CAPRICON REALTY LTD, MUMBAI V. DCIT CIR 2(1), MUMBAI

ITA 6448/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0741 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 01-03-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 20-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G N MAKWANADR
• Assessee Lawyers: NEHA PARANJAPE
• Keywords: Business income; Business expenditure; Search and seizure; Principle of natural justice; Earning of tax free income; Revenue expenditure
• Section: 143(3); 14A

Judgement Text

, ,, , INCOME TAX APPELLATE TRIBUNAL, MUMBAI C BENCH , BEFORE S/SH. MAHAVIR SINGH,JM & RAMIT KOCHAR ,AM ./ ITA NO./6448/MUM/2014 , / ASSESSMENT YEARS: 2010-11 M/S. CAPRICON REALITY LTD. VITHALDAS CHAMBERS, 3RD FLOOR 16, MUMBAI SAMACHAR MARG, FORT MUMBAI-400 001. PAN:AAACC 4297 J VS. THE DCIT - CIRCLE - 2(1) ROOM NO.542, 5TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. ( / APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI G.N. MAKWANA-DR ASSESSEE BY: SHRI K. GOPAL & MS. NEHA PARANJAPE -AR / DATE OF HEARING: 20/04/2017 / DATE OF PRONOUNCEMENT:17/05/2017 , 1961 254(1) ORDER U/S 254(1) OF THE INCOME-TAX ACT, 1961(THE AC T) O R D E R , / PER RAMIT KOCHAR,AM : THIS APPEAL, FILED BY THE ASSESSEE , BEING ITA NO. 6448/MUM/2014, IS DIRECTED AGAINST THE APPELLATE OR DER DATED 06 TH AUGUST 2014 PASSED BY LEARNED COMMISSIONER OF INCOM E 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 ORDER DA TED 23RD MARCH, 2013 PASSED BY THE LEARNED ASSESSING OFFICER (HEREI NAFTER CALLED THE AO) U/S 143(3) OF THE INCOME-TAX ACT,1961 (HEREINA FTER CALLED THE ACT). 6448/M/14(10-11) CAPRICON REALITY LTD. 2 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN TH E MEMO OF APPEAL FILED WITH THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI (HER EINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS ) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.20,27,472/- UNDER RULE 8D(II) ON ACCOUNT OF INTEREST EXPENSES. YOUR APPELLANTS SU BMIT THAT NO INTEREST BEARING FUNDS HAVE BEEN UTILIZED TO EARN E XEMPT INCOME AND THAT THE SAID DISALLOWANCE IS NOT WARRANTED AND OUGHT TO BE DELETED. WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLANTS SUB MITS THAT NO INTEREST EXPENSES HAVE BEEN CLAIMED BY THE APPELLAN TS DURING THE YEAR SINCE THE ENTIRE INTEREST EXPENSES HAVE BE EN CAPITALIZED TO THE WORK IN PROGRESS ACCOUNT. WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLANTS SUB MITS THAT INTEREST IF ANY HAS TO BE CONSIDERED FOR DISALLOWAN CE SHOULD BE NET OF THE INTEREST INCOME EARNED DURING THE YEAR A ND OFFERED TO TAX. 2. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS ERRED IN CONFIRMING DISALLOWANCE OF RS.11,45,953/- ON ACC OUNT OF EXPENSES UNDER RULE 8D(III) BEING 0.5% OF THE AVERA GE INVESTMENTS. YOUR APPELLANTS SUBMIT THAT THE DISALL OWANCE NOT WARRANTED AND OUGHT TO BE DELETED. WITHOUT PREJUDICE TO THE ABOVE, YOU APPELLANTS SUBM IT THAT HAVE CLAIMED ONLY RS.14,08,071/- AS BUSINESS EXPENDITURE AND HAVE TAKEN REST OF EXPENDITURE AMOUNTING TO RS. 3,75,96, 844/- TO WORK IN PROGRESS AND THAT THE DISALLOWANCE IF ANY H AS TO BE OUT OF RS.14,08,071/- WHICH HAS BEEN CLAIMED BY THE APP ELLANTS. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT. DURING THE COURSE OF ASSESSMENT PROCEE DINGS U/S 143(3) R.W.S. 143(2) OF THE 1961 ACT, IT WAS OBSERVED BY THE ASSE SSING OFFICER (A.O.) THAT THE ASSESSEE HAS CLAIMED EXEMPTION OF DIVIDEND INCO ME AMOUNTING TO RS.97,58,944/-. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS U/S 143(3) R.W.S. 143(2) OF THE 1961 ACT, THE ASSESSEE WAS ASK ED TO SHOW CAUSE AS TO 6448/M/14(10-11) CAPRICON REALITY LTD. 3 WHY THE DISALLOWANCE UNDER SECTION 14A OF THE 1961 ACT READ WITH RULE 8D OF THE 1962 RULES SHOULD NOT BE MADE. THE ASSESSEE SUBMITTED THAT NO EXPENSES HAVE BEEN INCURRED BY IT TO EARN THE SAID EXEMPTED INCOME OF DIVIDEND OF RS.97,58,944/-. THE AO REJECTED THE CONTENTION OF THE ASSESSEE IN V IEW OF SECTION 14A OF THE 1961 ACT R.W.RULE 8D OF THE 1962 RULES AND MADE A D ISALLOWANCE OF RS.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 23-03-201 3 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 A N APPEAL BEFORE THE LEARNED CIT(A). THE ASSESSEE SUBMITTED THAT INVESTM ENTS IN SHARES AND SECURITIES TO THE TUNE OF RS.45,83,81,269/- IS ANCI LLARY TO THE MAIN BUSINESS ACTIVITIES OF THE REAL ESTATE DEVELOPMENT. IT WAS S UBMITTED THAT THE FUNDS WERE BORROWED IN EARLIER YEARS FOR SPECIFIC PURPOSE S BUT INVESTMENTS HAVE BEEN MADE IN THE CURRENT FINANCIAL YEAR. IT WAS SUB MITTED THAT THERE WERE NO BORROWINGS PAYABLE AS OF 31-03-2010.IT WAS ALSO SUB MITTED THAT INTEREST EXPENSES OF RS.1,20,17,356/- AND PREMIUM ON REDEMPT ION OF DEBENTURES TO THE TUNE OF RS.1,30,66,409/- WAS DEBITED TO P&L ACC OUNT BUT WERE TRANSFERRED TO THE WORK IN PROGRESS. IT WAS SUBMITT ED THAT NO INTEREST EXPENDITURE CAN BE DISALLOWED AS INVESTMENTS ARE MA DE OUT OF WON FUNDS AND NOT BORROWED FUNDS.THE ASSESSEE CLAIMED THAT NO EXPENSES WERE CLAIMED AND HENCE NO DISALLOWANCE CAN BE MADE BY TH E ASSESSEE. THUS, IT WAS SUBMITTED THAT SINCE NO EXPENSES WERE INCURRED TO EARN TAX FREE INCOME 6448/M/14(10-11) CAPRICON REALITY LTD. 4 OF RS. 97,58,944/- , NO DISALLOWANCE U/S 14A OF THE 1961 ACT IS WARRANTED. IT WAS SUBMITTED THAT THE AO HAS DISALLOWED THE EXP ENSES WITHOUT GIVING ANY REASONS OR EXPLANATIONS WHATSOEVER. THE ASSESSE E CLAIMED THAT IT RECEIVED RS.79.30 CRORES AGAINST THE SALE OF FLATS DURING THE YEAR AND THESE BUSINESS RECEIPTS WERE THE SOURCE OF MAKING INVESTM ENTS IN THE CURRENT YEAR.IT IS ALSO SUBMITTED THAT NO INTEREST WAS CLAI MED AS AN EXPENDITURE BY THE ASSESSEE AS THE SAME WAS TRANSFERRED TO WIP BEI NG THE PROJECT SPECIFIC EXPENSES . IT WAS SUBMITTED THAT IN ANY CASE PREMIU M ON REDEMPTION OF DEBENTURE SHALL NOT BE CONSIDERED FOR DISALLOWANCE. IT WAS ALSO ARGUED THAT THE INTEREST TO BE CONSIDERED FOR DISALLOWANCE SHOU LD BE NET OF TAXABLE INTEREST INCOME.WITH RESPECT TO DISALLOWANCE OF ADM INISTRATIVE EXPENSES OF RS.11,45,953/- IS CONCERNED , IT WAS SUBMITTED THAT NO EXPENSES ARE INCURRED FOR EARNING EXEMPT INCOME. IT WAS SUBMITTE D THAT THERE ARE FIVE INVESTMENTS MADE DURING THE CURRENT YEAR , OUT OF W HICH 3 ARE IN MUTUAL FUNDS HAVING A DAILY DIVIDEND PLAN. IT WAS SUBMITTE D THAT INVESTMENTS WERE MADE THROUGH BROKERS WHO WERE PAID COMMISSION BY TH ESE FUNDS AND NOTHING WAS PAID BY THE ASSESSEE FOR MAKING SUCH IN VESTMENT. IT WAS SUBMITTED THAT THESE DIVIDENDS GOT RE-INVESTED ITSE LF AND DOES NOT REQUIRE ANY MANAGEMENT . ON REDEMPTION , PROCEEDS GOT CREDI TED TO THE ASSESSEES BANK ACCOUNT DIRECTLY. IT WAS SUBMITTED THAT IT DOE S NOT REQUIRE ANY MANAGEMENT. THUS, IT WAS CONTENDED THAT NO EXPENDIT URE WERE INCURRED FOR EARNING OF EXEMPT INCOME. IT WAS SUBMITTED THAT EX PENSES OF RS.3,90,31,159/- WAS DEBITED IN PROFIT AND LOSS ACC OUNT AND MOST OF THE EXPENSES WERE TRANSFERRED TO WORK IN PROGRESS ACCOU NT.IT WAS SUBMITTED THAT THE ASSESSEE IS FOLLOWING PROJECT COMPLETION METHOD , ALL PROJECT RELATED 6448/M/14(10-11) CAPRICON REALITY LTD. 5 EXPENSES STOOD DEBITED TO WORK IN PROGRESS AND HENC E THE SAME CANNOT BE DISALLOWED. THE ASSESSEE SUBMITTED LIST OF EXPENSE S OF RS. 3,75,96,844/- AS EXPENSES WHICH WERE DEBITED TO WIP. IT WAS SUBMITTE D THAT THERE ARE EXPENSES OF RS.1,63,246/- WHICH WERE EXPENSES OF ST ATUTORY IN NATURE SUCH AS AUDIT FEE,WORKERS LEGAL DUES, PROFESSION TAX , R ENT, RATES AND TAXES WHICH ARE IN NO MANNER RELATED TO THE EXEMPT INCOME. IT W AS ALSO SUBMITTED THAT THERE ARE EXPENSES OF RS.12,44,825/- WHICH ARE DAY TO DAY GENERAL EXPENSES NOT RELATED TO EXEMPT INCOME INCURRED BY THE ASSESS EE.HENCE ,IT WAS CLAIMED THAT EXPENSES OF RS. 3,90,04,915/- (RS. 3,75,96,844 /- + RS.1,63,246/- + RS.12,44,825/- ) UNDER THE ABOVE THREE HEADS CANNOT BE DISALLOWED FOR THE PURPOSES OF SECTION 14A OF THE 1961 ACT. THE ASSESS EE ALSO SUBMITTED THAT THE AO HAS CONSIDERED ALL TYPES OF INVESTMENTS FOR MAKING DISALLOWANCE 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 DEBE NTURES. IT WAS SUBMITTED THAT INVESTMENTS IN DEBENTURES IS YIELDIN G 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 A SSESSEE AND OBSERVED THAT THE ASSESSEE HAS INVESTED RS.45,83,81,269/- IN SHAR ES AND SECURITIES , INCOME FROM WHICH IS NOT INCLUDIBLE IN THE TOTAL IN COME OF THE ASSESSEE. IT WAS OBSERVED BY LEARNED CIT(A) THAT THE ASSESSEE HA S EARNED DIVIDEND INCOME OF RS.97,58,944/- WHICH WAS CLAIMED EXEMPT U /S 10(34) OF THE 1961 ACT. IT WAS OBSERVED BY THE LEARNED CIT(A) THAT ASS ESSEE WAS UNABLE TO ESTABLISH NEXUS BETWEEN CAPITAL OF ASSESSEE INVESTE D IN SECURITIES AND THAT IT WAS NOT POSSIBLE TO BELIEVE THAT OUT OF COMMON HOTC H POTCH OF FUNDS THE 6448/M/14(10-11) CAPRICON REALITY LTD. 6 ENTIRE CAPITAL WOULD HAVE GONE INTO BUSINESS OF THE ASSESSEE AND NONE OF THE INVESTMENT HAS GONE INTO SHARES AND SECURITIES. THE LEARNED CIT(A) ALSO OBSERVED THAT IT WAS NOT POSSIBLE TO BELIEVE THAT T HE ENTIRE CAPITAL WOULD HAVE BEEN INVESTED IN SHARES AND SECURITIES ESPECIA LLY WHEN THE ASSESSEE ITSELF WAS NOT SURE AS TO HOW MUCH OF THE SUM HAD B EEN INVESTED IN BUSINESS OF THE ASSESSEE. IT WAS ALSO OBSERVED BY T HE 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 WHIC H WAS NOT INCLUDIBLE IN THE TOTAL TAXABLE INCOME. THE LEARNED CIT(A) OBSERV ED THAT THE ASSESSEES CASE IS COVERED BY SUB SECTION (3) OF SECTION 14A O F THE ACT, BECAUSE THE ASSESSEE HAS CLAIMED BEFORE ASSESSING OFFICER THAT NO EXPENDITURE WAS INCURRED BY IT IN RELATION TO THE EXEMPT INCOME WHI CH DID NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. IT WAS ALSO OBSER VED BY THE LEARNED CIT(A) THAT ASSESSEES CLAIM WAS COVERED BY SUB SECTION (2 ) OF SECTION 14A OF THE ACT BECAUSE THE ASSESSING OFFICER WAS NOT SATISFIED WIT H THE CORRECTNESS OF THE CLAIM IN RESPECT OF THE EXPENSES INCURRED IN RELATI ON TO EARNING OF EXEMPT INCOME. THE LEARNED CIT(A) OBSERVED THAT FOR THE PU RPOSE 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 A ND HENCE EVEN SHARES HELD AS STOCK IN TRADE SHALL ALSO BE COVERED FOR DI SALLOWANCE. 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 AR I.E. 31.03.2010 AND IT WAS CLAIMED THAT THE ASSESSEE RECEIVED ADVANCES FRO M BOOKING OF RS.79.30 CRORES. THE SAID CONTENTION WAS REJECTED BY THE CIT (A) AS IT WAS OBSERVED BY HIM THAT THE ASSESSEE HAD RAISED INTEREST BEARING LOANS IN EARLIER YEARS AND 6448/M/14(10-11) CAPRICON REALITY LTD. 7 INVESTMENT IN SHARES AND SECURITIES WERE MADE IN TH E CURRENT FINANCIAL YEAR. IT WAS OBSERVED BY THE CIT(A) THAT ALTHOUGH THE ASS ESSEE HAD REPAID INTEREST BEARING LOANS BEFORE THE END OF THE RELEVANT FINANC IAL YEAR BUT ON THE DATES OF INVESTMENT IN SHARES AND SECURITIES, OF WHICH TH E INCOME WAS CLAIMED EXEMPT BY THE ASSESSEE, OLD INTEREST BEARING LOANS AND BORROWINGS STOOD PAYABLE IN THE BOOKS OF ACCOUNT OF THE ASSSESSEE. T HE ASSESSEE COULD NOT PRODUCE ANY EVIDENCE TO PROVE THAT THE SHARES AND S ECURITIES WERE ACQUIRED FROM INTEREST FREE LOANS WAS THE OBSERVATIONS OF TH E LEARNED CIT(A). THE CONTENTION OF THE ASSESSEE THAT IT HAD DEBITED AN E XPENDITURE OF RS.3,75,96,844/- IN ITS P&L ACCOUNT FOR AY 2010-11 IN THE FORM OF PRINTING AND STATIONERY. FILING FEE, AUDITOR REMUNERATION, B ANK CHARGES, EMPLOYEES SALARY, BONUS, EX-GRATIA, LEGAL & PROFESSIONAL FEE RETAINERSHIP FEES, RENT, RATE, TAXES, POSTAGE AND COURIER, TRAVELLING AND CONVEYAN CE, REPAIRS AND MAINTENANCE, MOTOR CAR EXPENSES, SUNDRY EXPENSES, T ELEPHONE EXPENSES, BROKERAGE & COMMISSION, INTEREST ON LOAN, PREMIUM O N REDEMPTION OF DEBENTURES ETC. TO THE WORK-IN-PROGRESS WERE ALSO R EPELLED BY THE LEARNED CIT(A) WHO CONFIRMED THE ASSESSMENT ORDER PASSED BY THE 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 P ASSED BY LEARNED CIT(A) , ASSESSEE FILED AN APPEAL BEFORE THE TRIBUN AL. AT THE OUTSET THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSE E HAD DEBITED AMND TRANSFERRED AN AMOUNT OF RS.3,75,96,844/- TO WORK I N PROGRESS OUT OF EXPENSES INCURRED BY THE ASSESSEE WHICH FOUND DEBIT ED IN PROFIT AND LOSS 6448/M/14(10-11) CAPRICON REALITY LTD. 8 ACCOUNT AND HENCE DISALLOWANCE CANNOT BE MADE AS TH E ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE FROM THE REVENUE. IT WAS AR GUED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS NOT CLAIMED EXPENDITURE OF RS.3,75,96,844/- AS REVENUE EXPENDITURE AS THE SAME GOT DEBITED AND TRANSFERRED TO WORK-IN-PROGRESS. THE LD. COUNSEL FO R THE ASSESSEE FURTHER DREW OUR ATTENTION TO THE AUDITED ACCOUNTS AT PAGE- 23 OF THE PAPER BOOK FILED WITH THE TRIBUNAL WHICH IS PROFIT AND LOSS AC COUNT AND OTHER SCHEDULES AND SAID NO DISALLOWANCE CAN BE MADE 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 AS SESSEE DURING THE YEAR UNDER CONSIDERATION. OUR ATTENTION WAS DRAWN TO BAL ANCE SHEET OF THE ASSESSEE WHICH IS PLACED AT PAGE-22 OF THE PAPER BO OK FILED WITH THE TRIBUNAL. IT WAS SUBMITTED THAT THE ASSESSEE HAS MA INLY RAISED FUNDS AS ADVANCE FOR BOOKING OF FLATS TO THE TUNE OF RS. 79. 30 CRORES WHICH WERE INVESTED IN SHARES AND SECURITIES, WHICH ARE CAPAB LE OF YIELDING TAX FREE INCOME. IT IS ALSO SUBMITTED THAT PREMIUM ON REDEMP TION OF DEBENTURES DEBITED TO P & L A/C CANNOT BE DISALLOWED UNDER SEC TION14A AS PROCEEDS OF DEBENTURES WERE NOT UTILIZED FOR MAKING INVESTMENT IN SECURITIES WHICH ARE CAPABLE OF YIELDING TAX FREE INCOME AS THESE DEBENT URES WERE ISSUED IN EARLIER YEARS WHILE THE INVESTMENTS WERE MADE IN TH E CURRENT YEAR AND THESE DEBENTURES WERE REDEEMED DURING THE YEAR. THE LD. D EPARTMENTAL REPRESENTATIVE ON THE OTHER HAND RELIED UPON THE OR DERS OF THE LEARNED CIT(A). 6448/M/14(10-11) CAPRICON REALITY LTD. 9 6. WE HAVE CAREFULLY CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD BEFORE US. WE HAVE OBSERVED THA T THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT. THE ASSESSEE HAS EARNED DIVIDEND OF RS.97,58,944/- WHICH WAS CLAIMED AS EXE MPT FROM TAX U/S 10(34) OF THE 1961 ACT. THE ASSESSEE CLAIMED THAT N O EXPENDITURE WAS INCURRED IN CONNECTION WITH THE EARNING OF THE SAID EXEMPT INCOME AND HENCE NO DISALLOWANCE OF EXPENDITURE CAN BE MADE BY THE AO. THE AO INVOKED RULE 8D(2)(II) AND 8D(2)(III) OF THE 1961 A CT TO MAKE DISALLOWANCE OF RS.31,73,425/- U/S 14A OF THE 1961 ACT. WE HAVE OBS ERVED THAT THE ASSESSEE HAS MADE INVESTMENT OF RS.45,83,81,269/- I N SHARES AND SECURITIES DURING THE YEAR. THE DETAILS OF THE SAID INVESTMENT FOUND MENTIONED IN ASSESSMENT ORDER / PAGE 5 WHICH CONSIS TED OF INVESTMENTS IN SHARES, DEBENTURES AND MUTUAL FUNDS. WE ARE AGREEAB LE WITH THE PROPOSITION OF THE ASSESSEE THAT INVESTMENTS IN DEB ENTURES CANNOT BE CONSIDERED AS PART OF INVESTMENTS FOR COMPUTING D ISALLOWANCE OF EXPENDITURE U/S 14A OF THE 1961 ACT AS INTEREST INC OME EARNED FROM THE DEBENTURES IS TAXABLE UNDER THE PROVISIONS OF THE 1 961 ACT AND NO EXEMPT INCOME ARISES FROM DEBENTURES AND HENCE SECTION 14A OF THE 1961 ACT CANNOT BE INVOKED. WE HAVE OBSERVED FROM THE BALANC E SHEET OF THE ASSESSEE THAT THE ASSESSEE HAS AGGREGATE OWN FUNDS IN THE FO RM OF SHARE CAPITAL/RESERVES TO THE TUNE OF RS.1.62 CORES AND A LSO APPLICATION MONEY RECEIVED TO THE TUNE OF RS.79.30 CRORES AS AT 31-03 -2010 . THE ASSESSEE HAS EXPLAINED SAID APPLICATION MONEY RECEIVED TO BE INT EREST-FREE ADVANCES FROM BOOKING OF THE FLATS WHICH THE ASSESSEE CLAIMED TO HAVE INVESTED IN SHARES AND SECURITIES . THE INVESTMENTS WERE MADE DURING T HE RELEVANT PREVIOUS 6448/M/14(10-11) CAPRICON REALITY LTD. 10 YEAR WHICH WERE TO THE TUNE OF RS. 45.83 CRORES AS AT 31-03-2010. THE ASSESSEE HAD CLAIMED THAT ADVANCES FOR BOOKING OF F LAT BEING APPLICATION MONEY RECEIVED TO THE TUNE OF RS. 79.30 CRORES WAS INTEREST-FREE WHICH WAS INVESTED IN SHARES AND SECURITIES .THIS CLAIM OF TH E ASSESSEE THAT THESE ADVANCES OF RS. 79.30 CRORES WAS AN INTEREST FREE A DVANCES FROM BOOKING OF FLATS WHICH GOT INVESTED IN SHARES AND SECURITIES C APABLE OF YIELDING EXEMPT INCOME , NEEDS VERIFICATION FOR WHICH WE ARE INCLIN ED TO SET ASIDE AND RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICE R FOR DE-NOVO DETERMINATION OF THE AO.THE CLAIM OF THE ASSESSEE THAT OPENING IN TEREST BEARING LOANS WHICH WERE IN THE FORM OF DEBENTURES TO THE TUNE OF RS. 9.31 CORES WHICH WERE REPAID DURING THE YEAR WAS NOT INVESTED IN SHA RES AND SECURITIES AND HENCE NO DISALLOWANCE OF INTEREST / PREMIUM ON REDE MPTION OF DEBENTURE CAN BE MADE U/S 14A OF THE 1961 SHALL ALSO BE VERIF IED BY THE AO IN DE-NOVO PROCEEDING. THE ASSESSING OFFICER HAD ALSO MADE DI SALLOWANCE FOR ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III) OF IN COME 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 CONSIDER ED 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 OBSE RVED THAT THE ASSESSEE IS CLAIMING THAT THE OTHER EXPENSES DEBITED TO P&L ACC OUNT ARE IN THE NATURE OF ADMINISTRATIVE EXPENSES AND THE ASSESSEE HAS CLAIME D THAT SAME IS DEBITED TO THE WORK-IN-PROGRESS ACCOUNT FOR WHICH NECESSARY DETAILS WERE SUBMITTED AND HENCE CLAIM IS MADE THAT NO DISALLOWANCE SHOUL D BE MADE U/S 14A OF THE 1961 ACT. WE ARE AFRAID THAT THE CONTENTION OF THE ASSESSEE CANNOT BE 6448/M/14(10-11) CAPRICON REALITY LTD. 11 ACCEPTED. WE HAVE OBSERVED FROM THE FINANCIAL ACCOU NTS AT PAPER BOOK PAGE- 31 WHEREIN METHOD OF VALUATION OF INVENTORY IS SPEC IFIED TO BE THAT THE INVENTORY IS TO BE VALUED AT COSTS OR AT NET REALIZ ABLE VALUE WHICHEVER IS LOWER AND IT ALSO INCLUDES DIRECTLY ATTRIBUTABLE DE VELOPMENT EXPENSES AND INTEREST COST INCURRED(NET OF CREDITS, IF ANY THERE ON) 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 THE SE ADMINISTRATIVE EXPENSES OF RS. 3.76 CRORES ARE DIRECTLY ATTRIBUTAB LE DEVELOPMENT EXPENSES TO BRING INVENTORY TO PRESENT STATUS WHICH ARE PROP ERLY AND LEGITIMATELY DEBITED TO WORK IN PROGRESS IN COMPLIANCE WITH AS-2 ISSUED BY ICAI, BUT STILL THE DISALLOWANCE U/S 14A OF THE 1961 ACT IS REQUIRE D TO BE MADE . THE REASON IS SIMPLE AND QUITE OBVIOUS, ONCE THE ASSESS EE HAS DEBITED THESE EXPENSES OF RS. 3.76 CRORES TO THE PROFIT AND LOSS ACCOUNT DIRECTLY ATTRIBUTABLE DEVELOPMENT EXPENSES TO BRING INVENTOR Y TO PRESENT STATUS, THE ASSESSEE HAS LODGED ITS CLAIM FOR ALLOWABILITY OF T HESE EXPENSES BEFORE THE REVENUE AND ONCE THESE EXPENSES ARE DEBITED AND TRA NSFERRED TO WORK IN PROGRESS, THE SAME ARE TO BE ADDED TO WORK IN PROGR ESS 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 INCURRIN G OF THESE EXPENSES WILL ENTITLES ASSESSEE TO CARRIED FORWARD THE ENHANCE VA LUE OF WORK IN PROGRESS TO THE SUBSEQUENT YEAR AS PART OF CURRENT ASSETS AS CL OSING WORK IN PROGRESS AND IN THE IMMEDIATELY SUCCEEDING YEAR , IT WILL AG AIN ENTER ON THE DEBIT SIDE OF PROFIT AND LOSS ACCOUNT AS OPENING WORK IN PROGR ESS WHICH WILL GET OFFSET BY SALE OF THE STOCK/INVENTORY OR SHALL BE FURTHER CARRIED FORWARD AS 6448/M/14(10-11) CAPRICON REALITY LTD. 12 STOCK/INVENTORY TO THE SUCCEEDING YEAR IF THE SAME IS NOT SOLD. THUS , THESE COSTS ARE DEFINITELY GOT DEBITED TO PROFIT AND LOSS ACCOUNT AND DISALLOWANCE IS TO BE MADE U/S 14A OF THE 1961 ACT AS THE CLAIM OF WORK IN PROGRESS/INVENTORY AT THE VALUE WHICH IS INCLUSIVE OF THESE COSTS ARE ALLOWED BY THE AO IN THE IMPUGNED ASSESSMENT YEAR FOR ROLLO VER TO THE NEXT YEAR. THUS , THIS CONTENTIONS OF THE ASSESSEE CANNOT BE A CCEPTED THAT MERELY BECAUSE IT GOT ADDED TO CLOSING WORK IN PROGRESS , IT HAS NEUTRALIZED THE EXPENSES ACCOUNT ON THE DEBIT SIDE OF PROFIT AND LO SS ACCOUNT . WE HAVE OBSERVED FROM THE PERUSAL OF THE AUDITED FINANCIAL STATEMENT OF THE ASSESSEE THAT THE INVESTMENTS OF RS. 45.83 CRORES ARE HELD AS INVESTMENT AND NOT AS STOCK IN TRADE AND HENCE THE ISSUE OF APPLICAB ILITY OF SECTION 14A OF THE ACT TO STOCK IN TRADE DO NOT NEED REQUIRE ADJUDIC ATION BY US. AS PER SECTION 14A OF THE ACT WHERE ANY EXPENDITURE IS INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH IS NOT INCLUDIBLE IN TOTAL INCO ME OF THE ASSESSEE , SUCH EXPENSES SHALL NOT BE ALLOWED AS EXPENDITURE. THUS, DISALLOWANCE OF SUCH EXPENDITURE INCURRED IN RELATION TO EARNING OF INCO ME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER PROVISIONS OF THIS ACT S HALL BE COMPUTED HAVING REGARD TO ACCOUNTS OF THE ASSESSEE AS PROVIDED IN S ECTION 14A(2) OF THE ACT. HON'BLE SUPREME COURT IN A VERY RECENT DECISION PRO NOUNCED ON 8 TH MAY, 2017 IN THE CASE OF GODREJ & BOYCE V. DCIT (CIVIL A PPEAL NO.7020 OF 2011) WHEREIN THE HONBLE SUPREME COURT HAS UPHELD THE DI SALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF INCO ME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME AS IS CONTEMPLATED U/S 14A OF T HE 1961 ACT. THE PRIMARY ONUS IS ON THE ASSESSEE TO WORK OUT THE DISALLOWANC E OF EXPENDITURE INCURRED IN RELATION TO EARNING OF THE INCOME WHICH IS NOT FORMING PART OF 6448/M/14(10-11) CAPRICON REALITY LTD. 13 TOTAL INCOME OF THE ASSESSEE HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE. THESE ARE FACTS WHICH ARE ESPECIALLY IN THE KNOWLED GE OF THE ASSESSEE AND PRIMARY ONUS/BURDEN IS ON THE ASSESSEE TO BRING THO SE FACTS BEFORE THE AO OF HAVING INCURRED EXPENDITURE IN RELATION TO EARNI NG OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE. THEREAFTER, THE ONUS SHIFTS TO THE ASSES SING OFFICER TO WORK OUT THE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATIO N TO EARNING OF INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, HAVING RE GARDS TO THE ACCOUNTS OF THE ASSESSEE AS IS CONTEMPLATED U/S 14A(2) OF THE 1 961 ACT . IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF T HE DISALLOWANCE OF EXPENDITURE SUO MOTU OFFERED BY THE ASSESSEE BEING INCURRED IN RELATION TO EARNING OF INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE IF THE SAME COULD NOT BE WORKED OUT FROM THE MANNER IN WHICH ACCOUNTS ARE MADE BY THE A SSESSEE, THE ASSESSING OFFICER CAN INVOKE RULE 8D OF THE 1962 RULES R.W.S. 14A OF THE 1961 ACT AND APPLY METHOD PRESCRIBED U/R 8D OF THE 1962 RULES FO R MAKING DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. KEEPING IN VIEW FACTS AND CIRCUMSTANCES OF THE CASE, IN OUR CONSIDERED VIEW THE MATTER NEEDS TO B E SET ASIDE AND RESTORED TO THE FILE OF AO FOR RE-COMPUTING THE DISALLOWANC E U/S. 14A OF THE 1961 ACT OF THE EXPENDITURE INCURRED IN RELATION TO THE EARN ING 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 I NCURRED IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME HAVING 6448/M/14(10-11) CAPRICON REALITY LTD. 14 REGARDS TO THE ACCOUNTS OF ASSESSEE AS IS CONTEMPL ATED U/S 14A OF THE 1961 ACT. THE PRIMARY ONUS/BURDEN IS ON THE ASSESSEE TO PRODUCE SUCH WORKING AS THE SAID FACTS ARE ESPECIALLY IN THE KNOWLEDGE O F THE ASSESSEE. IF THE AO IS NOT SATISFIED WITH THE WORKING AS IS SUBMITTED BY T HE ASSESSEE AS SUCH DISALLOWANCE CANNOT BE WORKED OUT KEEPING IN VIEW A CCOUNTS OF THE ASSESSEE, THE AO WILL BE JUSTIFIED IN INVOKING RULE 8D OF THE 1962 RULES. NEEDLESS TO SAY, PROPER AND ADEQUATE OPPORTUNITY OF HEARING SHOULD BE GRANTED BY THE AO TO THE ASSESSEE IN ACCORDANCE WIT H PRINCIPLES OF NATURAL JUSTICE. THE ASSESSING OFFICER IS DIRECTED TO ADMIT NECESSARY EVIDENCES AND EXPLANATION FILED BY THE ASSESSEE IN ITS DEFENSE W HICH SHALL BE ADMITTED AND ADJUDICATED ON MERITS.WE ORDER ACCORDINGLY. 7. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH MAY, 2017. 17 , 2017 SD/- SD/- ( / MAHAVIR SINGH ) (RAMIT KOC HAR) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 17/05/2017. . . . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / ; 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, DY./ASST. REGISTRAR , /ITAT, MUMBAI .