500 - TDS RET URN FILING FEES 360 TOTAL 4,860 PROFESSIONAL CHARGES - LEGAL FEES 12,23,545 - ARCHITECTURAL CONSULTANCY FEES 36,27,181 - FINANCIAL CONSULTANCY 3,00,000 - PROFESSIONAL FEES TRANSFER PRICING AUDIT 93,755 - OTHERS 1,68,943 TOTAL 54,13,424 AUDITORS REMUNERATION AUDIT FEES (INCLUDING SERVICE TAX) 5,51,550 MISCELLANEOUS EXPENSES 2,36,384 TOTAL 62,06,218 FROM THE PERUSAL OF THE ABOVE, IT IS SEEN THAT, THE MAJOR EXPENDITUR E INCURRED IS TOWARDS PROFESSIONAL CHARGES. BEFORE THE LD. CIT(A), THE ASSESSEE HAD CATEGORICALLY STATED THAT THE PROFESSIONAL CHARGES INCURRED WERE IN RESPECT OF REAL ESTATE PROJECT UNDERTAKEN BY THE ASSESSEE. FURTHER, A S REQUIRED BY THE BENCH AT THE TIME OF HEARING FROM THE LD. COUNSEL, DETAILS OF PROFESSIONAL CHARGES ALONG WITH THE BILLS WERE SOUGHT AND WHICH HAVE BEEN FILED BEFORE US R UNNING INTO 34 PAGES. FROM THE PERUSAL OF THE PROFESSIONAL BILLS, IT IS EVIDENT THAT, THE PROFESSIONAL FEES HAS BEEN INC URRED FOR ARBITRATION PROCEEDINGS, FILING OF SLP BEFORE HONBLE SUPREME COURT, FEES TOWARDS CONFERENCES WITH SOLICITORS AND ADVOCATES , F EES TOWARDS APPEARANCE IN THE COURT MATTERS, DRAFTING OF PAPERS , PETITIONS , PAPER - BOOKS, AFFIDAVITS , ETC. ALL THESE EXPE NSES HAVE NOTHING TO DO WITH THE INVESTMENT ACTIVITY ALBEIT IT IS PURELY FOR THE REAL ESTATE WORK AS STATED BY THE LD. COUNSEL . THUS, OUT OF RS.62,06,218/ - AN AMOUNT OF RS.54,24,312/ - CANNOT 8 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 BE ROPED IN AT ALL FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A IN RELATION TO THE EARNING OF EXEMPT INCOME. COMING TO THE EXPENSES INCURRED UNDER THE HEAD RATES AND TAXES ALSO, IT IS SEEN THAT, IT HAS PAID FEES FOR FILING OF APPEALS AND ALSO FOR FILING OF TDS RETURN AND FILING FEES WHICH AGAIN HAS NOTHING TO DO WITH THE INVESTMENT ACTIVITY. HOWEVER, EXPENSES RELATING TO AUDITORS FEES AND MISCELLANEOUS EXPENSES , THEY CAN BE TO SOME EXTENT HELD TO BE FOR THE INVESTMENT ACTIVITIES ALSO AND, THEREFORE, UNDER THE FACTS AND CIRCUMSTANCES, WE DIRECT THE AO TO DISALL OW 50% OF EXPENSES DEBITED UNDER THE HEAD MISCELLANEOUS EXPENSES AND AUDITORS FEES. THESE DISALLOWANCES WOULD BE SUFFICIENT FOR THE PURPOSE OF ALLOCATING INDIRECT EXPENDITURE WHICH CAN BE SAID TO BE ATTRIBUTABLE FOR THE EARNING OF DIVIDEND INCOME, HAVI NG REGARD TO THE ACCOUNTS OF THE ASSESSEE. THUS, IN VIEW OF OUR AFORESAID FINDING, THE GROUND RAISED BY THE ASSESSEE ARE TREATED AS PARTLY ALLOWED. AT THE OUTSET, THE LD. COUNSEL SUBMITTED THAT GROUNDS NO.2, 3 & 4 ARE NOT PRESSED, ACCORDINGLY, THESE GROUN DS ARE DISMISSED AS NOT PRESSED. 8 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH AUGUST, 2016 . SD/ - SD/ - ( ) ( ) (ASHWANI TANEJA ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 10 TH AUGUST, 2016. 9 FORMAX REAL ESATE LTD ITA 219 / MUM/ 2014 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3 ) THE CIT (A) 6/CONCERNED___ , MUMBAI. 4 ) THE CIT - CONCERNED___ , MUMBAI 5 ) , , / THE D.R. F BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS