DY. COMMISSIONER OF INCOME TAX CIRCLE-14 (1)(2), MUMBAI V. M/S. GODREJ PROPERTIES LIMITED, MUMBAI

ITA 655/MUM/2023

AI Insights

The case involves an appeal by the Dy. Commissioner of Income Tax against the order of the Commissioner of Income Tax (Appeals), which had deleted the disallowance made under Section 14A read with Rule 8D of the Income Tax Act, 1961, by the Assessing Officer. The disallowance pertained to expenses and interest attributed to earning exempt income. The Tribunal examined whether the disallowance under Section 14A could exceed the amount of exempt income earned, which was Rs. 6,54,331 for the assessee. The Tribunal referenced several precedents, including decisions from the Supreme Court and the Bombay High Court, which supported the assessee's position that disallowances should not exceed the exempt income.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 301229 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 09-05-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 05-03-2023
• Other Referred Cases: HDFC Bank Ltd. vs. DCIT, PCIT vs. State Bank of Patiala, South Indian Bank Ltd. vs. CIT, ACIT vs. Vireet Investment (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “G”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA No.655/M/2023 Assessment Year: 2014-15 Dy. Commissioner Of Income Tax, Circle-14(1)(2), Room No. 455, 4 th Floor, Ayakar Bhavan, M.K. Road, Mumbai-400020 Vs. M/s. Godrej Properties Ltd., 5 th Floor, Godrej One, Phirojshahnagar, Eastern Express Highway, Vikhroli (E), Mumbai-400079 PAN: AAACG3995M (Appellant) (Respondent) CO No. 41/M/2023 (Arising Out of ITA No.655/M/2023) Assessment Year: 2014-15 M/s. Godrej Properties Ltd., 5 th Floor, Godrej One, Phirojshahnagar, Eastern Express Highway, Vikhroli(E), Mumbai-400079 PAN: AAACG3995M Vs. Dy. Commissioner Of Income Tax, Circle-14(1)(2), Room No. 455, 4 th Floor, Ayakar Bhavan, M.K. Road, Mumbai-400020 (Appellant) (Respondent) Present for: Assessee by : Shri Jitendra Jain, A.R. Revenue by : Shri Ajay Singh, Sr. AR Date of Hearing : 10. 05. 2023 Date of Pronouncement : 08. 08. 2023 ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 2 O R D E R Per : Kuldip Singh, Judicial Member: For the sake of brevity aforesaid appeal and cross objections emanated from same impugned order passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as Ld. CIT(A)] are being taken up for disposal by way of composite order. 2. Appellant, Dy. Commissioner of Income Tax, Circle- 14(1)(2), Mumbai (hereinafter referred to as the Revenue) and the cross objector M/s. Godrej Properties Ltd. (hereinafter referred to as the assessee) by filing the present appeal and cross objections respectively sought to set aside the impugned order dated 05.01.2023 passed by the Ld. CIT(A) on identically worded grounds except the difference in amount of addition/disallowance inter-alia that: “Grounds of Revenue (ITA No.655/M/2023) Whether on the facts of the instant case and in law, the Ld. CIT(A) was justified in deleting the disallowance amounting to Rs. 1,60.56,090/- that is contrary to the provisions of Section 14A read with Rule 8D, as it stood for the relevant Assessment Year. 2. Whether on the facts of the instant case and in law, the Ld. CIT(A) was justified in deleting the addition of interest disallowed by the AO, in the absence of any evidence that indicated that borrowed funds were not used for the purpose of making investments that yielded exempt income? 3. Whether on the facts of the instant case and in law, the Ld. CIT(A) was justified in placing reliance on the ratio laid down by the Hon'ble Bombay High Court in the case of Ld. CIT(A) Vs. HDFC Bank Ltd. [2014] 49 taxmann.com 335 (Bom), which considered the law as it stood for A.Y.2001-02 to A.Y.2005-06 before Section 14A was amended to incorporate a prescribed method for calculating the disallowance? ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 3 4. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 5. The appellant prays that the order of Ld. CIT(A) on the above ground be set- aside and that of the assessing officer be restored.” Grounds of Cross Objector in CO No.41/M/2023: “1. The learned Commissioner of Income-tax (Appeals) erred in disregarding the Order passed by the Income Tax Appellate Tribunal dated November 11, 2020, for the Assessment Year 2013-14, wherein the Hon'ble Members have directed the Assessing Officer to delete the entire disallowance of interest expenditure computed under Section 14A of the Act read with Rule 8D(2)(ii), including the disallowance voluntarily made by the assessee in the Return of Income. 2. The learned Commissioner of Income-tax (Appeals) erred in not restricting the disallowance under Section 14A of the Act to the amount of exempt income earned during the year under consideration. 3. Without prejudice to the foregoing grounds, the learned Commissioner of Income-tax (Appeals) erred in not adjudicating the contention raised by the Appellant that only the net interest expenditure was to be considered when computing the disallowance under Rule 8D(2)(ii). 4. The Assessing Officer erred in applying the provisions of Section 14A of the Act read with Rule 8D while computing the book profit under Section 115JB of the Act. 5. The Cross Objector craves leave to add to, alter or amend the above Grounds of Cross Objections as and when advised.” 3. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : assessee company is a public limited company into the business of property development. During the scrutiny proceedings the Assessing Officer (AO) flagged various issues including disallowance of Rs.2,44,38,832/- under section 14A of the Income Tax Act, 1961 (for short ‘the Act’) since other additions made by the AO have been deleted by the Ld. CIT(A), which order has been accepted by the Revenue, the sole issue raised before the Tribunal by filing present appeal by the ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 4 Revenue and cross objections by the assessee is qua disallowance made by the AO under section 14A of the Act and deleted by the Ld. CIT(A). 4. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted the addition made by the AO by following the order passed by Tribunal in assessee's own case for A.Y. 2011-12, 2012-13 & 2013-14. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the Revenue as well as assessee company have come up before The Tribunal by way of filing present appeal and cross objections respectively. 5. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders. passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. 6. Undisputedly the assessee has earned dividend income of Rs.6,54,331/- and claimed the same as exempt income during the year under consideration. It is also not in dispute that the assessee company has made suo-moto disallowance of Rs.83,82,742/- under section 14A of the Act. 7. However, the AO after rejecting the computation of income made by the assessee company for the purpose of disallowance under section 14A invoked the provisions contained under section 14A read with rule 8D of the Act and computed the disallowance as under: (i) The amount of 3,16,188 ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 5 expenditure directly relating to income which does not form part of total income (ii) Proportionate of interest expenditure computed in accordance with the formula given in Rule 8D(2)(ii) (A X B/C) Rs.2,10,42,002/- (ii) Amount equal to one-half percent 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 0.5% of Rs.61,61,28,419/- Total Expenditure disallowed u/s. 14A Rs.2,44,38,832/- Note (i) A = Interest (finance cost) debited to Profit and Loss A/c Rs. 118,54,02,140/- (ii) B = Average of exempt income-bearing investments Rs.61,61,28,419/- Op. Investment = Rs.48,08,72,432/-, Cl. Investment =Rs.75,13,84,405/- (iii) C Average of total assets appearing in the Balance Sheet on the first and last day of the previous year = Rs.34,70,96,22,044/- Op Assets = Rs.27,67,23,59,254/-, Cl. Assets = Rs.41,74,68,84,833/- The amount of expenditure attributable to the activity that may / might generate income that does not form part of total income, in accordance with Rule 8D works out to Rs.2,44,38,832/-. The assessee has suomoto disallowed an amount of Rs.83,82,742/-. Accordingly, the balance ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 6 amount of Rs. 1,60,56,090/- is disallowed u/s. 14A of the Income Tax Act, 1961.” 8. Ld. D.R. for the Revenue challenging the impugned deletion of disallowance made by the AO under section 14A read with Rule 8D relied upon the order passed by the AO and contended that the disallowance made by the AO is in accordance with the provisions contained under section 14A read with rule 8D of the Act which has been ignored by Ld. CIT(A) while deleting the disallowance. 9. However, on the other hand, the Ld. A.R for the assessee in order to repel the arguments advanced by the Ld. D.R for the Revenue contended inter-alia that the Ld. CIT(A) has erred in not restricting the disallowance under section 14A of the Act to the amount of exempt income earned by the assessee during the year under consideration; that Ld. CIT(A) has erred in not following the order passed by the Tribunal dated 11.11.2020 for A.Y. 2013-14 directing the AO to delete the entire disallowance of interest expenditure computed under section 14A read with rule 8D2(ii) including the disallowance voluntarily made by the assessee in return of income and relied upon the decision rendered by the Hon’ble Supreme Court in cases of PCIT vs. State Bank of Patiala (2018) 99 taxmann.com 286 (SC) and South Indian Bank Ltd. vs. CIT (2021) 130 taxmann.com 178 (SC), decision rendered by the Hon’ble Bombay High Court in case of HDFC Bank Ltd. vs. DCIT (2016) 67 taxmann.com 42 (Bombay) and decisions of Tribunal in assessee’s own case in ITA No.6486/M/2018 & ITA No.6637/M/2018 for A.Y. 2013-14 order dated 11.11.2020 and the decision rendered by the Special Bench of Tribunal in case of ACIT ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 7 vs. Vireet Investment (P.) Ltd. (2017) 82 taxmann.com 415 (Delhi- Trib.) (SB). 10. The assessee has brought on record the details of dividend income earned by it during the year under consideration ending March 31, 2014 which is extracted as under for ready perusal: “Statement giving the details of Dividend Income earned during the year ended March 31, 2014. Name of the Company/ Mutual Fund Amount Rs. Amount Rs. On Shares: Saraswat Co-operative Bank Ltd. 1000 Ansal Housing & Construction Ltd 240 Ansal Buildwell Ltd 150 The Great Eastern Shipping Co. Ltd. 612 2002 On Mutual Fund Units: ICICI Prudential Floating Rate Plan D- Daily Dividend Reinvestment 63,840 Kotak Floater Long Term Daily Dividend Reinvestment 5,88,490 6,52,329 Total 6,54,331 11. The assessee has also brought on record comparative table of disallowance made by the AO as well as the assessee itself under section 14A of the Act which is as under: Clause of Rule 8D Particulars As per Return of Income (Rs.) As per Assessment Order (Rs.) 2(0 The actual expenditure directly relating to income which does not form part of total income 3,16,188 3,16,188 2(ii) The amount of interest expenditure not directly attributable to any particular exempt income or receipt 49,85,912 2,10,42,002 ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 8 2(iii) Indirect expenditure being the amount computed @0.5% of average investment value 30,80,642 30,80,642 Total 83,82,742 2,44,38,832 Less: Amount suo moto disallowed in the Return 83,82,742 Disallowance as per Assessment Order 1,60,56,090 12. When we examine the computation made by the AO for the purpose of disallowance under section 14A it is apparent that the AO has made disallowance to the tune of Rs.2,10,42,002/- under rule 8D2(ii) of the rules. The Ld. A.R. for the assessee stated that Ld. CIT(A) has rightly deleted the disallowance made by the AO under rule 8D2(ii) because assessee has never consumed interest bearing funds to earn the dividend income and drew our attention towards balance sheet available at page 5 of the paper book, which shows that the assessee is having share capital and reserve and surplus to the tune of Rs.1790,15,44,047/- as against the total investment of Rs.911,84,47,535/-. So it is proved that since the assessee has not incurred any interested bearing funds to earn the dividend income and as such disallowance made by the AO to the tune of Rs.2,10,42,002/- is liable to be deleted which includes an amount of Rs.49,85,912/- suo-moto disallowed by the assessee. Eventually it will reduce the returned income of the assessee. So when the assessee was having sufficient own interest free funds in the form of share capital and reserves and surplus at the beginning and closing of the years. as against the total investment edition made under rule 8D2(ii) is not sustainable as has been held by Honourable Bombay High Court in case of HDFC Bank Limited vs. CIT (supra) and decision rendered by Honourable Supreme ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 9 Court in case of South Indian Bank (supra) wherein it is held as under: “Section 14A. read with section 263, of the Income-tax Act, 1961 Expenditure Incurred in relation to income not includible in total income (Computation of Assessment year 2010-11 In course of assessment, Assessing Officer made addition on account of apportionment of expenses against exempted income under section 14A Commissioner passed a revisional order directing Assessing Officer to enhance amount of addition under section 14A-Tribunal set aside revisional order as well as consequent assessment order passed by Assessing Officer enhancing addition made under section 14A -High Court upheld order of Tribunal holding that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure-Whether on facts, SLP filed against decision of High Court was to be dismissed-Held, yes [Para 1)[in favour of Assessee]" 13. It is also undisputed fact on record that initially at the time of filing the return of income assessee has itself made suo-moto disallowance of Rs.83,82,742/- as per comparative table extracted in preceding para number 11. However now the assessee by filing the cross objections contended that the Ld. CIT(A) has erred in not restricting the disallowance under section 14A of the Act to the amount of exempt income earned during the year under consideration. It is settled principle of law that disallowance under section 14A cannot be more than the exact income earned by the assessee during the year under consideration as has been held by Honourable High Court of Punjab and Haryana in case of PCIT, Patiala vs. State Bank of Patiala (2018) 99 taxmann.com 285 which is confirmed by Honourable Supreme Court in case cited as PCIT vs. State Bank of Patiala PCIT vs. State Bank of Patiala (2018) 99 taxmann.com 286 (SC) (supra) by returning following findings: “Section 14A, read with section 263, of the Income-tax Act, 1961 Expenditure Incurred in relation to income not includible in total income (Computation of Assessment year 2010-11 In course of assessment, Assessing Officer made addition on account of apportionment of expenses against exempted income under section 14A ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 10 Commissioner passed a revisional order directing Assessing Officer to enhance amount of addition under section 14A-Tribunal set aside revisional order as well as consequent assessment order passed by Assessing Officer enhancing addition made under section 14A -High Court upheld order of Tribunal holding that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure-Whether on facts, SLP filed against decision of High Court was to be dismissed-Held, yes [Para 1)[in favour of Assessee]” 14. In the backdrop of the aforesaid discussion now the question arises for determination in this case is: "As to whether assessee is entitled to relief sought for by way of filing cross abjection that disallowance under section 14A cannot be more than the exempt income i.e. Rs.6,54,331/- in the face of the fact that the assessee itself has made suo-moto disallowance of Rs.83,82,742/-"? 15. The contention raised by the Ld. D.R for the Revenue that the income returned by the assessee itself cannot be reduced is not sustainable because under Article 265 of the constitution of India the revenue is entitled to collect the taxes in accordance with the law and not on the basis of consent or acceptance of the assessee. In other words there is no estoppel against the statute. So in view of the matter we direct the AO to delete the disallowance of the interest made under rule 8D2(ii) of the rules. 16. So far as disallowance made by the AO to the tune of Rs.30,80,642/- under rule 8D2(iii) of the rules is concerned, we are of the considered view that no doubt assessee has himself made similar disallowance of Rs. 3080642 under rule 8D2(iii) of the rules but by applying the same analogy as discussed in the preceding para that the Income Tax Department is empowered to collect the tax in accordance with the law contained under Article 265 of the constitution of India, the AO is directed to consider only those investments which had actually yielded exempt income for working ITA No.655/M/23 & CO No.41/M/23 M/s. Godrej Properties Ltd. 11 out the disallowance thereon in view of the decision rendered by special bench of the Tribunal in case of Vireet Investment (P.) Ltd.(supra). 17. The assessee has given the detail of scrips/mutual fund on which it has earned the dividend income as detailed in preceding para No.10. So the AO is directed to recompute the disallowance under rule 8D2(iii) of the rules qua the exempt income yielding investment which would further reduce the disallowance already made by the assessee under rule 8D2(iii) of the rules. 18. In view of what has been discussed above the appeal filed by the Revenue is hereby dismissed and cross objections filed by the assessee are partly allowed. Order pronounced in the open court on 08.08.2023. Sd/- Sd/- (AMARJIT SINGH) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 08.08.2023. * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The Ld. CIT(A), Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.