Adani Properties Pvt. Ltd Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that the disallowances made under section 14A read with rule 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Income Tax Act.
Facts-
The assessee is a private limited company and engaged in the activity of letting out and/or, leasing of immovable properties and in wholesale trading of the commodities. The assessee in the year under consideration has declared exempted income of Rs. 33.52 crores only. However, the assessee has not made any disallowance of the expenses against such exempted income as mandated under the provisions of section 14A of the Act. Thus, the AO invoked the provisions of rule 8D of Income Tax Rule and worked out the amount to be disallowed on account of administrative expenses at Rs. 15,82,69,483/- only. However, the AO found that the total administrative expenses claimed by the assessee in the financial statement stands at Rs.9,87,19,946/- and therefore the AO restricted the disallowance at Rs.9,87,19,946/- only by making addition to the total income of the assessee.
AO, further, while computing the income under the head MAT in pursuance to the provisions of section 115 JB of the Act has also considered the impugned amount of disallowance made while calculating the income under the normal head of income. As such, the AO has also made disallowance of the impugned amount of Rs.9,87,19,946/- while calculating the book profit under section 115JB of the Act.
Aggrieved, assessee preferred an appeal to the learned CIT (A). CIT(A) restricted the disallowance under section 14A to Rs. 2,95,49,434/-. Being aggrieved, by the order of CIT(A), both assessee and revenue has preferred the appeal.
Conclusion-
Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act.
The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case on hand. Thus, it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The cross appeals have been filed at the instance of the Assessee & Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-1, Ahmedabad dated 14/08/2019 arising in the matter of assessment order passed under section 143(3)of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2016-17.
2. The assessee has raised following grounds of appeal:
“1. On the facts and in the circumstances of the case, the learned CIT(A) erred in sustaining disallowance to the extent of Rs.2,95,49,434 out of the total disallowance of. Rs.9,87,19,946 made by the Assessing Officer u/s.14A of the I.T. Act.
2. On the facts and in the circumstances of the case, the learned CIT(A) erred in dismissing the relevant ground of appeal challenging the addition of Rs.9,87,19,946 being disallowance u/s 14A made by the Assessing Officer while computing the total income, to the book profit computed under the provisions section 115JB of the I.T. Act.
3. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal. ”
3. The only issue raised by the assessee is that the learned CIT (A) erred in restricting the disallowance made by the AO for Rs. 2,95,49,434/- out of the total disallowance of Rs.9,87,19,946/- made by the AO instead of deleting the same in entirety under the provisions of section 14A read with rule 8D of Income Tax Rules.
4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the activity of letting out and/or, leasing of immovable properties and in wholesale trading of the commodities. The assessee in the year under consideration has declared exempted income of Rs. 33.52 crores only. However, the assessee has not made any disallowance of the expenses against such exempted income as mandated under the provisions of section 14A of the Act. Thus, the AO invoked the provisions of rule 8D of Income Tax Rule and worked out the amount to be disallowed on account of administrative expenses at Rs. 15,82,69,483/- only. However, the AO found that the total administrative expenses claimed by the assessee in the financial statement stands at Rs.9,87,19,946/- and therefore the AO restricted the disallowance at Rs.9,87,19,946/- only by making addition to the total income of the assessee.
5. The AO, further, while computing the income under the head MAT in pursuance to the provisions of section 115 JB of the Act has also considered the impugned amount of disallowance made while calculating the income under the normal head of income. As such, the AO has also made disallowance of the impugned amount of Rs.9,87,19,946/- while calculating the book profit under section 115JB of the Act.
6. Aggrieved, assessee preferred an appeal to the learned CIT (A).
7. The assessee before the learned CIT (A) contended that the AO while making the disallowance of the expenses incurred in relation to exempt income has failed to establish any nexus between the exempted income viz a viz the connected expenses. As such, the AO without verification of the expenses has just applied the provisions of rule 8D of Income Tax Rules and made the disallowance accordingly.
8. The assessee further contended that the exempted income stands at Rs.33.52 crores which is mainly representing the dividend income received from the group company whereas the gross total income excluding exempted income stands at Rs. 236.37 crores. The exempted income against the gross total income stands at 14% approximately whereas the AO has assumed the entire administrative expenses against the exempted income and therefore he has made the disallowance of the entire administrative expenses which is patently wrong. According to the assessee, the administrative expenses were incurred for the day to day functioning of the business and not for the purpose of the exempted income. These administrative expenses have to be incurred irrespective of the letting out business activity of the assessee. On the contrary, there is not any requirement of incurring administrative expenses against the dividend income which was from the investment made in the group companies. As such, the dividend income was directly credited to the bank account of the assessee without incurring any specific administrative expenses.
9. The assessee further submitted that the administrative expenses incurred by the assessee has no connection with the dividend income. The assessee further submitted that the ITAT in the own case of the assessee in the earlier year was pleased to make ad hoc disallowance of 2 lacs only in ITA No. 2456/AHD/2013 and 2768/AHD/2014 vide order dated 31st July 2018 against the exempted income of Rs. 37.81 Crores.
10. The assessee also contended that there cannot be any disallowance of depreciation against the exempted income. The assessee further contended that there were certain expenses which were disallowed in the computation of income amounting to Rs. 27,01,784/- only. Therefore, the same cannot be considered for the purpose of the disallowance under section 14A read with rule 8D of Income Tax Rule.
11. The assessee with respect to the disallowance made while computing the book profit under the provisions of section 115 JB of the Act has contended that the amount disallowed while calculating under normal computation of income cannot be imported while calculating the book profit under the provisions of section 115 JB of the Act.
12. However, the learned CIT(A) after considering the submission of the assessee observed that the ITAT in the own case of the assessee for the Assessment Year 2012-13 in ITA No. 2006/AHD/2016 and the CO. 136/AHD/2016 vide order dated 14th July 2019 has computed the disallowance of the expenses against the exempted income in a particular manner. Thus, the learned CIT (A) following the order of the ITAT has allowed the ground of appeal of the assessee in part by observing as under:
“It is observed that both appellant and Department has filed appeals against such order wherein Hon’ble Ahmedabad ITAT in ITA No.2006/AHD/2016 with CO 136/AHD/2016 vide order dated 4th July, 2019 is held as under:
10. As regards the disallowance of administrative expenditure, the AO has computed the disallowance at Rs.1,21,69,984/- under Rule 8D(2)(iii) as noted above. The CIT(A) has analysed the nature of expenditure and restricted the same to Rs.19,49,768/- as per the tabulation reproduced in the CIT(A)’s order. Both Revenue and assessee are aggrieved by the aforesaid action of the CIT(A). The Revenue seeks disallowance of the amount as computed under Rule 8D(2)(iii) whereas the assessee has disputed the analysis of the CIT(A). It is the case of the assessee that itemized expenditure can be demonstrably relatable to various segment of taxable income. For instance, the disallowance o f Rs.61,565/- made by the CIT(A) on account of insurance expenses incurred was paid for rented properties and thus has no relation to the exempt income. Likewise, the personne l expenses of Rs.17,00,616/- is also claimed by the assessee to be towards timely collection of rent expenses. The assessee has urged for deletion of the aforesaid two items out o f the disallowance made by the CIT(A) amounting to Rs.19,49,768/-. 11. We do not find merit in the plea of the Revenue for applicability of Rule 8D(2)(iii) where the specification of the nature of the expenditure is available and such expenditure can be reasonably identified toward revenue from taxable operations and revenue from income which is exempt. On the other hand, we however find substance in the plea of the assessee partially. Rs.61,565/- on account of insurance expenses has not apparent connection with the investment giving rise to tax free income. Thus, such expenses cannot find part o f disallowance under s. 14A of the Act. The claim of personnel expenses of Rs.17,00,616/-disputed by the assessee to be attributable to collection of rent only is however without any cogent evidence. The assessee is engaged in the multiple business viz. trading o f commodities, deriving rent income and also generating exempt income. Having regard to the various stream of income generated by the assessee, the personnel expenses, to our mind, can be fairly estimated to be 1/3rd of the total costs. The assessee thus gets relie f of Rs.11,33,744/- on this score. The total relief thus works out to Rs.11,95,309/- against the disallowance of Rs.19,49,768/- confirmed by the CIT(A). Thus, while Ground No.1 o f the Revenue’s appeal is dismissed, the Ground No.1 of the assessee’s cross objection is allowed in part.
3.7 It is observed that appellant has also carried out three different activities being letting out properties, trading activities in commodities and investment activities, which are similar to activities carried out in Asst. Year 2012-13 as discussed by Hon’ble Ahmedabad ITAT. As facts of the year under consideration are similar with facts discussed by Hon’ble ITAT referred supra, disallowance under Section 14A made by AO is adjudicated as under:
