BENGAL FINANCE & INVESTMENT P.LTD,MUMBAI vs. DCIT CIR 8(1), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER; 1. This set of three appeals, out of which two cross appeals for Assessment Year 2011-12 and third appeal by assessee for Assessment Year 2012-13 are directed against the order ld. Commissioner of Income Tax (Appeals)-16 [the ld. CIT(A), Mumbai dated 13.01.2016 & 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. 31.03.2016 for Assessment Year 2011-12 & 2012-13 respectively. The parties have raised common grounds of appeal. Thus, all appeals were clubbed and heard together and decided by a consolidated order to avoid the conflicting decisions. With the consent of parties, ITA No. 3976/Mum/2016 for Assessment Year 2012-13 was treated as lead case.

The assessee has raised the following grounds of appeal:

2. The Hon'ble Commissioner of Income Tax (Appeal) has erred in confirming the Order of Assessing Officer while calculating the 'Average Value of Investments', erred in taking the opening and closing value of Investments of Rs.1,37,34,68,089/- and Rs.2,94,62,54,452/ - respectively instead of the opening and closing value of Investments of Rs. 88,26,79,313/- and Rs. 1,66,22,60,632/- respectively as per the working of the appellant. It is submitted that the appellant has considered only those. Investments on which any exempt income is earned during the year under consideration. Further, it is submitted that the appellant has been consistently following this method which has been accepted in the earlier assessment years. 3. The Hon'ble Commissioner of Income Tax (Appeal) has erred in confirming the Order of Assessing Officer by disallowing the demat charges of Rs. 9,38,703/- as direct expenses incurred for the purpose of disallowance U/s 14A of the Income Tax Act, 1961. It is submitted that demat charges is incurred in relation to sale / purchase of the Gold / Silver and not related to any exempt Income. It is submitted that the hon'ble CIT (A) failed to consider the submission of the appellant and erred in stating that the appellant has not furnished any documentary evidence in support 2 , 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd.

of its claim. It is submitted that due to such act this has resulted in double taxation of the same amount as the amount of Rs. 9,38,703/- is already disallowed in the computation of total income. In view of the above facts, necessary direction should be given in this regard.

4. The Hon'ble Commissioner of Income Tax (Appeal) has erred in confirming the Order of Assessing Officer by disallowing the expenses by invoking U/s 14A of the Income Tax Act, 1961 while calculating book profit U/s 115jb of the Income Tax Act, 1961 without considering the facts and circumstances of the case. In view of the above facts, necessary direction should be given in this regard.

1. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition made by the assessing officer under section 14A of the Income-tax Act, 1961('Act') read with rule 8D of the Income Tax Rules, 1962. The Appellant therefore, submits that the addition made by the assessing officer be deleted.

2. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition made by the assessing officer by invoking section 14A read with rule 8D(2)(ii) without appreciating the fact that the Appellant had sufficient own funds and no part of the borrowed funds were utilized in making investments from which exempt income has been earned by the Appellant. Therefore, the Appellant submits that rule 8D(ii) cannot be invoked in its hands and hence, the addition made by the assessing officer be deleted.

, 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd.

During the assessment, the Assessing Officer noted that assessee- company is holding investment in various scrip/fund and in partnership firm, income from which is not includable in total income. The Assessing Officer further recorded that the assessee held investment in equity shares worth Rs. 83.34 crore at the end of year, it held the said equity shares investment worth Rs. 294.62 crore. In addition, the assessee also held a capital of Rs. 49 crore in a partnership firm. The assessee earned tax free exempt income of Rs. 3.05 crore, which consist of dividend of Rs. 2.94 crore and Long Term Capital Gain of Rs. 10.56 lakhs. The assessee made a suo-motu disallowance under section 14A of Rs. 86,67,731/-. The Assessing Officer on perusal of Audit Report in Form 3CD noted that Auditor has worked out the disallowance under section 14A at Rs. 77.29 lakhs which consists proportionate interest component of Rs. 13.66 lakhs as per Rule 8D(2)(ii) and as per Rule 8D(2)(iii) Rs. 63.62 lakhs being .5% of average value of investment of Rs. 127.24 crore. Thus, the Assessing Officer noted the different working of assessee vis-à-vis the Tax Audit Report. The assessee was 4 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. issued show-cause notice why disallowance should not be made in accordance with Rule 8D. The assessee filed its reply dated 01.09.2014 and stated that only those investments need to be taken into consideration on which the assessee earned exempt income during the year. The assessee claimed that the disallowance under section 14A needs to be restricted to Rs. 13.57 lakhs only.

The relevant part of order of Assessing Officer is reproduced below:

“3.4 Thus, having regard to the accounts of the assessee company of the previous year relevant to A.Y. 2012-13, the undersigned is not satisfied with the correctness of the assessee’s claim. Accordingly, the amount of expenditure disallowance u/s. 14A of the Act in relation to such income is hereby determined in accordance with the provisions of Rule 8D of the Income Tax Rules, 1962 as under:

(i) The amount of expenditure Demat charges Rs. 9,38,703/- directly relating to income which does not form part of total income (ii) Proportionate of interest (AXB/C) Rs.23,19,768/- expenditure computed in accordance with the formula given in Rule 8D(2)(ii) (iii) Amount equal to one-half 0.5% of Rs.1,07,99,306/- percent of the average of the Rs.215,98,61,271 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 5 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. the last day of the previous year. Total Expenditure disallowed u/s. 14A Rs.1,40,57,777/- Note (i) A= Interest (finance cost) = Rs. 43,68,256/- (ii) B = Average of exempt income bearing investments = Rs. 215,98,61,271/- (iii) C = Average of total assets appearing in the Balance Sheet on the first and last day of the previous year = Rs. 406,71,779/- B Average value of investments – [figures taken from Note No.9 annexed to the financial statements] = Opening balance of investments + Closing balance of investments 2 [883468089 + 490000000] + [ 2946254452 + 1] 2 = Rs. 215,98,61,271/- 3.5 Thus, the amount of expenditure attributable to the activity of investments, income from which is not includible in total income of the assessee-company, is hereby determined in accordance with Rule 8D of the Income Tax Rules, 1962 at Rs. 1,40,57,777/-. Thus, considering the voluntary disallowance to the tune of Rs. 86,67,731/- [ 988703 + 1357738 + 6371290], the balance sum of Rs. 53,90,046/- is hereby disallowed u/s. 14A and the same is added to the income of the assessee-company.

5. The Assessing Officer also increased the books profit under section 115JB on disallowance made under section 14A. Aggrieved by the action of Assessing Officer, the assessee filed appeal before the ld. CIT(A). The ld. CIT(A) given partial relief of interest expenditure of Rs. 28,537/- under the disallowance of Rule 8D(2)(ii). Thus, further aggrieved by the order of ld. CIT(A), the assessee filed the present appeal before us.

. It was further submitted that no additional facts are required to be brought on 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. record for considering the additional grounds of appeal. All facts relating to adjudication of additional grounds of appeal which relates to addition/disallowance under Rule 8D(2)(ii) are already available on record of the lower authorities. In support of his submission, the ld. AR of the assessee relied upon the decisions of Hon’ble Supreme Court in Jute Corporation of India [187 ITR 688 (SC)] and National Thermal Power Corporation vs. CIT [229 ITR 383].

7. On the other hand, the ld. DR for the revenue submits that the assessee for the first time has raised the grounds of appeal and raised the plea that they have sufficient funds to make the investments and no part of borrowed funds were utilized in making investment from which exempt income has been earned by the assessee. The ld DR submits that in case the additional grounds of appeal are admitted the grounds may be restored to the file of assessing officer for verifications of facts and adjudication of the issues raised by way of additional grounds of appeal.

8. We have considered the submission of both the parties and find that the main ground of appeal raised by assessee relates to disallowance under section 14A. The additional ground of appeal raised by assessee also relates to one of the components of disallowance under section 14A r.w.r 8D. Considering the contention of both the parties, we are of the view that no additional facts or evidence is required to be brought on ITA No. 3976, 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. record for adjudication of additional ground. Therefore, we admit the additional ground of appeal raised by assessee.

9. On merits, the ld. AR of the assessee submits that ground no.1, 2 & 5 are interconnected grounds of appeal, if the assessee is granted relief on ground no.2, the ground no. 1 & 5 will become academic. The ld. AR of the assessee submits that the lower authorities erred in considering the average value of investment by taking opening and closing value of investment of Rs. 137.34 crore and Rs. 294.62 crore, instead of opening and closing value of investment of Rs. 88.26 crore and Rs. 166.22 crore respectively as per the working of assessee on which the assessee earned the exempt income. The ld. AR of the assessee submits that assessee considered only those investments on which exempt income is earned during the period under consideration. The assessee has been consistently following this method which has been accepted in all earlier Assessment Years. In support of his submission, the ld. AR of the assessee relied upon the decision Special Bench of Delhi Tribunal in CIT vs. Vireet Investments Pvt. Ltd. [(2017) 82 taxmann.com 415 (Del.

Trib.) (SB)].

is allowed for statistical purpose.

13. Since we have granted relief to the assessee on ground no. 2, therefore, as per the contention of ld. AR of the assessee, the adjudication on ground no. 1 & 5 have become academic.

14. Ground No.3 relates to disallowance of DMAT charges. The ld. AR of the assessee submits that he is not pressing this ground of appeal.

Considering the submission of ld. AR of the assessee, this ground of appeal is dismissed.

15. Ground no.4 relates to adjustment of book profit on disallowance of section 14A. The ld. AR of the assessee submits that this ground of 9 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. appeal is covered in favour of assessee by the decision of Special Bench of Delhi Tribunal in Vireet Investment Pvt. Ltd. (supra), wherein it was held that computation under clause-(f) of Explanation-1 to section 115JB is to be made without resorting to computation as contemplated under section 14A r.w.r 8D.

16. On the other hand, the ld. DR for the revenue supported the order of lower authorities.

17. We have considered the submission of both the parties and found that this ground of appeal is squarely covered in favour of assessee by the decision of Special Bench of Delhi Tribunal in Vireet Investment Pvt. Ltd. (supra), wherein it was held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. Therefore, the Assessing Officer is directed to make the computation of book profit under section 115JB afresh by following the decision of Special Bench of Delhi Tribunal in Vireet Investment Pvt. Ltd. (supra).

18. In the result, ground no.4 is allowed.

19. The additional ground of appeal relates to disallowance under Rule 8D(2)(ii). The ld. AR of the assessee submits that assessee had sufficient interest free funds available and that no interest bearing fund was invested for making investment for earning exempt income. The ld. AR of the assessee submits that the assessee under Reserve and Surplus of 10 ITA No. 3976, 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. more than Rs. 400 crore as on 31.03.2012, which are more than the investment made during the relevant perios and therefore, no interest disallowance under Rule 8D(2)(ii) is warranted.

for the first time; hence, this ground of appeal may be restored to the file of Assessing Officer to examine and verify the facts and to decide it afresh.

21. We have considered the submission of both the parties and gone through the orders of authorities below. We have noted that the assessee has raised this plea before the Tribunal for the first time while raising the additional ground of appeal. Therefore, in all fairness, we deem it appropriate to restore the plea/issue to the file of Assessing Officer to examine the facts and records and to pass the order /disallowance under Rule 8D(2)(ii) in accordance with law after considering the submissions of the assessee made hereinabove. Needless to order that before passing the order the assessing officer shall grant opportunity of hearing to the assessee. Hence, this ground of appeal is allowed for statistical purpose.

22. In the result, appeal of the assessee is partly allowed.

ITA No. 2975/Mum/2016 for A.Y. 2011-12 23. The assessee has raised the following grounds of appeal:

1. The Hon'ble Commissioner of Income Tax (Appeal) has erred in confirming the Order of Assessing Officer by considering the value of 'Current Account' balance of Rs.48,90,00,000/ - with partnership firm 11 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd. while working out the' Average Value of Investments' while calculating the amount of disallowance U/s. 14A of the Income Tax Act, 1961 read with Rule 8D.

2. The Hon'ble Commissioner of Income Tax (Appeal) has erred in confirming the Order of Assessing Officer of disallowance at Rs. 92,98,995/- u/s 14A of the Income Tax Act, 1961 r.w.r. 8D(2)(iii) without considering the fact that actual expense claimed by the Appellant being Rs.45,14,435/- during the year under consideration.

3. The Hon'ble Commissioner of Income Tax (Appeal) has erred in confirming the Order of Assessing Officer while calculating the 'Average Value of Investments', erred in taking the opening and closing value of Investments of Rs.2,34,61,30,240/- and Rs.1,37,34,68,089/- respectively instead of the opening and closing value of Investments of Rs.3,90,82,818/- and Rs.1,40,56,76,529/- respectively as per the working of the appellant. It is submitted that the appellant has considered only those Investments on which any exempt income is earned during the year under consideration. Further, it is submitted that the appellant has been consistently following this method which has been accepted in the earlier assessment years 24. Further, the assessee has raised the following grounds of appeal:

2. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition made by the assessing officer by invoking section 14A read with rule 8D(2)(ii) without appreciating the fact that the Appellant had sufficient own funds and no part of the borrowed funds were utilized in making investments from which exempt income has been earned by the Appellant. Therefore, the Appellant submits that rule 8D(ii) cannot be invoked in its hands and hence, the addition made by the assessing officer be deleted.

, 2975 & 2580 Mum 2016-M/s Bengal Finance & Investment Pvt. Ltd.

3. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the assessing officer by making an addition of Rs. 2,08,84,099/- by invoking provisions of section 14A of the Act while calculating 'book profits' under section 115JB of the Act. the Appellant thus, submits that the action of the assessing officer is bad in law and deserves to be reversed. 25. We have noted that Ground No.2 of this appeal is identical to the Ground No.2 of appeal for A.Y. 2012-13 which we have allowed for statistical purpose by following the decision of Vireet Investment Pvt. Ltd. (supra). Therefore, following the principle of consistency, this ground of appeal is also allowed with similar direction.

ITA No. 2580/Mum/2016 for A.Y. 2011-12

(a) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in considering the interest expenses at Rs. 11,97,061/- while computing the disallowance u/s 14A of the Act, thereby ignoring the fact that the assessee itself computed the disallowance on its own by taking interest expenses of Rs. 2,89,27,097/- in the return of income." (b) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in considering the interest expenses at Rs. 11,97,061/- instead of Rs. 2,89,27,097/- ignoring the fact that the term "expenditure" occurring in Section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial."

Therefore, adjudication on the grounds of appeal raised by revenue has become infructuous.

Order pronounced in the open court on 25/09/2019.