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Judgment
PER NAVEEN CHANDRA [A. M]:
The above captioned appeal is preferred by the Revenue against the order dated 27.11.2017, passed by Learned Commissioner of Income Tax (Appeals)-9, New Delhi (hereinafter referred to as ‘ld. CIT(A)), under section 250 of the Income Tax Act, 1961 [hereinafter referred to as, “Act”] for Assessment Year 2016-17. The assessment order in this appeal is passed by the Assessing Officer [for short, AO] under section 143(3) of the Act.
The Revenue has raised following grounds of appeal:-
1."The impugned order of the CIT (A) is bad in law as well as on facts of the case."
2."On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made u/s 14A of the Income Tax Act, 1961, the Ld. CIT(A) has erred on the fact in not considering the CBDT Circular 5/2014 dated 11.02.2014. Although the above circular has been overruled by the judgement, but the judicial position is not yet settled. "
3."On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance on account of legal and professional charges for Roof Top Restaurant and exploring business opportunity in southern India as there is no income generated from new business. These expenses has no business nexus with income of the assessee. "
4."The Appellant craves, leave or reserving the right to amend, modify, alter, add or forego any of the Grounds) of Appeal at any time before or during the hearing of this appeal."
The Revenue has filed a revised ground of appeal as follows:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 2,01,26,936/- made u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. The Ld. CIT(A) failed to appreciate that the Assessing Officer had recorded valid satisfaction regarding the incorrectness of the assessee's claim and that the assessee had earned substantial exempt income of Rs. 19.49 Crores during the year."
The substantial issue raised by the Revenue is deletion of disallowance made under section 14A and deletion of disallowance on account of legal and personal charge for rooftop restaurant at HT House. Brief facts of the case is that the assessee has 12.90% of Exempt income as compared to total income which aggregates to Rs. 19,49,29,066/- comprising of (i) dividend of Rs. 17,34,47,052; and (ii) interest on tax free bonds of Rs. 2,14,82,014. The assessee has made suo-motu disallowance of Rs. 55,85,330 u/s 14A determined as- (i) 50% salary of two Key Managerial Personnels involved in investments and (i) proportionate miscellaneous/ administrative expenses. The AO made an additional disallowance of Rs.2,01,26,936 applying method under Rule 8D(2)(iii). The CIT(A) deleted the disallowance.
The ld counsel of the assessee stated that 93.25% of the dividend received from old strategic long-term investments hence there cannot be any basis to attribute any expense to earning exempt income. The ld AR further stated that it is incumbent upon the AO to considered the details and record an objective satisfaction, having regard to the accounts of the assessee that expenditure having proximate nexus to exempt income is incurred; in absence of valid satisfaction, mechanical application of Rule 8D is invalid and relied of the following decisions:
- H.T. Media Ltd. v. PCIT: [2017] 399 ITR 576 (Del)
- Coforge Ltd vs. ACIT: [2021] 436 ITR 546 (Del)
The ld AR submitted that the AO has not pointed out any incurrence of actual expenditure having proximate nexus with earning of exempt income which is necessary to make disallowance u/s 14A and relied on the following decisions:
- CIT vs. Walfort Share & Stock Brokers: [2010] 326 ITR 1 (SC)
- Godrej & Boyce Mfg. Co. Ltd. v. DCIT: [2010] 328 ITR 81 (Bom) affirmed in [2017] 394 ITR 449 (SC)
- Maxopp Investment Ltd: [2012] 347 ITR 272(Del)
Per contra, the ld DR relied on the orders of the AO.
We have heard the rival submissions and have perused the materials on record. We find that the AO has accepted that the investment made by the assessee is out of the surplus funds, yet he applied Rule 8D to determine the proportionate expenditure for disallowance on that the ground that it is ‘Department stand’. We are therefore of the view that the AO has mechanically applied the Rule 8D and there is objective satisfaction recorded. The AO further, has not recorded as to how the suo-motto disallowance made by the assessee is not appropriate/invalid.
We further find that the ITAT in assessee’s own case for AY 2011-12 in ITA 4413/Del/2017, has decided the issue in favour of the assessee as follows:
6.At the outset, we find that the learned AO had apparently proceeded on the premise that no suo moto disallowance was made by the assessee. No way in the assessment order he hadbothered to discuss as to why the basis adopted by the assessee for making suo moto disallowance is incorrect. The learned AO directly proceeds to apply the computation mechanism provided in Rule 8D(2) of the Rules. In our considered opinion, if suo moto disallowance of the expenditure has been made by the assessee and basis thereon has been explained by the assessee, then the learned AO ought to have recorded an objective satisfaction with the cogent reasons as to why such disallowance made by the assessee is incorrect and thereafter resort to proceed with the computation mechanism provided in Rule 8D(2) of the Rules. This is mandate of law provided in section 14A(2) of the Act r.w. Rule 8D(1) of the Rules. Since the same is conspicuously absent in the instant case, we hold that the disallowance made by the learned AO under section 14A of the Act deserves to be deleted. Hence, we hold that only a sum of Rs.36,54,208/- being the suo moto disallowance made by the assessee in the return of income under section 14A should be sustained. Accordingly, Ground Nos. 1 and 1.1 raised by the assessee are allowed.
Respectfully following the above decision, we hold that in absence of any justification for rejecting the assessee’s own calculation for disallowance u/s 14A and absence of any actual expenditure having been incurred for earning the exempt income during the year under consideration, no disallowance over and above the suo-motu disallowance is permitted. We also note that in absence of the valid satisfaction, the application of Rule-8D has been considered as invalid in the case of HT Media Ltd.(supra), a case of the assessee subsidiary. The ground is accordingly dismissed.
The second ground pertains to disallowance of legal and professional charges. Briefly, the assessee is company engaged, inter-alia, in the business of real estate, providing various facilities/ services to tenants etc. With a view to expand its activities, the assessee explored the option of exploiting the rooftop/ terrace space for commercial purposes. The assessee availed consultancy services from the service provider and paid professional charges of Rs 47,50,000/- to two entities. It is the claim of the assessee that the aforesaid expenditure was incurred by the assessee in its normal course of operations to ensure business efficiency whereas the AO disallowed the said expense holding that the said expenditure has no business nexus with the present income/receipts of the assessee. The CIT(A) deleted the said disallowance.
In this regard, the ld AR submitted that the expenditure incurred in order to expand the existing business of the assessee, is allowable under section 37 of the Act. It is stated that the aforesaid expenditure is allowable in view of the fact that Expenditure incurred voluntarily or otherwise for commercial expediency is allowable deduction; It is not necessary that the expenditure incurred should result in immediate gain/ profit/ receipt; even expenditure to explore opportunities is allowable as deduction and relied on Malayalam Plantations Ltd: 53 ITR 140 (SC), S. A. Builders vs. CIT: 288 ITR 1 (SC), CIT vs. Hero Cycles Limited: 379 ITR 347 (SC).
Per contra the ld DR relied on the AO’s order.
We find that the issue of legal and professional charges is covered in favour of the assessee by the order of the Delhi Bench Tribunal in assessee’s own case for AY 2015-16 in ITA No.7597/Del/2019. Respectfully following the ITAT, we hold that expenditure on exploring expansion of the business is allowable u/s 37(1) of the Act and direct the AO to delete the addition. The ground is dismissed.
In the result, the appeal of the Revenue in ITA No.27/Del/2020 is dismissed.