ORDER
G. S. Pannu, Accountant Member - The captioned appeal by the Revenue is directed against an order of the Commissioner of Income Tax (Appeals)-II, Pune dated 29.06.2012 which, in turn, has arisen from an order dated 30.12.2011 passed by the Assessing Officer u/s 143(3) of the Income-tax Act,1961 (in short "the Act") pertaining to the assessment year 2009-10.
2. In this appeal, the Revenue has raised the following Grounds of Appeal :—
"1.
The learned Commissioner of income-tax (Appeals) erred in deleting the disallowance u/s.14A of the Income Tax, Act 1961 (the Act).
2.
The order of the learned Commissioner of Income-tax (Appeals) erred in holding that the Assessing Officer did not record any satisfaction with respect to the nexus between borrowed funds and investment in mutual funds before applying section 14A of the Act read with Rule 8D of the Income Tax Rules.
3.
The learned Commissioner of Income-tax (Appeals) erred in not appreciating that the assessee failed to quantify the direct/indirect expenditure incurred by not maintaining separate accounts for funds utilized in such investments, inviting application of Rule 8D of the Rules.
4.
The learned Commissioner of Income-tax (Appeals) erred in holding that the income derived by the assessee from the letting out of premises of the 'Cyber City' has to be assessed as business income and not as income under the head "House Property" as had been taken in the assessment.
5.
The learned Commissioner of Income-tax (Appeals) erred in failing to appreciate that the primary object of the assessee was to let out the properties in order to derive income there from and not to exploit them commercially and merely because certain infrastructure has been provided to facilitate such letting out, such provision can by no means amount to carrying on complex commercial activities.
6.
The learned Commissioner of Income-tax (Appeals) erred in attaching undue importance to a clause in the agreement as per which the cost involved in the services is built into the cost per sq.ft. as per the tenancy agreement and without appreciating that the infrastructure and services provided by the assessee were incidental to the letting out of the properties and that substantial income as per the agreement was towards rent and not towards provision of services."
3. In terms of Ground of Appeal No.1 to 3, the issue relates to the action of the CIT(A) in deleting the disallowance of Rs.20,66,011/- made by the Assessing Officer by invoking section 14A of the Act. In this context, brief facts are that the assessee is, inter-alia, engaged in the business of development of integrated township known as 'Magarpatta City' at Hadapsar, Pune. In the course of assessment proceedings, the Assessing Officer noted that assessee had earned dividend income of Rs.2,75,483/- which was exempt from tax. On account of earning of such exempt income, the Assessing Officer show-caused the assessee as to why the expenditure incurred in relation to the said income be not disallowed as prescribed by section 14A of the Act. The assessee contended before the Assessing Officer that the said dividend income was considered as an incidental business income and it was not considered as an exempt income in the computation of income and therefore, there was no necessity of invoking section 14A of the Act. Without prejudice to the above, assessee also pointed out that it possessed owned paid-up share Capital of Rs.54,99,00,900/- and accumulated profits and free reserves of Rs.135.37 crores as on 31.03.2009 whereas the total investment made in the shares of the subsidiary companies was only to the tune of Rs.20,08,93,600/- and therefore no borrowed monies were used towards investment in shares or even in the mutual funds which have yielded the impugned exempt income. Secondly, it was also asserted that the dividend income was directly credited into the bank account and therefore there was no possibility of incurrence of even any expenditure towards collection of dividend.
4. The Assessing Officer did not accept the plea of the assessee and instead determined an expenditure of Rs.20,66,011/- as having been incurred in relation to the exempt income and disallowed the same in terms of section 14A of the Act. In computing such disallowance the Assessing Officer applied the provisions of rule 8D of the Income Tax Rules, 1962 (in short "the Rules"), particularly clauses (ii) and (iii) of sub-rule (2) of rule 8D of the Rules. Against such a disallowance, assessee carried the matter in appeal before the CIT(A). Apart from reiterating the submissions made to the Assessing Officer, assessee also submitted before the CIT(A) that the application of rule 8D of the Rules to compute the disallowance u/s 14A of the Act was not automatic because the Assessing Officer was required to be satisfied with the correctness or otherwise of the claim of the assessee in respect of expenditure incurred in relation to the exempt income, which was a requirement of section 14A(2) of the Act. It was pointed out that the Assessing Officer did not record any satisfaction as required by section 14A(2) of the Act, as factually it was evident that the assessee had made a small investment which could yield exempt income, which was made out of own funds and that too towards the end of the assessment year under consideration. In support of such proposition reliance was placed on the judgement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT [2010] 328 ITR 81/194 Taxman 203 . The CIT(A) has upheld the plea of the assessee and has deleted the addition on the ground that the Assessing Officer erred in invoking rule 8D of the Rules to compute the disallowance without recording a satisfaction mandated in terms of section 14A(2) of the Act. The CIT(A) also records a finding in para 4.6 of his order that the Assessing Officer failed to appreciate the none of the borrowed funds were utilized to make the impugned investments. Against such action of the CIT(A) in deleting the disallowance, Revenue is in appeal before us.
5. Before us, the learned CIT-DR has pointed out that the CIT(A) erred in deleting the addition because the Assessing Officer had duly considered the submissions put-forth by the assessee and had also recorded his satisfaction that the claim of the assessee of no expenditure having been incurred in relation to the exempt income was incorrect. In this context, the learned CIT-DR has referred to the discussion made by the Assessing Officer in paras 3.4 and 3.5 of the assessment order.
6. On the other hand, the learned Representative for the respondent-assessee has defended the order of the CIT(A) by pointing out that in the present case, there was no satisfaction recorded by the Assessing Officer with regard to the plea of the assessee that no direct or indirect expenditure is incurred in relation to the earning of the exempt income. It is pointed out that the Assessing Officer should have verified the books of account, firstly, to confirm as to whether any expenses directly or indirectly have been incurred in connection with the exempt income and if it was so found only then the Assessing Officer could be said to have recorded his satisfaction as required by section 14A(2) of the Act and this would have justified invoking of rule 8D of the Rules to compute the disallowance. It is vehemently argued that no such exercise has been undertaken by the Assessing Officer, and therefore the CIT(A) has rightly held that the disallowance has been incorrectly made by the Assessing Officer. In this context, reliance placed by the CIT(A) on the judgement of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra) was reiterated. The learned counsel also relied upon a decision of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. v. Addl.CIT vide IT Appel No.1733/PN/2012, order dated 30.01.2014 wherein following the judgement of the Hon'ble Bombay High Court it has been held that invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is conditional upon recording of an objective satisfaction by the Assessing Officer with regard to the incorrectness of the claim of the assessee having regard to the accounts of the assessee. On the aforesaid basis, the stand of the CIT(A) in deleting the addition is sought to be defended.
7. We have carefully considered the rival submissions. In so far as the provisions of section 14A of the Act is concerned, it contemplates that for the purposes of computing total income no deduction is to be allowed in respect of any expenditure incurred in relation to an income which does not form part of the total income under the Act. In the present case, assessee was found to have earned exempt income by way of dividend on investments made in the mutual funds. The existence of such exempt income prompted the Assessing Officer to invoke section 14A of the Act while computing the total income of the assessee. Further, the Assessing Officer invoked rule 8D of the Rules to compute the disallowance. Ostensibly, sub-section (2) of section 14A of the Act enables the Assessing Officer to invoke rule 8D of the Rules so as to determine the amount of expenditure incurred in relation to an income which does not form part of the total income. However, the phraseology of sub-section (2) of section 14A of the Act itself brings out that the power of the Assessing Officer to invoke rule 8D of the Rules is subject to the condition that 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 expenditure incurred in relation to the income which does not form part of the total income i.e. exempt income. It is no longer res integra that invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is dependent merely on the existence of an exempt income in the hands of the assessee. In support of the aforesaid proposition, a gainful reference can be made to the judgement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) as well as the judgement of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd…. v. Commissioner Of Income-Tax, New Delhi [2011] 15 taxmann.com 390/203 Taxman 364 . The Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. (supra) has also considered the aforesaid judgements and concluded that section 14A(2) of the Act envisages a condition precedent for invoking rule 8D of the Rules and computing disallowance; and, such condition being that the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the total income under the Act, having regard to the accounts of the assessee. Notably, the aforesaid precedents also bring out that the satisfaction which is mandated in terms of section 14A(2) of the Act must be based on reasons and on relevant consideration. In other words, 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 recording of an objective satisfaction by the Assessing Officer with regard to the incorrectness of the claim of the assessee in respect of expenditure in relation to the exempt income, having regard to the accounts of the assessee. In our considered opinion, the aforesaid parity of reasoning in relation to invoking of rule 8D of the Rules read with section 14A of the Act applies to the fact of the present case.
8. In the background of the aforesaid discussion, we may now examine the facts of the present case. As noted earlier, assessee has earned dividend income of Rs. 2,75,483/- on investment in mutual funds. In the course of proceedings before the lower authorities, apart from other assertions, assessee claimed that no expenditure was incurred in relation to earning of such income. Firstly, it was pointed out that the dividend on mutual funds was earned on investment made for about two months only i.e. January and February, 2009 (as found from extract of assessee's submissions to the CIT(A) reproduced in para 3.1 of his impugned order). On the said basis, the case setup by the assessee is that the funds were parked in mutual fund by the bank for a temporary period; and, that it had more than enough non-interest bearing funds by way of share capital and accumulated profits to cover the impugned investment. Thus, no interest was incurred in relation to the investment in mutual funds, which yielded the impugned income. Secondly, it was pointed out that the dividend was credited to the bank account directly by the bank i.e. HDFC and it has also been asserted that the investment in the mutual funds were also made by the same bank. It was therefore contended that there was no direct or indirect expenditure incurred in relation to earning of the impugned exempt income.
9. In para 4.2 of the impugned order, the CIT(A) notes that the Assessing Officer has not examined the availability of interest-free funds and the investments made by the assessee in the mutual funds during the year. The CIT(A) further notes that the Assessing Officer considered interest expenditure of Rs.3,00,19,761/- as expenditure not directly attributable to any particular income or receipt and subjected the same to disallowance as per clause (ii) of sub-rule (2) of rule 8D of the Rules. As per the CIT(A), the manner and the working for considering Rs.3,00,19,761/- for the purposes of clause (ii) of sub-rule (2) of rule 8D of the Rules has not been recorded by the Assessing Officer in his order. The CIT(A) further records that the Assessing Officer has not examined the accounts of the assessee so as to arrive at a satisfaction and finding regarding incurrence of direct or indirect expenses in connection with earning of the exempt income, as required by sub-section (2) of section 14A of the Act. The CIT(A) also observed that assessee has made the investment from own funds and therefore question of any expense on account of interest for earning of impugned exempt income, "in the given set of facts and circumstances of the case, does not arise".
10. Pertinently, we find no such reasons to distract from the aforesaid findings of the CIT(A) which are clearly borne out by the material on record. In-fact, discussion in the assessment order, which has been referred to by the learned CIT-DR before us does not show as to how the categorical assertions of the CIT(A) are wrong. Though, the Assessing Officer does say that he is "not satisfied with the correctness of the claim of expenditure made by the assessee" so however, the same is merely a bald assertion, devoid of any objective analysis of the accounts maintained by the assessee, a mandatory requirement of sub-section (2) of section 14A of the Act. Therefore, in the absence of adherence to the requirements of section 14A(2) of the Act, the Assessing Officer could not have proceeded to invoke rule 8D of the Rules and subject the impugned interest expenditure for disallowance as per clause (ii) of rule 8D of the Rules. Similarly, the CIT(A) records another finding which is to the effect that the dividend receipt has been directly credited into the bank account of the assessee, thus "leaving no scope for incurring any other expenses for earning exempt income" by the assessee. For the said reason, the indirect expenditure sought to be disallowed by invoking clause (iii) to sub-rule (2) of rule 8D of the Rules has also been faulted by the CIT(A). On this aspect, we are in agreement with the CIT(A) that under the given facts and circumstances of the case, the Assessing Officer was not justified in invoking rule 8D of the Rules in order to compute the disallowance u/s 14A(1) of the Act. In view of the aforesaid discussion, we hereby affirm the action of the CIT(A) in deleting the disallowance of Rs.20,66,011/- made by the Assessing Officer invoking section 14A of the Act. Thus, on this aspect, Revenue fails and accordingly the Grounds of Appeal No.1 to 3 are dismissed.
11. By way of Grounds of Appeal No. 4 to 6, the issue raised is with regard to the action of the CIT(A) in holding that the income earned by the assessee from letting out of premises of 'Cyber City' is liable to be assessed as 'business income' and not as income under the head 'house property', as taken by the Assessing Officer during the assessment proceedings.
12. On this aspect, it was a common point between the parties that identical controversy was considered by the Tribunal in the assessee's own case for earlier two assessment years of 2007-08 and 2008-09 vide ITA No.822/PN/2011 order dated 18.09.2012 and ITA No.1130/PN/2012 order dated 30.07.2013 respectively.
13. In the above background, we have perused the material on record and also the precedents in the assessee's own case dated 18.09.2012 (supra) and 30.07.2013 (supra) for assessment years 2007-08 and 2008-09 respectively. The relevant operative portion of the order of the Tribunal dated 18.09.2012 (supra) for the lead assessment year of 2007-08 is reproduced as under :—
"In this background, it is clear that assessee has provided various complex integrated services as mentioned in Schedule-II to the lease agreement with the I.T. Company. The services are vast and the amenities provided were in the nature of plant and machinery as contended by the assessee and it has been established by the clauses of the agreements that the cost of providing these services was also included in the lease rent of Rs.14.30 per sq.ft.. The assessee also clarified that cost involved in the services provided to the particular company i.e., exl Services.com was Rs.2.83 crores which was almost 40% of the land and building cost of that tower. By no stretch of imagination such extensive and specialized services which could only be utilized by the IT/Software/BPOs businesses to be located in the I.T. Part could be treated as forming part of income from house property. It is certainly a constitution of organized structure for carrying out business activities. Section 22 provides only for rental income out of building or land appurtenant thereto, whereas in the case before us, complex and varied services provided and the huge investment therein were in the nature of plant and machinery which could be included within the expression building or land appurtenant thereto. Thus, the assessee has conducted systematic activity to earn profit and accordingly income was to be assessed as income from business. In view of the submissions made on behalf of the assessee, and analysis of various clauses and Schedule-II of the agreement entered with the I.T. Company, CIT(A) was justified in holding that in assessee's case the said income was to be assessed as business income. This reasoned factual finding need no interference from our side. We uphold the same."
14. Following the aforesaid discussion made by the Tribunal in assessee's own case on an identical issue, we hereby affirm the order of the CIT(A) in holding that the income earned by way of license of letting out of premises of 'Cyber City' is liable to be assessed as 'business income' and not under the head 'house property', as held by the Assessing Officer. Thus, in view of the aforesaid precedent, the Grounds of Appeal No. 4 to 6 raised by the Revenue are dismissed.
15. In the result, the appeal of the Revenue is dismissed.
POOJA