DCIT, CIRCLE-11(1), NEW DELHI vs. HERO CORPORATE SERVICES PVT. LTD., NEW DELHI

ORDER PER SUDHANSHU SRIVASTAVA, JM: This appeal is preferred by the Revenue against order dated 06.03.2017 passed by the Learned Commissioner of Income Tax (Appeals)-39, New Delhi {CIT(A)} and pertains to Assessment Year 2011-12.

DCIT vs. M/s Hero Corporate Services Pvt. Ltd.

2.0 The brief facts of the case are that the assessee respondent is engaged in the business of consultancy, online data, retrieval services, corporate insurance agency, software development etc. The return of income for the year was filed declaring an income of Rs.18,41,86,642/- which was subsequently revised declaring an income of Rs.18,41,86,642/- by claiming enhanced amount of tax deducted at source (TDS). The assessment U/s 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) was completed at an income of Rs.22,13,85,570/- after making the following additions and disallowances:-

(i) Addition U/s 14A Rs.2,76,36,280/- (ii) Addition on account of disallowance of Bank Charges incurred for corporate guarantees Rs.94,55,537/- (iii) Addition on account of prior period expenses Rs.1,07,111/- 2.1 Aggrieved, the assessee approached the Ld. First Appellate Authority challenging the additions and disallowances. The appeal of the assessee was allowed by the Ld. CIT(A).

DCIT vs. M/s Hero Corporate Services Pvt. Ltd.

2.2 Now, the Department has approached this Tribunal challenging the action of the Ld. CIT(A) in deleting the disallowance made U/s 14A of the Act. The grounds raised by the Department are as under:-

“1. Whether on the facts & Circumstances of case, the Id. CIT(A) was correct in deleting the disallowance u/s 14A r.w.r. 8D ignoring the fact that the assessee company didn't produce the specific documents in the shape of scripts of the mutual funds/shares in all the cases of the investment made as appearing in the balance sheet so that the invest which may yield exempt income.

DCIT vs. M/s Hero Corporate Services Pvt. Ltd.

3.0 None was present for the assessee/respondent when the appeal was called out for hearing nor was any adjournment application received by the registry of this Tribunal on behalf of the assessee/respondent. A perusal of the case record shows that this appeal of the Department was earlier fixed for hearing on 27.11.2019, then on 28.12.2020 and later on 08.03.2021 but on all these three occasions, the assessee/respondent did not choose to be represented. The same is the case on 14.07.2021. It is also seen that the notices of the hearing were duly dispatched to the address of the assessee/respondent but the assessee/respondent has not bothered to comply with the notices so sent. We also note that in the notices sent by the registry of this Tribunal, the address in the assessment order, the address in Form-35 filed by the assessee and the address in the impugned order are the same.

Therefore, this gives an impression that the assessee/respondent is not bothered about getting its case properly represented before this DCIT vs. M/s Hero Corporate Services Pvt. Ltd.

Tribunal. Therefore, looking into the facts of the case and considering the continued non-compliance by the assessee/ respondent, we deem it appropriate to here this appeal ex-parte qua the assessee /respondent.

4.0 The Ld. Sr. Departmental Representative (DR), while referring to the grounds of appeal, submitted that the Ld. CIT(A) had incorrectly deleted the disallowance made U/s 14A of the Income Tax Act, 1961 (hereinafter called ‘the Act’) read with Rule 8D of the Income Tax Rules, 1962 (hereinafter called ‘the Rules’) ignoring that the assessee had not produced any documentary evidences to demonstrate that the investments were not related to earning exempt income. It was also submitted that the Ld. CIT(A) was not correct in deleting the disallowance of Rs.15,42,508/- made suo moto by the assessee by relying on the judgment of the Hon’ble Apex Court in the case of M/s Goetze (India) Ltd. vs. CIT. The Ld. Sr. DR also submitted that the Ld. CIT(A) was not correct in deleting the disallowance U/s 14A of the Act completely ignoring that there was no co-relation between the dividend earned and DCIT vs. M/s Hero Corporate Services Pvt. Ltd. disallowance U/s 14A in terms of CBDT Circular No.5/2014 dated 11.10.2014. The Ld. Sr. DR also submitted that, although, the assessee has submitted the calculation of disallowance u/s 14A of the Act, the same was not found correct as per the records available and the submissions filed by the assessee company. It was submitted that since there was absence of details of scriptwise investments made by the assessee company, the Assessing Officer had no option but to compute the disallowance by taking the entire investments while doing so. It was also submitted that the assessee had incurred rental expenditure, personnel cost, depreciation, communication cost etc. which was directly related to the volume of transactions and, therefore, it cannot be said that the assessee had not incurred any administrative expenses for earning tax free income. The Ld. Sr. DR supported the order of assessment and prayed that the Ld. CIT(A)’s order deserves to be dismissed.

5.0 We have heard the Ld. Sr. DR and have also gone through the impugned order. Findings of the Ld. CIT(A) on the issue are contained in paragraphs 5.1,5.2, 5.3 and 5.4. The same are being reproduced herein under for a ready reference:-

DCIT vs. M/s Hero Corporate Services Pvt. Ltd.

“5. I have considered the order U/s 143(3) of the Act, the submission of the AR along with the case laws relied upon by him and the extant law in this regard. It is observed from the grounds of appeal at Page 3 above that the ground at (I) is overarching, it is included in all the other grounds. Further, while the ground at (V) is consequential and that at (VI) is general and not pressed by the appellant during the course of appellant proceedings, these are not discussed in this order.

“5.1 As regards the grounds at (Ia), (IIb), (IIc), (IId) and (IIe), it is observed from the grounds of appeal that these relate to the disallowance u/s 14A r w Rule 8D made in the impugned order. It is observed therefrom that the AO has rejected the contention of the appellant towards the proposed disallowance of expenses u/s 14A on the strength of the meaning of Section 14A itself, its determination vide application of Rule 8D of the Income tax Rules 1962 and having placed reliance on the following judicial pronouncements - • CIT vs. United General Trust Ltd., 200ITR 455 (SC) • ITO Ward 6(2) Mumbai vs. M/s. Daga Capital Management Pvt. Ltd. IT A No. 8057/Mum/2003 • M/s. Maxopp Investment Ltd. vs. ACIT CIR 6(1), New Delhi IT A No. 1372/Del/2005 5.1 From a plain reading of Section 14A (1), it is clear that the objective behind the provision is to disallow only such expense which is relatable to tax-exempt income and not expenditure in relation to any taxable income. While there is no doubt that the method for determining amount of expenditure in relation to income not includible in total income is available in Rule 8D of the Income tax Rules 1962 [inserted by IT (Fifth Amdt.) Ruies2008 w.e.f. 24/3/2008], yet the intention of the legislature on this aspect is clear. The AO is required to first satisfy himself/herself before embarking on the disallowance u/s 14A r w Rule 8D.

DCIT vs. M/s Hero Corporate Services Pvt. Ltd.

Thus, while Section 14A of the IT Act stipulates that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act, it also places a duty on the AO to determine the amount of such expenditure incurred, in accordance with the prescribed method (Rule 8D), satisfaction of the AO regarding the assessee’s claim of expenditure or NIL expenditure. Further, the issue stands fairly settled (albeit the Revenue’s SLP has been admitted by the Apex Court) in view of the plethora of judicial pronouncements as under – � disallowance of expenses related to tax exempt income � satisfaction of AO, regarding claim of expenditure / nil expenditure disallowed by assessee from its books of accounts, compulsory � disallowance u/s 14A not automatic. AO to show nexus between tax exempt income and related expenditure � earning of tax exempt income necessary for determining disallowance u/s 14A � disallowance restricted to the quantum of tax exempt income received � Only net interest expenses on borrowed funds to be considered for disallowance u/s 14A 5.2 In the impugned order it is mentioned, inter alia, “...The Assessee company did not produce the specific documents in the shape of scripts of the Mutual Fund/Shares in all the cases of the investment made as appearing in the balance sheet so that the investments which are yielding exempt income or supposed to be yield exempt income in future years can be taken for the purpose of calculation disallowance u/s 14A r.w.r. 8D in the absence of those figures of the details of the script wise investment I am bound to calculate the disallowance by taking whole of the investments to protect the interest of the DCIT vs. M/s Hero Corporate Services Pvt. Ltd. revenue. Further, the assessee has itself detemnined the expenses u/s 14A at Rs. 15,42,508/-...The earning of exempt income is not in nature of passive activity having no input. In fact in present situation making of Investment, maintaining or continuing investment and time of exit from investment are well informed and well-coordinated management decisions involving not only inputs from various source but also acumen of senior management functionaries. Therefore, cost is inbuilt into even so called “passive” Investment. There are incidental expenditures of collection, telephone, follow up etc. Since in the present case, out of total funds available/raised by the assessee, a substantial portion of it amounting to Rs.1,01,78,47,180/- has been invested in Shares and mutual Funds, therefore, it can be held that expenditure in relation to earning of exempt dividend income are embedded in indirect expenses The investment to the extent of Rs.1,01,78,47,180/- made by the assessee company , being a conscious decision and having deployment of funds clearly brings into picture expenditure by way of cost of funds ‘Invested.” Composite fund having cost needs to be spread so as to apportion appropriate cost of funds invested in the activity lending to earning of exempt income…. The assessee company has total turnover of 49 Crores and total turnover of mutual funds is at Rs.101 crores. For both the turnover the major expenses related to turnover are audit expenses as the auditor of the company audited all the transaction expenses related to turnover are audited expenses as the auditor of the company audited all the transaction recorded in the books of account either for turnover of for sale of mutual funds. The assessee company has also incurred banking chargers for all the banking transactions which also included the transaction of mutual fund. The assessee company also incurred rental expenses of, personnel cost, depreciation, communication cost of etc. as reflected in accounts of the company. All the expenses are directly related to the volume of transactions and therefore the undersigned is proposed his hereby allocate all the above expenses on the DCIT vs. M/s Hero Corporate Services Pvt. Ltd. basis of turnover of the company for various items and for turnover of mutual funds...” 5.3 It can therefore be safely be inferred from the impugned order that the satisfaction of the AO for disallowance of expenses, in view of the presumed tax-exempt dividend income, u/s 14A of the Act is drawn from the fact that the appellant suo motu made a disallowance of Rs. 15,42,508/-. Also, there appears to have been no objective analysis of the appellant’s expense in this regard vis-a-vis its accounts. Only presumptions regarding possible common expenses have been taken as conclusion in the impugned order. Again, the legislative intent of Section 14A which is to disallow the expenditure in relation to income, which does not form part of total income-requires proper identification rather than disallowing all or proportionate interest and administrative expenses on an ad hoc basis. In fact, the AR’s version of the facts is borne out from records. Accordingly, in view of the extant law on the subject, presently settled by judicial precedents from the courts including the jurisdictional High Court (Delhi HC) • Maxopp Investment Ltd vs. CIT (A Y 2002-03) IT A no. 687/2009 (Del HC) • Cheminvest Ltd. vs. CIT (AY 2004-05) (2015) 61 taxmann.com 118 (Del HC) • Commissioner of Income Tax-IV vs. Holcim India Pvt. Ltd., IT A No. 486/2014 and 299/2014 • CIT vs. Taikisha Engineering India Limited IT A 115/2014 & 119/2014 dated 25/11/2014 (Del) • DCM Ltd. vs. DCIT, Circle 10 (1) New Delhi and Vice- Versa 2015 (9) TM11110ITAT Delhi • Joint Investments Pvt. Ltd. vs. Commissioner of Income Tax 372ITR 694 • CIT vs. Hero Cycles Ltd.[2010] 189 taxmann 50 (PUNJ. & HAR.)

DCIT vs. M/s Hero Corporate Services Pvt. Ltd. and in due deference to the aforementioned court decisions, I am inclined to agree with the contention of the appellant in this regard and delete the disallowance made u/s 14A of the Act (Rs.2,76,36,280/-) over and above made by the appellant (Rs. 15,42,508/-) in the impugned order.

5.4 Further, at the time of appeal hearing, the AR of the appellant sought for modification of its disallowance of Rs. 15,42,508/- u/s 14A made suo motu in its return of income as the date for filing the revised return was over. In this connection, the AR argued that the case regarding M/s. Goetze India in the apex court related to making a fresh claim of deduction before the AO. It is also gathered from available records that the submissions / arguments put forth by the AR of the appellant are borne out from records and in accordance with the extant law as promulgated by the jurisdictional High Court (Hon’ble Delhi HC). Further, I agree with the appellant’s contention on the point regarding admittance of a fresh claim of deduction by the first appellate authority as it is in sync with the extant provisions of the Act. Also, the first appellate authority under the Income tax Act 1961 still retains the character of an Income tax Officer especially with regard to adherence to the CBDT Circular No. 14 (XL-35) of 1955 dated 11 April 1955. The AR’s argument regarding withdrawal of its suo motu disallowance u/s 14A relying on the decision of the Gujarat HC in CIT vs. UTI Bank Ltd, 223 Taxman 157 (Guj) (Mag) appears plausible. The investment in group concerns and in funds yielding dividend income that is taxable is not required to be included while working out the disallowance of expenses u/s 14A in view of the court decisions cited supra. Accordingly, the suo motu disallowance made by the appellant towards Section 14A of the Act is reduced to NIL.”

5.1 A perusal of the above paragraphs from the order of the Ld. CIT(A) shows that while allowing complete relief to the assessee on DCIT vs. M/s Hero Corporate Services Pvt. Ltd. the issue of disallowance U/s 14A of the Act, the Ld. CIT(A) has completely ignored the observations of the Assessing Officer that the total turnover of the mutual fund was Rs.101/- Crores and that the major expenditure relating the turnover were audit expenses as the auditor of the company had audited all the transaction expenses relating to turnover. The Assessing Officer had also pointed out incurrence of banking charges for the banking transactions and also incurrence of rental expense, personnel cost, depreciation, communication cost etc. However, the Ld. CIT(A) did not consider these observations of the Assessing Officer as being relevant while allowing entire relief to the assessee company. A perusal of the impugned order also shows that the Ld. CIT(A) did not refer to any documentary evidences submitted by the assessee in this regard which the assessee would have relied upon to refute the observations of the Assessing Officer. There is also no bifurcation of income earned as tax free income and taxable income.

Thus, apparently the Ld. CIT(A) has accepted the contention of the assessee without giving a proper and thoughtful consideration to the issue before him. In such circumstance, we have no option but DCIT vs. M/s Hero Corporate Services Pvt. Ltd. to direct the Ld. CIT(A) to re-examine the issue before him and adjudicate the same after giving proper opportunity to the assessee to present its case.

6.0 In the final result, the appeal of the Department stands allowed for statistical purposes.

Order pronounced on 30th September, 2021.