DCIT vs Aamby Valley City Ltd.

PER MANISH AGARWAL, AM :

The captioned appeal filed by the Revenue alongwith Cross-objection filed by the assessee against the order dated 12.08.2023 by Ld. Commissioner of Income Tax (A)-23, New Delhi [“Ld. CIT(A)”] in Appeal No. 23/10308/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 28.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2016-17.

Since Grounds of appeal raised in the appeal filed by the Revenue and Cross-objection filed by the assessee having inter-connected issues therefore, both the appeals are decided by a common order of the sake of convenience.

Brief facts of the case are that the assessee company is a limited company, engaged in the business of sale of plots, construction of chalets, villas condominiums etc. and construction of commercial infrastructure viz. road, dam, water treatment plant, sewerage treatment plant, IT infrastructure, hospital, airport and around the product site for the use of its prospective buyers and tourists and filed its return of income on 15.04.2017, declaring loss of INR 1,47,36,74,419/- and claimed a refund of INR 50,38,470/-. Apart from this, assessee has also claimed exempt income of INR 1,67,63,485/- in the return of income filed during the year under appeal. The case was selected for complete scrutiny and notice u/s 143(2) was issued followed by various notices issued u/s 142(1) alongwith questionnaire. In response to these notices, the requisite details were filed by the assessee on ITBA portal. After considering the same, assessment order was passed by making various additions/ disallowance. Against the said order assessee preferred the appeal before the ld. CIT(A) who has partly allowed the appeal of the assessee. Aggrieved by the order of ld. CIT(A), revenue is in appeal before the Tribunal and assessee has filed the cross objections, by taking various grounds of appeal and cross objections.

Ground of appeal No.1 of the Revenue and Cross Objection No. 5 of the assessee are with respect to the addition of INR 3,10,92,75,555/- made by AO u/s 14A which stood deleted by Ld. CIT(A). The AO observed that the assessee has made investments in the equity shares of various subsidiaries which has yielded exempt income however, no disallowance was made by the assessee as per section 14A r.w. Rule 8D of the Income Tax Rules (“the Rules”). The total investment made by the assessee was of INR 4,75,68,12,88,143/-. The AO thus, taken the average value of investment of INR 475,591,998,693/- for making addition u/s 14A by applying @ 1% as per Rule 8D of the Rules. However, since the total expenses claimed was of INR 400,00,76,629/- thus the total disallowance was restricted to this extent and a sum of INR 89.08 crores being already been disallowed was further reduced and the differential amount of INR 3,10,92,75,555/- was added u/s 14A of the Act under Rule 8D of the Income Tax Rules, 1962 (“the Rules”). Ld. CIT(A) has deleted the additions by observing that the assessee has no exempt income therefore, he followed the judgement of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs CIT reported in [2015] 378 ITR 33 (Del.) and deleted the same. Ld. CIT(A) further observed that the SLP against the said order was dismissed by Hon’ble Supreme Court. Ld.CIT(A) further observed that the amendment made in Section 14A vide Finance Bill, 2022 is prospective in nature and thus, is not applicable in the year under appeal. For this, he placed reliance on the judgement of Hon’ble Delhi High Court in the case of PCIT vs Era Infrastructure (India) Ltd. reported in [2022] 448 ITR 674 (Del. HC).

Before us, Ld.CIT DR for the Revenue vehemently supported the order of the AO and submits that the assessee has made investment in its subsidiary companies and having interest bearing funds on which the interest of more than 400 crores was paid and therefore, the AO has rightly invoked the provisions of section 14A. He further submits that the amendment has been made in section 14A w.e.f. Finance Act, 2022 according to which even if there is no exempt income, disallowance u/s 14A should have been made as per the method provided into Rule 8D of the Rules. Ld. CIT DR submits that the said amendment is clarificatory in nature and the same is applicable to the year under appeal also.

Ld.CIT DR submits that AO has thus, computed the amount of disallowance u/s 14A of the Act as per the method provided in Rule 8D of the Rules and requested for the restoration of the addition made.

On the other hand, Ld.AR for the assessee supported the order of Ld.CIT(A) and submits that during the year, no fresh investment was made by the assessee and all the investments of INR 4,75,68,12,88,143/- crores were made in preceding years. It is further submitted that the assessee has made the investments in its subsidiary companies under commercial expediency and no exempt income was received. It is also submitted by Ld.AR that no direct expenses whatsoever, were incurred on such investments. Ld.AR further submits that the amendment made by Finance Act, 2021 inserting the Explanation 14A is prospective in nature and cannot be applied retrospective. For this, He placed reliance on the judgement of Hon’ble Delhi High Court in the case of PCIT vs Era Infrastructure (supra) and PCIT vs Sahara India Financial Corporation Ltd. reported in [2024] 168 taxmann.com 165 (Del.HC). He therefore, requested for the confirmation of the order of Ld.CIT(A).

Heard the contentions of both the parties at length and perused the material available on record. In the instant case, admittedly assessee had not received nor claimed any exempt income on account of dividend income received from the investments made. It is also a matter of fact that no investments were made during the year under appeal and all the investments are carried forward from previous year. Ld. CIT(A) after appreciating the fact that assessee has not earned any exempt income and no direct expenditure was incurred on making such investments, has deleted the disallowance by observing in para 50 to 62 of his order as under:-

It is evident from the observations made herein above by Ld. CIT(A), the very basis for deletion of addition is that no exempt income was earned by the assessee and Hon’ble Delhi High Court in the case Cheminvest Ltd. (supra) has already decided this issue in favour of the assessee followed by numerous judgements of the Hon’ble Jurisdictional High Court as well as of Hon’ble Supreme Court wherein it is held that if no exempt income is claimed, no disallowance u/s 14A of the Act could be made. Regarding the argument of the revenue that amendment made in section 14A vide Finance Act, 2021 is clarificatory and thus applied to the year under appeal, the Hon. Supreme Court in Sedco Forex International Drill. Inc. v. CIT, reported in (2005) 12 SCC 717 has held that a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. Following the aforesaid judgment of hon’ble Apex Court the hon’ble jurisdictional high court in the case of PCIT vs. Era Infrastructure India Limited reported in (2022) 448 ITR 674 order dated 20/07/2022 held that amendment brought in by the Finance Act 2022 in Sec.14A is applicable Prospectively w.e.f. AY 2022-23.

Thus, by respectfully following the same, we find no error in the order of Ld.CIT(A) in deleting the addition made u/s 14A of the Act. Accordingly, the order of Ld. CIT(A) is hereby, upheld. Ground of appeal No.1 raised by the Revenue is dismissed and C.O.No.5 of the assessee which is in support of the order of Ld.CIT(A) is hereby, allowed.

Ground of appeal No.2 raised by the Revenue with respect to the disallowance of sundry balances return of INR 49,56,91,581 & INR 12,06,15,896/-.

The facts are that during the year under appeal, the assessee has debited a sum of INR 61,88,28,925/- in the P&L Account under the head “Sundry creditors balances written off” which comprised of INR 49,56,91,581/- out of the security deposits paid to landlord of property taken on rent in BKC, Mumbai and further INR 12,06,15,896/- out of the waiver of interest receivable on the advances given for purchase of land. The AO hold that the security deposit was the capital advance given and not offered for tax in preceding years therefore, though it is in the nature of bad debt however, could not be allowed as it was not offered for tax in preceding years and thus, the conditions prescribed u/s 36(1)(vii) of the Act are not fulfilled. With respect to the interest, AO observed that the interest was charged on the advances given and since assessee has acquired the land out of principal amount and thus the waiver of the interest receivable on such advance at the most, should be treated as capital expenditure and be added back to the total cost of land purchased out of such advances. Ld. CIT(A) allowed the claim of the assessee of on both counts.

Before us, Ld.CIT DR for the Revenue vehemently supported the orders of the AO and submits that once the assessee has failed to fulfil the conditions as prescribed u/s 36(1)(vii) r.w.s. 36(2) for claiming bad debts which are as under:-

Ld.CIT DR submits that the amount of security deposits was written off in the books of accounts however, it was never offered to tax thus the assessee has failed to fulfill the second condition of section 36(1)(vii) r.w.s. 36(2) of the Act. He, therefore, requested for the restoration of the order of AO on this account.

With respect to the interest waiver, Ld.CIT DR stated that though the said interest was offered for tax in preceding years however, as settlement was reached between the parties to whom, advances was made and the assessee has received land. Therefore, interest accrued on such advances, should be treated as part of total cost of land taken and cannot be claimed as expenditure being waived off. He therefore, requested that AO has rightly made the disallowances which deserves to be uphold.

On the other hand, Ld.AR for the assessee submits that the assessee has entered into the agreement for different properties taken on rent at BKC, Mumbai and the same were used for the purpose of office by the assessee. The assessee due to financial constraints, has failed to pay the lease rent therefore landlord deposited the security deposits against the outstanding lease rent and balance amount was forfeited. The assessee has also filed the copy of these agreements before us. It is further submitted that the assessee has filed suit against the recovery of the security amount forfeited by the landlord and the same is still pending. Ld.AR further submits that the landlord filed a winding up petition against the assessee company against the appeal was filed before Hon’ble Bombay High Court. Ld.AR submits that under these circumstances, recovery of the balance amount of security deposits after adjustment of outstanding lease rent became doubtful and in the larger interest of business, in terms of Board resolution dated 23.09.2016, the said amount was decided to be write off in the books of accounts for FY 2015-16. Copy of the said resolution is placed at page 49 of the Paper Book. Ld.AR submits that the Co-ordinate Bench in the case of ACIT vs Benetton India Pvt. Ltd. in ITA No.1091/Del/2018 (Del. Trib.) under identical circumstances, has allowed the deduction as normal business loss u/s 37(1) of the Act. Similarly in the case of DCIT vs Genesis Colour Pvt. Ltd. in ITA No.347/Del/2017 (Del. Trib.), advance rent written off was allowed as normal business expenditure. Ld.AR submits that Ld.CIT(A) has discussed this issue in para 36 to 45 of the order wherein Ld.CIT(A) has made observation for deleting the same. The said observations are reproduced as under:-

As stated above, both the amounts claimed as set off during the year were though given as advances however, since they became irrecoverable thus, in larger interest of business, management has decided to write off the same in the books of accounts and claimed them as bad debts. Even if, the same is not considered to be an allowable expenditure u/s 36(1)(vii) r.w.s. 36(2) of the Act, these are allowable as business expenditure u/s 37(1) of the Act since they were incurred in the regular course of business. This view is supported by the judgement of Co-ordinate Bench of the Tribunal in the case of Benetton India Pvt. Ltd. and Genesis Colour Pvt. Ltd. (supra).

The Co-ordinate Bench of Delhi Tribunal in the case of Fab India Overseas Pvt. Ltd. Vs. ACIT in ITA No.199/Del/2012 vide order dt. 28.06.2013 under similar circumstances has held the forfeiture of security deposit given to landlord as revenue expenditure and allowable u/s 37(1) of the Act. The relevant observations of the bench are as under:

In view of above discussion, and by respectfully the aforesaid judgements of the Co-ordinate bench of Tribunal wherein the benches has followed the decision of hon’ble jurisdictional high court while holding the forfeiture of security deposit as revenue expenditure, we find no error in the order of Ld. CIT(A) in deleting the disallowance made by AO. Accordingly, Ground of appeal No.2 of the Revenue is hereby, dismissed. This will also cover C.O. No.4 of the assessee.

Ground of appeal No. 3 raised by the Revenue is with respect to the deletion of addition on account of interest of INR 15,26,22,621/- on account of interest free loans given to its subsidiary. The assessee also taken C.O. No.6 which is in support of the order of Ld.CIT(A).

Brief facts of the case are that during the year, the assessee has given advances to its subsidiary companies totaling to INR 125.33 crores and no interest was charged on the same.

The claim of the assessee was that this advance was given for business purposes and has the direct nexus with its business activity. The AO observed that though the assessee company was in heavy loss however, has not charged any interest and therefore, he made the addition of notional interest @ 11% on such outstanding advances. Ld. CIT(A) has deleted the addition by observing that only real income could be taxed and no hypothetical income could be assessed. Ld. CIT(A) further observed that advance was given to the subsidiary which are in the nature of business transactions. Ld.CIT(A) further observed that assessee has having own interest free funds therefore, advance given out of such funds cannot be held as interest bearing.

Before us, Ld.CIT DR for the Revenue vehemently supported the order of the AO and submits that the Auditor in the Audit Report has clarified that the assessee company should charge interest on such loans moreover, the assessee is in losses and paid interest on the borrowed funds therefore, AO has rightly made the addition of notional interest @ 11% and he requested for the confirmation of the same.

On the other hand, Ld.AR vehemently supported the order of Ld.CIT(A) and submits that the sole basis for making addition is Note-13 of the financial statement where the Auditor has expressed his opinion that interest should be charged on the advance given to subsidiaries. The assessee was earlier owned by Sahara India Commercial Corporation and in terms of the demerger segment approved by Hon’ble Bombay High Court, the assessee company demerged from Sahara India Commercial Corporation Limited (“SICCL”) and thereafter invested into various companies which are form as SPVs for looking after various activities of the assessee. Ld. AR submits that advances given to such SPVs are wholly and exclusively for the purpose of business and therefore, there was direct nexus between the advance made and business interest of the assessee. He further submits that section 36(1)( iii) of the Act allowed the payment of interest made where the funds were borrowed and utilized for the sole purpose of business expediency. He thus, requested for the deletion of the addition made.

Ld.AR relied upon the various judgements which are as under:-

Heard the contentions of both the parties at length and perused the material available on record. The AO has made the addition of notional income on account of interest free advance given to subsidiary whereas the claim of the assessee was that such advances were made for the purpose of business.

Ld.CIT(A) while deleting the additions has appreciated the facts and further observed that only real income to be taxed for which reliance is placed on the judgement of Hon’ble Supreme Court in the case of CIT vs Shoorji Vallabhdas & Co. reported in 46 ITR 144 (SC) and Godhra Electricity Co. Ltd. vs CIT reported in 225 ITR 746 (SC). The relevant observations as contained in para 83 to 94 are as under:-

On careful consideration of the observations made by Ld.CIT(A), it is observed that the sole reason for deletion of the additions is that only real income should be taxed and no hypothetical income could be brought to tax. Further, Ld. CIT(A) observed that assessee has failed to provide any specific details of how much advances were given to each SPV which are credited for the furtherance of the business of the assessee. With respect to the assessee’s own interest free funds, it is observed that such funds were utilized by the assessee for making investment in the subsidiary companies for which disallowance made u/s 14A of the Act, has already been deleted by the Ld.CIT(A) and such order is confirmed hereinabove.

The Co-ordinate bench of Delhi Tribunal in the case of Sahara India Real Estate Corporation Ltd. in ITA No. 1085/Del/2024 vide order dt. 07.10.2025 deleted the addition made on account of notional interest where the AO has not invoked the provisions of section 36(1)(iii) of the Act. The relevant observations as contained in para 6-7 of the order are reproduced as under:

Thus, looking to the entirety of the facts, it is correct that no hypothetical income could be taxed. While making the addition the AO has taken the prevailing market rate of 11%% and applied to the outstanding balance of the advances to subsidiaries. It is further observed that the AO has not invoked the provisions of section 36(1)(iii) of the Act though he was satisfied that the assessee has failed to prove the nexus between interest free funds and interest free advance given to its subsidiary more particularly when no interest free funds available after reducing the amount of investment made any subsidiary. Under these circumstances we left with no other alternative but to confirm the order of ld. CIT(A) in deleting the addition made on account of notional interest on interest free advances given to its subsidiaries. Accordingly, Ground of appeal No. 3 raised by the Revenue is dismissed and C.O.No.6 of the assessee is disposed off.

Now coming to the remaining Cross-Objections raised by the assessee.

The first Cross-objection raised by the assessee is with respect to the confirmation of disallowance of INR 21,87,54,857/- made by AO towards the fixed assets written off by treating the same as capital expenditure.

Heard the contentions of both the parties at length and perused the material available on record. It is observed that the assessee has written off a sum of INR 1,57,08,60,568/- related to the cost of agricultural land, construction of road and land escaping etc. The assessee itself has disallowed a sum of INR 1,35,21,05,711/- in the return of income filed and remaining amount of INR 21,87,54,857/-was claimed as written off on account of dormitory shades demolished which are not in existence. The AO disallowed the same by holding it as capital loss however, Ld.CIT(A) confirmed the same by concurring the finding given by the AO. Ld. CIT(A) further observed that assessee has claimed depreciation on block of assets and the block of assets still exists after writing off of all these assets therefore, the assessee is not entitled for depreciation qua the written off. The relevant observations of Ld.CIT(A) are in para 29 to 32 of the order which is reproduced as under:-

After careful consideration of the above facts and circumstances of the case, we are in agreement with the observations of Ld.CIT(A) that assessee has claimed of depreciation as per block of assets and the block of office balance still exists after reducing the amount of assets claimed as written off. Once the block of assets remains in existence and depreciation on the same is allowed, again taking deduction of the assets so written off as revenue expenditure is claiming double deduction which is not permissible. The assessee is not entitled for claiming expenditure separately on account of assets written off which is the capital loss and to be added back to the total income, therefore, we find no error in the order of Ld.CIT(A) on this score which is hereby, sustained. The Cross objection No.1rasied by the assessee is dismissed.

Cross objection No.2 raised by the assessee is with respect to the confirmation of disallowance of INR 53,05,062/- made u/s 43B of the Act. The AO observed that the assessee has made provision of INR 75,59,100/- towards gratuity and had claimed expenditure to the tune of INR 22,54,038/- therefore, the differential amount cannot be allowed u/s 40A(7) of the Act.

Heard the contentions of both the parties at length and perused the material available on record. It was the claim of the assessee that funds were received on the closure of Gratuity Fund which was not debited in the P&L Account therefore, question of any disallowance u/s 40A(7) does not arise. It was further claimed by the assessee that the amount paid towards the gratuity was claimed as expenditure in the Profit & Loss Account however, the AO has mistakenly considered the liability of the amount received from the closure of gratuity funds as fresh provision towards gratuity payable and disallowed the differential amount u/s 40A(7) of the Act.

On careful consideration of the facts and circumstances of the case, we find force in the arguments of the assessee that if this amount is not claimed in the Profit & Loss Account as fresh provision and was received from the Gratuity Trust therefore no disallowance could be made. However, in absence of precise details, we set aside this issue to the file of AO with the directions to verify the claim of the assessee and if it is found that no provision was made by the assessee and the amount appearing in the Balance Sheet is towards the amount received from the Gratuity Trust, no disallowance is to be made. With these directions, C.O. No. 2 raised by the assessee is allowed for statistical purposes.

Cross Objection No.3 raised by the assessee is general in nature, require no separate adjudication.

In the final result, appeal of the Revenue in ITA No.3090/Del/2023 is dismissed & Cross-Objection No.35/Del/2024 filed by the assessee for Assessment Year 2016-17, is partly allowed.