Indrani Chandrakant Choksi, Mumbai vs Department Of Income Tax

IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI

BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO.3541/Mum/2013 Assessment year: -2009-10

Indrani Chandrakant Choksi Vs.` Addl. Commissioner of H-1, Eden Hall, 8th Floor, Income Tax, Dr. Annie Besant Road, Range 18(1), Worli, Room No. 118, Piramal Mumbai - 400018. Chambers, Lalbaug Mumbai - 400012.

Appellant Respondent ITA NO.4481/Mum/2013 Assessment year: -2009-10 Addl. Commissioner of Income Vs.` Indrani Chandrakant Choksi Tax, H-1, Eden Hall, 8th Floor, Range 18(1), Dr. Annie Besant Road, Room No. 118, Piramal Worli, Chambers, Mumbai - 400018. Lalbaug Mumbai - 400012.

Appellant Respondent Assessee By Shri Naresh Jain Revenue By Shri Vijay Kumar Bora

Date of hearing 30.12.2014 Date of pronouncement 16.01.2015

ORDER

Per Vijay Pal Rao, JM

These cross appeals are directed against the order dated 04.03.2014 of CIT(A) for A.Y. 2009-10. First we take up the appeal of the assessee, wherein following grounds have been raised:-

Indrani Chandrakant Choksi

"GROUND OF APPEAL

GROUND NO 1 DISALLOWANCE OF RS.24,766/- U/S 14A OF THE ACT 1 On the facts and in the circumstances of the case and in law, the learned C.LT. (A) erred in upholding disallowance of Rs.24,766/- u/s 14A of the Act read with Rule 8D(2)(iii) of the Rules in respect of the following expenses:

Nature of expense incurred Amount (In Rs.) Audit Fees 7,304 Bank charges 17,462 Total expenses claimed 24,766

2 On the facts and in the circumstances of the case and in law, the learned C.LT. (A) erred in ignoring the fact that the provisions of section 14A of the Act enabling disallowance of expenses incurred to earn income which does not form part of the Total Income are not applicable to the nature of expenses incurred by the Appellant which have been enumerated above in para 1.

GROUND NO 2 REDUCTION OF RS. 23,62,840/- FOR DEDUCTION CLAIMED U/S 54F OF THE ACT 1 On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) erred in restricting the claim of the Appellant for deduction u/s 54F of the Act to Rs.5,20,65,966/- and thereby disallowing the claim of the Appellant for deduction u/s 54F of the Act to the extent of Rs.23,62,8401- (Rs.9,90,0001- plus Rs.13, 72,8401-).

2 On the facts and in the circumstances of the case and in law, the learned C.IT. (A) erred in ignoring the fact that the Appellant had rightfully claimed the capital expenditure incurred for the purposes of purchase of a residential flat, over and above the purchase consideration which entitled her for claim of deduction u/s 54F of the Act.

3 On the facts and in the circumstances of the case and in law, the learned C.IT. (A) erred in ignoring the fact that the Appellant had paid Contribution of Rs.9,90,0001- towards Building Repairs & Development Fund, which is a precondition to obtain the membership to the Loyal Coop. Hsg. Soc. Ltd., in which the residential flat is situated and claimed as deduction u/s 54F of the Act.

4 On the facts and in the circumstances of the case and in law, the learned C.IT. (A) erred in ignoring the fact that the Appellant had paid a sum of Rs.13,72,8401- to various parties towards the renovation in the nature of capital expenditure in order to make the said residential flat habitable and claimed as deduction u/s 54F of the Act .

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GROUND NO 3 ALLOWANCE OF INDEXED COST OF ACQUISITION • OF RS.88,25,241/- AGAINST SALE OF SHARE IN IMMOVABLE PROPERTY FOR A CONSIDERATION OF RS.60,95,OOO/-

1 On the facts and in the circumstances of the case and in law, the learned C.IT. (A) erred in not directing the AO to compute the capital gains after reducing the Indexed Cost of Acquisition of Rs.88,25,241/- and there by ignoring the Long Term Capital Loss of Rs.27,30,241/- arising on sale of % share in Pawana House property by the Appellant.

2 On the facts and in the circumstances of the case and in law, the learned C.IT. (A) erred in ignoring the fact that the Appellant was entitled to reduce the Indexed Cost of Acquisition of Rs.88,25,241/- against the sales consideration of Rs.60,95,OOOI-.

In view of the above, the Appellant Individual prays that:

a. The disallowance of Rs.24,655/- u/s 14A of the Act be deleted and relief be given to the Appellant.

b. The reduction of the claim of the Appellant for deduction u/s 54F of the Act to the extent of Rs.23,62,8401- be ignored and relief be given to the Appellant.

c. The benefit of Indexed Cost of Acquisition of Rs.88,25,241/- against the sales consideration of Rs.60,95,OOOI- be allowed and Long Term Capital Loss of Rs.27,30,241/- arising on sale of % share in Pawana House property by the Appellant HUF be computed.

2. Ground no. 1 is regarding disallowance u/s 14A. The assessee earned dividend income of Rs. 14,71,443/- which is claimed exempt u/s 10(34).

The Assessing Officer noted that the assessee claimed Rs. 8,15,135/- as expenses excluding purchases in the P&L Account. The Assessing Officer made a disallowance of Rs. 1,43,647/- u/s 14A as worked out under Rule 8D of the Income Tax Rules.

3. On appeal, the CIT(A) confirmed the disallowance of interest computed under Rule 8D(2) and restricted the administrative expenses to

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the extent of Rs. 24.766/- being total expenditure claimed by the assessee. Aggrieved by the order of CIT(A), both assessee and revenue filed cross appeals on this issue.

4 Before us, the Ld. Authorized Representative of the assessee has submitted that no expenses were incurred by the assessee for earning the dividend income, therefore, no disallowance can be made u/s 14A. He has further contended that the Assessing Officer worked out the administrative expenses under Rule 8D(2)(III) which is many times more than the actual expenditure claimed by the assessee in the P&L Account. He has further contended that the expenditure claimed by the assessee in the P&L Account cannot be attributed to the earning of dividend income.

5 On the other hand, the Ld. DR has relied upon the order of Assessing Officer and submitted that the disallowance has to be worked out as per Rule 8D and, therefore, the Assessing Officer is justified in disallowing the amount of edxpenses under Rule 8D.

6 We have considered the rival submissions as well as relevant material on record. The assessee has claimed the expenses while computing the income from profits & gains of business as under:-

Nature of expenses incurred Amount in Rs. Audit Fees 7,304

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Bank charges 17,462 Interest paid 68,187 Total expenses claimed 92,953

7 The Assessing Officer made disallowance u/s 14A r.w.r 8D as under:-

Head of disallowance u/s 14A of the Amount in Rs. Act read with Rule 8D of the Ruls Expenditure directly relting to NIL exempt income u/r 8D2(i) Interest paid u/r 8D(2)(ii) 16,293 Average value investments u/r 1,27,354 8D2(iii) Total disallowance u/s 14A of the 1,43,647 Act

8 Thus it is clear that the disallowance on account of administrative

expenses under section 14A has been made by the Assessing Officer at Rs. 1,27,354/- which is even more than the total expenses claimed by the assessee. The CIT(A)has restricted the disallowance to the actual claim of expenses without going into the aspect of attributability of the said expenses for earning the dividend income. Thus it is clear that the working under the provisions of Rule 8D militates with the undisputed fact and thus become unworkable as it gives the results that is inconsistent with the undisputed fact. It shows that there is an inherent fallacy under the provisions of Rule 8D of the Income Tax Rules so far as it results the quantum of disallowance more than the actual expenditure claimed and otherwise absolute contradictory to the fact. Hence

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there as situations when the working of Rule 8D gives absurd results in complete disregard to the fact of the issue. Therefore, the provisions of Rule 8D suffers serious fundamental defect of non envisage of the ground reality of actual expenditure. It is a case where a provision is introduced to remove the mischief but turn out itself tobe more mischievous than the mischief to be remedied. Therefore, when a provision become unworkable and unrealistic then it cannot be applied in such a case. In the case in hand the assessee claimed expenditure on account of audit fee and bank charges total amounting to Rs. 24,766/- and also shown the income from the business and profession at Rs. 1,08,35,372/- apart from the dividend income of Rs. 14,71,443/-. If the provisions of Rule 8D(2)(iii) are applied for working out the disallowance u/s 14A without considering the actual expenditure it comes to Rs. 1,27,354/- which is more than five times higher than the actual expenses claimed by the assessee. Therefore, the provisions of Rule 8D(2)(iii) cannot be invoked in this case.

9. Even, otherwise, these two item of expenditure i.e. audit fee and bank charges do not fall under the category of the expenditure incurred for a composite activity resulting taxable and non taxable income, therefore, there is no direct or proximate nexus of these two expenditures with the earning of dividend income. Under the provisions of section 14A, the apportionment of an expenditure is required to be made only when the expenditure is incurred for a composite activity or indivisible activity which results taxable and non taxable income. In the absence of any nexus of the expenditure in question with earning of the dividend income, no disallowance is called for u/s 14A of the

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Act. Accordingly we delete the disallowance made u/s 14A on account of administrative expenditure.

10. Ground no. 2 is regarding reduction of claim u/s 54F. The assessee has earned the Long Term Capital Gain of Rs. 7,53,44,067/- from the sale of shares of M/s Hindustan Platinum Ltd., the assessee claimed deduction u/s 54EC to the extent of Rs. 50 lakh for investment in REB (rural electrification bonds) and also claimed deduction u/s 54F of Rs. 5,44,28,806/- for investment in new residential house. The Assessing Officer noted that the amount of Rs. 5,44,28,806/- includes a sum of Rs. 9,90,000/- paid to the society towards repair and development fund. The Assessing Officer accordingly, disallowed the claim of deduction u/s 54F in respect of the said amount of Rs. 9,90,000/-.

11. The assessee challenged the action of Assessing Officer before CIT(A) but could not succeed.

12. Before us, the Ld. Authorized Representative of the assessee has submitted that as per deed of transfer executed by the assessee for the purpose of acquiring residential flat, the assessee is required to pay the society the transfer charges/donation/ contribution payable for the said society. Accordingly, the assessee made the payment of Rs. 9,90,000/- towards contribution of building repair and development fund of the society. He has further submitted that without the payment of the said amount, the assessee could not get the admission to the said society and as such she would not be in position to enjoy the fruits of the purchase of said residential flat. The Ld.

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Authorized Representative further submitted that in the assessment of the society, the Assessing Officer has disallowed this amount and has taxed the same and, therefore, the said amount should be allowed as part of investment in the new asset.

13. On the other hand, the Ld. DR has submitted that the Assessing Officer as well as the CIT(A) has given a finding that the payment to the society is voluntary contribution after the property was transferred in the name of the assessee. Thus the payment is nothing to do with the purchase consideration of the flat in question but for the maintenance and development charges paid to the society. He has relied upon the order of the authorities below.

14. We have considered the rival submissions as well as relevant material on record. It is pertinent to note that apart from Rs. 9.90 lakh as sum of Rs. 25,600/- was also paid by the assessee to the society as entry fee which was allowed by the Assessing Officer as part of the cost of the acquisition of flat. Thus it is clear that for entrance in the society, the charges were only Rs. 25,600/- which has been allowed. There is no mandate of payment of Rs. 9.90 lakh to the society as a pre condition for transfer of flat in question when the entrance fee is separately paid by the assessee. Further it was paid for maintenance and development fund of the society and has no connection with acquisition of or transfer of flat in question. The stand of the society in the assessment proceedings of the society is that the amount is collected from the members for carrying out repair of the building of the society and not of any particular flat. Such repair is carried out once in every 10 to 12 years, therefore, when the payment is not for acquisition or transfer of flat then it

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cannot be part of the cost of the new flat for the purpose of exemption u/s 54F of the Income Tax Act. Accordingly, we do not find any error or illegality in the order of CIT(A) qua this issue.

15. Ground no. 2 is regarding reduction of deduction u/s 54F on account of expenditure on renovation. In the claim of deduction u/s 54F, the assessee also included the renovation expenditure of Rs. 13,72,814/-. The Assessing Officer noted that at the time of deed of transfer on 30.12.2008, the vendor was residing in the flat. The Assessing Officer accordingly disallowed the deduction u/s 54F on this amount of Rs. 13,72,814/- claimed by the assessee as incurred for making the property in a habitable condition.

16. On appeal, the assessee placed reliance on various decisions of this Tribunal, however, could not succeed.

17. Before us, the Ld. Authorized Representative of the assessee has contended that the expenditure has been incurred for making the flat in a habitabale condition. He has referred the details of the expenditure and submitted that the expenditure were necessary for making the flat fit for habitation. He has relied upon the various decisions as relied before the CIT(A) as well as the decision of this Tribunal dated 04.09.2013 in the case of MEHER R. SURTY, MUMBAI Vs. ITO in ITA No. 531/Mum/2013.

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18. On the other hand, the Ld. DR has relied upon the orders of authorities below and submitted that the Assessing Officer as well as the CIT(A) has given the finding that the expenditure was not required for making the flat fit for habitation as the vendor was residing in the flat at the time of transfer.

19. We have considered the rival submissions as well as relevant material on record. From the details of the expenditure it is manifest that the expenditure has been incurred for replacing the floor with marble as well as wall tiles and granites. There is no report or any assessment from the Architect that the work was required for making the flat habitable. The assessee has relied upon the various decisions of this Tribunal on this point. However in all the decisions it was noted that the expenditure was incurred for making the residential flat habitable. This fact was duly brought on record in those cases by way of report of architect. In the case in hand, no such evidence was produced by the assessee to show that the house was not in a habitable condition and the expenditure was incurred for making it habitable. Accordingly, we do not find any error or illegality in the order of CIT(A) qua this issue.

20. Ground no. 3 is regarding disallowance of indexed cost of acquisition of immovable property, share in which was sold by the assessee.

21. We have gone through the impugned orders of authorities below and find that no such ground was either raised before the authorities below or adjudicated by the authorities below. Even no argument was addressed by the assessee before us on this issue except the ground. Therefore, this ground of

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the assessee's appeal does not emanate from the impugned orders of the authorities below and accordingly the same is dismissed.

22. The revenue in its appeal has raised following grounds:-

"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 1,02,5881- made u/s14A of the Income Tax Act without appreciating the fact that the disallowance uls 14A has been made as prescribed under Rule 8D of the Income Tax Rules.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 60,95,0001 - being income from other sources without appreciating the fact that no remand report was called for from the AO to substantiate the claim of the assessee.

23. Ground no. 1 is regarding disallowance u/s 14A restricted by the CIT(A).

24. We have heard the Ld. DR as well as Ld. AR and considered the relevant material on record. We find that this ground is common to the ground no. 1 of the assessee's appeal and in view of our finding in ground no. 1 of the assessee's appeal, this ground of the revenue's appeal is dismissed.

25. Ground no. 2 is regarding deletion of addition of Rs. 60,95,000/- u/s 68.

26. The assessee has shown a receipt of Rs. 60,95,000/- against the transfer of half share in the immovable property at Pawana. The Assessing Officer

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rejected the explanation of the assessee and made the addition u/s 68 as unexplained cash credit.

On appeal, the CIT(A) has allowed the claim of the assessee by considering the MOU as well as the payments made by the assessee towards the construction of the property in question.

27. Before us, the Ld. DR has submitted that the assessee has failed to prove that the property was shown in the capital account of the assessee for the earlier years and, therefore, it was an afterthought for showing the sale of property in question against the said payment of Rs. 60,95,000/-.

28. On the other hand, the Ld. Authorized Representative has submitted that the assessee has brought on record the details and evidence to show the payments made by the assessee from year 2000 to 2007 for construction of property. All the payments were made through cheques and, therefore, vide MOU dated 08.01.2009, the assessee transferred her half share in the property in favour of the HUF against the refund of the cost of construction incurred by the assessee. The Ld. Authorized Representative of the assessee has further submitted that in the case of the HUF, the Tribunal vide order dated 16.11.2014 has accepted the said transaction for the purpose of allowing the claim of deduction u/s 54.

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29. We have considered the rival submissions as well as relevant material on record. The Assessing Officer doubted the source of the amount received by the assessee in the bank account from Chandrakant S. Choksi HUF and accordingly, made the addition u/s 68. On appeal, the CIT(A) has considered the relevant fact and decided the issue in para 12 as under:-

"12. I have considered the facts of the case and the arguments of the appellant and the findings given by the Assessing Officer. The contention of the appellant is acceptable because of the following reasons:-

(i) There is a credit entry of RS.60,95,000/- in the bank account of the appellant which was received from Chandrakant S.Choksi HUF. The AO. has not doubted the genuineness of this credit.

(ii) During assessment proceedings, the appellant filed copies of balance sheet for the years ending on 31-03-2006, 31-03-2007, 31-03-2008 and 31-03-2009.

However these balance sheets were not accepted by the AO. on the ground that they were unsigned. Once these documents were submitted by the appellant herself, there is no need for her to sign the document personally. Further, the earlier returns of the appellant were available with the AO. and he has given no finding that these balance sheets were different from the balance sheet submitted along with the return of income field by the appellant.

(iii) It is seen that appellant has been showing this property under the head "investment" with a narration "Pawana Property". The copies of balance sheets have been filed right from the year 2000-01 onwards. The land of this property has been separately shown in the Balance Sheet through these years on a value of RS.25,000/-. The year-wise construction and corresponding increase in the value of property has been shown as below:-

1) 31-03-2000 RS.33,85,000/-

2) 31-03-2001 RS.54,75,000/-

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3) 31-03-2002 RS.56,25,000/-

4) 31-03-2003 Rs.56,25,000/-

5) 31-03-2004 Rs.57,35,000/-

6) 31-03-2005 Rs.58,25,000/-

7) 31-03-2006 Rs.60,20,000/-

8) 31-03-2007 Rs.60,95,000/-

(iv) The appellant has given the details of cheque numbers and bank account details for this payment of Rs.60,95,0001-. All these payments have been made from her bank account NO.125296 in Bank of Baroda and these payments have been made from 06-04-1999 onwards. Therefore, the fact that appellant has invested Rs.60,95,0001- in the "Pawana Prooperty" from her own funds have been proved beyond doubt.

(v) As per the MOU, the appellant decided to withdraw her rights from the constructed property at Pawana land in favour of Chandrakant S.Choksi HUF. Accordingly, Chandrakant S.Choksi HUF paid Rs.60,95,0001- to the appellant as the reimbursement of construction cost incurred by her.

(vi) In the case of appellant the identity and capacity of the source i.e. Chandrakant S.Choksi HUF has not been doubted by the A.O. and even the genuineness of transaction has also been accepted by the A.O. This transaction is also reflected in the return filed for A Y. 2009-1 0 by Chandrakant S.Choksi HUF, In that case, the assessment has been framed u/s.143(3) of I.T.Act and this transaction has not been challenged by the AO. therein. In that case, Chandrakant S.Choksi HUF has claimed deduction u/s.54F on account of investment in a new property for the above stated amount of Rs.60,95,OOO/-. However, the AO. has not allowed deduction u/s.54F on the ground that it only amounted to extension of exiting house. The A.a., in that case, did not doubt the genuineness of transaction i.e. purchase of 50% of share in the Pawana Property from the appellant by Chandrakant S.Choksi HUF for a consideration of Rs.60,95,0001-.

(vii) As per section 68 of I.T.Act the conditions for its applicability are:-

I. The existence of books of accounts maintained by the assesee himself. II. A credit entry in the books of account, and

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III. The absence of a satisfactory explanation by the assessee about the following:

(i) Identity of creditor

(ii) Capacity of creditor, and

(iii) Genuineness of transaction From the above discussion, it is clear that in the case of appellant the identity and capacity of the creditor and genuineness of transaction have been sufficiently proved by the appellant. The A.O. has not given any finding that this amount was funded from the income of the appellant from undisclosed sources and therefore this amount cannot be added to the income of the appellant u/s.68 of ITAct. Accordingly, the addition made by the A.O. of RS.60,95,OOOI- u/s.68 of ITAct is deleted. This ground is allowed."

30. Thus it is clear that the assessee produced the record to show the payment towards construction of the property in question from the year 2000 till 31.03.2007 total amounting to Rs. 60,95,000/-. As per MOU the assessee has received back only the invested amount of Rs. 60,95,000/- without any surplus or gain on the same. Further we note in the case of Shri Chandrakant S. Choksi HUF Vs. ACIT in ITA No. 3540/Mum/2013, the Tribunal vide order dated 18.11.2014 has accepted the fact of transfer of the share in the property in question by the assessee in favour of the HUF. The relevant part of the Tribunal's order in para 4.3 is as under:-

"4.3 Lastly, regarding whether registration of MoU is compulsory or not, we find that this issue is squarely covered by the decision of the Hon'ble Bombay High Court in the case of CIT v. Laxmichand Narpal Nagda (supra) and Delhi High Court in the case of Balraj v. CIT (supra). In the latter decision, the Hon'ble Delhi High Court held that for the purpose of attracting the provisions of section 54, it was not necessary that the assessee should become owner of the property on only through registration, as the section speaks of "purchase" and registration of document was not imperative. Thus, on all counts, the reasoning given by the A.O. as well as CIT(A) cannot be sustained in view of the aforesaid legal proposition discussed above. Accordingly, we hold that the assessee is eligible for

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claim of deduction of Rs.60,95,000 u/s 54F in purchase of acquiring one half share of the residential house owned by Smt.Indrani Chandrakant Choksi, one of the members of the assessee-HUF. Therefore, the ground raised by the assessee stands allowed."

Accordingly in view of the above facts and circumstances of the case as well as the order of coordinate Bench of this Tribunal in the case of Shri Chandrakant S. Choksi HUF Vs. ACIT (Supra), we do not find any error or illegality in the order of CIT(A) qua this issue.

31. In the result, the appeal of the assessee is partly allowed whereas appeal of the revenue is dismissed.

Order pronoucned in the open court on this 16th Day of January 2015.

Sd/- Sd/-

(R.C. Sharma) (Vijay Pal Rao) ys[kk lnL;) (Accountant Member/ys lnL; U;kf;d lnL;) (Judicial Member/U;kf;d lnL;

Mumbai dated 16-01-2015 SKS Sr. P.S,

Copy to: 1. The Appellant 2. The Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. The DR, "I" Bench, ITAT, Mumbai By Order

Assistant Registrar Income Tax Appellate Tribunal, Mumbai Benches, MUMBAI

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