2022 (8) TMI 1186 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D(2)(iii) - Mandatory requirement of recording satisfaction - HELD THAT - It is undisputed position that the appellant company made investments in partnership firm and in equity shares, income from which is exempt from tax. It is contention of the appellant that no expenditure was incurred to earn the exempt income and, therefore, the question of disallowance u/s 14A does not arise. It is mandatory on the part of the AO to record a satisfaction as to the correctness or otherwise of claim of the assessee regarding the expenditure incurred to exempt income. In the absence of recording of such satisfaction by the AO resort to the provisions of section 14A cannot be made as held by the Hon ble Bombay High Court in the case of PCIT vs. Reliance Capital Asset Management Limited 2017 (10) TMI 177 - BOMBAY HIGH COURT The law is settled to the extent that without recording the satisfaction as to correctness or otherwise, the claim of the assessee that no expenditure was incurred to exempt income, the Assessing Officer cannot resort to the provisions of section 14A of the Act. In the present case, from the perusal of the assessment order as well as the order of the ld. CIT(A), it would clearly reveal that the appellant had asserted that no expenditure was incurred. The Assessing Officer had not recorded any finding on the submissions made by the appellant company - Therefore, we remit the issue to the file of the ld. CIT(A) to adjudicate the contention of the appellant company that in the absence of recording of satisfaction, no disallowance u/s 14A can be made in accordance with law. Accordingly, these grounds of appeal no.2 and 4 stands partly allowed. Addition on account of notional rental value of unsold flats lying in stock-in-trade - HELD THAT - This issue is decided in favour of the appellant company by this Tribunal in the case of Kumar Properties and Real Estate Pvt. Ltd 2021 (4) TMI 1163 - ITAT PUNE , KUMAR CONSTRUCTION AND PROPERTIES PRIVATE LIMITED 2021 (10) TMI 441 - ITAT PUNE . Addition on account of provision for expenses which has been made in respect of properties which are completed and the expenses had to be incurred - HELD THAT - It is settled position of law that if liability for expenditure had crystallized during the previous year relevant to the assessment year under consideration, then the deduction should be allowed, although the liability is discharged at future date. Reliance in this regard can be placed on the decision of the Hon ble Apex Court in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT Thus without examining the crystallization of liability for the expenditure, the Assessing Officer had made disallowance. This approach of the Assessing Officer cannot be upheld. Accordingly, we remit this matter back to the file of the Assessing Officer to examine the allowability of this claim for provision for expenses on being satisfied that the liability for this expenditure had been crystallized during the previous year relevant to the assessment year under consideration and these expenses are incurred in respect of flat already sold and the balance of the expenditure is carried to the closing work-in-progress. Grounds partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition on account of notional rent on unsold flats.
3. Disallowance of provision for expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The appellant company made investments in a partnership firm and equity shares, generating exempt income. The Assessing Officer (AO) disallowed Rs. 18,69,491/- under Section 14A, invoking Rule 8D(2)(iii) of the Income Tax Rules, 1962, despite the appellant's claim that no expenditure was incurred to earn this exempt income. The AO failed to record satisfaction regarding the correctness of the appellant's claim, a mandatory requirement before making a disallowance under Section 14A. The Tribunal referenced judgments from the Hon'ble Bombay High Court and the Hon'ble Supreme Court, emphasizing the necessity of such satisfaction. Consequently, the Tribunal remitted the issue back to the CIT(A) to adjudicate the appellant's contention that disallowance under Section 14A without recording satisfaction is impermissible. This ground was partly allowed.

2. Addition on Account of Notional Rent on Unsold Flats:

The AO added Rs. 89,68,680/- as notional rental income on unsold flats, treating them as stock-in-trade. The appellant contended that these unsold flats should not attract notional rent under Section 22 of the Act, referencing the Tribunal's decision in similar cases. The Tribunal agreed, citing previous judgments where unsold flats held as stock-in-trade were not subjected to notional rent. The Tribunal concluded that the unsold flats met all conditions for exclusion under Section 22, thus allowing this ground in favor of the appellant.

3. Disallowance of Provision for Expenses:

The AO disallowed Rs. 11,38,26,228/- provision for expenses, asserting it was not crystallized. The CIT(A) partially upheld this, confirming Rs. 2,35,60,537/- as disallowable while directing the deletion of the remaining amount included in the closing work-in-progress. The appellant argued that the provision was based on the matching principle, correlating expenses with the revenue from sold flats. The Tribunal referenced the principle that liability for expenditure, if crystallized during the relevant year, should be allowed as a deduction, as established in Bharat Earth Movers vs. CIT. The Tribunal remitted the matter back to the AO to verify the crystallization of the liability and its correlation with the sold flats, thus partly allowing this ground for statistical purposes.

Conclusion:

The appeal was partly allowed for statistical purposes, with specific issues remitted back to the CIT(A) and AO for further examination and adjudication based on the principles outlined in the judgment. The Tribunal emphasized the necessity of recording satisfaction for disallowances under Section 14A and upheld the exclusion of notional rent on unsold flats held as stock-in-trade.