THE ACIT, CENTRAL-1, INDORE vs. M/S. ARIHANT CAPITAL MARKETS LTD., INDORE

IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER

ITA No.370/Ind/2017 Assessment Year: 2013-14

ACIT Circle 1, Indore ::: Appellant Vs M/s Arihant Capital Markets Ltd. Indore ::: Respondent C.O. No. 17/Ind/2018 Arising out of ITA No. 370/Ind2017

M/s Arihant Capital Markets Ltd. Indore ::: Objector Vs ACIT Central 1 Indore ::: Respondent

Revenue by Shri K.G. Goyal Assessee by Shri Ajay Tulsiyan & Shri Kapil Shah Date of Hearing 18.5.2018 Date of Pronouncement 31.5.2018

ORDER PER MANISH BORAD, AM

The revenue has filed the appeal whereas the assessee has

filed the cross objection relating to the assessment year 2013-14

against the order of the learned Commissioner of Income Tax

(Appeals)-I, Indore, dated 28.2.2017 arising out of the order u/s

143(3) of the Income Tax Act dated 15.3.2016 framed by the DCIT

1(1), Indore.

of appeal :-

(i) “On the facts and in the circumstances of the case, the learned

CIT(Appeals) erred in restricting the disallowance made by A.O.

u/s 14A of the Income Tax Act read with Rule 8D of the Income

Tax Rules to 0.05% without appreciating the facts and

evidences brought into light by the A.O. during assessment

proceedings.

(ii) “On the facts and in the circumstances of the case, the learned

CIT(Appeals) erred in deleting the addition made by the A.O. of

Rs. 1,62,098/- on account of disallowance of penalty and

Rs.15,508/- on account of disallowance of prior period

expenses without appreciating the facts and evidences brought

into light by the A.O. during assessment proceedings.”

In Cross Objection the assessee has taken the following grounds :-

“(i) The learned CIT(A) erred in confirming the addition u/s 14A to

the extent of Rs. 5,77,013/-. That on the facts and in the

circumstances of the case, the disallowance confirmed is wrong

and uncalled for.

(ii) The learned CIT(A) erred in confirming the addition of Rs.

1,99,500/- out of prior period expenses made by the learned

A.O. That on the facts and in the circumstances of the case, the

disallowance confirmed is wrong and uncalled for.”

for not pressing both the grounds raised in cross objections. The

learned DR has no objection. We, therefore, dismiss the grounds

raised in cross objection of the assessee.

1 relating to disallowance u/s 14A of the Act read with Rule 8D,

briefly stated the facts are that the assessee declared income of

Rs.3,14,87,710/- in the return of income filed for the assessment

year 2013-14 on 26.9.2013. Case selected for scrutiny and

necessary notices u/s 143(2) and 142(1) of the Act duly served

upon the assessee. The Assessing Officer on going through the 3

financial statements observed that the assessee has made

investments in quoted/unquoted shares and also incurred

expenditure on interest. However, no expenditure has been

disallowed u/s 14A of the Act. The Assessing Officer accordingly

applying the method provided under Rule 8D of the Income Tax

Rules read with section 14A of the Act made disallowance of Rs.

52,26,627/- which comprised of interest disallowance of Rs.

42,64,143/- and disallowance for administrative expenses of Rs.

9,62,484/-.

assessee went in appeal before the learned Commissioner of Income

Tax (Appeals) and majorly succeeded as the learned Commissioner

of Income Tax (Appeals) deleted total disallowance for interest

expenditure and sustained administrative expenditure disallowance

of Rs. 5,77,013/-.

Assessing Officer and further heavily relied upon the judgment of

the Hon'ble Apex Court in the case of Maxopp Investment Limited

vs. CIT; 101 CCH 0092.

findings of the learned Commissioner of Income Tax (Appeals) and

further added that no expenditure was incurred in relation to

earning exempt income. The investments were made out of the own

capital and reserves and the assessee has no effective borrowing on

the contrary it had huge bank balance. The assessee has earned net

interest income at the close of the year and there is a direct nexus

of interest expenditure with the earning of taxable income. It was

also submitted that major investments were brought forward from

earlier years and they majorly included unlisted shares of

subsidiary companies which never yielded any income. The learned

counsel for the assessee also differentiated the facts of the

assessee’s case with the facts eminating in the case of Maxopp

Investment Ltd. (supra) which mainly focused on the point that in

the case of Maxopp Investment Ltd. (supra) case, the investments

were made out of the borrowed funds on which interest expenditure

was incurred whereas in the case of the assessee investments were

made out of own capital and reserves and, hence, no interest was

incurred in respect of such investment. Reliance was placed on the

judgment of Hon'ble Bombay High Court in the case of CIT vs.

Reliance Utilities & Power Limited; 313 ITR 340 and another

judgment of Hon'ble Bombay High Court in the case of HDFC Bank

Ltd.; 366 ITR 505. The learned counsel for the assessee further

placed reliance on the following judgments :-

A For the proposition that if both funds are available with the assessee that is interest bearing and interest free, then the presumption would arise that investment would be out of interest free funds available with the company, if the same are sufficient to meet the investments. (i) Decision of Honorable High Court of Bombay in the case of 99 – 104 CIT v/s. M/s. Reliance Utilities & Power Ltd. (2009) 313 ITR 0340 (ii) Decision of Honorable High Court of Bombay in the case of 105 – 109 CIT V/s HDFC Bank Ltd 366 ITR 505 (2014).

B While apportioning interest expenditure under Rule 8D(2)(ii), interest expenditure incurred for earning taxable income should be excluded from consideration. Decision of Honorable High Court of Delhi in the case of Pr 110 – 116 CIT vs Bharti Overseas Pvt Ltd [TS-5584-HC-2015] (2016) 237 Taxman 0417 (Delhi)

C Only investments yielding exempt income ought to be considered. The Honourable Delhi High Court in the case of ACB India Ltd v/s ACIT [(2015) 374 ITR 0108 (DEL)] has held that for the purpose of Rule-8D, only those investments shall be considered which have actually yielded exempt income during the relevant previous year. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered.

D In respect of the investments made in unlisted subsidiaries companies which never generated any exempt income – For the proposition that when no exempt income is earned disallowance u/s 14A is not called for. Decision of Honorable High Court of Delhi in the case of M/s. Cheminvest Limited v/s. CIT (2015) 378 ITR 0033 (Delhi). Reversing the decision of the Special Bench of the Tribunal it was held that where no exempt income has been received by the assessee in the previous year, disallowance under section 14A of the Act is not warranted. The High Court has further held that reliance placed by the Special Bench on the decision of the Supreme Court in the case of Rajendra Prasad Moody was misplaced in as much as the Supreme Court in the said case dealt with the interpretation of section 57(iii) of the Act, which is an allowance provision and the same would, therefore, not apply with respect to interpretation of section 14A of the Act, which is for computing disallowance of expenditure incurred in relation to earning of exempt income. Decision of Honorable High Court of Allahabad in the case of CIT v/s. M/s. Shivam Motors (P) Ltd. (2015) 230 Taxman 0059 (Allahabad). “Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, 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 the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, corresponding expenditure could not be worked out for disallowance u/s 14A”. Decision of Honorable High Court of Delhi in the case of CIT v/s. M/s. Holcim India P. Ltd. (2014) 90 CCH 0081 Del HC. Relying upon on the decision rendered by the Punjab and Haryana High Court in CIT Vs. M/s. Lakhani Marketing Incl. ITA No. 970/2008, in which the Honorable court has made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 and held that Section 14A cannot be invoked when no exempt income was earned. Redington India Ltd. V/s Addl. CIT (2016) 97 CCH 0219 203 – 208 (Chennai) Overruling the Circular 5 of 2014 in respect of 14A – held that the provision of section 14A r.w.r. 8D cannot be made applicable in a vacuum i.e. in the absence of exempt income. Decision of Honorable Gujarat High Court in CIT Vs. Corrtech Energy (P.) Ltd. [(2015) 372 ITR 0097 (Guj)

E For the proposition that the disallowance is not tenable where the AO did not recorded proper satisfaction. Decision of Honorable High Court of Calcutta in the case of 120 – 121 CIT Central – II v/s. M/s. REI Agro Ltd. GA No. 3022 of 2012 ITAT 161 of 2013 dated 23.12.2013. Decision of Honorable ITAT Kolkatta Bench in the case of 122 – 133 DCIT v/s. M/s. REI Agro Ltd. in ITA No. 1811/Kol/2012 dated 14.05.2013. Decision of Honourable High court of Punjab & Haryana in 134 – 143 the case of Pr. CIT V/s Empire Package (P) Ltd. (2016) 136 DTR 0342 (P&H)

F Circular no. 5 of 2014 dated 11.02.2014 overruled. Redington India Ltd. V/s Addl. CIT (2016) 97 CCH 0219 203 – 208 (Chennai)

available on record and have also gone through the judgments

referred to and relied upon by both the parties. The issue before us

is with regard to disallowance u/s 14A which relates to

disallowance of expenditure incurred for earning exempted income.

The total disallowance made by the Assessing Officer u/s 14A of the

Act ofRs. 52,26,627/- comprised of two items –

(i) Under Rule 8D(2)(ii) Indirect interest expenses Rs.42,64,143/-

(ii) Under rule 8D2(iii) other expenses Rs. 9,62,484/-

9. First of all, we would like to deal with the interest disallowance

of Rs.42,64,143/-.

balance sheet at page 5 of the paper book are summarised as

follows :-

S.No. Particulars 31.03.2013 31.03.2012

2 Investment in 6,37,42,726 12,70,62,695 Quoted shares 3 Investment in 4,00,00,000 - quoted units Grand Total 18,08,89,206 20,41,04,175 (1+2+3)

11. The assessee earned dividend income of Rs.38,46,571/-

during the year. Total interest expenditure incurred during the year

is Rs.2,04,36,402/- and the interest income from FDRs and other

sources is Rs.5,79,73,438/- thereby showing net interest income of

Rs. 3,75,37,036/-. The assessee has also taken working capital

loan on which interest expenditure has been incurred. The above

chart clearly shows that the investments during the year majorly

consists of investments in unquoted equity shares as well as shares

of subsidiary companies valued at Rs.7,71,46,480/-.

reserve surplus totaling Rs. 50.86 crores and Rs. 51.67 crores

approximately as on 31.3.2012 and 31.3.2013, respectively. These

accumulated capital and reserves are much more than the

investments made in the equity shares fetching exempted income.

As on 31.3.2012 and 31.3.2013 investment in quoted shares

fetching exempted income is Rs.12.71 crores (approx) and Rs. 6.37

crores (approx) which is not more than 20% of the total interest free

capital & reserves.

13. In the background of above facts, we observe that the learned

Commissioner of Income Tax (Appeals) deleted the interest

disallowance observing as under :-

“5. Ground No. 1 : This ground of the appellant is directed

against the disallowance of Rs. 5226627/- u/s 14A of the Act.

The detailed facts of the case as per the assessment order are

reproduced at Para No. 2 above and the detailed submissions of

the appellant are reproduced at Para No. 3 above.

5.1 On perusal of the assessment order it is seen that the A.O.

has rejected the contention of the appellant that no interest

bearing funds were utilised in making investments yielding

exempt income and such rejection is without considering the

detailed explanation of the appellant. From the material placed

on record which was also before the A.O. it is seen that the

major investments were made in the earlier years from own

funds and no borrowed funds were utilised in making these

investments. Further the investments made during the year

under consideration were also not made from borrowed funds.

The capital and reserve funds with the appellant stood at Rs.

51.66 crores as on 31.3.2012 and these were at Rs.52.44 as on

31.3.2013 while the Non Currente investments increased

marginally from 7.70 Cr to 7.71 Crore and the current

investments reduced from 12.70 Crore to 10.37 crore and the

stock in trade stood at Nil as on 31.3.2013 as against 6.81

crores as on 31.3.2012. The own capital and disposable

reserves far exceeded the investments. Majority of the

investments were made in the earlier year and as seen from the

appellate orders for A.Y. 2010-11 the investment in that year

was also only Rs. 78.98 lacs and in the appellate orders for both

A.Y. 2009-10 and 2010-11 it has been held that the investment

was far less than the own funds and therefore no interest

expense can be said to be incurred in relation to investment

earning exempt income. The only fresh investment made in

mutual funds for Rs. 4.0 crores during the year under

consideration was also established to have no nexus with the

interest bearing funds. These facts have not been repudiated by

the A.O. by placing any details establishing that this is not the

case. In view of the above it cannot be said that the investments

yielding exempt income if any were out of borrowed funds and 13

therefore interest qualified for disallowance u/s 14A of the Act.

Further asa per the extant legal position also it is held in the

case of CIT vs. Reliance Utilities And Power Ltd. (2009) 366 ITR

505 that if both funds are available with the assessee i.e.

interest bearing funds and interest free funds then the

presumption would arise that investment made would be out of

interest free funds available with the company, if the interest

free funds are sufficient to meet the investments and in view of

the above no presumption can be drawn in the absence of

definite material brought on record to show that the interest

bearing funds were utilised for investments earning exempt

income. No such definite material is on record to show that the

brought forward investments are out of interest bearing funds

and the investments made during the year are already

established to be out of interest free funds.

5.2 It is also to be noted that the appellant further explained

that interest income offered ofRs. 30929734/- is mainly received

from banks on FDRs and also interest of Rs. 27043704/-

received from its clients as deferred payment charges totaling to

Rs. 57973438/- whereas the interest payment of Rs.

20436402/- is on its working capital borrowings during the year

and the net interest income earned of Rs. 37537036/- has been

assessed as business income. The appellant as a broker of both

BSE and NSE has taken working capital limits to cater to the

pay-in and pay-out obligations of these exchanges. At the end of

the every trading session the appellant needs to meet out the

margins and payouts of the exchanges according to the open

positions taken by its customer. The customers generally pay the

amount to the appellant towards their outstanding in 3-4

working days whereas the appellant is required to pay to the

exchanges on regular basis. For this reason the ap-p hasa taken

working capital limits from bank and on utilisation of such limit

the appellant has incurred the interest expense. From the

sanction letter issued by the bank in respect of the overdraft

limit taken for working capital purpose by the appellant, it is

verifiable from the page 2 of the letter that the purpose of the

loant aken was “Working capital requirement/Stock Exchange

Obligations”. From the perusal of the security clause mentioned

on the same page it is apparent that the limit taken from banbk 15

was secured against the FDRs made and pledged by the

appellant. The overdraft facility taken by the appellant is

utilised only for pay outs on account of positions held by th

clients to stock exchange. The appellants interest cost on

overdraft against FDs is thus directly related to the core broking

business of the appellant. In view of the abvove it is thus evident

that the interest expenditure was outside the scope of section

14A of the Act. It has been held in the case of Pr CIT vs. Bharti

Overseas Pvt. Ltd.; 237 Taxmann 417 (2015) (Delhi) that while

apportioning interest expenditure under clause (ii) of Rule 8D(2)

of the Rules, interest expenditure incurred for earning taxable

income should be excluded from consideration.

5.3 The A.O. has further rejected the contention of the

appellant that no disallowance is called for when there is no

exempt income earned during the year. The A.O. has relied

primarily on the decision of the Special Bench of ITAT Delhi in

the case of Cheminvest Ltd. The said decision has been reversed

by the Delhi High Court by holding as under ;-

“(i) The expression “does not form part of the total income” in

section 14A of the envisages that there should be an actual

receipt of income which is not includible in the total income

during the relevant previous yeasr for the purpose of disallowing

only expenditure incurred in relation to the said income/. In

other words, section 14A will not apply if no exempt income is

received or receivable during the relevant previous year. The

decision of the Supreme Court in Rajendra Prasad Moody (supra)

was rendered in the context of allowability of deduction under

section 57(iii) of the Act, where the expression used is “for the

purpose of making or earning such income”. Section 14A of the

Act on the other hand contains the expression “in relation to

income which does not form part of the total income.” The

decision in Rajendra Prasad Moody cannot be used in the

reverse to contend that even if no income has been received, the

expenditure incurred can be disallowed under section 14A of the

Act.”

5.4 The A.O. has also rejected the contention of the appellant

that investments in shares of unlisted private limited subsidiary

companies/associate concerns and the shares held as stock in

trade are made out of commercial business expediency and does

not attract disallowance u/s 14A. Investments made in stock in

trade is not made for the purpose of earning of tax exempt

income in form of Dividend. The dividend income earned on the

shares held as stock in trade is incidental to its holding Dividend

declared by various listed companies is miscule in comparison to

their market rates and no investment is made with the intention

of earning such nominal dividend. In the case of CCI Ltd. vs.

JCIT (Kar) 206 Taxmann 563 it has been held that 14A does not

apply in respect of shares held as stock in trade. Disallowance

on notional basis is invalid “When no expenditure is incurred by

the assessee in earning dividend income, notional expenditure

cannot be disallowed u/s 14A. The assessee had not retained

shares with the intention of earning dividend. The dividend

income was incidental to the business of sale of shares which

remained unsold by the assessee. It canot be said that the

expenditure incurred in acquiring the shares had to be

apportioned to the extent of dividend income and that there

should be a disallowance u/s 14A”. 18

5.5 Considering the above discussion and keeping in view the

appellate decisions in the appellant’s own case for A.Y. 2009-10

and A.Y. 2010-11 as the facts for the year under consideration

are identical to the facts prevailing in the earlier years, the

disallowance worked out by the A.O. under section 14A read

with Rule 8D at Rs. 5226627/- is directed to be restricted to

0.05% of the average investments excluding the investment in

unquoted subsidiaries and also excluding the investment in

stock in trade which works out to Rs. 577013/-. This ground of

the appellant is therefore partly allowed.”

upon the judgment of the Hon'ble Apex Court in the case of Maxopp

Investment Ltd (supra). We, however, find force in the contention of

the learned counsel for the assessee that the facts of the assessee’s

case are altogether different from that of Maxopp Investment Ltd.

(supra). Both can be differentiated in the following manner :-

Sl. Facts of Maxopp Investment Facts of the Appellants No Ltd. and findings of the case and his contentions Hon’ble Supreme Court 1. Major investments were Here the major made in the shares of investment is in the 19

widely held quoted/ listed shares of closely held public limited group unlisted group company. companies, shares of which are not quoted. as the gains arising out of sale of such shares is taxable under the head of capital gains and the assessee has never earned any exempt income in respect of these investments. 2. Substantial dividend No dividend income income was earned from has been ever earned the investments in the by the assessee from shares of investee listed the investments in the group company. This shares of private dividend income was companies. In this claimed as exempt in scenario, the return of income. instigation of provision of section 14A in respect of such investment fails ab- initio. 3. In Maxopp the investment In the present case the was made out of borrowed investment was made funds on which interest out of own capital & expenditure was incurred. reserves and not out of borrowed funds hence no interest was incurred in respect of this investment. 4. The intent behind the In the present case

legislation in insertion of double benefit can section 14A was not to never arise to the permit the assessee Assessee as no double benefit of exempt dividend income was income on one hand and earned or accrued on deduction of expense on such shares and another (as observed in further any gain which para 3 and 6) may arise on the sale of such unquoted shares will accrue to the assessee in form of taxable income only.

On the basis of the above distinguishable facts of both the cases the

case of the assessee is clearly distinguishable on facts and is on a

much better footings than the case of Maxopp Investments Limited,

rather the observations of the Hon’ble Apex court further

strengthens the appellant’s contention in so far as that the

disallowance can be contemplated only when exempt income is

earned and there is some expenditure incurred. The Honourable

Supreme Court also upheld its own findings rendered in CIT v/s

Wallfort Shares & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1 (SC)

that the basic principal of taxation is to tax the net income and on

the same analogy the exemption is also in respect of net income

entailing that when there is no exempt income, disallowance is not

attracted.

Hon'ble Apex Court cannot be applied to the facts of the assessee’s

case because it is well evident that the borrowed funds have not

been utilised for the purpose of making investments in shares and

securities. It has also been consistently held by various Hon'ble

Courts that if the assessee possesses sufficient capital and reserves

as well as interest free funds and if there is no finding by the

revenue authorities that interest bearing funds have been applied

for investing in shares and securities, it has to be presumed that

the assessee has invested its own capital and reserves i.e. interest

free funds for making the investments. We find support from the

judgment of ther Hon'ble High Court of Bombay in the case of

Reliance Utilities (supra) and HDFC Bank (supra). We, therefore,

respectfully following the above judgments of the Hon'ble Courts,

are of the considered view that the learned Commissioner of Income

Tax (Appeals) has rightly deleted the interest disallowance of Rs.

42,64,143/-.

16. As regards the disallowance of administrative expenditure of

Rs.9,62,484/-, we find no reason to interfere with the finding of the

learned Commissioner of Income Tax (Appeals) who has sustained

the addition of Rs. 5,77,013/- by keeping in view the investments

made in quoted shares as well as unquoted shares as well as

looking to the aspect that the assessee is engaged in the business of

purchase and sale of shares. We accordingly uphold the same.

deletion of addition of Rs. 1,62,098/- on account of disallowance of

penalty and Rs. 15,508/- on account of disallowance of prior period

expenses, the learned DR supported the observations of the

Assessing Officer whereas the learned counsel for the assessee has

relied upon the findings of the learned Commissioner of Income Tax

(Appeals). The learned counsel for the assessee also referred to the

decision of the Hon'ble High Court of Bombay in the case of CIT vs.

Stock & Bond Trading Company; ITA No. 4117 of 2010 wherein it

has been held that payments made to the stock exchange for

violation of their regulation are not on account of offence which is

prohibited by law and, hence, the invocation of Explanation to

section 37 of the Act is not justified.

available on record. The assessee paid penalty of Rs.1,62,098/-

levied by Stock Exchange for procedural defaults such a delay in

submission of return, etc. but nowhere it has been mentioned that

it is for infringement of any law. The learned Assessing Officer

disallowed this expenditure. However, the learned Commissioner of

Income Tax (Appeals) deleted the disallowance. From a perusal of

the finding of the learned Commissioner of Income Tax (Appeals) as

well as going through the submissions given by the assessee in the

light of the judgment of the Hon'ble High Court of Bombay in the

case of CIT vs The Stock & Bond Trading Company (supra), we are

of the considered view that the assessee made no offence prohibited

by law which can be contemplated to be covered under Explanation

to section 37 of the Act and, therefore, the payment of penalty made

by the assessee to the Stock Exchange is a regular business

expenditure and the impugned disallowance has rightly been

deleted by the learned Commissioner of Income Tax (Appeals). We

uphold the same.

prior period expenses by the learned Assessing Officer we find that

the payment related to service tax and the necessary proof of

payment was placed on record. Therefore, as the liability has

crystalised during the year, the learned Commissioner of Income

Tax (Appeals) has rightly allowed the assessee’s claim of

expenditure of Rs.15,508/-. No interference is, therefore, called for

in the findings of the learned Commissioner of Income Tax

(Appeals). We accordingly uphold the same. Revenue’s ground no. 2

is, therefore, dismissed.

the assessee stand dismissed.

Pronounced in open Court on 31st May, 2018.

Sd/- sd/- (KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER

31 May, 2018 Dn/- 25 Copy to – Appellant/Respodent/Pr.CIT/CIT(A)/DR/Guard File By order Private Secretary