KOTAK ALTERNATE OPPERTUNITIES(INDIA)FUND,MUMBAI vs. ACIT, 17(2), MUMBAI

Briefly the facts are, the assessee is stated to be a irrevocable trust established under the Indian Trust Act. The objective of the assessee is to primarily invest into and hold as long term investments, privately negotiated instruments and term loans and advances in portfolio companies in the real estate sector so as to achieve long term capital appreciation. As per the trust deed, the assessee invests in equity, quasi equity and equity related instruments issued by portfolio companies operating within the investment objective of the fund. For the assessment year under dispute, assessee filed its return of income on 30-07-2013 declaring total income at Rs.35,36,06,013/-. As observed by the Assessing Officer, during the year under consideration, the assessee did not carry out any business activity. However, it had income under the head “Income from other sources” as well as long term capital gain, besides exempt income. The details of such income earned by the assessee are as under:- Nature of Income Amount (Rs.) Interest income from Debentures 42,75,54,197 Interest on bank fixed deposits 61,70,936 Dividend on Portfolio investments 1,31,39,574 Dividend on current investment 7,19,81,047 Gain on sale / redemption of portfolio investments – shares 18,08,84,485 Gain on sale / redemption of current investments - Debentures 14,64,50,203 Total 86,41,80,443 As against income earned ofRs.84,61,80,843/-, the assessee claimed expenditure under various heads aggregating to Rs. 30,07,72,878/-. Out of the total expenditure, the assessee apportioned an amount ofRs.27,62,69,137/- towards earning of interest and other investment income which was offered to tax. Further, the assessee disallowed an amount of Rs.2,05,92,611/- under section 14A of the Act, being expenditure attributable to earning of exempt income. In course of assessment proceedings, the Assessing Officer called upon the assessee to justify the apportionment of expenditure for earning exempt income. Though, the assessee submitted that disallowance made under section 14A of the Act is the expenditure relatable to earning of exempt income; however, the Assessing Officer was not convinced. He observed, various expenditures, such as, fee paid to asset management company (AMC) have not been properly apportioned between the investment made for earning exempt income and other investments. He observed, due diligence of the AMC is attributable for identifying the investment opportunity for investment in equity shares. Therefore, out of the total expenses incurred by the assessee for engaging the services of AMC, he apportioned 45.60% towards investment in equity shares and the balance 54.31% towards investment in debentures.

Shri Farrokh V Irani, the learned Counsel appearing for the assessee submitted, the assessee being a fund, basically undertakes investment activities and in the process has invested both in equity share yielding exempt income as well as in FDRs, debentures, etc. giving rise to taxable income. He submitted, in the return of income assessee has computed disallowance of expenditure under section 14A of the Act for earning the exempt income. He submitted, in the note attached to the computation of total income, the assessee has very clearly provided the basis of computation of disallowance under section 14A of the Act r.w.r. 8D. He submitted, the Assessing Officer, on purely estimate basis, has apportioned a part of fee paid to AMC towards expenditure for earning exempt income. He submitted, while doing so, the Assessing Officer has treated it as a direct expenditure under rule 8D(2)(i) for earning exempt income. He submitted, when the Assessing Officer has failed to establish any direct nexus between the expenditure incurred towards AMC and the exempt income earned and the apportionment has been done purely on estimate basis, it could not have been disallowed under rule 8D(2)(i). Further, he submitted, the Assessing Officer himself has accepted the disallowance made by the assessee under rule 8D(2)(ii). Therefore, on merits, the disallowance made by the Assessing Officer under rule 8D(2)(i) is unsustainable. He submitted, merely because assessee did not contest such disallowance, it cannot be held against the assessee and lead to automatic initiation of penalty proceeding. He submitted, the reason for not contesting the disallowance is only for the purpose of not entering into litigation which could have delayed the fund. He submitted, not only in the return of income, but in course of assessment proceedings, the assessee has furnished full particulars not only of income earned by the assessee but also the expenditure incurred. He submitted, the manner/mode of computation of suo motu disallowance under section 14A of the Act was also furnished before the Assessing Officer. Therefore, the assessee cannot be accused of furnishing inaccurate particulars of income. He submitted, at best, whether the disallowance made under rule 8D(2)(i) is sustainable or not is a highly debatable issue. Therefore, no penalty can be imposed on the basis of such disallowance, notwithstanding the fact that the assessee has accepted such disallowance. Finally, the learned Counsel submitted, in the preceding assessment years, though, similar disallowances were made, however, no penalty proceedings were initiated. In this context, he drew our attention to the assessment orders passed for Assessment Years 2009-10 to 2012-13. He submitted, in case of one of assessee’s sister concerns, learned Commissioner (Appeals) has deleted penalty imposed under section 271(1)(c) of the Act by holding that the disallowance under section 14A of the Act is a debatable issue. Further, the learned Counsel for the assessee relied upon the following decisions:- (1) CIT Vs. Reliance Peroproducts (P) Ltd.[2010] 322 ITR 158 (SC) (2) Dilip N Shroff Vs. JCIT [2007] 161 Taxman 218 (SC) (3) Robust Transportation Pvt Ltd Vs. DCIT, dated. 23.08.2018. (4) Sir Shadilal Sugar & General Mills Ltd Vs. CIT, [1987] 33 Taxman 460A (SC)

The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, the assessee has deliberately not included fee paid to the AMC as direct expenditure while computing disallowance under section 14A of the Act r.w.r. 8D in the computation of total income. Further, he submitted, the very fact that the assessee has not contested the disallowance made by the Assessing Officer proves that the assessee has furnished inaccurate particulars of income. Thus, he submitted, the penalty imposed has to be sustained. 6 We have considered rival submissions in the light of decisions relied upon and perused the materials on record. Undisputedly, though, in the assessment order the Assessing Officer has initiated proceedings for imposition of penalty under section 271(1)(c) of the Act for both the limbs i.e. furnishing of inaccurate particulars of income and concealment of income, however, in the penalty order passed under section 271(1)(c) of the Act, he has ultimately held that “assessee has furnished inaccurate particulars of income”. Thus, it is evident, the Assessing Officer himself was convinced that the assessee has not concealed its income. Having said so, it is a fact on record that the disputed addition on the basis of which penalty under section 271(1)(c) has been imposed relates to disallowance made under section 14A of the Act r.w.r. 8D. On perusal of facts on record it is clearly revealed that in the computation of total income filed along with the return of income, the assessee has disallowed an amount of Rs.2,05,92,611 under section 14A of the Act r.w.r 8D(2)(iii) and in note.10 attached to the computation of total income, the assessee has provided the basis for such computation. In the assessment order, the Assessing Officer has noted the total expenditure claimed by the assessee during the year as under:- Particulars Amount (Rs.) Management Fee 28,94,28,749 Professional Fee 79,04,743 Trustee Fee 16,85,400 Printing and stationery 2,49,211 Auditors’ remuneration: - Audit Fees 9,25,000 - Out of pocket expenses 13,490 - Others 1,50,000 Rates and taxes 1,34,537 Misc Expenses 2,53,568 Custodian charges 28,180 Total 30,07,72,878

As noted at paragraph 4.1 of the assessment order, as against income of Rs.43,37,25,133/- under the head “Income from other sources”, the assessee has claimed expenditure of Rs.27,62,69,137/-. Further, expenditure of Rs.19,61,50,029/- was claimed against income under the head ‘Capital gains”. As far as the balance expenditure is concerned, the assessee itself has disallowed Rs.16,85,400 towards trusteeship fee; Rs.34,01,390/- towards loss on sale of investments; Rs.1,568/- towards bad debt; Rs.28,180/- towards custodian charges and Rs.2,05,92,600 under section 14A of the Act. It is further evident, out of the various expenses claimed, the Assessing Officer has only picked up the expenditure incurred towards engaging the AMC and apportioned it between exempt income yielding investment and taxable income yielding investment. Further, while doing so on purely estimate basis, he has apportioned 45.69% towards investment in exempt income yielding asset and 59.38% to taxable income yielding investment. Interestingly, the amount of Rs.13,66,39,477/-,being 45.69% apportioned to exempt income yielding investment, has been disallowed under rule 8D(2)(i) by treating it as direct expenditure incurred for earning the exempt income. When the Assessing Officer has apportioned the aforesaid expenditure purely on estimate basis, we fail to understand how it can be treated as direct expenditure for earning the exempt income as per rule 8D(2)(i). A direct expenditure, as contemplated under rule 8D(2)(i), is an expenditure which must have direct and proximate nexus with the exempt income earned. It cannot be some expenditure which has to be computed on apportionment basis. For such kind of disallowance, the legislature has put in place Rule 8D(2)(ii) and (iii). Admittedly, the Assessing Officer has accepted the suo motu disallowance made by the assessee under rule 8D(2)(iii) at Rs.2,05,92,611/-.

Though, at this stage, we are not called upon to decide the merits of the disallowance made by the Assessing Officer under section 14A r.w.r. 8D, however; we have to examine whether such disallowance made by the Assessing Officer can lead to the conclusion that assessee has furnished inaccurate particulars of income so as to visit it with penalty under section 271(1)(c) of the Act. In this context, we find substantial force in the submissions of the learned Counsel for the assessee. When the disallowance under rule 8D(2)(i) r.w.s. 14A of the Act has been made on a purely estimate basis, that too, without establishing any direct/proximate nexus with the exempt income earned, in our considered opinion, the assessee cannot be accused of furnishing inaccurate particulars of income. Merely because the assessee has not contested the disallowance in appeal, for that reason alone assessee cannot be automatically visited with penalty under section 271(1)(c) of the Act. In case of CIT vs Reliance Petroproduts Pvt Ltd (supra), the Hon’ble Supreme Court, while dealing with the issue of imposition of penalty on the basis of disallowance made under section 14A of the Act has observed that when the assessee had furnished all the details of its expenditure as well as income in its return which were not found to be inaccurate, it cannot lead to furnishing of inaccurate particulars of income merely because the claim made by the assessee was not accepted by the department. In case of Sir Shadilal Sugar & General Mills Ltd vs CIT (supra), the Hon’ble Supreme Court has held that merely because the assessee agreed to certain addition, it will not follow that the assessee concealed income relating to such addition. At this stage, we must observe, irrespective of the fact whether or not the assessee has accepted the disallowance, in our considered view, the validity of the disallowance made under rule 8D(2)(i) is a highly debatable one on which more than one view is possible.

We may further observe, proceedings relating to imposition of penalty under section 271(1)(c) of the Act being a completely independent and separate proceeding from the assessment proceeding, an appellate authority would not be strictly bound by the decision taken in the assessment order, but would be free to examine and evaluate all facts and materials afresh to find out whether a case of furnishing of inaccurate particulars of income is made out. In the present case, for the reasons stated hereinabove, we hold that a case of furnishing of inaccurate particulars of income has not been made out against the assessee. As pointed out by the learned Counsel for the assessee and noted by us, though, similar disallowances were made by the Assessing Officer in preceding assessment years and accepted by the assessee, however, no penalty proceedings for imposition of penalty under section 271(1)(c) of the Act was initiated by the Assessing Officer. Though, nothing much turns on this, however, it clearly shows that while making disallowances under section 14A of the Act in similar manner in the preceding assessment years, the Assessing Officer was convinced that the assessee had not furnished inaccurate particulars of income.

In view of the aforesaid, we delete the penalty imposed under section 271(1)(c) of the Act.

In the result, appeal is allowed.