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2021 (5) TMI 763 - AT - Income TaxDisallowances u/s 40A(2)(b) - payment towards commission made to related party M/s. DLF Home Developers Ltd for service charges on account of collection received from customers on account of project Capital Green Phase 1 - DLF Home Developers is a subsidiary company of the assessee company and therefore, claim of the assessee is that provision of section 40A(2)(b) do not apply to such payment - AO held that the assessee has not incurred these expenses to meet legitimate needs of the business - HELD THAT - Assessee has made payment to the parties for three bills - AO has disallowed amount involved in last bill but has allowed the earlier two bills despite the payments made for same services. There is no reasoning given by the ld AO that why the earlier two payment to the same party for the same services for the same accounting period on same terms and conditions are allowable, whereas the last bill itself was found to be not justified. Even at the time of disallowances, the ld AO could not show any comparable cases that the payment made to the recipient of income is unreasonable or excessive. In fact, the ld CIT(A) has noted that the assessee has paid commission to this party @ 1% whereas commission to other brokers is paid @2%. Therefore it is apparent that conditions satisfied u/s 40A(2) of classifying expenditure as excessive or unreasonable is not satisfied as the comparable market rate for same services provided by unrelated parties are higher. In view of this, we do not find any infirmity in the order of the ld CIT(A) in deleting the above disallowance - Decided in favour of assessee. Capital gain computation - Disallowance on account of cost of improvement while calculating the capital gain earned by the assessee - HELD THAT - Cost of development was paid to Associated Infrastructure Company for cost of development of the land at the rate of ₹ 200 per sq ft as per tripartite arrangement dated 29.04.2008. The ld CIT(A) considered the agreement and referred to the clauses of agreement at para 5.3. It was noted that the above amount of cost of development was integral part of the development and therefore, it cannot be ignored and disallowed. The purchase agreement itself contains the provisions for development of land at the behest of the Vendor. It was also carried in the books of accounts of earlier years. Therefore, there is no justification for the ld AO to disallow the same - we confirm the order of the ld CIT(A) in deleting the addition as cost on improvement for the land sold. Accordingly, the ground No. 2 of the appeal of the ld AO is dismissed. Addition on account of brokerage paid to M/s. Totem Infrastructure Ltd on sale of land - AO disallowed the same as the assessee could only submit the copy of the bill for brokerage but according to ld AO assessee failed to submit justification for payment of brokerage to the above party - CIT(A) deleted the addition - HELD THAT - The assessee has also paid similar brokerage for sale of land at Jamnagar. Therefore, the claim of the ld AO that the assessee paid brokerage only for sale of Vadodara property is not correct. However, during the course of assessment wherein details of payment of brokerage at 1.80% on sale of ₹ 87 crores at Vadodara land along with address and PAN of the broker was given. The ld AO did not make any enquiry on the bill but merely on other reasons made the disallowance. CIT(A) has categorically dealt with all these reasons and deleted the addition. Even before us, the findings of the ld cit (A) were not controverted. We find that the brokerage paid by the assessee is demonstrated in the bill , which is for the purpose of the sale of Vadodara Land. Therefore, in absence of any specific enquiry proving otherwise, the above disallowance cannot be made. Even otherwise, other findings of the ld AO about payment of brokerage on other properties sold were not found correct. Thus, we do not find any infirmity in the order of the ld CIT(A) in deleting the above disallowances. Accordingly, ground No. 3 of the appeal of the ld AO is dismissed. Disallowances of interest u/s 14A - AO noted that the assessee has made interest payment and has also incurred certain expenditure. Therfore according to him, the assessee has incurred proportionate expenditure for earning exempt income. Therefore, disallowances u/s 14A of the Act is required to be made - HELD THAT - Assessee has incurred certain expenditure for the purpose of earning exempt income. However, the assessee did not given any basis for allocating 50% of the salary of one person. No other corresponding expenditure or incidental expenditure was disallowed. The ld AO noted this fact and recorded his satisfaction that the claim of the assessee is that it has not incurred any expenditure in earning the exempt income is incorrect. Thus no fault can be found with the action of the ld AO in applying provision of Rule 8 D as it satisfied the condition laid down u/s 14A (2) of the act. As far as the issue of interest expenditure is concerned, it is apparent that assessee has huge interest free funds in form of share capital and free reserve of approximately ₹ 983 crores against the investment in equity shares of ₹ 53 crores. Therefore, in absence of any contrary evidence, the presumption lies in favour of the assessee that investment in such equity shares have been made out of interest free funds. The ld CIT(A) has deleted the same on this basis only. In view of this we do not find any infirmity in the order of the ld CIT(A) in so far as the deleting the disallowance on account of interest. It is also not the claim of the ld AO that the assessee has utilized interest-bearing funds for making investment in the equity shares. So far as the issue of other expenditure there is no justification for reducing the sum of ₹ 22.67 crores being investment in subsidiaries out of total investment in equity shares of ₹ 53.51 Therefore, we find that disallowances of ₹ 26,75,393/- should have been confirmed by the ld CIT(A). Anyway as the disallowance u/s 14A cannot exceed the exempt income of ₹ 22,34,355/- ,we direct the ld AO to restrict the disallowance only to the extent of ₹ 22,34,355/-. Accordingly, appeal of the assessee is dismissed and appeal of the ld AO with respect to ground No. 4 and 5 is partly allowed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Addition under Section 40A(2)(b) of the Income Tax Act. 3. Disallowance of cost of improvement for capital gains calculation. 4. Disallowance of brokerage paid on the sale of land. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The assessee challenged the recomputation and restriction of disallowance under Section 14A to ?15,42,000 by the CIT(A), arguing that the already disallowed amount of ?6,23,210 was sufficient. The CIT(A) upheld the disallowance of ?15,42,000 being 0.5% of the investment, excluding investments in subsidiary companies. The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments and thus deleted the interest expenditure disallowance. However, the Tribunal referenced the Supreme Court's decision in Maxopp Investment Ltd vs. CIT, which stated that the dominant purpose for investments is irrelevant for Section 14A disallowance. Therefore, the Tribunal held that the disallowance should not exclude investments in subsidiaries, but should be capped at the exempt income of ?22,34,355, thus partly allowing the AO's appeal and dismissing the assessee's appeal. 2. Addition under Section 40A(2)(b) of the Income Tax Act: The AO disallowed ?83,08,348 paid to a related party, DLF Home Developers Ltd, under Section 40A(2)(b), claiming it was excessive. The CIT(A) deleted the disallowance, noting that the payment was for legitimate business needs and was lower than the market rate for similar services. The Tribunal upheld the CIT(A)'s decision, confirming that the payment was not excessive or unreasonable as per Section 40A(2). 3. Disallowance of cost of improvement for capital gains calculation: The AO disallowed ?2,38,26,486 claimed as cost of improvement for land sold, due to lack of documentary evidence. The CIT(A) deleted the disallowance, referencing agreements and consistent reflection in the books of accounts. The Tribunal confirmed the CIT(A)'s decision, noting that the cost was integral to the development and justified by the agreements and books of accounts. 4. Disallowance of brokerage paid on the sale of land: The AO disallowed ?1,72,72,980 paid as brokerage to Totem Infrastructure Ltd, questioning its justification. The CIT(A) deleted the disallowance, citing invoices and the broker's appointment details. The Tribunal upheld the CIT(A)'s decision, noting that the brokerage was for the sale of Vadodara land, and the AO did not provide evidence to the contrary. Conclusion: The Tribunal dismissed the assessee's appeal and partly allowed the AO's appeal, confirming the disallowance under Section 14A to be capped at the exempt income and upholding the CIT(A)'s deletion of disallowances under Sections 40A(2)(b) and for cost of improvement and brokerage. The order was pronounced on 24/05/2021.
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