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2022 (11) TMI 1409 - AT - Income TaxDisallowance u/s. 14A r.w.r. 8D - suo moto made disallowance - scope of amendment - HELD THAT - Whether the aforesaid amendment by the Finance Act, 2022 is prospective or retrospective in operation, in PCIT vs M/s Era infrastructure (India) Ltd, 2022 (7) TMI 1093 - DELHI HIGH COURT held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022 23 and subsequent assessment years. Thus, in view of the aforesaid decision of Hon ble Delhi High Court, we find no merits in the submission of learned DR. We further find that in Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Respectfully following the aforesaid decision, the AO is directed to delete the disallowance made u/s 14A read with Rule 8D. As a result, ground No. 1 raised in assessee s appeal is allowed. Disallowance of interest expenses - AO disallowed the expenditure on the basis that interest expenditure has a direct nexus with the project undertaken and therefore same is to be allowed as business expenditure in the ratio of revenue offered from the project - HELD THAT - Lokhandwala Constructions Inds. Ltd 2003 (1) TMI 93 - BOMBAY HIGH COURT in case of a builder held that where the loan was obtained for the project of construction of flats, which is stock in trade, the assessee is entitled to deduction u/s 36(1)(iii) of the Act in respect of interest expenditure on such loans. In the present case, undisputedly funds were borrowed for the purpose of the projects undertaken by the assessee, and only based on accounting treatment, the claim of the assessee was denied. It is pertinent to note that the allowability of any deduction is to be decided based on the provisions of the Act. In the present case, since the funds were borrowed for the purpose of projects undertaken by the assessee, therefore, the interest paid on such borrowing is allowable u/s 36(1)(iii) in view of the aforesaid decision of Hon ble jurisdictional High Court. Accordingly, the AO is directed to grant the deduction under section 36(1)(iii) of the Act in respect of the interest expenditure claimed by the assessee. As a result, ground No. 2 raised in assessee s appeal is allowed. Disallowance of commission expenses - assessee claims that the commission expenses incurred by the assessee are not in respect of any particular project and these expenses are required to be incurred under all circumstances while carrying on the business - as per AS 7 para 19 selling costs cannot be attributed to contract activity and the same cannot be allocated to the contract and therefore are to be excluded from the cost of the construction contract - HELD THAT - As evident that in the present case the commission expense has been identified by the assessee not only in respect of each project undertaken by it but also in respect of each flat for which such commission expenses were incurred. Insofar as the decision in Rustomjee Evershine Joint-Venture Private Ltd 2017 (12) TMI 579 - ITAT MUMBAI we find that in para 7 the coordinate bench after perusal of AS-7 noted that general administrative costs and selling costs are not considered as part of the contract cost unless they are contract specific. C. Thus we find no infirmity in the impugned order passed on this issue. As a result, ground No. 3 raised in assessee s appeal is dismissed. Disallowance of interest - HELD THAT - We find that even now no details regarding the expenditure incurred under the head Interest - Others have been filed by the assessee. Therefore, we find no infirmity in the impugned order passed upholding the disallowance - As a result, ground raised in assessee s appeal is dismissed. Disallowance of interest on late payment of TDS - In its appeal before the CIT(A) the assessee raised no ground challenging the disallowance of interest on late payment of TDS. Thus, when the assessee has agreed to disallowance of interest on late payment of TDS, we find no infirmity in the order passed by the AO on this issue. In any case, nothing has been brought on record to show that the said expenditure was incurred wholly and exclusively for the purpose of the business for being allowed u/s 37 of the Act. Therefore, in view of the above, additional ground No. 1 raised by the assessee is dismissed. Disallowance u/s 14 A r/w Rule 8D - HELD THAT - We find that Hon ble jurisdictional High Court in Nirved Traders (P.) Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, respectfully following the aforesaid decision of the Hon ble jurisdictional High Court, we direct the AO to restrict the disallowance made under section 14A of the Act to the extent of exempt income earned by the assessee, during the year under consideration. As in assessee s appeal is partly allowed, while additional ground No. 1 is allowed. Scope of assessment proceedings in case of limited scrutiny - AR submitted that it was a limited scrutiny case and no approval was taken by the AO from CIT for expanding the scope of its jurisdiction - HELD THAT - From the perusal of the record, it is evident that the AO vide assessment order passed under section 143(3) of the Act disallowed the interest expenditure and commission expenditure debited by the assessee in its profit and loss account. AO also made disallowance under section 14 A r/w Rule 8D after considering the interest expenditure debited to the profit and loss account. Thus, in view of the above, we are of the considered opinion that the additions made by the AO are covered under aforesaid point (iii) and (iv) of the CASS reasons and the scope of enquiry by the AO was also limited to the verification of the aforesaid aspects. Therefore, we find no infirmity in the impugned order passed on this issue. As a result, grounds No. 1 and 2 raised in assessee s appeal are dismissed. Validity of assessment proceedings in the name of the erstwhile entity - At no stage the AO was informed about the order approving the scheme of amalgamation passed by NCLT - HELD THAT - We are of the considered view that merely issuing notice to the income tax authorities in compliance provision of section 230(5) of the Companies Act 2013 as per directions of the Hon ble NCLT intimating the continuation of merger proceedings cannot be treated as intimation regarding the merger of M/s Rustomjee Constructions Private Limited with Keystone Realtors Private Ltd., as it is only upon the passing of final order approving the scheme of the merger the entity can be said to have been merged and lost its legal existence, even though the merger took effect from the retrospective date. As further pertinent to note that the date of effect of the merger also came into existence only on 14/09/2017. Therefore, in light of the decision of Mahagun Realtors (P.) Ltd, 2022 (4) TMI 347 - SUPREME COURT we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground No. 1 raised in assessee s appeal is dismissed.
Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961. 2. Disallowance of interest expenses. 3. Disallowance of commission expenses. 4. Disallowance of interest on delayed expenses. 5. Scope of assessment proceedings in case of limited scrutiny. 6. Validity of assessment proceedings in the name of the erstwhile entity. Detailed Analysis: 1. Disallowance under section 14A of the Income Tax Act, 1961: - Facts: The assessee challenged the disallowance of Rs. 54,33,62,192 under section 14A r/w Rule 8D for the assessment year 2013-14, arguing that no dividend income was earned during the year. - Decision: The Tribunal found that no dividend income was earned by the assessee during the year under consideration. It referenced the Delhi High Court's decision in PCIT vs M/s Era Infrastructure (India) Ltd, which held that the amendment by Finance Act, 2022, is prospective and applies from the assessment year 2022-23. Thus, the AO was directed to delete the disallowance made under section 14A r/w Rule 8D. 2. Disallowance of interest expenses: - Facts: The assessee incurred finance costs, part of which was capitalized to completed contracts, and the balance debited to the profit and loss account. The AO disallowed the balance interest as revenue expenditure and capitalized it to WIP. - Decision: The Tribunal held that the funds were borrowed for the purpose of the projects undertaken by the assessee. Following the Bombay High Court's decision in CIT vs Lokhandwala Constructions Inds. Ltd., the interest paid on such borrowing is allowable under section 36(1)(iii). The AO was directed to grant the deduction under section 36(1)(iii) for the interest expenditure claimed by the assessee. 3. Disallowance of commission expenses: - Facts: The assessee debited commission and brokerage expenses to the profit and loss account, arguing these were selling and marketing expenses not related to a single project directly. The AO disallowed these expenses, adding them to WIP. - Decision: The Tribunal found that the commission expenses were identifiable in respect of each project and flat. Therefore, the commission expenditure should be allowed proportionally to the revenue offered. The AO's disallowance was upheld. 4. Disallowance of interest on delayed expenses: - Facts: The assessee debited Rs. 89,54,967 towards interest on delayed payments of TDS, VAT, WCT, etc. The AO disallowed interest on late payment of TDS and 'Interest-Others' due to lack of details. - Decision: The Tribunal upheld the disallowance of Rs. 48,53,340 due to the absence of details. Additionally, the disallowance of interest on late payment of TDS was upheld as the assessee had agreed to it during the assessment proceedings. 5. Scope of assessment proceedings in case of limited scrutiny: - Facts: The assessee argued that the AO exceeded the scope of limited scrutiny by making additions beyond the purview of the limited scrutiny category. - Decision: The Tribunal found that the AO's additions were covered under the CASS reasons for selection, which included verification of low net profit or loss from large gross receipts and large other expenses claimed in the profit and loss account. Therefore, the AO did not exceed the scope of limited scrutiny. 6. Validity of assessment proceedings in the name of the erstwhile entity: - Facts: The assessee challenged the assessment order passed in the name of M/s Rustomjee Constructions Private Limited, which had merged with Keystone Realtors Private Ltd. - Decision: The Tribunal noted that the assessee did not inform the AO about the culmination of merger proceedings and the final order of the NCLT. Therefore, the assessment order passed in the name of the erstwhile entity was upheld. Conclusion: - The appeals were partly allowed, with specific directions to the AO on various issues, including the deletion of disallowances under section 14A, allowance of interest expenses under section 36(1)(iii), and proportionate allowance of commission expenses. The Tribunal upheld the AO's actions within the scope of limited scrutiny and the validity of assessment proceedings in the name of the erstwhile entity.
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