SRI KSSV FINVEST PRIVATE LIMITED, HYDERABAD,HYDERABAD vs. ITO, WARD-3(3), HYDERABAD, HYDERABAD

PER S. RIFAUR RAHMAN, A.M.:

This appeal filed by the assessee is directed against the order of CIT(A) – 3, dated 30/08/2016, Hyderabad for AY 2012-13.

2.1 During the course of assessment proceedings, the AO asked the A.R of the assessee to show-cause as to why the provisions of section 14A read with Rule 8D(2) should not be invoked since the assessee company earned dividend income and income from units of

2 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. mutual funds aggregating to Rs.21,63,996/- which is exempt as per the provisions of section 10 of the I.T. Act, 1961. The AR of the assessee filed written submissions during the course of hearing conducted on 12.01.2015, the relevant portion of which reads as follows: "It is submitted that there is no disallowable expenditure uls 14A of the IT Act since the investment in shares and mutual funds was not made out of borrowed funds and no direct expenditure can be attributable to earning of dividend (exempt) income. It is further submitted that there is no interest payment made on account of borrowed funds. Therefore disallowance of expenditure is not warranted uls 14A r.w.r. 8D."

2.2 The AO rejected the above submissions of the assessee for the reason that on verification of financial statements for the previous year relevant to A.Y 2012-2013, the other expenses debited to profit and loss account (Schedule 16 to profit and loss account) are found to have nexus and proximate connection with earning of dividend income and other exempt income since substantial funds were invested in various companies towards share capital and in units of mutual funds. The average value of investments worked out to Rs.12,96,15,109/-.

2.3 In view of the above observations as well as referring to the provisions of section 14A and relying on the decision of Kerala High Court in the case of CIT Vs. State Bank of Travancore, 203 Taxmann 639 and in the case of Bellwether Microfinance Fund in ITA No. 1743/Hyd/2013, dated 22/06/14, computed the disallowance u/s 14A rwr 8D at an amount of Rs. 6,48,076/-, which is 0.5% of Rs. 12,96,15,109/-.

3 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. 4. Before the CIT(A), the assessee filed written submissions, in which, it was stated that the AO did not record his satisfaction with reference to accounts and correctness of claim of expenses, therefore no disallowance u/s 14A can be made. Even if any disallowance is to be made, the same should be restricted to 5% of the expenses. It was submitted that the decision in the case of Bellwether Microfinance Fund (supra) does not apply to assessee’s case as the issue of satisfaction u/s 14A was not the subject matter of that appeal.

4 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. Rs.6,48,076/- out of expenses of Rs. 33,31,803/- (44,31,803 - 11,00,000), whereas he mechanically applied Rule 8D(2)(iii) rws 14A of the I.T. Act without reaching satisfaction. 3. Learned CIT(A) has also erred in holding that substantial funds were invested and expenses claimed has proximate nexus with earning of Dividend income. This is against the facts of the case because no expenditure was incurred to receive or earn Dividend income, all the funds invested being own funds. Dividends get directly credited in the Bank a/c of the assessee and no expenditure is incurred for the purpose. 4. Learned CIT(A) has erred in coming to the conclusion that observation of the A.O. that substantial funds were invested and expenses claimed has proximate nexus with earning of Dividend indicates satisfaction on the part of the A.O, under Sec. 14A of the I.T. Act LW.S Rule 8D whereas A.O. has not indicated only such satisfaction. 5. Assuming that the observations of the A.O. amount to his satisfaction u/s 14A r.w.s Rule 8D, learned CIT (A) has erred in holding that substantial investments of own funds has any nexus with any of the items of expenses claimed. The two are totally unconnected. 6. For these and any other Grounds that may be raised at/before the time of hearing, it is prayed that the disallowance made by the A.O, and upheld by the Learned CIT(A) be kindly deleted. 6.1 The assessee has also raised the following additional grounds before us, relying on the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Vs. CIT, 229 ITR 382:

“Without prejudice to the grounds of appeal originally raised 1. Computation of disallowance under Rule 8D(2)(iii) at Rs. 6,48,076/- is not legally correct because the value of investments in shares from which exempt income does not form part of the total income has also been included in the computation. 2. AO is not legally correct in adding any disallowance u/s 14A for computing Book Profits u/s.115JB.”

5 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. following the decision of Hon’ble Supreme Court in the case of National Thermal Power Co., Limited Vs. CIT 229 ITR 383 (SC), we admit the said additional grounds of assessee.

6 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; In particular, the notes for ‘B’ clearly states that the average value of investment, income from which does not or shall not form part of the total income. It is clear that we have to include those investments which has generated income and exclude those investments, which have not generated income. In the present case, AO had taken the total investment instead of those investments, which have generated income. Accordingly, we direct the AO to calculate the disallowance of interest as below ( as per rule 8D): Interest X Investment( which generated income) Average total assets The main reason is that as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which is exempt from tax. The relevance is the expenditure in relation to income. The quantification has to be undertaken in relation to the exempt income. The investment which has not generated exempt income should be excluded from the calculation of ratio to determine the disallowance. 11.2 Similarly, for the administrative expenses, 0.5% of average investments from which the exempt income is received should be considered instead of average of the total investments. 11.3 considering the above discussion, we direct the AO to recalculate the disallowance as per rule 8D as per the above guidance. Accordingly, ground raised by assessee is allowed.” As the issue under consideration is materially identical to that of the said case, following the conclusions drawn therein we direct the AO to recalculate the disallowance as per rule 8D as per the guidelines given as above in the case of Transport Corporation of India and calculate the disallowance of expenditure under rule

7 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. 8D(2)(iii) taking the average investment from which the exempt income is received.” Following the above decision, we direct the AO to calculate the disallowance under rule 8D(2)(iii) in line with the above decision and it is in line with the decision of special bench decision of ITAT, Delhi Bench in the case of ACIT Vs. Vireet Investment P. Ltd., in ITA No. 502/Del/2012 and C.O. No. 68/Del/2014. Accordingly, 1st additional ground raised by the assessee is allowed for statistical purposes.

10.1 With regard to 2nd additional ground regarding disallowance u/s 14A for computing book profits u/s 115JB, AO has made addition in calculating book profit u/s 115JB of the Act. We find that on similar ground, the ITAT, Ahmedabad Bench in the case of M/s Torrent Pvt. Ltd. in ITA Nos. 737 & 1671/Ahd/2012, vide order dated 13/04/2018 has held as under:

“After the careful analysis of the issue involved, we are of the opinion that the book profit has to be computed as per the audited books of accounts maintained by the appellant and the audited results which have been approved in the A.G.M. by the shareholders. Only those adjustments can be made to the approved book profit which are specifically mentioned in the Income Tax Act. Any notional adjustment in the book profit is not permissible. The facts of the case are also identical to the judgment of ITAT, Ahmedabad in the case of Gujarat State Energy Generation Ltd.(supra) and therefore respectfully following the judgment of ITAT, Ahmedabad, the disallowance made by the A. O. as per Clause F to the explanation of Section 115JB is directed to be deleted. The ground of appeal is allowed." 10.2 Hon’ble Mumbai ITAT Benches in the case of DCIT Vs. Viraj Profiles Limited ITA No. 4439/Mum/2013 Assessment year 2008-09 vide order dated 21.10.2015, has held as under: “We have observed that Section 115JB of the Act starts with non-obstante clause 'Notwithstanding anything contained in any other provision in this act..." meaning thereby that the Section 115JBshall be applicable notwithstanding anything contained in any other provision of the Act and shall have over-riding effect upon other provisions of the Act. The Section 115JB stipulates

8 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. payment of Minimum Alternate tax based upon the book profit computed as per provisions of Section 115JB(2) of the Act. Book Profit shall be computed as per Section 115JB(2) of the Act which stipulate that Book Profit means net profit as shown in Profit and Loss Account prepared for financial year in accordance with Part II and III of Schedule VI to the Companies Act,1956 , also complying with other conditions as stipulated in Section 115JB(2) of the Act . Such book profit has to be increased by item Nos. (a) to (k) of the said Explanation 1 to Section 115JB of the Act if they are debited to the Profit and Loss Account and from such profit item Nos. (i) to (viii) of the Explanation are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous years. The explanation 1 clause (f) to Section 115JB(2) of the Act stipulate that amount of expenditure relatable to any exempt income, other than Section 10(38) of the Act, is liable to be added back to net profit shown in Profit and Loss Account if the amount referred to therein is debited to Profit and Loss Account. Now, we refer to Section 14A of the Act which reads as under: "Expenditure incurred in relation to income not includible in total income

For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of the total income under this Act.] The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed90, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]"

9 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. Perusal of Section 14A of the Act provides that it mandates disallowance of expenditure 'in relation' to the income which does not form part of the total income under the Act while clause (f) in explanation1 to Section 115JB (2) of the Act mandates disallowance of expenditure 'relatable' to the income to which Section 10 (other than Section 10(38) of the Act) or Section 11 or Section 12of the Act applies . The close perusal of the both the above provisions reveals that more or less similar language is used in both the afore- stated provisions. The dividend income is declared on the share investment which is exempt u/s 10(33) of the Act (not Section 10(38) of the Act) . We also note that the clause (f) to explanation 1 to Section 115JB(2) of the Act requires expenditure relatable to the exempt income to be disallowed provided the same is debited to Profit and Loss Account while Section14A(2) of the Act mandates that if the AO is not satisfied with the correctness of the claim of the assessee with regard to the expenditure incurred by the assessee in relation to the income which does not form part of the total income , then disallowance shall be computed in accordance with the prescribed method. Rule 8D of Income Tax Rules, 1962 prescribes the method for computing disallowance of expenditure in relation to earning of exempt income . The said Rule 8D of Income Tax Act,1961 is a machinery provision to compute disallowance of expenditure u/s 14 A of the Act in relation to the income which does not form part of the total income and is held to be applicable w.e.f. assessment year 2008-09 as held by Hon'ble Bombay High Court in Godrej and Boyce Manufacturing Limited(supra) decision . The impugned assessment year under appeal in present case is also assessment year 2008-09 and hence Section 14A of the Act read with Rule 8D of Income Tax Rules,1962 is applicable. It is axiomatic to assume that the amount computed under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 shall have no reference to the amount debited to the Profit and Loss Account and there cannot be any disallowance u/s 14A of the Act unless the expenditure is debited to Profit and Loss Account and hence disallowance u/s 14A is always a part of expenditure debited to the Profit and Loss Account. In the instant case under appeal, the AO has disallowed the expenditure of Rs. 73,07,018 computed u/s 14A of the Act read with Rule 8D of Income Tax Rules , 1962 for computing normal taxable income which is upheld by the CIT(A) in the first appeal and the same amount of expenditure of Rs. 73,07,018/- is added to compute book profit u/s 115JB of the Act which is computed u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962.” Respectfully following the proposition laid down by the Hon’ble Tribunal we direct the AO to make the addition of the amount of disallowance under section 14A of the Act read with rule 8D of

10 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd. Income Tax Rules 1962 to the total income of the assessee under the normal provisions and under the provisions of the MAT as specified under section 115JB of the Act. Hence this ground of appeal of the assessee is partly allowed. In the given case, AO disallowed u/s 14A applying rule 8D(2)(iii), which is based on presumption that assessee must have utilized the resources for earning the exempt income. Therefore, there is no direct impact on the P&L A/c maintained by the assessee. Hence, AO cannot make addition while determining book profit. Accordingly, respectfully following the above said decisions, we direct the AO to delete the disallowance made u/s 14A for computing book profit u/s 115JB. Accordingly, 2nd ground of additional ground is allowed. 11. In the result, appeal of the assessee is allowed. Pronounced in the open Court on 24th July, 2019.

Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 24th July, 2019 kv

Copy to:- 1) Shri KSSV Finvest Pvt. Ltd., 3rd Floor, Mohans Plaza, Plot No. 733, Road No. 36, Jubilee Hills, Hyderabad – 500 033 2) ITO, Ward – 3(3), Signature Towers, Kondapur, Opp. Botanical Gardens, Hyderabad 3) CIT(A) – 3, Hyderabad. 4) Pr. CIT - 3, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File

11 ITA No. 1591/Hyd/16 Sri KSSV Finvest Pvt. Ltd., Hyd.

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