M/s DLF Southern Towns Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 4103/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97103 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 25-08-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 04-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Keywords: Depreciation; Earning of tax free income; Question of law; Capital receipt; Revenue expenditure
• Section: 14A; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : B NEW DELHI BEFORE SHRI T.S. KAPOOR, ACCOUNTANT MEMBER AND SMT BEENA A PILLAI, JUDICIAL MEMBER ITA NO: 4103/DEL/2013 ASSTT. YEAR 2010-11 DLF SOUTHERN TOWNS PRIVATE LIMITED VS. DCIT I-E, NAAZ CINEMA COMPLEX, CIRCLE-10(1), JHANDEWALAN EXTENSION, NEW DELHI. NEW DELHI 110 055. (PAN AADCP9107F) (APPELLANT) (RESPONDENT) ITA NO: 4431/DEL/2013 ASSTT. YEAR 2010-11 DCIT VS. DLF SOUTHERN TO WN PVT. LTD. CIRCLE-10(1) E-1, NAAZ CINEMA COMPLEX, NEW DELHI. JHANDEWALAN EXTENSION NEW DELHI 110 055 (PAN AADCP9107F) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.S. SINGHVI, CA RESPONDENT BY :SMT. PARWINDER KAUR, SR.DR DATE OF HEARING :28.8.2015 DATE OF PRONOUNCEMENT : .9.2015 O R D E R PER T.S. KAPOOR, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS FILED BY THE RE VENUE AS WELL AS BY ASSESSEE AGAINST THE ORDER OF LD. CIT(A) DATED 10.5.2013. THE GROUND S OF APPEAL TAKEN BY REVENUE AS WELL AS BY ASSESSEE ARE REPRODUCED BELOW:- ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 2 ITA NO. 4103/DEL-2013(ASSES SEES APPEAL) 1. T HAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN LAW, IN UPHOLDING THE ORDER OF THE ASSESSING OFFICER IN MAKING DISALL OWANCE U/S 14A OF THE INCOME TAX ACT, 1961, READ WITH RULE 8D OF T HE INCOME TAX RULES 1962, AT RS. 46.13 LACS, AS AGAINST RS. NIL C OMPUTED BY THE APPELLANT COMPANY 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 ACCO UNTING STANDARD 16 ISSUED BY THE ICAI 1.2 THAT ON THE FACTS THE EXEMPT INCOME HAD BEEN OFFERE D TO TAX AND THEREFORE, PROVISIONS OF SECTION 14A OF THE INC OME TAX ACT, 1961 ARE NOT APPLICABLE. ITA NO. 4431/DEL/2013 (REVENUES APPEAL) 1. WHETHER THE CIT(A) UNDER THE FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW WAS JUSTIFIED IN DELETING THE ADDITION O F RS. 1,81,53,159/- MADE BY THE AO ON ACCOUNT OF BROKERAGE EXPENSES REL ATED TO VARIOUS PROJECTS THE REVENUE OF WHICH WERE NOT FULL Y RECOGNIZED DURING THE YEAR UNDER CONSIDERATION, BASED ON PERCE NTAGE OF COMPLETION METHOD, FOLLOWED BY THE ASSESSEE? 2. THE BRIEF FACTS OF THE CASE ARE THAT THE COMP ANY IS ENGAGED IN REAL ESTATE BUSINESS AND IS A COMPANY OF DLF GROUP. AS PER FACT S NOTED IN THE ASSESSMENT ORDER, DURING THE YEAR UNDER CONSIDERATION, THE COM PANY WAS IN THE PROCESS OF DEVELOPING REAL ESTATE PROJECT. THE CASE OF THE ASS ESEE WAS SELECTED FOR SCRUTINY. DURING ASSESSMENT PROCEEDINGS, THE AO MADE THE FOLL OWING TWO ADDITIONS :- I) DISALLOWANCE OF PROPORTIONATE BROKERAGE EXPENSES - THE AO OBSERVED THAT ASSESSEE WAS FOLLOWING PERCENTAGE OF COMPLETION MET HOD IN RECOGNISING ITS REVENUE AND HAD RECOGNISED ONLY 40.29% AS REVENUE O UT OF THE TOTAL ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 3 REVENUE. THE AO OBSERVED THAT ASSESSEE HAD CLAIMED ENTIRE BROKERAGE EXPENSES AMOUNTING TO RS. 3,04,02,210/- WHEREAS IN HIS OPINION THE EXPENSES SHOULD HAVE BEEN BOOKED ONLY TO THE EXTENT OF 40.29 % IN VIEW OF THE MATCHING CONCEPT OF INCOME AND EXPENDITURE. THEREFO RE HE ALLOWED THE BROKERAGE EXPENSES TO THE EXTENT OF 40.29% ONLY AND DISALLOWED THE REMAINING AMOUNT OF RS. 1,81,53,159/-. II) DISALLOWANCE U/S 14A - THE AO FURTHER OBSERVED THAT ASSESSEE HAD EARNED DIVIDEND INCOME AMOUNTING TO RS. 3,06,88,926/- FROM INVESTMENT MADE IN MUTUAL FUND AND HAS OBSERVED THAT ASSESSEE HAD NOT ALLOCATED ANY EXPENDITURE TO EARN EXEMPT INCOME. THEREFORE HE MAD E AN ADDITION OF RS. 46,12,728/- AS DISALLOWANCE U/S 14A CALCULATED IN A CCORDANCE WITH RULE 8D OF THE ACT. 3. AGGRIEVED THE ASSESSEE FILED APPEAL BEFORE L D. CIT(A) . THE LD. CIT(A) AS REGARDS BROKERAGE EXPENSES ALLOWED THE APPEAL OF AS SESSEE 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 ASSE SSING OFFICER AND SUBMISSION OF THE APPELLANT. IT IS NOTED THAT THIS ISSUE IS COVERED BY MY OWN ORDER IN THE CASE OF APPELLANT GROUP COMPANY NAMEL Y DLF HOME DEVELOPERS LIMITED FOR THE ASSESSMENT YEAR 2009-10 AN D IN THE CASE OF DLF LIMITED FOR THE ASSESSMENT YEAR 2007-08, 2008-09 AND 2009-10. IT IS SEEN THAT THE ASSESSING OFFICER HAS DISALLOWED PRO PORTIONATE BROKERAGE BY CORRELATING THE SAME WITH REVENUE, WHICH IS BEING RECOGNIZED BY THE APPELLANT ON POCM BASIS. THE APPEL LANT HAS ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 4 SUBMITTED BEFORE ME THAT ITS STAND IN CLAIMING BROKERA GE IS COVERED IN APPEAL NO. 52/86-87 FOR A.V. 1983-84 IN CASE OF ONE OF GROUP COMPANY & ALSO COVERED BY THE ORDER OF CIT(APPEALS)-XVIII PASS ED FOR THE A.V. 2006-07 IN M/S DLF LIMITED AND THE SAME IS ALLOWABL E AS PER AS-7 AS WELL. THE ASSESSING OFFICER HAS CONTENDED IN ASSESSMENT ORD ER THAT PERUSAL OF THE AS-7CLAUSE 19 REVEALS THAT IT APPLIES TO CONS TRUCTION CONTRACT AND NOT TO THE DEVELOPMENT PROJECT UNDERTAKEN BY THE APPE LLANT. THE ASSESSING OFFICER HAS HELD THAT BROKERAGE IS ONE OF TH E MOST IMPORTANT DIRECT EXPENDITURE RELATED TO SALES, THEREFORE ALLOWING THE SAME IN ONE PARTICULAR YEAR WILL GIVE A DISTORTED PICTURE OF THE PROF ITS OF A PARTICULAR YEAR FOR THE REASON THAT BROKERAGE IS PAID TO VARIOUS PROP ERTY DEALERS ON THE INITIAL BOOKING MADE BY CUSTOMERS ON THE LAUN CH OF ANY PROJECT. ASSESSING OFFICER FURTHER CONTENDED THAT DECISION OF T HE APPEAL FOR A.V. 1983-84 IS NOT APPLICABLE TO APPELLANT AS ACCOUNTIN G POLICIES FOLLOWED IN A.V. 1983- 84 WERE DIFFERENT FROM THE ACCOUNTING POLIC IES FOLLOWED IN THE YEAR UNDER CONSIDERATION ON THE OTHER HAND, APPELLA NT HAS SUBMITTED BEFORE ME THAT EVEN IF THESE BROKERAGE EXPEN SES 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 Y EAR 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 AN Y WAY INCREASE THE COST OF PROJECT, IT RATHER REDUCES THE REALIZATION O F SALES. THE APPELLANT SUBMITTED THAT BROKERAGE IS PAYABLE AS SOON AS A BOOKING IS DONE THROUGH A BROKER AND SPECIFIED CONDITIONS ARE FULF ILLED. THEREAFTER, APPELLANT HAS NO RECOURSE TO BROKER AND IT IS ONE TIME PERMANENT OUTGO. THE APPELLANT FURTHER CONTENDED THAT IT DOES NOT IN A NY WAY IMPACT THE FUTURE COSTS TO BE INCURRED ON A PROJECT AND IT IS A PE RMANENT ONE TIME DENT ON THE SALE VALUE AND HENCE EVEN IN NORMAL UNDE RSTANDING OF THE NATURE OF EXPENSES, IT CANNOT BE CAPITALIZED. IT IS SEEN THAT AS PER PARA-19 OF AS-7, IT IS MENTION ED THAT THE SELLING COST CANNOT BE ATTRIBUTED TO CONTRACT ACTIVITY OR CANN OT BE ALLOCATED TO A CONTRACT UNDER CONSTRUCTION. EVEN AS PER AS-2 VALUATI ON OF INVENTORY ISSUED BY ICAI, IT IS SEEN THAT SELLING AND DISTRIBU TION COST CANNOT BE CONSIDERED AS PART OF THE COST OF INVENTORY AND SUCH E XPENSES HAS TO ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 5 RECOGNIZE IN THE PERIOD IN WHICH THEY ARE INCURRED. THE COST WHICH CAN BE ATTRIBUTED/ALLOCATED OVER THE INVENTORY SHOULD COMP RISE ALL THE COST OF PURCHASE, COST OF CONVERSION AND OTHER COST INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. IN THE CASE OF CONSTRUCTION ACTIVITIES THE COST OF PURCHASE OF LAND AND CONSTRUCTION COST CAN ONLY BE ATTRIBUTED OVER THE PROJECT. THE BROKE RAGE EXPENSES ARE PURELY A SELLING COST AND CANNOT FORM A PART OF INV ENTORY. IN VIEW OF THE ACCOUNTING STANDARD, THE BROKERAGE EXPENSES BEING A SELLING COST CANNOT BE CAPITALIZED WITH THE COST OF INVENTORY AND 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 I TAT 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 ACC OUNTING POLICY FOLLOWED DURING THE YEAR UNDER CONSIDERATION. IT IS SEE N THAT IN A.Y. 1983-84 ALSO THE SELLING COST I.E. BROKERAGE AND COMM ISSION WERE CLAIMED IN THE YEAR IN WHICH THEY ARE INCURRED AND SAME WERE NOT RECOGNIZED ON THE BASIS OF REVENUE RECOGNITION. THEREFO RE, THE RATIO OF THE SAID JUDGMENT STILL APPLICABLE IN THE CASE OF A PPELLANT AND THE BROKERAGE AND COMMISSION HAS TO BE ALLOWED IN THE YEA R IN WHICH IT HAS BEEN INCURRED AND CANNOT BE ASSOCIATED WITH CONSTRUCTI ON COST. THE CONTENTION OF THE ASSESSING OFFICER THAT THE BROKERAG E EXPENDITURE TO BE POSTPONED TO SUBSEQUENT YEAR AS PER AS-9 CANNOT B E ACCEPTED, AS BROKERAGE AND COMMISSION ARE RELATED TO THE SALE OF FLA TS 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 COVE RED BY THE ORDER OF CIT (APPEALS)-XVIII, NEW DELHI IN ONE OF GROUP COMPANY N AMED M/S DLF LTD. PASSED FOR THE A.Y. 2006-07. IT HAS BEEN VERIFIE D THAT ACCOUNTING POLICIES OF THE APPELLANT FOR THE YEAR UNDER CONSIDERAT ION IS SAME AS THAT OF DLF LTD. IN A.Y. 2006-07. CONSIDERING THE FA CTS DISCUSSED ABOVE, I AM OF THE CONSIDERED OPINION THAT THE EXPENSES ON BR OKERAGE FOR FLATS ETC. ARE PART OF SELLING EXPENSES AND CANNOT BE INCLU DED IN THE COST OF CONSTRUCTION FOR THE PURPOSE OF VALUATION OF CLOSING STOCK OF WIP. THE ACCOUNTING STANDARD OF ICAI ALSO DOES NOT SUPPORT THE PROPOSITION OF ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 6 CAPITALIZATION OF BROKERAGE. I AM, THEREFORE OF THE OP INION THAT THIS EXPENDITURE CANNOT BE CAPITALIZED AND HAS TO BE ALLO WED AS A REVENUE EXPENDITURE. THEREFORE, THE ADDITION OF RS. 1,81,53,15 9/- IS DELETED. THE ASSESSING OFFICER HAS RELIED UPON THE SUPREME COU RT JUDGMENT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORP. 225 IT R 802. (SC), AND HAS HELD THAT THE EXPENSES HAS TO BE SPREAD OVER IN S EVERAL YEARS IF THE BENEFIT OF SUCH EXPENDITURE IS CONTINUING IN THE ENS UING YEARS. THE FACTS OF THIS JUDGMENT CANNOT BE APPLIED TO THE APPELLANT 'S CASE AS BROKERAGE AND COMMISSION LINKED WITH THE SERVICES RENDERED BY TH E BROKER TO THE APPELLANT FOR SELLING THE FLATS AND OTHER PROPERTIES. THERE IS A NEXUS BETWEEN THE EXPENSES AND SERVICES RENDERED WHICH CANNO T BE SPREAD TO SEVERAL YEARS. THE BENEFIT OF THE BROKERAGE AND COMMISS ION IS RELATED TO A PARTICULAR PROPERTY OR FLAT SOLD AND IT CANNOT BE EXTE NDED TO OTHER PROPERTIES. THEREFORE, BROKERAGE EXPENSES CANNOT BE POSTP ONED FOR THE FUTURE YEARS. THEREFORE, RATIO OF THE SAID JUDGMENT IS NOT APPLICABLE IN THE CASE OF APPELLANT. IN SUPPORT OF MY DECISION, RELIANCE IS PLACED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF NOKIA CORPORA TION VS. DIT, DELHI, 2007, 162 TAXMAN 369 (DELHI), WHEREIN IT IS HELD THA T EVEN IF THE DEPARTMENT HAS FILED FURTHER APPEAL AGAINST THE LAST O RDER, WHICH IS IN FAVOUR OF THE APPELLANT, THE LAST ORDER IS JUDICIALLY BINDING ON THE SUBORDINATE AUTHORITY. HENCE, RESPECTFULLY FOLLOWING T HE 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 O RDER FOR THE ASSESSMENT YEAR 2009-10 IN THE CASE OF DLF HOME DEVE LOPERS LIMITED AND FOR THE ASSESSMENT YEAR 2007-08,2008-09 AND 2009- 10 IN THE CASE OF DLF LIMITED, BOTH APPELLANT'S GROUP COMPANIES, TH E ADDITION/DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTING TO RS. 1,81,53,159/- ON ACCOUNT OF BROKERAGE EXPENSES FOR SAL E OF VARIOUS PROPERTIES CANNOT BE SUSTAINED. THEREFORE, THE ADDITION /DISALLOWANCE OF RS. 1,81,53,159/- IS DELETED. HENCE, THE GROUND OF APPEAL NO. 2 RAISED BY THE APPELLANT IS ALLOWED IN FAVOUR OF THE APPELLANT. ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 7 4. AS REGARDS DISALLOWANCE U/S 14A THE LD. CI T(A) UPHELD THE ADDITION HOLDING THAT THE DISALLOWANCE WAS MANDATORY. THE RELEVANT F INDINGS 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 B Y THE APPELLANT ON THIS ISSUE AND OTHER MATERIAL ON RECORD. THE ASSESSING OFFIC ER HAS MADE AN ADDITION OF RS.46,12,728/- U/S 14A OF THE INCOME-TAX ACT, 19 61 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 ON ACCOUNT OF EXPENDITURES REL ATING TO EARNING EXEMPT INCOME. IN THIS REGARD, THE APPELLANT HAS SUBMITTED T HAT DURING THE YEAR UNDER APPEAL, THERE WERE TEMPORARY SURPLUS FUNDS, WHICH WERE I NVESTED IN MUTUAL FUNDS TO EARN SOME INCOME, AS A PRUDENTIAL BUSINESS D ECISION. AS PER PROVISIONS OF ACCOUNTING STANDARD 16 AND VARIOUS DECIS IONS (INCLUDING DECISION OF THE HON'BLE SUPREME COURT), INCOME EARNED ON INVES TMENT OF TEMPORARY SURPLUS FUNDS, BORROWED FOR THE EXECUTION OF THE PROJEC T ARE REQUIRED TO BE REDUCED FROM THE COST OF THE PROJECTS IN PROGRESS. ACCO RDINGLY, 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 AT APPELLANT HAS EARNED DIV IDEND INCOME OF RS. 306,88,926/-ON THE INVESTMENTS OF RS. 72,98,72,442/ - MADE IN THE MUTUAL FUNDS DURING THE YEAR. IT IS SEEN THAT APPELLANT HAS NOT ATTRIBUTED ANY INDIRECT EXPENDITURE ON EARNING SUCH EXEMPT INCOME. IT IS SEEN THAT EARNING OF DIVIDEND INCOME IS NOT A PASSIVE ACTIVITY. IN THE PRESENT AGE OF MAKING OF INVESTMENTS, MAINTAINING OR CONTINUING WITH INVESTMENTS AND TIME OF EXIT FROM THE INVESTMENT ARE WELL INFORMED AND WELL COORDINATED MANA GEMENT DECISION INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT AL SO ACUMEN OF SENIOR MANAGEMENT FUNCTIONARIES. THEREFORE, COST IS INBUILT E VEN IN SO CALLED PASSIVE INVESTMENTS. THERE ARE INCIDENTAL EXPENDITURE OF COLL ECTION, TELEPHONE AND FOLLOW UP ETC. THEREFORE, EXPENSES RELATING TO EARNING OF EXEMPT INCOME ARE EMBEDDED IN THE EXPENSES DEBITED TO PROFIT & LOSS A CCOUNT. THIS IS A.Y. 2010-11, THEREFORE, THE PROVISION OF SECT ION 14A READ WITH RULE 8D ARE CLEARLY APPLICABLE IN THE CASE OF APPELLANT. FURTH ER FOR APPLICABILITY OF THE ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 8 PROVISION OF SECTION 14A READ WITH RULE 8D, IT IS NOT NECESSARY THAT DIVIDEND INCOME HAS TO BE EARNED. IT IS SO HELD BY THE SPECIA L BENCH 'ITAT' DELHI IN THE CASE OF CHEMINVEST LTD. VS. ITO (2009) 317 ITR (AT) 86 (DEL) AS HELD ABOVE, THAT NO INTEREST BEARING FUNDS WERE UTI LIZED FOR MAKING INVESTMENTS IN THE MUTUAL FUNDS, THEREFORE, THE PART-I I OF FORMULA PRESCRIBED UNDER RULE 8D IS NOT APPLICABLE FOR WORKING OUT INTERE ST ATTRIBUTABLE TO INVESTMENTS MADE. HOWEVER, THE APPELLANT HAS INCURRED INDIRECT EXPENSES FOR MANAGEMENT AND ADMINISTRATION OF THE INVESTMENTS MAD E. THEREFORE, A PART OF THE INDIRECT EXPENSES DEBITED TO PROFIT AND LOSS A CCOUNT HAS TO BE APPORTIONED ON THE INVESTMENT MADE ON WHICH EXEMPT I NCOME IS EARNED BY THE APPELLANT. HENCE, 0.5% OF THE AVERAGE INVESTMENT S OF RS. 92,25,45,692/- WHICH COMES TO RS. 46,12,728/-IS TAKEN AS EXPENSES INCURRED ON ADMINISTRATION AND MANAGEMENT OF SUCH INVESTMENTS AND FOR EARNING EX EMPT INCOME. THEREFORE, DISALLOWANCE OF EXPENSES OF RS. 46,12,728/ - IS WORKED OUT TO BE INCURRED ON ACCOUNT OF ADMINISTRATION AND MANAGEMENT O F SUCH INVESTMENTS AND EARNING EXEMPT INCOME. HENCE, THE DISALLOWANCE OF EXPENSES MADE BY THE ASS ESSING OFFICER UNDER RULE 8D(2)(III) OF RS. 46,12,728/- IS CONFIRMED. 5. AGGRIEVED BOTH THE PARTIES ARE IN APPEAL B EFORE US. LD. AR AT THE OUTSET SUBMITTED THAT REVENUES APPEAL WAS COVERED IN FAVO UR OF ASSESSEE BY THE ORDER OF HONBLE DELHI HIGH COURT IN THE CASE OF DLF UNIVERS AL LTD. WHICH WAS A GROUP COMPANY OF ASSESSEE WHEREIN THE HONBLE COURT VIDE ORDER DATED 16.4.2015 HAD DISMISSED THE APPEAL FILED BY THE REVENUE ON SIMILA R FACTS AND CIRCUMSTANCES. AND IN THIS RESPECT OUR ATTENTION IS INVITED TO QUESTION N O. 4 FRAMED BY HONBLE COURT. LD. DR FAIRLY AGREED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE. AS REGARDS ASSESSEES APPEAL, LD. AR SUBMITTED THAT ASSESSEE W AS SETTING UP A REAL ESTATE PROJECT WHICH FACT IS APPARENT FROM THE FINDINGS OF THE AO AND LD. CIT(A) AND DURING THE SETTING UP OF PROJECT, THERE WERE CERTAIN SURPL US FUNDS WHICH IT INVESTED IN ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 9 MUTUAL FUND FOR EARNING OF SOME INCOME AND THE INCO ME EARNED THEREFROM WAS REDUCED FROM THE WORK IN PROGRESS. THE LD. AR SUBMI TTED THAT THE TREATMENT OF INCOME EARNED DURING SETTING UP OF THE PROJECT WAS MADE IN ACCORDANCE WITH ACCOUNTING STANDARD 16 ISSUED BY INSTITUTE OF CHAR TERED ACCOUNTANT OF INDIA. HE FURTHER ELABORATED THAT IN FACT THE ASSESSEE HAD BY REDUCING COST OF PROJECT 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 ATTENTIO N TO SCHEDULE VII PLACED AT PAPER BOOK AT PAGE 12 AND INVITED OUR ATTENTION TO THE EX PENSES INCURRED ON WORK IN PROGRESS WHICH INCLUDED FINANCE COST (NET OF FINANC E INCOME). THE LD. AR SUBMITTED THAT THE DIVIDEND INCOME EARNED FROM MUTUAL FUND WA S REDUCED FROM FINANCE COST AND THUS THE ASSESSEE BOOKED LOWER COST OF PROJECT TO THE EXTENT OF DIVIDEND INCOME AND THEREFORE PROFITS OFFERED FROM SALE OF PROJECT WILL BE MORE TO THE EXTENT OF DIVIDEND INCOME. INVITING OUR ATTENTION TO ASSES SMENT ORDER, THE LD. AR SUBMITTED THAT THESE WERE NOT BORROWED FUNDS AS AO HAS NOT MA DE ANY ADDITION ON ACCOUNT OF INTEREST. REGARDING THE ADDITION ON ACCOUNT OF ADMI NISTRATIVE EXPENSES, THE LD. AR INVITED OUR ATTENTION TO PAPER BOOK PAGE 8 WHERE TH E DETAIL OF EXPENSES WAS PLACED AND ARGUED THAT THE EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT DO NOT INCLUDE ANY EXPENSES INCURRED FOR THE PURPOSE OF EARNING EX EMPT INCOME AND, THEREFORE, THE DISALLOWANCE WITHOUT PINPOINTING ANY EXPENDITURE RE LATED TO EXEMPT INCOME CANNOT BE SUSTAINED. FURTHER ADVANCING ARGUMENT LD. AR SUB MITTED THAT THE TREATMENT OF DIVIDEND BY REDUCING FROM COST OF PROJECT WAS IN AC CORDANCE WITH THE GUIDANCE OF ICAI AND ALSO REFERRED TO HONBLE SUPREME COURT DEC ISION IN THE CASE OF CIT VS. BOKARO STEEL LTD. 236 ITR 315. LD. AR SUBMITTED THA T THE HONBLE SUPREME COURT ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 10 DISTINGUISHING THE CASE LAW OF TUTICORIN ALKALI CHE MICALS & FERTILISERS LTD. VS. CIT HAS HELD THAT WHERE THE FUNDS ARE INEXTRICABLY CONN ECTED WITH THE PROJECT THE INCOME THERE FROM IS NOT TAXABLE. 6. LD. DR ON THE OTHER HAND INVITED OUR ATTE NTION TO SECTION 56 OF THE ACT AND SUBMITTED THAT DIVIDEND INCOME IS TAXABLE UNDER TH E HEAD INCOME FROM OTHER SOURCES AND ACCORDINGLY THE ASSESSEE CANNOT HIDE I TS INCOME FROM OTHER SOURCES BY REDUCING IT FROM WORK IN PROGRESS. SHE SUBMITTED TH AT THOUGH DIVIDEND INCOME WAS EXEMPT IN THE RELEVANT YEAR YET IT ATTRACT THE DISA LLOWANCE U/S 14A WHICH THE AO HAS RIGHTLY DONE. SHE HEAVILY RELIED UPON THE NOTIFIC ATION DATED 31.3.2015 ISSUED BY CBDT AND INVITED OUR ATTENTION TO INCOME COMPUTATIO N & DISCLOSURE STANDARD III RELATING TO CONSTRUCTION CONTRACTS. SIMILARLY SHE T OOK US TO THE HEADING THE USE OF RESOURCES BY OTHERS YIELDING INTEREST, ROYALTIES & DIVIDENDS AND ARGUED THAT AS PER NOTIFICATION DIVIDENDS ARE TO BE RECOGNISED IN ACCO RDANCE WITH PROVISIONS OF THE ACT AND THE PROVISIONS OF ACT ARE VERY CLEAR WHICH SAY THAT DIVIDENDS ARE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. IN VIEW OF T HE ABOVE SHE ARGUED THAT TREATMENT OF DIVIDEND BY REDUCING FROM WORK IN PROG RESS IS NOT IN ACCORDANCE WITH LAW. 7. WE HAVE HEARD RIVAL SUBMISSIONS AND HAVE GON E THROUGH THE MATERIAL AVAILABLE ON RECORD. WE TAKE UP THE REVENUES APPEAL. WE FIN D THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF H ONBLE DELHI HIGH COURT DATED 16.4.2014 IN THE CASE OF CIT VS. DLF UNIVERSAL LTD. WHEREIN THE HONBLE COURT HAS ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 11 DECIDED SIMILAR ISSUE IN QUESTION NO. 4 THE RELEVAN T FINDING OF HONBLE COURT AS CONTAINED IN PARA 8 AND 9 REPRODUCED BELOW:- 8. THE ASSESSEE HAD CLAIMED RS. 61,78,414/- AS EXP ENDITURE TOWARDS BROKERAGE AND COMMISSION. THE AMOUNT WAS PAID TO IT S BROKERS FOR BOOKING AND SALE OF CERTAIN PROPERTIES DURING THE A SSESSMENT YEAR. THE ASSESSING OFFICER DISALLOWED THIS EXPENDITURE ON TH E GROUND THAT DURING THE YEAR THE CONVEYANCE OF THE SALE DEEDS WERE NOT EXECUTED. THE CIT(A) AND ITAT ACCEPTED THE ASSESEES CONTENTIONS AND SET ASIDE THE DISALLOWANCE. AT THE OUTSET, WE NOTICE THAT THE ASS ESSEES EXPLANATION CLEARLY STATED IS AS FOLLOWS :- IN THIS CONNECTION IT IS SUBMITTED THAT BROKERAGE AND COMMISSION IS NOT A DIRECT EXPENSES FOR ACQUIRING T O A SPECIFIC PROPERTY BUT IT IS IN FACT FINANCIAL COST/SELLING E XPENSES AND IS FULLY ALLOWABLE IN THE YEAR IN WHICH THE SAME IS IN CURRED. THE PROPERTY BROKERS WHO HAVE RENDERED THEIR SERVICES T O OBTAIN ADVANCES ON BOOKING OF PROPERTIES ARE ENTITLED TO T HE PAYMENT OF COMMISSION IN TERMS OF AGREEMENT ENTERED INTO WITH THEM. THEREFORE, THE EXPENSES INCURRED ON BROKERAGE AND C OMMISSION ON BOOKING OF PROPERTIES BEING A FINANCE/SELLING EX PENSES ARE ALLOWABLE IN FULL. IN THIS CONNECTION YOUR ATTENTIO N IS INVITED TO THE VARIOUS ORDERS OF CIT(A) ON THIS POINT WHEREIN THE ADDITION ON ACCOUNT HAS BEEN DELETED. YOUR ATTENTION IS ALSO DR AWN TO ORDER DATED 20.7.1994 OF HONBLE ITAT, NEW DELHI FOR THE ASSESSMENT YEAR 1983-84 OF THE INCOME-TAX WHEREIN AN ADDITIONA L GROUND TAKEN BY THE DEPTT. FOR INCLUSION OF THE AMOUNT OF BROKERAGE AND COMMISSION IN THE SALES PROMOTION EXPENSES U/S 37(2 )(A) HAVE BEEN DISMISSED. WE UNDERSTAND THAT THE DEPTT. HAS N OT FILED ANY REFERENCE APPLICATION IN THE HIGH COURT AGAINST IS ORDER. 9. IT IS NOT DISPUTED BY THE REVENUE THAT FOR THE OTHER YEARS, THE ASSESSEES TREATMENT OF SUCH EXPENSES HAS BEEN IN H IS FAVOUR AND THE REVENUE HAS NOT CHOSEN TO CHALLENGE IT. EVEN OTHERW ISE, WE ARE OF THE OPINION THAT SUCH EXPENDITURE HAS TO BE ALLOWED. TH E QUESTION OF LAW IS CONSEQUENTLY ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 8. SINCE THE FACTS AND CIRCUMSTANCES IN THE P RESENT YEAR ARE SIMILAR, THEREFORE, RESPECTFULLY FOLLOWING THE ORDER OF HONBLE DELHI H IGH COURT WE DISMISS THE APPEAL FILED BY THE REVENUE. ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 12 9. NOW COMING TO THE APPEAL FILED BY THE ASSE SSEE. WE FIND THAT AO HAS MADE THE DISALLOWANCE U/S 14A AND HAS MECHANICALLY FOLLO WED RULE 8D WITHOUT PINPOINTING ANY EXPENDITURE RELATABLE TO EARNING OF EXEMPT INCO ME. FROM THE DETAILS OF DISALLOWANCE MADE BY AO, WE FIND THAT AO HAS NOT MA DE ANY DISALLOWANCE ON ACCOUNT OF INTEREST. WE FIND THAT HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES 323 ITR 518 (PH) HAS HELD THAT DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPT INCOME NO EXPENDITURE WAS INCURRED DISALLOWANCE CAN NOT BE MADE. WE FIND THAT ASSESSEE HAD DEBITED ALL EXPENSES RELATED TO PROJEC T 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 E XPENDITURE FOR EARNING OF EXEMPT INCOME. THE PROFIT AND LOSS ACCOUNT AS PLACE D IN PAPER BOOK PAGE 8 DO NOT REFLECT ANY EXPENDITURE RELATABLE TO EARNING OF EXE MPT INCOME. MOREOVER, WE FIND THAT ASSESSEE HAD DEPLOYED ITS SURPLUS FUNDS IN MUT UAL FUNDS AND FOR INVESTMENT IN MUTUAL FUNDS ADVISORS DO NOT CHARGE ANY FEE AND, WH ATEVER FEE OR CHARGES ARE CHARGED THEY ARE DEDUCTED FROM THE AMOUNT OF INVEST MENT ITSELF. THEREFORE, ALSO THE ASSESSEE CANNOT BE SAID TO HAVE INCURRED ANY EXPEND ITURE DIRECTLY OR INDIRECTLY FOR EARNING OF EXEMPT INCOME. MOREOVER, WE FIND THAT HO NBLE SUPREME COURT IN THE CASE OF CIT VS. BOKARO STEEL LTD. (SUPRA) HELD THAT IF DURING SETTING UP OF A PROJECT ASSESSEE EARNED ANY AMOUNT FROM FUNDS WHICH ARE INE XTRICABLY LINKED WITH THE PROCESS OF SETTING UP OF THE PROJECT THE INCOME WIL L GO TO REDUCE THE COST OF ITS PROJECT AND THE RECEIPTS ARE OF A CAPITAL NATURE AN D CANNOT BE TAXED AS INCOME. THE RELEVANT FINDING OF THE HONBLE COURT ARE CONTAINED IN PARA 7 ARE REPRODUCED BELOW :- ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 13 7. THE APPELLANT, HOWEVER, RELIED UPON THE DECISION OF THIS COURT IN TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. VS. CIT (SUPRA). T HAT CASE DEALT WITH THE QUESTION WHETHER INVESTMENT OF BORROWED FUNDS PRIOR TO COMMENCEMENT OF BUSINESS, RESULTING IN EARNING OF INTEREST BY THE ASSE SSEE WOULD AMOUNT TO THE ASSESSEE EARNING ANY INCOME. THIS COURT HELD THAT IF A PERSON BORROWS MONEY FOR BUSINESS PURPOSES, BUT UTILISES THAT MONEY TO EA RN INTEREST, HOWEVER TEMPORARILY, THE INTEREST SO GENERATED WILL BE HIS INCO ME. THIS INCOME CAN BE UTILISED BY THE ASSESSEE WHICHEVER WAY HE LIKES. MERE LY BECAUSE HE UTILISED IT TO REPAY THE INTEREST ON THE LOAN TAKEN, WILL NOT MAKE T HE INTEREST INCOME AS A CAPITAL RECEIPT. THE DEPARTMENT RELIED UPON THE OBSERVA TIONS MADE IN THAT JUDGMENT (AT P. 179) TO THE EFFECT THAT IF THE COMP ANY, EVEN BEFORE IT COMMENCES BUSINESS, INVESTS SURPLUS FUNDS IN ITS HA NDS FOR PURCHASE OF LAND OR HOUSE PROPERTY AND LATER SELLS IT AT PROFIT, THE GAIN M ADE BY THE COMPANY WILL BE ASSESSABLE UNDER THE HEAD 'CAPITAL GAINS'. SIMIL ARLY, IF A COMPANY PURCHASES RENTED HOUSE AND GETS RENT, SUCH RENT WILL B E ASSESSABLE TO TAX UNDER S. 22 AS INCOME FROM HOUSE PROPERTY. LIKEWISE, THE CO MPANY MAY HAVE INCOME FROM OTHER, SOURCES. THE COMPANY MAY ALSO, AS IN THAT CASE, KEEP THE SURPLUS FUNDS IN SHORT-TERM DEPOSITS IN ORDER TO EARN INTEREST. S UCH INTEREST WILL BE CHARGEABLE UNDER S. 56 OF THE IT ACT. THIS COURT ALSO EMPHASISED THE FACT THAT THE COMPANY WAS NOT BOUND TO UTILISE THE INTEREST SO EARNED TO ADJUST IT AGAINST THE INTEREST PAID ON BORROWED CAPITAL. THE COM PANY WAS FREE TO USE THIS INCOME IN ANY MANNER IT LIKED. HOWEVER, WHILE I NTEREST EARNED BY INVESTING BORROWED CAPITAL IN SHORT-TERM DEPOSITS IS AN INDEPEND ENT SOURCE OF INCOME NOT CONNECTED WITH THE CONSTRUCTION ACTIVITIES OR BUS INESS ACTIVITIES OF THE ASSESSEE, THE SAME CANNOT BE SAID IN THE PRESENT CAS E WHERE THE UTILISATION OF VARIOUS ASSETS OF THE COMPANY AND THE PAYMENTS RECEIV ED FOR SUCH UTILISATION ARE DIRECTLY LINKED WITH THE ACTIVITY OF SETTING UP T HE STEEL PLANT OF THE ASSESSEE. THESE RECEIPTS ARE INEXTRICABLY LINKED WITH THE SETTIN G UP OF THE CAPITAL STRUCTURE OF THE ASSESSEE-COMPANY. THEY MUST, THEREFORE , BE VIEWED AS CAPITAL RECEIPTS GOING TO REDUCE THE COST OF CONSTRUCTION. IN THE CASE OF CHALLAPALLI SUGARS LTD. VS. CIT 1974 CTR (SC) 309 : (1975) 98 IT R 167 (SC) : TC 17R.834, THIS COURT EXAMINED THE QUESTION WHETHER INTEREST PAID BEFO RE THE COMMENCEMENT OF PRODUCTION BY A COMPANY ON AMOUNTS BORROWED FOR THE ACQUISITION AND INSTALLATION OF PLANT AND MACHINERY WOULD FORM A PART OF THE ACTUAL COST OF THE ASSET TO THE ASSESSEE WITHIN THE MEANING OF THAT EX PRESSION IN S. 10(5) OF THE INDIAN IT ACT, 1922, AND WHETHER THE ASSESSEE WILL B E ENTITLED TO DEPRECIATION ALLOWANCES AND DEVELOPMENT REBATE WITH REFERENCE TO SU CH INTEREST ALSO. THE ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 14 COURT HELD THAT THE ACCEPTED ACCOUNTANCY RULE FOR DETE RMINING COST OF FIXED ASSETS IS TO INCLUDE ALL EXPENDITURE NECESSARY TO BRIN G SUCH ASSETS INTO EXISTENCE AND TO PUT THEM IN WORKING CONDITION. IN C ASE MONEY IS BORROWED BY A NEWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CO NSTRUCTING AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMEN T OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALISED AND ADDED TO T HE COST OF THE FIXED ASSETS CREATED AS A RESULT OF SUCH EXPENDITURE. BY THE SAME REASONING IF THE ASSESSEE RECEIVES ANY AMOUNTS WHICH ARE INEXTRICABLY L INKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY, SUCH RECEIPTS WILL GO TO REDUCE THE COST OF ITS ASSETS. THESE ARE RECEIPTS OF A CAPITAL NATURE AND CANNOT BE TAXED AS INCOME. 10. ABOVE ALL WE FIND THAT AO HAS NOT RECORDED ANY SATISFACTION AS TO WHY HE WAS NOT SATISFIED WITH THE CLAIM OF ASSESSEE THAT NO EX PENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME. THE RELEVANT FINDINGS OF AO AS CONTA INED IN PARA 5.19 ONWARDS ARE REPRODUCED BELOW :- 5.19 THE EARNING OF EXEMPT INCOME IS NOT IN NATURE O F PASSIVE ACTIVITY HAVING NO INPUT. IN FACT IN PRESENT SITUATION MAKING OF INVESTMENT, MAINTAINING OR CONTINUING INVESTMENT AND TIME OF EXI T FROM INVESTMENT ARE WELL INFORMED AND WELL COORDINATED MANAGEMENT DECI SIONS INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCE BUT ALSO ACUMEN OF SENIOR MANAGEMENT FUNCTIONARIES. THEREFORE, COST IS INBUILT I NTO EVEN SO CALLED 'PASSIVE' INVESTMENT. THERE ARE INCIDENTAL EXPENDITURE S OF COLLECTION, TELEPHONE, FOLLOW UP ETC. SINCE IN THE PRESENT CASE, OUT OF TOTAL FUNDS AVAILABLE/ RAISED BY THE ASSESSEE, A SUBSTANTIAL PORT ION OF IT HAS BEEN INVESTED IN SHARES AND MUTUAL FUNDS, THEREFORE, IT CA N BE HELD THAT EXPENDITURE IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME ARE EMBEDDED IN INDIRECT EXPENSES. 5.20 THE INVESTMENT MADE BY THE ASSESSEE COMPANY, B EING A CONSCIOUS DECISION AND HAVING DEPLOYMENT OF FUNDS CLEARLY BRING S INTO PICTURE EXPENDITURE BY WAY OF COST OF FUNDS 'INVESTED.' COMP OSITE FUND HAVING COST NEEDS TO BE SPREAD SO AS TO APPORTION APPROPRIATE COST OF FUNDS INVESTED IN THE ACTIVITY LENDING TO EARNING OF EXEMP T INCOME. ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 15 5.21 THE SUPREME COURT IN THE CASES OF CIT VS. MAHARAS HTRA SUGAR MILLS LTD REPORTED IN [1971] 82 ITR 452 (SC) AND RAJASTHAN STATE WAREHOUSING CORPORATION VS. (IT REPORTED IN [2000] 242 ITR 450 (SE) HAVING HELD THAT WHERE THERE IS ONE INDIVISIBLE BUSI NESS GIVING RISE TO TAXABLE INCOME AS WELL AS EXEMPT INCOME, THE ENTIRE EXPENDITURE INCURRED IN RELATION TO THAT BUSINESS WOULD HAVE TO BE ALLOWED EVEN IF A PART OF THE INCOME EARNED FROM THE BUSINESS WOULD HAVE TO BE ALLOWED EVEN IF A PART OF THE INCOME EARNED FROM THE BUSINESS IS EXEMPT FROM TAX. SECTION 14A OF THE ACT WAS ENACTED TO OVERCOME THOSE JUDICIAL PRONOUNCEMENTS. THE OBJECT OF SECTION 14A OF THE ACT IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO I NCOME 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 WH EREAS THE ASSESSEE WAS UNABLE TO PRODUCE ANY MATERIAL BEFORE TH E AUTHORITIES BELOW SHOWING THE SOURCE FROM WHICH SUCH SHARES WERE AC QUIRED. IN OUR OPINION, THE AUTHORITIES BELOW RIGHTLY HELD THAT PROPO RTIONATE AMOUNT SHOULD BE DISALLOWED HAVING REGARD TO THE TOTAL INCOM E AND THE INCOME FROM THE EXEMPT SOURCE. 5.23 THE POSITION IN LAW IS SETTLED AND NOW IT IS F ULLY ESTABLISHED THAT PROPORTIONATE DISALLOWANCE WITH REGARD TO EXEMPT INCOME HAS TO BE MADE FOR WHICH THE LEGISLATURE HAS ENVISAGED A PROVISI ON IN THE SHAPE OF RULE 8 D WHICH PRESCRIBES SPECIFIC DISALLOWANCES AS P ER FIXED FORMULA. THE POSITION IN LAW BEING SETTLED THERE CANNOT BE AN Y DEVIATION IN THIS REGARD. RELIANCE IN THIS REGARD IS PLACED ON THE JUDICI AL PRONOUNCEMENT IN THE CASE OF M/S. DHANUKA AND SONS VS. COMMISSION ER 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 :- ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 16 - FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSETS S HALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCO UNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. DISALLOWANCE UNDER RULE 8 D OF I. TAX RULES :- = AGGREGATE OF (I) + (II) + (III) = RS. 46,12,728/- 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 ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY :- A X B/C WHERE : A- AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED N CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B- THE AVERAGE OF 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 ASSESEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; 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. A- INTEREST : RS. NIL B AVERAGE INVESTMENT : RS. 922545692 C-AVERAGE ASSETS : RS. =A X B/C =NIL =RS. NIL 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. AVERAGE INVESTMENTS : RS =0.5% TO RS. 922545692 = RS. 46,12,728/- ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 17 11. IN THE ABOVE FINDINGS, WE DO NOT SEE ANY SA TISFACTION RECORDED BY AO REGARDING DISLODGING OF CLAIM OF THE ASSESSEE. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD. 37 0 ITR 338 (DELHI) UNDER SIMILAR CIRCUMSTANCES HAS HELD AS UNDER :- 18. IT IS IN THIS CONTEXT WE FEEL THAT THE FINDING S 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 ASSESS ING OFFICER TO HOLD AND RECORD HIS SATISFACTION CLINCHES THE ISSUE IN FAVOUR O F THE RESPONDENT ASSESSEE AND AGAINST THE REVENUE. THE SELF OR VOLUNTARY DEDUCT IONS MADE BY THE ASSESSEE WERE NOT REJECTED AND HELD TO BE UNSATISFACT ORY, ON EXAMINATION OF ACCOUNTS. JUDGMENTS IN TIN BOX CO. (SUPRA) , RELIANC E UTILITIES AND POWER LTD. (SUPRA) , SUZLON ENERGY LTD. (SUPRA) AND EAST INDIA PH ARMACEUTICAL WORKS LTD. (SUPRA) WOULD BE RELEVANT IF THE SATISFACTION OF THE ASSESSING OFFICER IS IN ISSUE, AND SUCH QUESTION OF SATISFACTION IS WITH REFERENCE TO THE ACCOUNTS. 19. HOWEVER, THE DECISIONS RELIED UPON BY THE TRIBUNA L IN THE CASE OF TIN BOX CO. (SUPRA) , RELIANCE UTILITIES AND POWER LTD. (SUP RA) , SUZLON ENERGY LTD. (SUPRA) AND EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPRA ) COULD NOT BE NOW APPLICABLE, IF WE APPLY AND COMPUTE THE DISALLOWANC E UNDER RULE 8D OF THE RULES. THE SAID RULE IN SUB RULE (2) SPECIFICALLY P RESCRIBES THE MODE AND METHOD FOR COMPUTING THE DISALLOWANCE UNDER SECTION 1 4A OF THE ACT. THUS, THE INTERPRETATION OF CLAUSE (II) TO SUB RULE (2) TO RULE 8D OF THE RULES BY THE CIT(A) AND THE TRIBUNAL IS NOT SUSTAINABLE. THE SAID CLAUSE EXPRESSLY STATES THAT WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF I NTEREST IN THE PREVIOUS YEAR AND THE INTEREST PAID IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT THEN THE FORMULA PRESCRIBED WOULD APPLY. UND ER CLAUSE (II) TO RULE 8D(2) OF THE RULES, THE ASSESSING OFFICER IS REQUIRED TO EXAMINE WHETHER THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST IN THE PREVIOUS YEAR AND SECONDLY WHETHER THE INTEREST PAID WAS DIRECTLY ATTRIBU TABLE TO PARTICULAR INCOME OR RECEIPT. IN CASE THE INTEREST PAID WAS DIRECT LY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THEN THE INTEREST ON LOAN AMOUNT TO THIS EXTENT OR IN ENTIRETY AS THE CASE MAY BE, HAS TO BE EXCLUDED F OR MAKING COMPUTATION AS ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 18 PER THE FORMULA PRESCRIBED. PERTINENTLY, THE AMOUNT TO B E DISALLOWED AS EXPENDITURE RELATABLE TO EXEMPT INCOME, UNDER SUB RULE (2) IS THE AGGREGATE OF THE AMOUNT UNDER CLAUSE (I) , CLAUSE (II) AND CLAUSE (III) . CLAUSE (I) RELATES TO DIRECT EXPENDITURE RELATING TO INCOME FORMING PART OF T HE TOTAL INCOME AND UNDER CLAUSE (III) AN AMOUNT EQUAL TO 0.5% OF THE AV ERAGE AMOUNT OF VALUE OF INVESTMENT, APPEARING IN THE BALANCE SHEET ON THE FI RST DAY AND THE LAST DAY OF THE ASSESSEE HAS TO BE DISALLOWED. 20. HOWEVER, IN THE PRESENT CASE WE NEED NOT REFER TO SUB RULE (2) TO RULE 8D OF THE RULES AS CONDITIONS MENTIONED IN SUB SECTIO N (2) TO SECTION 14A OF THE ACT READ WITH SUB RULE (1) TO RULE 8D OF THE RULES W ERE NOT SATISFIED AND THE ASSESSING OFFICER ERRED IN INVOKING SUB RULE (2) , WIT HOUT ELUCIDATING AND EXPLAINING WHY THE VOLUNTARY DISALLOWANCE MADE BY TH E ASSESSEE WAS UNREASONABLE AND UNSATISFACTORY. WE DO NOT FIND ANY SUCH SATISFACTION RECORDED IN THE PRESENT CASE BY THE ASSESSING OFFICER, BEFORE HE INVOKED SUB RULE (2) TO RULE 8D OF THE RULES AND MADE THE RE-COM PUTATION. THEREFORE, THE RESPONDENT ASSESSEE WOULD SUCCEED AND THE APPEAL SHO ULD BE DISMISSED. 12. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTAN CES & FOLLOWING THE ABOVE JUDICIAL PRECEDENTS WE ALLOW APPEAL OF THE ASSESSEE. IN VIEW OF THE ABOVE APPEAL OF REVENUE IS DISMISSED WHEREAS APPEAL OF THE ASSESSEE IS ALLO WED. 13. IN THE RESULT THE APPEAL OF THE REVENUE IS D ISMISSED AND APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST SEPTEMBER, 2015. SD/- SD/- (BEENA A PILLAI) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 1 ST SEPTEMBER, 2015 ITA NOS. 4103/DEL/2013,4431/D EL/2013 DLF SOUTHERN TOWNS PVT. LTD. VS DCIT & DCIT VS. DLF SOUTHERN TOW NS PVT. LTD. 19 VEENA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER DY. REGISTRAR SL. NO. DESCRIPTION DATE 1. DATE OF DICTATION BY THE AUTHOR 31.8..2015 2. DRAFT PLACED BEFORE THE DICTATING MEMBER 1.9.20 15 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT APPROVED BY THE SECOND MEMBER 5. DATE OF APPROVED ORDER COMES TO THE SR. PS 6. DATE OF PRONOUNCEMENT OF ORDER 7. DATE OF FILE SENT TO THE BENCH CLERK 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER