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TMI Blog2015 (7) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... trade would be sold. Therefore, we find ourselves in agreement with the order of the ld. CIT(A) who has rightly dealt with the issue. Accordingly we confirm the same. Cost of land as on 1.4.1981 adopted by the Assessing Officer for computing the capital gain accrued to the assessee on account of conversion of capital asset into stock-in-trade - Held that:- The fair market value determined by the registered valuer is not correct. On the other hand, the Assessing Officer has adopted the circle rate as on 1.4.1981 without looking to the fact that the assessee has filed the registered valuer’s report to determine the fair market value of the land as on 1.4.1981. We find force in the contention of the assessee that the Assessing Officer is not expert in the field of determining the value of land, therefore, he should have made reference to the DVO to determine the value of land as on 1.4.1981, but he did not do so. He adopted the circle rate as fair market value of land as on 1.4.1981 ignoring the registered valuer’s report submitted by the assessee and computed the long term capital gain. The approach adopted by the Assessing Officer does not appear to be correct. Since the market v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project development agreement during the year with a builder, the assessee has transferred this land and was thus liable to capital gains during the year under consideration. 2. The C1T(A) has also erred in in law and also in facts of he case in failing to appreciate that as per agreement with the builder the consideration for the transfer of the land had also been settled being a certain area of constructed property. As such capital gains has already arisen during the year order consideration, since section 2(47) defines 'transfer' as including 'exchange'. In the present case the assessee has exchanged unbuilt land for built up area. 3. Through the cross objection, the assessee has supported the order of the ld. CIT(A) by raising the following grounds:- 1. Because the First Appellate authority had decided the appeal on merit within the four corners of the law. 2. Because It is settled law that once the capital asset is converted its into stock in trade provisions of section 2(47)(iv) read with section 45(2) the Income Tax Act 1961 were applicable and the capital gain is taxable in the year such stock is sold or transferred. 3. Because th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence being ₹ 68,42,57,966.30 was claimed as long term capital loss. The Assessing Officer examined the transactions of transfer of land into stock-in-trade with reference to provisions of section 2(47) of the Income-tax Act, 1961 (hereinafter called in short the Act ) and held the same to be a transfer within the meaning of section 2(47)(v) and 2(47)(vi) of the Act. Accordingly, the Assessing Officer worked out the long term capital gains at ₹ 37,31,686/-. The Assessing Officer, on the basis of certain advances received by the assessee from M/s Arif Industries Ltd., concluded that conversion of the company s land into stock-in-trade and agreement with the said company constituted transfer under section 2(47) of the Act and assessed the long term capital gains as above. 6. The assessee preferred an appeal before the ld. CIT(A) with the submission that out of the advance of ₹ 1.98 crores received by the assessee during the period 19.5.2003 to 31.7.2005, an amount of ₹ 1.87 crores has been refunded on 2.6.2007 and only an amount of ₹ 11 lakhs is available with the company as security deposit. It was contended on behalf of the assessee that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with it, the ld. CIT(A) has held that capital gains on conversion of land into stock-in-trade in the financial year relevant to the impugned assessment year i.e. 2004-05 is chargeable to tax in the year in which it is sold and not in the year under consideration. Accordingly the capital gain computed by the Assessing Officer was deleted. It was also held by the ld. CIT(A) that as a corollary, the long term capital loss shown by the assessee at ₹ 68,42,57,966.30 shall also not arise in the year under consideration. The relevant observations of the ld. CIT(A) are extracted hereunder for the sake of reference:- 6(1) I have examined the facts and circumstances of the case. The Assessing Officer assessed the long term capital gains by taking recourse to provisions of clauses (iv), (v) and (vi) of sub-section 47 of section 2 of the Act. The relevant provisions of the Act are (47) transfer , in relation to a capital asset, includes,- (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock- in- trade of a business carried on by him, such conversion or treatment; or (v) any transaction involving the allowing of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and belonging to the assessee-company being lease hold property, and therefore the appellant-company cannot assign or part with the possession of the premises without the consent of the lessor because lease rights are expiring on 31.03.2032 and this has been clearly mentioned in the clause 2 and 3 of the project development agreement. It is further provided in clause 6 that the appellant shall get the said land converted into freehold as per government policy at cost and expenses subject to clause 17 of the project development agreement. From the development agreement aforesaid it is evident that the assessee handed over the possession of the property for construction of project by the developer. The assessee did not receive any consideration for handing over the possession of the property to the developer but as per the agreement the assessee got the right to get the built-up area. From the development agreement, the possession was handed over for carrying out the construction work by the developer and there is no other document except the development agreement which transfers the title of the property to the developer. In the absence of the transfer of the title of the property a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. 6(5) Section 45(2) of the Act provides that capital gain arising on account of conversion of capital asset into or its treatment as stockin- trade shall be chargeable to tax in the previous year in which such stock-in-trade sold or otherwise transferred. The Assessing Officer treated the transaction of handing over the possession of the land and building to the developer as transfer under section 2(47) of the Act read with section 53A of Transfer of Property Act. The provisions of Section 2(47) of the Act is applicable only in case of capital asset. As per Section 2(14) of the Act, capital asset does not include stockin- trade. Therefore, once capital asset is converted into stock-in-trade provisions of section 2(47) of the Act becomes irrelevant and does not apply. Section 45(2) of the Act starts with a non obstante clause. Therefore, the provision of Section 45(2) of the Act supersedes all the other provisions. Under this Sub-section (2) of Section 45 of the Act, it is clear that capital gain shall be char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The issue has been examined in detail by Hon'ble ITAT, Chennai bench in the case of R. Gopinath (HUF) v. ACIT [2010] 5 taxmann.com 80 (Chennai - ITAT). 6(7) It suffices to say therefore that as per section 45(2) if a capital asset is converted into stock-in-trade, the capital gain is taxable in the year such stock is sold, and the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of the transfer. Thus capital gain gets computed by taxability is postponed to the year of sale of such converted capital asset i.e., stock-in - trade. The provisions of section 45(2) of the Act have been given effect by the Assessing Officer in the assessment proceedings for the assessment year 2008-2009 when in the order dated 30.12.2010 passed under section 143(3) of the Act, the capital gains arising on transfer of land as stock in trade have been considered as taxable in that assessment year. 6(8) The issue regarding capital gains on conversion of land to stock in trade was considered in the Circular: No. 791, dated 2-6-2000 which considered the question Whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 9. The ld. counsel for the assessee, besides placing reliance upon the order of the ld. CIT(A), has invited our attention to the project development agreement dated 20.6.2003 with the submission that the assessee has entered into an agreement with M/s Arif Industries Ltd. to develop a major part of the land into a township as per terms of lease deed together with the Lucknow Master Plan. The Building Plan was submitted by the assessee to the Lucknow Development Authority (LDA) for sanction to construct residential towers and the sanctioned plans were released by the LDA on 8.1.2002 in respect of the residential towers. Accordingly the project development agreement was executed, in which proper description of the land was made. Since the land was obtained on lease by the assessee, it has undertaken the responsibilities to get the title cleared and make it marketable title free from all encumbrances, attachments, etc. and as per clause 6, the assessee shall get the said land converted into freehold as per the Government policy at their cost and expenses within a reasonable time required by the authorities subject to clause 17 and any unexplained delay in getting the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has further contended that as per clause 27 of the project development agreement, the assessee has handed over the possession of the vacant part of the said land to the second party at the time of signing of the agreement for project development work. The second party shall commence the construction of the building as soon as the revised plans are sanctioned by the LDA. The first party has also agreed to get the balance part of the said land vacated at the cost and expenses within one year or so from the date of this agreement and simultaneously handover the possession to the second party. In case of delay in getting the said land vacated by the first party and for handing of over the possession of the same to the second party, the resultant delay in construction and development would be solely attributable to the first party i.e. the assessee. Therefore, there is no absolute transfer of possession to the second party i.e. M/s Arif Industries Ltd. as per clause 18 of the project development agreement. The ld. counsel for the assessee has further contended that in the light of this project development agreement, the impugned land was never transferred in view of the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... piring on 31.3.2032. It was the responsibility of the assessee to get the said land converted into freehold as per Government policies at their own cast and expenses within a reasonable time by depositing various charges etc. to the concerned authorities as per clause 7 of the project development agreement. No doubt, the assessee has received a sum of ₹ 51 lakhs from the second party i.e. M/s Arif Industries Ltd., but as per clause 17, this amount was received as interest free refundable amount through cheque from the first party. Thereafter the assessee was to receive certain more amount as per clause 1 of the supplementary agreement. But as per clause 2 of the supplementary agreement, the entire amount of advance of ₹ 300 lakhs is to be refunded at different stages specified in clause 18 of the project development agreement. Therefore, it is clear from the different clauses of the agreement that whatever amount was received by the assessee from M/s Arif Industries Ltd., it was simply interest free advance to meet certain expenses to be incurred in getting the land converted into freehold and also for construction of building for the religious purposes. It is also evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SAID LAND in accordance with this Agreement.. Accordingly it is mutually agreed upon by the parties that as per the already sanctioned plans or as per revised approved plans, THE SECOND PARTY, in lieu of their development/construction cost, shall be entitled to as under and on the pattern as appearing in the Agreement. 1. FIRST PARTY 1/3rd portion (one third portion) in each of the Residential Towers (Floor wise), commercial shopping, garages, parking stilts, open parkings, value added facilities, educational school building, clubs, swimming pool etc. 2. SECOND PARTY 2/3rd portion (two third portion) in each of the Residential Towers (Floor wise), commercial shopping, garages, parking stilts, open parkings, value added facilities, educational school building, clubs, swimming pool etc. 3. The ten (10) shops already constructed by THE FIRST PARTY would exclusively belong to THE FIRST PARTY However, all the Towers and Buildings etc. as per sanctioned plans or the revised plans shall be demarcated and identified through a separate Memorandum of Understanding. 16. THAT the portion allocated for religious purposes would exclusively belong to THE FIRST P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LAND is absolutely vacant and is in complete possession of THE FIRST PARTY. THE FIRST PARTY has handed over the possession of the vacant part of THE SAID LAND to THE SECOND PARTY at the time of signing of this Agreement for project development' work. THE SECOND PARTY shall. commence the construction of the Building as soon as the revised plans are sanctioned by the Lucknow Development Authority or with in 30 days from the date of the receipt of the revised plans. THE FIRST PARTY agrees to get the balance part of THE SAID LAND vacated at the cost and expenses within one year or so from the date of this Agreement and simultaneously hand over the possession to THE SECOND PARTY.' In case of delay in getting THE SAID LAND vacated by THE FIRST PARTY and /or handing over of the possession of the same to THE SECOND PARTY the resultant delay in construction and development would be solely attributable to THE FIRST PARTY, It is further agreed by and between the party that THE FIRST PARTY will remove the rubble of the existing structures and also the trees. The rubble and the trees will exclusively belong to THE FIRST PARTY including any valuable article if found beneath the earth and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here absolute possession of capital asset was given to the buyer against certain consideration, but in the instant case no consideration was ever fixed for handing over the possession to the developer and whatever amount was received it was received as interest free advance to meet the expenses to be incurred in discharging certain responsibilities agreed upon in this agreement. Our attention was also invited to the balance sheet and list of sundry creditors as on 31.3.2004 in which M/s Arif Industries Ltd. was shown as sundry creditors and a sum of ₹ 51 lakhs was credited to its account. Therefore, from any angle there is no transfer of asset as per provisions of section 2(47) of the Act. 14. We have also carefully perused the judgments referred to by the assessee. 15. In the case of Chaturbhuj Dwarkadas Kapadia vs. CIT (supra), their Lordships of the Hon'ble Bombay High Court has held in order to attract section 53A for the following conditions need to be fulfilled. There should be a contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to transfer of immovable property; the transferee should have taken the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of real estate development and capital gain arising from the transfer of land by way of such conversion was chargeable to tax in the previous year relevant to the assessment year 2005-06 when the constructed portion is sold as per the provisions of section 45(2) of the Act. 18. Again in the case of DCIT vs. Crest Hotels Ltd. (supra), similar view was expressed by the Tribunal by holding that capital gain on conversion of capital asset into stock-in-trade to be assessed in those years in which the said stock-in-trade is sold out. The Tribunal has further held that the Legislature in its wisdom, considering the fact that on conversion only notional income has arisen, postponed the tax liability thereon till real income was earned on that asset. In short, the tax liability of capital gain on conversion will arise in the same year in which business profit arise to the assessee on sale of such asset. The asset cannot have dual characteristic at the same point of time in the hands of the same person. 19. Turning to the facts of the case, we find that as per project development agreement, the possession was given for construction/development of project with certain conditions stipul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is therefore erroneous both on facts and in law; 5. The CIT(A) has also erred in law and on facts of the case in observing that the AO has neither identified any income shown by the assessee which does not form part of total income or that he has not identified any expenditure which has been incurred by him for such income while deleting the disallowance made u/s 14A of the I.T. Act, 1961. Such items of income and expenditure have been clearly identified and are a part of the record. The decision of the CIT(A) on this issue is clearly incorrect. 22. In support of the order of the ld. CIT(A), the assessee has filed the cross objection. 23. The dispute raised through various grounds in the Revenue s appeal is with regard to the cost of land as on 1.4.1981 adopted by the Assessing Officer for computing the capital gain accrued to the assessee on account of conversion of capital asset into stock-in-trade. 24. The facts in brief borne out from the record are that the assessee has converted its land into stock-in-trade during the financial year 2003-04 and the corresponding capital gain is to be computed as per provisions of section 45(2) of the Act by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. The ld. CIT(A) has also observed that the said valuation report of the registered valuer relied upon by the assessee has been accepted in the assessment proceedings for assessment years 2004-05 and 2007-08 while framing the assessment under section 143(3) of the Act. The relevant observations of the ld. CIT(A) are extracted hereunder for the sake of reference:- 4(4) I have examined the facts and circumstances of the case. I have considered the findings of the Assessing Officer and the submissions made by the appellant in writing and before me during the course of the appellate proceedings. The registered valuer whose report has been submitted by the assessee, adopted a rate of 95 per square feet as on 01.04.1981 on the basis of auction rate of 2650 per square feet of an adjacent land auctioned in 1985 as is evident from page 2 of the valuation report. The value of land at the date of conversion of the land to stock in trade as on 01.04.2003 was taken as 285 per square feet being 3 times of the rate as on 01.04.1981. The value of land so arrived was proportionately apportioned to the flats sold during the year under consideration and thereby the assessee worked out the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket value of an asset is the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date and this value could be any value and not necessarily the circle rate. 4(6) Now therefore having ascertained that the cost of acquisition of the impugned land sold by the assessee in the form of proportionate value apportioned to constructed flats is to be valued at fair market value i.e. the price that the asset would ordinarily fetch on sale in the open market, the issue is ascertainment of that price. In this connection a reference may be made to the decision of Hon'ble Apex Court in the case of Special Land Acquisition Officer, Davangere V.P. Veerabhadrappa and Others (1984) 18 Taxman 1 (SC), 42 CTR 357, 154 ITR 190. The relevant portions are reproduced as under:- In Vyricherla Narayana Gajapatiraju v. Revenue Divisional Officer, Vizagapatnam [1939] LR 6b I A 104, the Privy Council adopted to traditional legal definition of the value as the price at which the property would sell as between a willing buyer and a willing seller . In its a narrowest sense, it is designed to preclude a valuation based on as assumed forced sale; the prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence of sales of comparable properties, proximate in time to date of the acquisition, similarly situate, and possessing the same or similar advantages and subject to the same or similar disadvantages. Market value is the price the property may fetch in the open market if sold by a willing seller unaffected by the special needs of a particular purchase. Where definite material is not forthcoming either in the shape of the sales of similar lands in the neighborhood at or about the date of the notification under s. 4(1) or otherwise, the court has no other alternative but to fall back on the method of valuation by capitalization. In valuing land or an interest in land for purpose of land acquisition proceedings, the rule as to number of years' purchase is not a theoretical or legal rule but depends upon economic factors such as the prevailing rate of interest in the money investments. The return which an investor will expect from an investment will depend upon the characteristic of income as compared to that of idle security. The main features are : (1) security of the income; (2) fluctuation; (3) chances of increase; (4) cost of collection, etc. The most difficult and yet th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate and thus in 1985 the rate was taken at 98.5 per square feet. This rate was therefore reduced to ₹ 95/- per square feet as on 01.04.1981. The rate was increased by a multiple of 3 for arriving at the rate of 285 per square feet as on 01.04.2003. I find that the multiple is itself reasonable as the circle rate of 15 per square feet as on 01.04.1981 was revised to 325.27 per square feet as mentioned by the AO in the computations. The rate adopted by the registered valuer has reference to the rates that corresponding properties were fetching in the vicinity of the impugned land in auction at relevant period of time. The rate is also in accordance with the decisions cited supra where auction rates have been accepted as fair market value of property. 4(8) The AO rejected the valuation report of the registered valuer for no apparent reasons. In case the AO was not satisfied about the correctness of the valuation done by the registered valuer, a reference could have been made to the Departmental Valuation Officer under section 55A of the Act which lays down as under - Reference to Valuation Officer. 55A. With a view to ascertaining the fair market value of a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property has been accepted as fair value in the judicial decisions cited supra. In absence of any other material, jt would be reasonable to accept the report of the registered valuer which is based on auction rates of neighborhood property and does give an indication of the value the property in the vicinity was fetching in the open market and hence the fair market value. I am therefore of the considered view that the cost of acquisition being fair market value of the property in question, the rate for the purpose of valuing the property requires to be,, taken as that ascertained by the registered valuer. The addition of ₹ 84,27,065/- made by b the AO by working out the capital gains on the basis of circle rate for cost of acquisition is directed to be deleted. The ground of appeal is allowed. 26. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed heavy reliance upon the order of the Assessing Officer. 27. In opugnation, the ld. counsel for the assessee, besides placing reliance upon the order of the ld. CIT(A), has submitted that the Assessing Officer has not raised any dispute with regard to the deemed value of the land as on 1.4.1981 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not correct. On the other hand, the Assessing Officer has adopted the circle rate as on 1.4.1981 without looking to the fact that the assessee has filed the registered valuer s report to determine the fair market value of the land as on 1.4.1981. We find force in the contention of the assessee that the Assessing Officer is not expert in the field of determining the value of land, therefore, he should have made reference to the DVO to determine the value of land as on 1.4.1981, but he did not do so. He adopted the circle rate as fair market value of land as on 1.4.1981 ignoring the registered valuer s report submitted by the assessee and computed the long term capital gain. The approach adopted by the Assessing Officer does not appear to be correct. Since the market value of the land as on 1.4.1981 was not determined correctly either by the assessee or the Assessing Officer, this issue requires a fresh adjudication by the Assessing Officer. Accordingly, we set aside the order of the ld. CIT(A) in this regard and restore the matter to the file of the Assessing Officer with a direction to readjudicate the issue afresh after determining the fair market value of the land as on 1.4.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed as deduction in computing the total income under the provisions of chapter IV of the Act. The incomes which do not form part of total income are those contained under chapter III of the Act. To put it differently, an expenditure which has been incurred by the assessee to earn income which does not form part of total income under chapter III of the Act is not allowable as deduction in computing the income forming part of total income under chapter IV of the Act. The Assessing Officer has neither identified any income shown by the assessee which does not form part of the total income nor has identified any expenditure which has been made merely b application of Rule 8D(2)(iii) as the assessee has shown income from dividends amounting to ₹ 2,08,13,952/-. 5(5) The appellant has neither claimed nor incurred any expenditure on the investments. Once this is an undisputed fact, no disallowance under section 14A of the Act is called for. Even the Assessing Officer has not brought out any nexus between the expenditure incurred and income generated which is not part of the taxable income. In the case of CIT Vs. Winsome Textile Industries Ltd. (2009) 319 ITR 205 (P H), Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business activities and such expenditure has no nexus with dividend income of the appellant. In the result the addition of ₹ 13,99,150/- made by the Assessing Officer is deleted resulting in relief of equivalent amount to the appellant. In view of above, this ground of the appellant is allowed. 31. Aggrieved, the Revenue has preferred an appeal before the Tribunal and has placed heavy reliance upon the order of the Assessing Officer; whereas the ld. counsel for the assessee, besides placing reliance upon the order of the ld. CIT(A), has invited our attention to the assessment order with the submission that the Assessing Officer has simply computed the disallowance under section 14A of the Act read with rule 8D(2)(iii) of the rules without recording any satisfaction with regard to the incorrectness of the accounts of the assessee with respect to the dividend income and the expenditure incurred in relation thereof. He has also invited our attention to the order of the Tribunal in the case of U.P. Electronics Corporation Ltd. vs. DCIT(TDS), Lucknow in I.T.A. No. 538/LKW/2012, in which the issue of recording of objective satisfaction while invoking the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 14A of the Act read with rule 8D of the rules for computing the disallowance, the Assessing Officer is required to record objective satisfaction with regard to the incorrectness of the expenditure or accounts relating to investment on which dividend income was earned. If satisfaction is not recorded, no disallowance under section 14A of the Act can be made. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:- 9. Having carefully examined the orders of the lower authorities in the light of the rival submissions, we find that out of total investments of ₹ 82,16,45,416/-, investment in subsidiary companies were of ₹ 60,90,10,559/- as per balance sheet appearing at pages 26 to 38 of compilation of the assessee. The assessee has raised a specific dispute with regard to the invocation of provisions of rule 8D with the contention that before invoking the provisions of rule 8D, the Assessing Officer has to record objective satisfaction with regard to the correctness of the accounts relating to provisions of section 14A of the Act. In support of his contention, the ld. counsel for the assessee has invited our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mandatory provisions for calculation of disallowance u/s 14A. Therefore, we do not find any infirmity in the order of the CIT(A) upholding the action of the Assessing Officer for disallowing the deduction u/s 14A read with rule 8D. The contention of the assessee that the AO without satisfaction being reached invoked the provisions of Rule 8D, in our opinion, does not hold good especially in absence of non-furnishing of details for the purposes of calculation of disallowance at ₹ 16.50 lakhs by the assessee on its own. In this view of the matter and in absence of any distinguishable feature brought to our notice by the learned Counsel for the assessee against the order of the CIT(A), we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the assessee is dismissed. 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be disallowed under section 14A Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation. 9. After considering these principles as emerged from the decision of Hon ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. (supra), Hon ble Jurisdictional High Court has held in para 32 and 33 as under:- 32. Sub-section (2) and (3) to section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub Sections (2) and (3) Provide as follows. 14A.(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1,2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154. 10. It has been made clear by the Hon ble High Court that subsection (2) does not ifso facto empower the AO to apply the method prescribed by Rules str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue that the assessee has incurred any direct expenditure or any interest expenditure for earning the exempt income or keeping the investment in question. If there is expenditure directly or indirectly incurred in relation to exempt income the same cannot be claimed against the income which is taxable. For attracting the provisions of section 14A- there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. (326 ITR 1). Therefore, there should be a proximate relationship between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted. 12. The issue of recording objective satisfaction by the Assessing Officer, before proceeding to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Income-tax Act, was also examined by the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (supra) and the Pune Bench, following the judgment of the Hon'ble Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. vs. Dy. CIT Another (supra), was also of the view that recording of objective satisfaction by the Assessing Officer with regard to the correctness of the claim of the assessee is mandatorily required in terms of section 14A(2) of the Act. The relevant observations of the Tribunal are also extracted hereunder:- 8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that for the purposes of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill, 2006, and the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existing provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. At this stage, we may also touch-upon a similar view expressed by the Hon ble Delhi High Court in the case of Maxopp Investment Ltd. Ors. vs. CIT, (2012) 247 CTR 162 (Del), wherein reference has been made to the judgment of the Hon ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra). As per the Hon ble Delhi High Court, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income in term of rule 8D of the Rules would be triggered only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. According to the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is not acceptable . Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the disallowance u/s 14A of the Act to the extent of ₹ 5,00,000/-, as returned by the assessee. 13. In that case, before proceeding to determine the amount of expenditure, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer is restored to the file of the Assessing Officer, the cross objection is partly allowed for statistical purpose. I.T.A. No. 301/LKW/2013 C.O. No.19/LKW/2013: 36. In this appeal, the dispute was raised with regard to the deemed cost of land as on 1.4.1981 adopted by the Assessing Officer. This issue was examined by us in the foregoing appeal, in which we have set aside the order of the ld. CIT(A) and restored the matter to the file of the Assessing Officer to determine the fair market value of the land as on 1.4.1981 for computing the capital gain. Following the view taken in the foregoing appeal, the issue relating to the deemed cost of land is restored to the file of the Assessing Officer with a direction to determine the fair market value of the land as on 1.4.1981 for computing the long term capital gain. Accordingly, this appeal of the assessee is allowed for statistical purposes. 37. The cross objection is filed in support of the order of the ld. CIT(A). Since the issue relating to cost of land adopted by the Assessing Officer is restored to the file of the Assessing Officer, the cross objection is partly allowed for statistical purpose. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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