Tribunal dismisses Revenue appeal, partly allows assessee cross-objection. Interest disallowance upheld, admin expenses to be recomputed.

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The deletion of interest disallowance under Rule 8D2(ii) was upheld, the administrative expenses disallowance under Rule 8D2(iii) was to be recomputed, and the reference to the DVO under Section 55A(b)(ii) was deemed invalid.

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Issues Involved:
1. Deletion of disallowance under Section 14A read with Rule 8D2(ii) regarding interest expenditure.
2. Disallowance under Section 14A read with Rule 8D2(iii) regarding administrative expenses.
3. Validity of reference to the Valuation Officer under Section 55A(b)(ii) and the addition on account of understatement of capital gains.

Detailed Analysis:

1. Deletion of Disallowance under Section 14A read with Rule 8D2(ii) Regarding Interest Expenditure:
The Revenue's appeal challenged the deletion of disallowance under Section 14A read with Rule 8D2(ii) concerning interest expenditure. The Assessing Officer had computed a disallowance of Rs. 78,96,449, which included Rs. 37,28,564 towards interest. The assessee argued that investments were made from surplus funds, not borrowed funds. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted this contention, finding a one-to-one correlation between the sale proceeds of land and the investments. This conclusion was supported by the decision in Reliance Utilities and Power Ltd [313 ITR 340]. The Tribunal sustained the CIT(A)'s order, confirming that no borrowed funds were used for the investments.

2. Disallowance under Section 14A read with Rule 8D2(iii) Regarding Administrative Expenses:
The assessee's cross-objection contended that investments not yielding income during the year should be excluded from the average investment computation under Rule 8D2(iii). The CIT(A) had sustained a disallowance of Rs. 35,56,410 towards administrative expenses. The Tribunal noted that this issue was covered by the Special Bench decision in ACIT v. Vireet Investments Private Limited [82 Taxman.com 415], which held that only investments yielding exempt income during the year should be considered. Accordingly, the Tribunal directed the Assessing Officer to recompute the disallowance in line with this decision.

3. Validity of Reference to the Valuation Officer under Section 55A(b)(ii) and Addition on Account of Understatement of Capital Gains:
The Revenue's second issue challenged the CIT(A)'s decision that the Assessing Officer had no relevant circumstances for referring the matter to the Valuation Officer under Section 55A(b)(ii) and deleting the addition for understatement of capital gains. The Assessing Officer had referred the property to the Departmental Valuation Officer (DVO) due to doubts about the fair market value as on 01.04.1981 provided by the Registered Valuer. The DVO's valuation was significantly lower than the assessee's valuation. The CIT(A) held the reference to the DVO as bad in law, citing that the valuation adopted by the Registered Valuer was based on stamp duty valuation and there were no extraordinary circumstances for such a reference.

The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's ruling in CIT v. Puja Prints [360 ITR 697], which stated that a reference under Section 55A(a) is valid only if the value declared by the assessee is less than the fair market value. Since the assessee's declared value was higher, the reference under Section 55A(b)(ii) was deemed inappropriate. The Tribunal confirmed that the Assessing Officer had not provided sufficient reasons for the reference under the residuary provision of Section 55A(b)(ii).

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The deletion of interest disallowance under Rule 8D2(ii) was upheld, the administrative expenses disallowance under Rule 8D2(iii) was to be recomputed, and the reference to the DVO under Section 55A(b)(ii) was deemed invalid. The order was pronounced in open court on 13th September 2017.

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