2018 (12) TMI 1870 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenses incurred to earn the exempt income - Sufficiency of own funds - HELD THAT - The assessee was having its own fund sufficient to invest the money to the tune of ₹ 4.81 crores which yielded tax free income. When a person who was having its own fund more than the investment then it would be presumed that the investment was made out of his own fund. In the case of HDFC Bank Ltd 2016 (3) TMI 755 - BOMBAY HIGH COURT . It is specifically held that the no disallowance is permissible u/s 14A of the I.T. Act, 1961 if, the investment in tax free securities has been made from interest free funds. In the group concern case titled as CIT Vs. Palm Grove Beach Hotels Pvt. Ltd. 2016 (7) TMI 959 - BOMBAY HIGH COURT as held that the no disallowance u/s 14A r.w. Rule 8D of the Act is required if, the assessee uses it is own fund for the investment to earn the exempt income No disallowance u/s 14A r.w. Rule 8D of the Act is required in the present case, therefore, we are of the view that the finding of the CIT(A) is wrong against law and facts, therefore, we set aside the finding of the CIT(A) on this issue and delete the addition raised on account of u/s 14A r.w. Rule 8D of the Act. Accordingly, this issue is decided in favour of the assessee against the revenue. Addition under the head of income from house property - deemed income from unsold unit/ flat which was closing stock of the appellant as per provisions of Sections 22 and 23 - HELD THAT - In view of the law relied upon the law representative of the assessee i.e. M/s. Runwal Constructions Vs. ACIT and M/s. C.R. Developments P. Ltd. Vs. JCIT 2015 (5) TMI 1161 - ITAT MUMBAI , we are of the view that the finding of the CIT(A) on this issue is wrong against law and facts whereas the case of the assessee has duly been covered by the law mentioned above, therefore, by honoring the orders mentioned above. We deleted the addition raised by assessee on account of notional income of vacant flats. Accordingly, this issue is decided in favour of the assessee against the revenue. Addition to net profit as on profit and loss account while computing book profit u/s 115JB being disallowed u/s 14A r.w. Rule 8D - HELD THAT - As relying on L T FINANCE LIMITED VERSUS DEPUTY COMMISSIONER OF INCOME TAX-CIRCLE 2 (2) , MUMBAI 2018 (3) TMI 210 - ITAT MUMBAI we are of the view that the no adjustment u/s 14A r.w. Rule 8D of the Act is required while assessing book profit in view of the provision u/s 115JB of the Act except to the extent of explanation u/s 115JB of the Act. Accordingly, we allowed the claim of the assessee and decided the issue in favour of the assessee against the revenue.

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D in respect of income not forming part of total income.
2. Assessment of deemed income from unsold units/flats as income from house property under Sections 22 and 23.
3. Adjustment of disallowance under Section 14A while computing book profit under Section 115JB.

Issue-wise Detailed Analysis:

Issue No. 1: Disallowance under Section 14A read with Rule 8D

The assessee challenged the addition of ?20,00,000 on account of expenses incurred to earn exempt income under Section 14A read with Rule 8D. The argument was that the assessee’s own funds were sufficient to cover the investment, which yielded tax-free income, thus no disallowance was required. The assessee relied on precedents such as CIT Vs. Palm Grove Beach Hotels Pvt. Ltd., HDFC Bank Ltd Vs. DCIT, and Ferani Hotels Pvt. Ltd. Vs. ACIT, which held that no disallowance is permissible if investments in tax-free securities are made from interest-free funds.

The Tribunal noted that the assessee had sufficient own funds and concluded that the investment was made from these funds. It was held that no disallowance under Section 14A read with Rule 8D is required if the investment in tax-free securities is made from interest-free funds. The Tribunal set aside the CIT(A)’s finding and deleted the addition, deciding the issue in favor of the assessee.

Issue No. 2: Assessment of Deemed Income from Unsold Units/Flats

The assessee challenged the addition of ?13,22,90,044 under the head "income from house property" on account of deemed income from unsold units/flats, which were treated as closing stock. The assessee argued that these unsold flats should be treated under the head "income from business" as they were stock-in-trade.

The Tribunal referred to cases such as Runwal Construction Vs. ACIT and C.R. Developments Vs. JCIT, where it was held that unsold flats, being stock-in-trade, should be assessed under the head "business income" and not as "income from house property." The Tribunal concluded that the unsold flats should be assessed as business income and directed the AO to delete the addition made under Section 23. The issue was decided in favor of the assessee.

Additional Ground: Adjustment of Disallowance under Section 14A while Computing Book Profit under Section 115JB

The assessee argued that the adjustment of the amount disallowed under Section 14A read with Rule 8D should not be made in the net profit while computing book profit under Section 115JB. The Tribunal referred to the case of L&T Finance Ltd. V. DCIT, where it was held that such adjustments are not required for computing book profit under Section 115JB.

The Tribunal held that no adjustment under Section 14A read with Rule 8D is required while assessing book profit under Section 115JB, except as provided in the explanation to Section 115JB. The issue was decided in favor of the assessee.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, setting aside the CIT(A)’s findings on all issues. The disallowance under Section 14A read with Rule 8D was deleted, the deemed income from unsold flats was assessed as business income, and no adjustment was made to the book profit under Section 115JB for the disallowance under Section 14A.

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