CHIMANLAL MANEKLAL SECURITIES PRIVATE LIMITED,MUMBAI vs. INCOME TAX OFFICER , AAYAKAR BHAWAN, MUMBAI

आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 25.11.2024 is filed by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 29.12.2018 for the Assessment Year [A.Y.] 2016-17.

1. Disallowance u/s 14(A) of Rs. 19,94,087/-: The learned commissioner of Income Tax (Appeals) has erred in confirming the action of the assessing officer in disallowing an amount of Rs. 19,94,087/- u/s 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 as against Rs 20,000/- disallowed by your appellant. Your appellants submit that looking at the facts and circumstances of the case and in law, the amount of Rs. 20,000/- already disallowed by the appellants in the return of income ought to have been accepted and the disallowance made by the Assessing officer and upheld by the CIT(A) is unwarranted and should be deleted. Without prejudice to the above, your appellant submits that the learned Assessing officer has considered bank charges of Rs. 5,23,647/- as interest expenditure while calculating disallowance under Rule 8D(ii) of Income-tax Rules, 1962. Your appellants submit that bank charges are not interest expenditure and therefore should be excluded from interest expenditure while calculating disallowance under Rule 8D(ii) of the Income-tax Rules, 1962 and the disallowance should be reduced accordingly. Without prejudice to the above, your appellant submits that the said disallowance is excessive and ought to be reduced substantially. Without prejudice to the above, your appellant submits that no disallowance can be made u/s. 14A on account of interest expenditure amounting to Rs.14,88,472/- as your appellant has not utilized any borrowed funds to make investments yielding dividend during the year. Your appellants submit that disallowances made u/s. 14A read with Rule 8D attributable to interest expenditure ought to be deleted.

2. Disallowance u/s 14(A) of Rs. 19,94,087/-: The learned Assessing officer erred in reproducing the submissions made by another assessee instead of your appellants' submissions in relation to disallowance u/s 14A in the assessment order. The Assessing officer has failed to record satisfaction in the assessment order, having regard to the accounts of the assessee, that he is not satisfied with the correctness of the claim of the assessee. Your appellants submit the learned Assessing officer has failed to consider the submission made by the appellant in relation to disallowance u/s 14A and made disallowance without applying his mind and therefore the same ought to be deleted.

A.Y. 2016-2017 Chimanlal Maneklal Securities Private Limited Without prejudice to the above, the appellant submits that the Commissioner of Income Tax (Appeals), while passing the order under Section 14A, assumed that the circumstances fordisallowance were identical to those of AY 2014-15. Consequently, the order for AY 2016-17 was passed without properly considering the facts and submissions specific to AY 2016-17. 3.Disallowance u/s 14(A) of Rs. 19,94,087/- to Book Profits u/s 115JB: The Commissioner of Income Tax (Appeals) failed to address the appellant's appeal regarding the disallowance of Rs. 19,94,087/- under Section 14A to the book profits calculated under Section 115JB. The appellant contends that the disallowance under Section 14A cannot be included in the computation of book profits, and the said addition is erroneous and should be deleted.

3.1 The AO, however, rejected the contentions by holding that provisions of section 8D were applicable to the facts of the case. It was observed by him that for the purpose of making investment and thereafter control of investment as well as purchase/sale of shares/mutual funds, the assessee has used its office and incurred expenses such as Transport charges, Office expenses, Telephones A.Y. 2016-2017 Chimanlal Maneklal Securities Private Limited expenses Travelling expenses. In the absence of separate accounts by way of which the management and administrative expenditure could be segregated, there could not be any doubt that some expenditure was incurred for making or earning, the income from dividend. He placed reliance on jurisdictional tribunal in Asha Lalit Kanodia vs Additional Commissioner of Income-tax, Range-12 (2), Mumbai (71 taxmann.com 84), ITAT Chennai Bench 'A' case in Voltech Engineers (P.) Ltd. vs Deputy Commissioner of Income-tax, Co. Circle III(4), Chennai (79 taxmann.com 158) etc. Regarding assessee’s contention that the assessee’s own funds and other non interest bearing funds were more than investment in shares, he placed reliance on CIT vs. V.I.Baby & Co. (254 ITR 248),Metal and Ferro Alloys Ltd. Vs CIT 193 ITR 344 (Ori) etc. Consequently, he worked put disallowance of in terms of Rule 8D clauses(ii) and (iii) of Rs. 14,88,472/- and Rs 5,23,647 respectively. The ld.CIT(A) upheld the addition made, placing reliance on the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT &Anr., (2010) 328 ITR 0081, the Hon’ble Bombay High Court.

A.Y. 2016-2017 Chimanlal Maneklal Securities Private Limited 5.1 The courts have consistently held in above stated situation, no disallowance could be made in terms of Rule 8D(ii).The Hon'ble Karnataka High Court in the case of CIT vs Microlabs Ltd., [2016] 383 ITR 490 (Karn) summed up the law on the issue after noticing the availability of own funds as per Balance Sheet of the assessee and after digesting all decisions on the subject, the Court noticed the decision of the Hon'ble Bombay High Court in Reliance Utilities & Power Ltd 313 ITR 340 (Bom), which was later confirmed by the Hon'ble Supreme Court in SLP No. 37/2019 vide order dated 02- 01-2019,wherein it was held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. Hon'ble Court referred to the judgment of Hon'ble Bombay High Court in CIT vs. HDFC Bank in of 2012 dated 23.7.2014, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. Hon'ble Supreme Court in the case of CIT vs UTI Bank Ltd. [2022] 142 taxmann.com 136 and in South Indian Bank Ltd. v. CIT [2021] 438 ITR 1,likewise held A.Y. 2016-2017 Chimanlal Maneklal Securities Private Limited that since interest free own funds available with assessee exceeded their investments in tax-free securities, investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A of the Act. In this case, since interest free own funds available with assessee exceeded their investments, investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A.

5.2 Respectfully following the above judicial precedents rendered by Hon'ble Apex Court and various High Courts(supra), we hold that the disallowance u/s 14A under clause(ii) of Rule 8D is legally not tenable and liable to be deleted. The AO is therefore, directed to delete the same.

As regard Rule 8D(2)(iii), it had been submitted that some mechanism or formula had to be adopted for attributing part of the administrative / managerial expenses to tax-exempt investment income. The administrative expenses attributable to tax- free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment.

6.1 Having considered the facts of the case and respectfully following the above decision, we confirm the disallowance of Rs.5,25,615/- made by the AO.

A.Y. 2016-2017 Chimanlal Maneklal Securities Private Limited prescribes the mode and manner for computing the total income of the assessee under Section 115JB of the Act. The said explanation nowhere mentions or denotes any mandate to import the disallowance as per Section 14A of the Act for computing MAT under Section 115JB of the Act. It is consistent with the decision in Apollo Tyres Ltd. v. Commissioner of income Tax (2002) 255 ITR 273 (SC) which held that "the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account - except to the extent provided in the Explanation to Section 115J. Further, the hon’ble Special Bench in the case of Vireet Investment P.Ltd(2017) 188TTJ 1(Del-ITAT) has held that no book profit adjustment u/s 115JB could be done by adding disallowance u/s 14A of the Act. Accordingly, we set aside the appellate order in this regard, allowing the ground of appeal.