INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “E”: NEW DELHI

BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER
AND

SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
(Through Video Conferencing)

ITA No. 3391/Del/2016

(Assessment Year: 2011-12)

DLF Universal Ltd, Vs. DCIT,

3rd Floor, Shopping Mall, Arjun Circle-1(1),

Marg, DLF City, Phase-1, Gurgaon

Gurgaon

PAN: AAACJ1655P

(Appellant) (Respondent)

ITA No. 3342/Del/2016

(Assessment Year: 2011-12)

ACIT, Vs. DLF Universal Ltd,

Circle-1(1), 3rd Floor, Shopping Mall,

Gurgaon Arjun Marg, DLF City,

Phase-1, Gurgaon

PAN: AAACJ1655P

(Appellant) (Respondent)

Assessee by : Shri R. S. Singhvi, CA
Shri Satyajeet Goel, CA
Revenue by: Ms. Aman Preet, Sr. DR
Date of Hearing
Date of pronouncement 22/03/2021
24/05/2021

O R D E R

PER PRASHANT MAHARISHI, A. M.

1. These are the cross appeals filed by the assessee DLF Universal Ltd (The
appellant/ assessee) and The Assistant Commissioner Of Income Tax ,
Circle-1(1), Gurgaon (The ld AO) against the order passed by the ld
Commissioner of Income tax (A)-1, Gurgaon[ The ld CIT (A) ] dated
31.03.2016 for the Assessment Year 2011-12.

2. The assessee in its appeal in ITA No. 3391/Del/2016 has raised the
following grounds of appeal:-

“1. That on the facts and in the circumstances of the case, the learned
Commissioner of Income-tax (Appeals) erred in re-computing and
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restricting the disallowance u/s 14A at Rs. 15,42,000 which is 0.5% of
investment of Rs. 30.84 Cr, without giving any cogent reasons or
pointing any inaccuracy in the amount already disallowed by the
appellant of Rs. 6,23,210/- in the return of Income..

2. That learned Commissioner of Income-tax (Appeals) failed to bring
anything on record to show as to how expenditure of Rs 6,23,210/-
already disallowed by the appellant company is not sufficient to earn
the tax free income of Rs. 22,34,355/-.

3. That learned Commissioner of Income-tax (Appeals) failed to bring to
record anything to show the proximity of expenditure calculated under
Section 14A with the dividend income earned, apart from the
expenditure already disallowed by the appellant.

4. That the impugned order dated 31.03.2016 passed by the learned
Commissioner of Income-tax (Appeals), Gurgaon is bad in law and
wrong on facts to the extent as stated above.”

3. The revenue in its appeal in ITA No. 3432/Del/2016 has raised the following

grounds of appeal:-

“1. Ld. CIT(A) has erred on fact and in law in deleting the addition u/s
40A(2)(b) of the Act of Rs.8308348/- made by the Assessing Officer on
account of payment made to related party M/s DLF Home Developers
Ltd.

2. Ld.CIT(A) has erred on fact and in law in deleting the addition of
2,38,26,486/- made by the Assessing Officer on account of payment
claimed to be made to Associated Infrastructure Company(AIC) for
construction of compound wall, leveling of land, construction of labour
quarter etc. when the assessee had not furnished any documentary
evidence of development work actually done on the land during
assessment proceedings.

3. Ld. CIT(A) has erred on fact and in law in deleting the addition of Rs.
1.72.72,980/- made by the Assessing Officer on account of brokerage
paid to M/s Totem Infrastructure Pvt. Ltd., on sale of land at Vadora as
the asessee had failed to produce any agreement with M/s Totem
Infrastructure Ltd for any such arrangement during assessment
proceedings.

4. Ld. CIT(A) has erred on fact and in law in restricting the disallowance
from Rs.6,03,51,403/- to Rs.15.42.000/ made by the Assessing Officer
under Section 14A of the Income Tax Act, 1961, since the Assessing
Officer has made the addition on proper application of Section 14A of
the Income Tax Act, 1961.

5. Ld.CIT(A) has erred on fact and in law in ignoring CBDT Circular No.5
of 2014 dated 11.02.2014 .clarifying that disallowance under Rule 8D
read with Section 14A of the Income Tax Act is to be made even where
taxpayer in a particular year ^has not earned any exempt income.”

4. Brief facts of the case shows that the assessee is a company carrying on the

business of real estate development. For Assessment Year 2011-12 the

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assessee filed its return of income on 31.09.2011 declaring total loss of Rs.
1,63,24,28,377/-. The return of income was revised on 31.03.2012 at
income of Rs. 41,49,07,760/-. On selection of scrutiny the ld AO assessed
the income u/s 143(3) of the Act per order dated 31.03.2014 at Rs.
52,46,66,977/-. The ld AO made the following additions/ disallowances:-

a. Disallowances u/s 14A of the Rs. 60351403/-.
b. Disallowance of brokerage paid on sale of land at Rs. 1,72,72,980/-
c. Disallowance on cost on improvement of Rs. 2,38,26,486/-.
d. Disallowance of payment u/s 40A2(b) of Rs. 83,08,348/-.
5. Thus, the total disallowance of Rs. 10,97,59,217/- was made to the total
income of the assessee.
6. The assessee preferred an appeal before the ld CIT(A), who upheld the
disallowance u/s 14A of Rs. 15,42,000/- being 0.5% of investment. He
deleted the other portion of disallowances on account of interest u/s 14A.
all other disallowances were also deleted by him. The ld AO is contesting the
other disallowances whereas the assessee is contesting the retention of the
disallowances to the extent of 0.5% u/s 14A of the Act. Thus, these two
appeals are filed.
7. We have heard the parties on these appeals, perused the orders of lower
authorities, and also gone through a paper book filed on behalf of assessee.
8. First, we take up the appeal of the ld AO.
9. First ground of appeal is against the deletion of the disallowances u/s
40A(2)(b) of the Act of Rs. 83,08,348/- made on account of payment
commission made to related party M/s. DLF Home Developers Ltd for
service charges on account of collection received from customers on account
of project Capital Green Phase 1. The assessee has deducted tax at source
on the same. The DLF Home Developers is a subsidiary company of the
assessee company and therefore, claim of the assessee is that provision of
section 40A(2)(b) do not apply to such payment. The said payment being
made by the developers assessee for arranging and organizing the collection
from customers on behalf of the assessee as marketing right of the project
lies with DLF Home Developers only. The ld AO held that the assessee has
not incurred these expenses to meet legitimate needs of the business.
Therefore, he applied the provisions of section 40A(2)(a) and held that the

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expenditure made by the assessee are excessive in nature. The ld CIT(A)
deleted the above disallowances.
10. Fact shows that the assessee has made payment to the parties for three
bills. Two bills have been made dated 30.09.2010 amounting to Rs. 1.40
crores and Rs. 39.18 lakhs. The third bills was paid as per bill dated
31.03.2011 of Rs. 83,08,348/-. The ld AO has disallowed amount involved
in last bill but has allowed the earlier two bills despite the payments made
for same services. There is no reasoning given by the ld AO that why the
earlier two payment to the same party for the same services for the same
accounting period on same terms and conditions are allowable, whereas the
last bill itself was found to be not justified. Even at the time of
disallowances, the ld AO could not show any comparable cases that the
payment made to the recipient of income is unreasonable or excessive. In
fact, the ld CIT(A) has noted that the assessee has paid commission to this
party @ 1% whereas commission to other brokers is paid @2%. Therefore it
is apparent that conditions satisfied u/s 40A(2) of classifying expenditure
as excessive or unreasonable is not satisfied as the comparable market rate
for same services provided by unrelated parties are higher. In view of this,
we do not find any infirmity in the order of the ld CIT(A) in deleting the
above disallowance. Accordingly, ground No. 1 of the appeal against the
deletion of the disallowance u/s 40A(2)(b) of Rs. 83,08,348/- for payment
made to the related party M/s. DLF Home Developers Ltd is confirmed.
Thus, Gr. No. 1 is dismissed.
11. Ground No. 2 is regarding the disallowance of Rs. 2,38,26,486/- on account
of cost of improvement while calculating the capital gain earned by the
assessee. The fact shows that another company M/s. DLF Comfort Hotels
Pvt Ltd got merged into assessee company during the year and has shown
a short term capital loss of Rs. 5,47,66,443/-. The ld AO noted that the
above loss is on account of sale of piece of land. The assessee has shown the
cost of improvement of Rs. 2,38,26,486/- as cost of improvement and has
claimed deduction for working capital gain. The assessee submitted that
this payment is paid to Associated Infrastructure Company for construction
of a compound wall, leveling of land etc. The ld AO disallowed the same as
the assessee did not furnish any documentary evidence and such working

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was also not evident from the sale deed. The contention of the assessee was
that above expenditure are reflected in the books of account consistently
over the years and has been accepted by the revenue. The ld CIT(A) deleted
the above addition.
12. It is apparent that the assessee company has sold land at Jamnagar at Rs.
7,91,35,786/- and incurred a loss of Rs. 5,47,66,443/-. The assessee has
incurred the total cost of Rs. 2,38,26,486/- for which major portion is cost
for development as per agreement dated 29.04.2008 at Rs. 2,26,10,196/-.
Small petty expenses of leveling etc were also incurred. The cost of
development was paid to Associated Infrastructure Company for cost of
development of the land at the rate of Rs. 200 per sq ft as per tripartite
arrangement dated 29.04.2008. The ld CIT(A) considered the agreement
and referred to the clauses of agreement at para 5.3. It was noted that the
above amount of cost of development was integral part of the development
and therefore, it cannot be ignored and disallowed. The purchase
agreement itself contains the provisions for development of land at the
behest of the Vendor. It was also carried in the books of accounts of earlier
years. Therefore, there is no justification for the ld AO to disallow the same.
Accordingly, we confirm the order of the ld CIT(A) in deleting the addition of
Rs. 2,38,26,486/- as cost on improvement for the land sold. Accordingly,
the ground No. 2 of the appeal of the ld AO is dismissed.
13. The ground No. 3 is against the deletion of addition of Rs. 1,72,72,980/- on
account of brokerage paid to M/s. Totem Infrastructure Ltd on sale of land
at Vadodara. The assessee has paid a brokerage of the above sum on sale of
land at Vadodora. The assessee incurred the capital loss. The ld AO
disallowed the same as the assessee could only submit the copy of the bill
for brokerage but according to ld AO assessee failed to submit justification
for payment of brokerage to the above party. The ld AO was of the view that
the brokerage has resulted into capital loss on the sale of land, the assessee
has not paid brokerage on sale of other asset, and assessee could not
establish that same is paid wholly and exclusively for sale of Vadodara land.
On appeal before the ld CIT(A), he noted that assessee has paid brokerage to
other brokers also for sale of land and he noted such existence. With respect
to the brokerage he referred to the invoices and also noted that Totem

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infrastructure Ltd were appointed as broker for rendering assistance and
services for the sale of land. The information along with PAN of the broker
was provided to the ld AO. The ld AO disbelieved it without any evidence
that the expenses are not wholly and exclusively for the transfer of the land.
The ld CIT(A) deleted the addition.
14. We find that the above brokerage was paid by the assessee to M/s. Totem
Infrastructure Ltd for sale of property at Vadodara. The assessee has also
paid similar brokerage for sale of land at Jamnagar. Therefore, the claim of
the ld AO that the assessee paid brokerage only for sale of Vadodara
property is not correct. However, during the course of assessment wherein
details of payment of brokerage at 1.80% on sale of Rs. 87 crores at
Vadodara land along with address and PAN of the broker was given. The ld
AO did not make any enquiry on the bill but merely on other reasons made
the disallowance. The ld CIT(A) has categorically dealt with all these reasons
and deleted the addition. Even before us, the findings of the ld cit (A) were
not controverted. We find that the brokerage paid by the assessee is
demonstrated in the bill , which is for the purpose of the sale of Vadodara
Land. Therefore, in absence of any specific enquiry proving otherwise, the
above disallowance cannot be made. Even otherwise, other findings of the ld
AO about payment of brokerage on other properties sold were not found
correct. Thus, we do not find any infirmity in the order of the ld CIT(A) in
deleting the above disallowances. Accordingly, ground No. 3 of the appeal of
the ld AO is dismissed.
15. Ground No. 4 and 5 of the appeal of the ld AO and ground No. 1 to 3 of the
appeal of the assessee are on the issue of disallowance made u/s 14A of the
Act. The facts shows that the assessee has made investment in shares to
the tune of Rs. 53.51 crores and during the year assessee has received the
dividend of Rs. 22,34,355/-, which is exempt income u/ 10 (34) of the act.
The ld AO noted that the assessee has made interest payment and has also
incurred certain expenditure. Therfore according to him, the assessee has
incurred proportionate expenditure for earning exempt income. Therefore,
disallowances u/s 14A of the Act is required to be made. During the
assessment proceedings, the assessee offered voluntarily disallowances
made under Rule 8D of Rs. 6,23,210/- being 50% of salary of Rs.

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12,46,542/- on one of the employee for disallowances. However, assessee
did not make any disallowance in the return of income u/s 14A of the act.
As assessee has offered disallowances during assessment proceedings,
The ld AO recording his satisfaction held that the assessee has incurred
expenditure for earning exempt income. With respect to the interest
expenditure the assessee submitted that its share capital and reserve is Rs.
983 crores whereas the investment in shares is only Rs. 53 crores,
therefore, there cannot be any disallowance on account of interest
expenditure. The assessee also stated that exempt income is only Rs.
22,34,355/- therefore, disallowance cannot exceed the above sum. With
respect to other expenditure-covered u/r 8D(2)(iii) assessee submitted that
it has not incurred any expenditure. However, ld AO noted that assessee
itself has offered salary expenditure for disallowance u/r 8D (2) (iii) ,
therefore, ld AO applied the provision of Rule 8D and disallowed interest
expenditure directly attributable of Rs. 4,40,41,001/-, indirect interest
expenditure of Rs. 1,36,35,010/- and other administrative expenditure
@0.5% on average value of investment of Rs. 36,75,392/-. The total
disallowances of Rs. 6,03,51,403/- was made. The ld CIT(A) deleted the
disallowances on account of interest expenditure of Rs. 4,40,41,001/- and
indirect interest expenditure allocated of Rs. 1,36,35,010/- for the reason
that share capital and free reserve available with assessee is much
higher than the amount of investment in equity shares yielding exempt
dividend income. With respect to other expenditure, he excluded Rs. 22.67
crores from the total investments made in the subsidiary company out of
investment of Rs. 53.51 crores relying on the decision of ITAT and thus he
applied 0.5% on investment of Rs. 30.84 crores and restricted the
disallowances of Rs. 1542,000/- instead of Rs. 3675953/-. Thus, the
disallowance u/s 14A was retained only to the extent of 0.5% of average
value of investment other than investment in subsidiaries companies.
16. It is apparent that the assessee has earned exempt income being dividend
from the investment in equity shares. It did not disallow any sum in the
return of income, however, when assessee was confronted during the
course of assessment proceedings, it surrendered a sum of Rs. 6,23,210/-
being 50% of the salary of one employee as expenditure incurred for earning

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exempt income. This fact itself proves that assessee has incurred certain
expenditure for the purpose of earning exempt income. However, the
assessee did not given any basis for allocating 50% of the salary of one
person. No other corresponding expenditure or incidental expenditure was
disallowed. The ld AO noted this fact and recorded his satisfaction that the
claim of the assessee is that it has not incurred any expenditure in earning
the exempt income is incorrect. Thus no fault can be found with the action
of the ld AO in applying provision of Rule 8 D as it satisfied the condition
laid down u/s 14A (2) of the act. As far as the issue of interest expenditure
is concerned, it is apparent that assessee has huge interest free funds in
form of share capital and free reserve of approximately Rs. 983 crores
against the investment in equity shares of Rs. 53 crores. Therefore, in
absence of any contrary evidence, the presumption lies in favour of the
assessee that investment in such equity shares have been made out of
interest free funds. The ld CIT(A) has deleted the same on this basis only.
The judicial precedents also now support this claim of the assessee. Hon.
Delhi High court in CIT V Taikisha Eng Co Ltd [2015] 54 taxmann.com 109
(Delhi)/[2015] 229 Taxman 143 (Delhi)/[2015] 370 ITR 338 (Delhi)/[2015]
275 CTR 316 (Delhi) has held that :-

18. It is in this context we feel that the findings recorded by the
CIT(A) and the Tribunal are appropriate and relevant. The clear
findings are that the assessee had sufficient funds for making
investments in shares and mutual funds. The said findings coupled
with the failure of the Assessing Officer to hold and record his
satisfaction clinches the issue in favour of the respondent assessee
and against the Revenue. The self or voluntary deductions made by
the assessee were not rejected and held to be unsatisfactory, on
examination of accounts. Judgments in Tin Box Co. (supra), Reliance
Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East
India Pharmaceutical Works Ltd. (supra) would be relevant if the
satisfaction of the Assessing Officer is in issue, and such question of
satisfaction is with reference to the accounts.”
17. In view of this we do not find any infirmity in the order of the ld CIT(A) in so
far as the deleting the disallowance on account of interest. It is also not the

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claim of the ld AO that the assessee has utilized interest-bearing funds for
making investment in the equity shares.
18. So far as the issue of other expenditure is concerned where the ld AO has
applied 0.5% of investment of Rs. 53.51 crores whereas the ld CIT(A)
restricting 0.5% only Rs. 30.84 holding that balance investment of
approximately Rs. 22 crores was made in the subsidiary companies and
there was no intention of earning any dividend income. The ld CIT(A) while
holding so relied upon the decision of the Chennai Bench in case of EIH
Associated Hotels Vs. Dy. CIT ITA No. 1503/Mds/2012 dated 27.05.2013
and also of Delhi bench in Pioneer Radio Trading Services Vs. Department of
Income Tax in ITA No. 4448/Del/2013 dated 19.01.2015. The main logic
behind this is that investments are made for strategic purposes. We find
that this controversy has come to an end by the decision of the Hon’ble
Supreme Court in case of Maxxop Investment Ltd Vs. CIT Civil Appeal No.
104/20162018] 91 taxmann.com 154 (SC)/[2018] 254 Taxman 325
(SC)/[2018] 402 ITR 640 (SC)/[2018] 301 CTR 489 (SC) wherein, it has been
held that dominant purpose for which investment into shares are made is
not relevant for disallowance u/s 14A of the Act. The Honourable
supreme court held that :-

“34. Having clarified the aforesaid position, the first and foremost issue
that falls for consideration is as to whether the dominant purpose test,
which is pressed into service by the assessees would apply while
interpreting Section 14A of the Act or we have to go by the theory of
apportionment. We are of the opinion that the dominant purpose for
which the investment into shares is made by an assessee may not be
relevant. No doubt, the assessee like Maxopp Investment Limited may
have made the investment in order to gain control of the investee
company. However, that does not appear to be a relevant factor in
determining the issue at hand. Fact remains that such dividend income
is non-taxable. In this scenario, if expenditure is incurred on earning
the dividend income, that much of the expenditure which is
attributable to the dividend income has to be disallowed and cannot be
treated as business expenditure. Keeping this objective behind
Section14A of the Act in mind, the said provision has to be interpreted,

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particularly, the word 'in relation to the income' that does not form part
of total income. Considered in this hue, the principle of apportionment
of expenses comes into play as that is the principle which is engrained
in Section 14A of the Act. This is so held in Walfort Share & Stock
Brokers (P.) Ltd., relevant passage whereof is already reproduced above,
for the sake of continuity of discussion, we would like to quote the
following few lines therefrom.”
19. Therefore, we find that the decision relied upon by the ld CIT(A) wherein,
could not be applied . In view of this we hold that there is no justification
for reducing the sum of Rs. 22.67 crores being investment in subsidiaries
out of total investment in equity shares of Rs. 53.51 Therefore, we find that
disallowances of Rs. 26,75,393/- should have been confirmed by the ld
CIT(A). Anyway as the disallowance u/s 14A cannot exceed the exempt
income of Rs. 22,34,355/- ,we direct the ld AO to restrict the disallowance
only to the extent of Rs. 22,34,355/-. Accordingly, appeal of the assessee is
dismissed and appeal of the ld AO with respect to ground No. 4 and 5 is
partly allowed.
20. In the result appeal of the assessee is dismissed and appeal of the ld AO is
partly allowed.
Order pronounced in the open court on 24/05/2021.

-Sd/- -Sd/-
(KUL BHARAT) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 24/05/2021
A K Keot

Copy forwarded to

1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT

ASSISTANT REGISTRAR
ITAT, New Delhi

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