2017 (9) TMI 1221 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D2(ii) - Held that - In respect of interest expenditure - CIT-A allowed claim - Held that - On perusal of the order of the CIT(A) we find that the interest expenditure was deleted based on the fact that assessee made investments from out of the sale of land and no borrowed funds were utilized for such investments. Thus, the order of the Ld.CIT(A) in deleting the interest under Rule 8D2(ii) is sustained. Whether investments not yielded income during the year should be excluded for the purpose of computing the average investments under Rule 8D2(iii)? - Held that - This issued stands covered by the recent decision of the Special Bench in the case of ACIT v. Vireet Investments Private Limited 2017 (6) TMI 1124 - ITAT DELHI wherein held that only those investments are to be considered for computing the average value of investments which yielded exempt income during the year. Thus, respectfully following the said decision we direct the Assessing Officer to compute the disallowance under Rule 8D2(iii) in accordance with the decision of the Special Bench (supra) Referring the matter to the Valuation Officer u/s 55A(b)(ii) - addition on account understatement of capital gains - value adopted by the assessee is more than the fair market value adopted by the DVO - Held that - In the case on hand also the case is covered by section 55A(a) since value of the asset claimed by the assessee is on the basis of the estimation made by the Registered Valuer. Therefore, in our opinion the issue is squarely stands covered by the decision in the case of CIT v. Puja Prints 2014 (1) TMI 764 - BOMBAY HIGH COURT . Thus, respectfully following the said decision we uphold the order of the Ld.CIT(A) in holding that the reference to DVO is bad in law. We sustain the order of the Ld.CIT(A) on this issue.

Summary

Issues Involved:
1. Deletion of disallowance under Section 14A read with Rule 8D2(ii) regarding interest expenditure.
2. Disallowance under Section 14A read with Rule 8D2(iii) regarding administrative expenses.
3. Validity of reference to the Valuation Officer under Section 55A(b)(ii) and the addition on account of understatement of capital gains.

Detailed Analysis:

1. Deletion of Disallowance under Section 14A read with Rule 8D2(ii) Regarding Interest Expenditure:
The Revenue's appeal challenged the deletion of disallowance under Section 14A read with Rule 8D2(ii) concerning interest expenditure. The Assessing Officer had computed a disallowance of ?78,96,449, which included ?37,28,564 towards interest. The assessee argued that investments were made from surplus funds, not borrowed funds. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted this contention, finding a one-to-one correlation between the sale proceeds of land and the investments. This conclusion was supported by the decision in Reliance Utilities and Power Ltd [313 ITR 340]. The Tribunal sustained the CIT(A)'s order, confirming that no borrowed funds were used for the investments.

2. Disallowance under Section 14A read with Rule 8D2(iii) Regarding Administrative Expenses:
The assessee's cross-objection contended that investments not yielding income during the year should be excluded from the average investment computation under Rule 8D2(iii). The CIT(A) had sustained a disallowance of ?35,56,410 towards administrative expenses. The Tribunal noted that this issue was covered by the Special Bench decision in ACIT v. Vireet Investments Private Limited [82 Taxman.com 415], which held that only investments yielding exempt income during the year should be considered. Accordingly, the Tribunal directed the Assessing Officer to recompute the disallowance in line with this decision.

3. Validity of Reference to the Valuation Officer under Section 55A(b)(ii) and Addition on Account of Understatement of Capital Gains:
The Revenue's second issue challenged the CIT(A)'s decision that the Assessing Officer had no relevant circumstances for referring the matter to the Valuation Officer under Section 55A(b)(ii) and deleting the addition for understatement of capital gains. The Assessing Officer had referred the property to the Departmental Valuation Officer (DVO) due to doubts about the fair market value as on 01.04.1981 provided by the Registered Valuer. The DVO's valuation was significantly lower than the assessee's valuation. The CIT(A) held the reference to the DVO as bad in law, citing that the valuation adopted by the Registered Valuer was based on stamp duty valuation and there were no extraordinary circumstances for such a reference.

The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's ruling in CIT v. Puja Prints [360 ITR 697], which stated that a reference under Section 55A(a) is valid only if the value declared by the assessee is less than the fair market value. Since the assessee's declared value was higher, the reference under Section 55A(b)(ii) was deemed inappropriate. The Tribunal confirmed that the Assessing Officer had not provided sufficient reasons for the reference under the residuary provision of Section 55A(b)(ii).

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The deletion of interest disallowance under Rule 8D2(ii) was upheld, the administrative expenses disallowance under Rule 8D2(iii) was to be recomputed, and the reference to the DVO under Section 55A(b)(ii) was deemed invalid. The order was pronounced in open court on 13th September 2017.