Income Tax Act – Section 14A, Rule 8 - The appeals are by the Revenue against separate orders of CIT(A) for two AYs respectively -The grievance of the Revenue in both the AYs is that the CIT(A) has erred in deleting the additions made on account of estimation of profit @8% of the work-in-progress. CIT(A) after going through the submissions and books of accounts of the assessee and also based on decision of the Tribunal in the case of the assessee for a previous AY deleted disallowance being interest expenses, and the balance amount being administrative expenses i.e. 05% of average investment was confirmed – HELD – In view of the findings of the ITAT in assessee’s earlier case the tribunal upheld and confirmed deletion of additions on account of estimation of work-in-progress for both the years. Ground No.1 of revenue stands rejected. Action of the AO in making disallowance u/s. 14A r. w. Rule 8D was not justified in view of the fact that the assessee has demonstrated that it has sufficient funds for making investment which yielded exempt income. After examining the explanation of the assessee and based on decision of the Tribunal in assessee’s own case for a previous AY, CIT (A) deleted the interest portion of the disallowance and the balance amount was sustained – No infirmity is found in order of CIT (A). Ground No.2 of revenue stands rejected - both appeals of the Revenue are dismissed.

 

2021-VIL-106-ITAT-AHM

 

IN THE INCOME TAX APPELLATE TRIBUNAL,

“D” BENCH, AHMEDABAD

 

ITA NO.1098 AND 1099/AHD/2019

ASSTT.YEAR: 2005-06 AND 2013-14

 

DATE OF HEARING: 09.12.2021

DATE OF PRONOUNCEMENT: 20.12.2021

 

DCIT, CENT.CIR.1(1)

 

Vs

 

M/s NAVRATNA ORGANIZERS & DEVELOPERS P LTD

 

REVENUE BY: SHRI VIDYUT TRIVEDI, SR.DR

ASSESSEE BY: SHRI TUSHAR HEMANI, WITH SHRI P.B. PARMAR, AR

 

BEFORE

SHRI RAJPAL YADAV, VICE-PRESIDENT

SHRI WASEEM AHMED, ACCOUNTANT MEMBER

 

ORDER

 

These appeals are by the Revenue against separate orders of ld.CIT(A)- 9 , Ahmedabad of even dated i.e. 2.4.2019 passed for the Asstt.Years 2005-06 and 2013-14. Since identical issues are involved in both the appeals, they are disposed of by this consolidated order.

 

2. Only ground in Asstt.Year 2005-06 and first ground in the Asstt.Year 2013-14 are identical except variation in quantum of amount. In other words, the grievance of the Revenue in both the above assessment years is that the ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.3,68,66,552/- for the Asstt.Year 2005-06 and Rs.7,03,93,962/- for the Asstt.Year 2013-14 made on account of estimation of profit @8% of the work-in-progress.

 

3. We would take a brief fact of the case for adjudication of this common ground. Assessee is a developer and engaged in development of various schemes on the land owned and belonging to different entities. It has filed return of income declaring total income at Rs.11,28,440/- on 4.5.2007 for the Asstt.year 2005-06 and Rs.3,07,88,041/- on 1.10.2013 for the Asstt.Year 2013-14. Both returns were selected for scrutiny assessment, and consequent notices under section 143(2) were issued and served upon the assessee. During the assessment proceedings, the ld.AO observed that the assessee is not following correct accounting method. Though the assessee was following mercantile system of accounting, but on construction/ developmental work, income has to be assessed on accrual basis by applying percentage completion method. Having failed to do so, the assessee has not shown correct figure of profit, though the assessee had involved in all stages of activities from acquisition of land to construction of the project. Not satisfied with the explanation of the assessee, the ld.AO has made addition by estimating the profit at 8% of WIP for both the assessment years. Aggrieved, assessee went in appeal before the ld.first appellate authority. The ld.CIT(A) has allowed claim of the assessee in both the years. The ld.CIT(A) while deciding the issue has relied upon orders of the ITAT in the assessee’s own case in ITA No.2634/Ahd/2011 for the Asstt.Year 2008-09 and ITA No.1114/Ahd/2005 for the Asstt.Years 1997-98. The crux of the conclusion in these orders is that the assessee is neither owner of the project nor WIP belonged to it. The assessee has received the booking amount on behalf of the co-operative societies for development activity, and there was no material with the Department to demonstrate that the alleged receipts were meant for the assessee, and income qua this receipt accrued to the assessee. The ld.CIT(A) has substantially reproduced the above orders of the Tribunal while deciding the issue in favour of the assessee in the impugned order. Dissatisfied with order of the ld.CIT(A) in deleting the impugned additions, Revenue is before the Tribunal.

 

4. The ld.DR relied upon order of the AO, while the ld.counsel for the assessee strongly supported the orders of the ld.CIT(A).

 

5. We have heard both the sides, and gone through orders of the Revenue authorities. We have also gone through orders of the ITAT in the assessee’s own case cited (supra) for the assessment years 2008-09 and 1997-98. Copies of both the orders are placed on record. We find that Co-ordinate bench of the Tribunal (in which one of us, Vice-President is party) has examined and discussed at length issue of estimation of net profit at the rate of 8% on the alleged work-in-progress, and came to the conclusion that the assessee was a developer, and the WIP did not belong to it. The assessee is consistently following mercantile system of accounting, where receipts in the form of development fees have been recognized on completion of project. The ld.AO without any basis construed that WIP belonged to the assessee, Accordingly, the Tribunal confirmed claim of the assessee. The ld.CIT(A) has reproduced order of the Tribunal in entirety for appreciating the facts in right perspective. In view of this fact, there is no reason for us to deviate from the findings of the ld.CIT(A) based on findings of the ITAT in the assessee’s own case cited (supra), and therefore, which we uphold and confirm deletion of additions on account of estimation of work-in-progress for both the years. Thus, ground no.1 of both appeals of the Revenue stand rejected.

 

6. Now only ground left for our adjudication is ground no.2, i.e. deletion of addition of Rs.3,06,946/- out of total addition of Rs.4,44,107/- made under section 14A of the Act for the Asstt.Year 2013-14.

 

7. During the assessment proceedings, the ld.AO noticed that the assessee has made substantial investment which yielded tax exempt income. The ld.AO was under a belief that such investment was made out of borrowed funds. The ld.AO accordingly issued show cause notice as to why disallowance of interest expenses under the provisions of section 14A read with Rule 8D of the Act should be made. In response thereof, the assessee explained that the investment was made out of interest free funds available with the assessee, and therefore, no expenditure was incurred by the assessee towards investment for making such investment which yielded exempt income. Assessee had filed details of investment along with balance sheet showing capital and general reserves & surplus available with the assessee during the year period under consideration. However, the ld.AO did not accept the explanation of the assessee and proceeded to compute disallowance under section 14A read with Rule 8D, and based on which disallowance of Rs.4,44,107/- has been made.

 

9. Aggrieved by action of the ld.AO, the assessee went in appeal before the first appellate authority. The ld.CIT(A) after going through the submissions and books of accounts of the assessee and also based on decision of the Tribunal in the case of the assessee for the Asstt.Year 2012-13, deleted disallowance to the extent of Rs.3,06,946/- being interest expenses, and the balance amount of Rs.1,37,161/- being administrative expenses i.e. 05% of average investment was confirmed. Now Revenue is in appeal before the Tribunal against deletion of disallowance on account of interest component of Rs.3,06,946.

 

10. Before us, the ld.DR defended in support of order of the ld.AO, while the ld.counsel for the assessee relied upon the order of the ld.CIT(A). The ld.counsel for the assessee further submitted that the assessee has substantial interest free funds available with it in the form of share capital plus reserves & surplus. As on 31.3.2013 the same is Rs.23,92,41,538/- while they were Rs.21,51,05,90/- as on 31.3.2012, and against which investment was only Rs.2,74,32,264/- as on 31.3.2013 whereas it was Rs.2,74,32,264/- on 31.3.2012. He further submitted that ratio of surplus available with the assessee is more than the last year, i.e. in the Asstt.Year 2012-13 it was 7.84 times while in the asstt.Year 2013-14 it was 8.72 times, and therefore, the assessee had sufficient interest free funds in excess of investment made for earning tax free income, and therefore, invocation of provisions section 14A read with rule 8D is not justified.

 

11. We have heard rivals submissions and gone through the record carefully. We find that action of the ld.AO in making disallowance under section 14A read with Rule 8D was not justified in view of the fact that the assessee has demonstrated that it has sufficient funds for making investment which yielded exempt income. As per the figures demonstrated by the assessee, assessee’s interest free funds far exceeded investment made for earning exempt, against which, there is no material with the Department to establish that borrowed funds were utilized by the assessee for the impugned investment. The ld.CIT(A) in the impugned order noticed that the assessee had sufficient interest free funds in excess of investment made for earning tax free income. After examining the explanation of the assessee and based on decision of the Tribunal in assessee’s own case for the Asstt.Year 2011-12 cited (supra), the ld.CIT(A) deleted the interest portion of the disallowance and the balance amount was sustained. We do not find any infirmity in the order of the ld.CIT(A) on this issue, which accordingly confirmed, and this ground of the Revenue stands dismissed.

 

12. In the result, both appeals of the Revenue are dismissed.

 

Order pronounced in the Court on 20th December, 2021 at Ahmedabad.

 

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