2019 (5) TMI 2038 - AT - Income Tax

Order remits recalculation under Section 14A and Rule 8D(2)(iii) and directs re-examination under Section 50C(2)

ITAT Bengaluru - AT set aside parts of the tribunal and CIT(A) orders and restored two issues to the AO for fresh consideration. On section 14A read with ... Disallowance u/s 14A r.w.r. 8D - AR contention that the AO has erred in working average value of investments on the opening balance and closing balance without considering the fact that non-dividend yielding investments are to be excluded - HELD THAT:- We support our view relying on the decision of the Special Bench in Vireet Investment (P) Ltd.[2017 (6) TMI 1124 - ITAT DELHI] restoring this disputed issue to the file of the AO to recalculate disallowance u/s 14A r.w. rule 8D(2)(iii) by including those investments which yielded exempted income. Learned AR further submitted that the disallowance cannot exceed the dividend income and relied on the decision of Cheminvest Ltd.[2015 (9) TMI 238 - DELHI HIGH COURT]. Accordingly, we restore the entire disputed issue to the file of the AO to re-calculate the disallowance u/s 14A read with Rule 8D(2)(iii) and allow grounds of appeal of the assessee for statistical purposes. Addition on applying the provisions of section 50C - AR contention that the assessee has not suppressed the sale value of the property and paid the stamp duty on SRO value - HELD THAT:- We notice that the stamp authority has registered the document without any objection for the reason that the stamp duty was paid according to his valuation. AR submitted that the assessee has raised an objection on valuation determined by stamp authorities before the CIT(A) but the same was not addressed to. Accordingly, he prayed that assessee may be provided with an opportunity in this regard as per section 50C(2) of the Act. We find merit in the said prayer. Accordingly, we set aside the order passed by the CIT(A) on this issue and restore the same to the file of AO for examining the same afresh in accordance with provisions of section 50C(2) of the Act. This ground of assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D should be computed by reference to the average value of all investments shown in the balance sheet or only by reference to those investments which yielded exempt income during the year. 2. Whether the disallowance under section 14A read with Rule 8D is liable to be limited by the amount of exempt income actually received (i.e., whether disallowance can exceed exempt dividend income). 3. Whether the assessing authority and appellate authority complied with the procedural requirements of section 50C(2) when making an addition by adopting the stamp registration authority (SRO) valuation over the sale deed consideration, and whether the matter should be remitted for fresh consideration in accordance with section 50C(2). ISSUE-WISE DETAILED ANALYSIS - Disallowance under section 14A read with Rule 8D Legal framework: Section 14A disallows expenditure incurred in relation to income which does not form part of the total income; Rule 8D prescribes methods for computing the disallowance, including a formula based on average value of investments. Rule 8D(2)(iii) contemplates computation by reference to investments relatable to exempt income. Precedent treatment: The Tribunal relied on a Special Bench ruling that only investments which yielded exempt income during the relevant year are to be considered for computing the average value of investments for the purposes of Rule 8D. The Tribunal also referenced judicial authority holding that the disallowance under section 14A cannot exceed the exempt dividend income. Interpretation and reasoning: The Tribunal examined the assessee's balance-sheet and schedules showing detailed investments and the quantum of dividend income. It held that the AO erred in computing average investments by indiscriminately including all investments (including non-dividend-yielding investments, share application money, partnership investments, immovable property etc.) instead of restricting the computation to those investments which actually yielded exempt income in the year. Relying on the Special Bench view, the Tribunal concluded that Rule 8D computation must be confined to investments that resulted in exempt income, and directed restoration to the file of the AO to recalculate disallowance accordingly. The Tribunal additionally noted the ratio from authority limiting disallowance to the amount of exempt dividend income and applied that as a controlling principle in recalculation. Ratio vs. Obiter: Ratio - The binding outcome (for the matter before the Tribunal) is that, under Rule 8D(2)(iii), only investments that yielded exempt income during the year are to be included in computing the average value of investments for section 14A disallowance; and that the disallowance should not exceed the exempt dividend income. Obiter - Observations about retrospective applicability of an amendment to Rule 8D and broader factual permutations not necessary to the specific remand are ancillary and not essential to the decision. Conclusions: The Tribunal set aside the assessing and appellate authorities' computation of section 14A disallowance and restored the issue to the AO with directions to recalculate disallowance under Rule 8D(2)(iii) by including only investments which yielded exempt income in the year, ensuring the disallowance does not exceed the exempt dividend income; the assessee's grounds on this issue were allowed for statistical purposes. ISSUE-WISE DETAILED ANALYSIS - Addition under section 50C (sale of flats) Legal framework: Section 50C deems the full value of consideration received on transfer of capital assets (being land/immovable property) to be the higher of the actual consideration and the value adopted by the stamp registration authority for stamp duty purposes; section 50C(2) permits reference to a valuation officer where the assessee disputes the SRO value, subject to procedural safeguards. Precedent treatment: The Tribunal referred to the statutory scheme that requires compliance with section 50C(2) before substituting SRO value, and to authorities recognizing that natural justice requires the taxpayer an opportunity to explain discrepancies between deed consideration and SRO valuation when a higher SRO value is proposed to be treated as the full value under section 50C. Interpretation and reasoning: The Tribunal observed that the assessee sold two flats for a stated consideration in registered sale deeds and paid stamp duty based on the SRO valuation; the assessing officer adopted the SRO valuation and made an addition without engaging the mechanism under section 50C(2). The assessee had raised objections on the valuation before the CIT(A) that were not dealt with. In the interest of natural justice and statutory procedure, the Tribunal found merit in remitting the matter to the AO to examine the disputed valuation afresh and, if appropriate, refer the matter to the valuation officer under section 50C(2), giving the assessee opportunity to explain and furnish evidence. Ratio vs. Obiter: Ratio - Where the AO proposes to adopt the SRO value exceeding the sale-deed consideration, the AO must examine the assessee's explanations and, if contested, proceed in accordance with section 50C(2), including reference to the valuation officer; failure to do so warrants remand. Obiter - Observations about stamp duty payment mechanics and endorsement on deed are factual notes supporting remand rather than general legal propositions beyond the statutory mandate of section 50C(2). Conclusions: The Tribunal set aside the appellate confirmation of the section 50C addition and restored the issue to the file of the AO for fresh examination in accordance with section 50C(2), with directions to afford the assessee appropriate opportunity to explain and to refer to the valuation officer if necessary; the assessee's ground on this issue was allowed for statistical purposes. OVERALL CONCLUSION The Tribunal allowed the appeals for statistical purposes by (a) directing recalculation of section 14A disallowance under Rule 8D(2)(iii) limited to investments that yielded exempt income and not exceeding the exempt dividend amount; and (b) setting aside the section 50C addition and remitting that issue to the AO for fresh consideration in accordance with section 50C(2), ensuring compliance with procedural and natural justice requirements.