TATA CAPITAL LTD,MUMBAI vs. ASST CIT 2(3), MUMBAI

2. The CIT(A) erred in referring the matter back to the ACIT for verification of proofs submitted during the appellate proceedings in support of the claim that the commission was actually paid to Automobiles P. Ltd. and IKON Solutions for services rendered.

3. The appellant craves leave to add, alter, amend, modify or delete any of the grounds taken in appeal.”

3. During the course of the assessment proceedings it was observed by the A.O that the assessee company had earned a dividend income of Rs.14,49,99,258/-, against which it had offered a disallowance under Sec.14A of Rs.54,86,307/-. It was the claim of the assessee that as the investment in the exempt income yielding assets was made out of the companies own funds, therefore, no part of the interest expenditure was liable to be disallowed under Sec.14A of the Act. In support of its aforesaid contention, the assessee had placed on record a fund flow statement. Apart there from, it was the claim of the assessee that the borrowings were used for advancing loans and earning interest therefrom. Accordingly, it was submitted by the assessee that a reasonable amount of salary and other over heads were attributed for earning of the exempt dividend income and resultantly disallowed under Sec. 14A. However, the A.O after deliberating on the contentions advanced by the assessee was not persuaded to subscribe to the same. It was observed by the A.O, that though the increase in the share capital and reserves was only Rs. 103.56 crores, however, the increase in the investments amounted to Rs.2,224.60 crores. Accordingly, the A.O was of the view that the investments made by the assessee were funded from the interest bearing funds raised by way of loans. On the basis of his aforesaid observations, the A.O held a conviction that there was a direct correlation between the investments and the loan funds. It was observed by him that out of the total increase in the investments, the increase in the investments made in mutual funds amounted to Rs.1544.63 crores, while for the balance increase was in respect of quoted and unquoted shares. On the basis of his aforesaid deliberations, the A.O called upon the assessee to correlate the investments with the bank statements so that it could be ascertained as to whether the interest bearing loans were used wholly and exclusively for the purpose for which they were raised or they had been diverted for making investments yielding tax free income. In reply, the assessee filed a fund flow statement. However, the A.O observing that while there was only an increase of Rs.103.56 crores of the share capital funds, the increase in the interest P a g e | 4 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) bearing loans taken and the investments made was manifold. Apart there from, it was noticed by him, that as the assessee had mixed funds, therefore, the possibility of utilisation of interest bearing funds for making of exempt income yielding investments could not be ruled out. Accordingly, the A.O was of the view that the assessee had failed to establish that the interest bearing loans were not utilised for making investments in exempt income yielding assets. As such, the A.O invoked the provisions of Sec.14A r.w.Rule 8D and worked out the disallowance at Rs.146,82,00,000/-, as against the disallowance of Rs.45,86,307/- offered by the assessee in its return of income. Resultantly, an amount of Rs.146,27,13,693/- was added for working out the total income of the assessee as per the normal provisions. Also, the disallowance worked out under Sec. 14A r.w. Rule 8D was added for computing the „book profit‟ of the assessee company under Sec. 115JB of the Act. However, the A.O vide his order passed u/s 154 of the Act, dated 11.01.2012, revised the disallowance u/s 14A at Rs. 71,37,00,000/-. Also, the „book profit‟ u/s 155JB was revised at Rs. 73,04,59,165/-.

4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Observing, that the assessee even in the course of the appellate proceedings could not establish that the investments yielding exempt income were made out of its own funds, therefore, the CIT(A) was of the view that the assesses funds were fungible. Accordingly, the CIT(A) found favour with the disallowance made by the A.O under Sec. 14A r.w. Rule 8D (as rectified under Sec.154). However, the CIT(A) directed the A.O to exclude the amount of the investments made by the assessee in its subsidiary company at Singapore, for the reason, that the same had yielded taxable income.

5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the orders of the lower authorities in context of the issue under consideration. It was submitted by the ld. A.R, that the assessee had earned a dividend income of Rs.14,49,99,258/-, against which it had offered a suo motto disallowance u/s 14A of Rs.54,86,307/- in its return of income. It was submitted by the ld. A.R that both the lower authorities had erred in failing to appreciate that for the purpose of computing the disallowance under Sec. 14A only the investments yielding tax free income were to be considered. It was further submitted by the ld. A.R, that the disallowance of Rs.146,82,00,000/- made by the A.O under Sec.14A was P a g e | 5 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) thereafter reduced by him to an amount of Rs. 71,37,00,000/-, vide his order passed under Sec. 154 of the Act. It was submitted by the ld. A.R, that as the assessee had sufficient own funds to justify the investments made in the exempt income yielding assets, therefore, no disallowance of any part of the interest expenditure was called for in its hands. In support of his aforesaid contention the ld. A.R had relied on the judgment of the Hon‟ble High Court of Bombay in the case of the CIT-2, Mumbai, Vs. HDFC Bank Ltd. (2014) 360 ITR 505 (Bom). Insofar, the disallowance of the administrative expenses made by A.O by attributing the same for earning of exempt dividend income by the assessee was concerned, it was submitted by the ld. A.R that the A.O had dislodged the disallowance that was voluntarily offered by the assessee u/s 14A in its return of income, without recording any dissatisfaction as regards the correctness of the claim of the assessee. It was averred by the ld. A.R, that the disallowance made by the A.O under Sec. 14A without arriving at a dissatisfaction as regards the correctness of the claim of the assessee on the basis of its accounts, as were placed before him, was not sustainable in the eyes of law. In support of his aforesaid contention, the ld. A.R had relied on the judgment of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). It was submitted by the ld. A.R, that the Hon‟ble Apex Court had observed that where the determination of the disallowance under Sec. 14A is to be made by applying the formula prescribed under Rule 8D or in the best judgment of the assessing officer, what the law postulates is the requirement of a satisfaction in the assessing officer that having regard to the accounts of the assessee, as placed before him, it was not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It was submitted by the ld. A.R, that the Hon‟ble Apex Court had observed that it is only after recording of a satisfaction by the A.O that the correctness of the claim of the assessee could not be accepted, that the provisions of Sec. 14A(2) and (3) r.w. Rule 8D or a best judgment determination as was earlier prevailing, would become applicable. The ld. A.R in support of his aforesaid contention also relied on the orders of the coordinate benches of the Tribunal viz. (i) M/s Taurian Engineering Pvt. Ltd. Vs. ITO-17(1)(1), Mumbai (ITA No. 7239/Mum/2016, dated 25.04.2018); (ii) Anshull Speciality Molecules Ltd. Vs. DCIT, Central Circle-6(3) (ITA No. 4436/Mum/2016, dated 13.06.2018); and (iii) ACIT-2(3), Mumbai Vs. M/s Tata Capital Ltd. (ITA No. 1688/Mum/2012, dated 09.05.2017). On the basis of his aforesaid contentions, it was P a g e | 6 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) averred by the ld. A.R, that the disallowance under Sec.14A may be restricted to the extent the same was offered by the assessee in its return of income for the year under consideration.

Opening Closing (in lacs) Balance Balance (i) The amount of expenditure directly relating to 0 income which does not form part of total income (ii) In case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula A Amount of expenditure by way of interest other 60,675 than the amount of interest included in clause (i) incurred during the previous year B The average value of investment, income from 295866 73406 184,636 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 1194828 433665 814,247 balance sheet of the assessee, on the first day and the last day of the previous year A X B/C 13,758 (iii) 0.5% of the average of the value of investment, 923 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 P a g e | 7 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) and the last day of the previous year DISALLOWANCE U/S. 14A (i) + (ii) + (iii) 14,682 As such, the A.O had worked out a disallowance under Rule 8D(2)(ii) of Rs.13,758 lacs and under Rule 8D(2)(iii) of Rs.923 lacs. A perusal of the order passed by the A.O reveals, that he had worked out the disallowance of the interest expenditure under Rule 8D(2)(ii), for the reason, that the assessee in the course of the assessment proceedings had failed to correlate its bank statements with the investments, as a result whereof, the fact that the loan funds were used wholly and exclusively for the purpose for which the same were taken and had not been diverted for making investments in tax free income yielding assets could not be ascertained. In fact, the A.O was of the view that the „onus‟ cast upon the assessee to produce the bank statements/bank books to establish that interest bearing loans were not utilised for making of investments yielding exempt income, was not discharged. We find that the ld. A.R had filed before us a „chart‟ in support of his claim that it had sufficient own funds for making of investments in exempt income yielding assets, and no part of the interest bearing funds were utilised for the said purpose. A perusal of the „chart‟ reveals as under:

Particulars Amt. (Rs. in Amt. (Rs. in lacs) lacs) Total investments as at 31.03.2009 295,866 (Refer page 22 of the paper- book-Financials) Less: Investments yielding taxable income: (5,644) 1. Investment in shares of foreign subsidiary Tata Capital Pte ltd.

2. Investment in Bonds and Debentures (1,000) 12.5% Steel Strips Wheels Ltd. ( 1) Indian Hotels Company Ltd.

3. Investment in Pass Through Certificates (7,293) Auto Securities 4. Investment in quoted Govt. securities (962) 5. Investment in units of Mutual Funds (Growth Scheme) (1,77,500) (1,92,400) (1,03,466) Total investments generating exempt income as at 31.03.2009 [Refer page 5 of the paper-book- submissions before CIT(A)] Owned Funds as at 31.03.20009 [Refer page 22 of the paper-book-Financials] 208,762 2,11,050 Share Capital 2,288 Reserves and Surplus P a g e | 8 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) On the basis of the aforesaid facts canvassed by the ld. A.R before us, we find, that it is the case of the assessee that the self owned funds available with it were sufficient enough to justify the investments made in the exempt income yielding assets. We find substantial force in the contention of the ld. A.R, that where the assessee has own funds and other non-interest bearing funds, which were more than investments made in the tax free securities, then no disallowance of any part of the interest expenditure under Sec. 14A r.w. Rule 8D(2)(ii) was liable to be made in its hands. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT-2 Ltd. Vs.HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The Hon‟ble High Court in its aforesaid order while concluding as hereinabove, had observed as under:

debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs.313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs.398.19 crores. In view thereof, it was submitted that from the analysis of the balance-sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under :-

If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.

“Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.” We are of the considered view that in the case before us, the A.O had failed to satisfy the statutory requirement of arriving at a satisfaction, that having regard to the accounts of the assessee, as placed before him, it was not possible for him generate the requisite satisfaction with regard to the correctness of the claim of disallowance made by the assessee under Sec. 14A. We are also not persuaded to subscribe to the claim of the ld. D.R, that as the disallowance by the assessee under Sec. 14A was on an estimate basis and not by way of a debit to any expenditure account, therefore, there was no obligation on the A.O to have recorded his satisfaction as to why the claim of the assessee was not to be accepted. We are of the considered view that the A.O remained under an obligation to have recorded the reason as to why he was not satisfied with the claim of the assessee, and he ought to have made a mention of the reasons leading to his dissatisfaction. In fact, we are of a strong conviction, that in case the A.O was not satisfied with the claim of disallowance of the assessee under Sec. 14A, then it was obligatory for him to have recorded cogent reasons which had led to such dissatisfaction on his part. We are of the view that as the A.O had failed to record the requisite satisfaction, therefore, the very assumption of jurisdiction by him for dislodging the claim of disallowance made by the assessee and substituting the same by the amount worked out as per the method prescribed in Sec. 14A r.w Rule 8D cannot be sustained and is liable to be vacated. We thus set aside the disallowance of Rs. 923 lacs made under Sec. 14A r.w. Rule 8D(2)(iii) by the A.O and sustained by the CIT(A). Accordingly, in terms of our aforesaid observations, the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(ii) in respect of the interest expenditure is restored to his file for fresh adjudication, in terms of our aforesaid observations. As for the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), the same in the absence of any dissatisfaction recorded by the A.O as P a g e | 12 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) regards the correctness of the claim of the assessee as regards attribution of a part of the administrative expenses for the purpose of earning of the exempt dividend income, the addition therein made by the A.O stands vacated. The Ground of appeal

No. 1 raised by the assessee is allowed in terms of our aforesaid observations.

9. It was submitted by the ld. A.R that as the disallowance made by the A.O of the commission paid to M/s Galaxy Automobiles Pvt. ltd. & M/s IKON Solutions had been deleted by the A.O while giving effect to the order passed by the CIT(A), vide his order dated 03.03.2014, therefore, the Ground of appeal No.2 is not being pressed.

10. The Ground of appeal No. 3 being general is dismissed as not pressed.

11. The appeal of the assessee is partly allowed in terms of our aforesaid observations. ITA No. 1098/Mum/2013 A.Y. 2009-10

12. We shall now advert to the appeal of the revenue. The revenue has assailed the order passed by the CIT(A) on the following grounds of appeal:

“On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:

1. 1. The order of the CIT(A) is opposed to law and facts of the case.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the professional fees paid to Mr. Arata Nambu without any substantial proof without appreciating the fact that the assessee could not furnish proof in support of its claim.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in setting aside the issue in Ground No.4 of appeal thereby ignoring the amended provisions of section 251 as setting aside is not allowed with effect from 01.06.2001.

4. For these and other grounds that may be urged at the time of hearing, the decision of CIT(A) may be set aside and that of the A.O restored.”

13. The ld. D.R at the very outset had assailed the deletion of the disallowance of the professional fees of Rs.43 lacs that was claimed by the assessee to have been paid to Mr. Arata Nambu. The ld. D.R drawing our attention to the assessment order in context of the aforesaid issue, submitted, that the assessee had claimed that the aforesaid amount was paid to Mr. Arata Nambu for the consultancy services which were rendered by him to the assessee company in Japan. It was submitted by the ld. D.R, that as the assessee had failed to place on record any evidence of services rendered by Mr. Arata Nambu, therefore, the aforesaid P a g e | 13 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) expenditure of Rs.43 lacs which was debited in the profit and loss account was disallowed. It was averred by the ld. D.R, that the CIT(A) had grossly erred in summarily vacating the aforesaid disallowance without appreciating the facts in the right perspective. Apart there from, it was submitted by the ld. D.R, that the CIT(A) was also in error in setting aside the issue as regards the disallowance of commission that was claimed by the assessee to have been paid to M/s Galaxy Automobiles Pvt. Ltd. and IKON Solutions, to the file of the A.O. It was the claim of the ld. D.R, that as the CIT(A) subsequent to 01.06.2001 was not vested with any power to „set aside‟ an issue to the file of the A.O, therefore, he had clearly erred in traversing beyond the limited scope of his jurisdiction as was vested with him under Sec.251 of the Act 14. Per contra, the ld. A.R submitted, that the professional fee of Rs. 43 lacs was paid by the assessee company to Mr Arata Nambu for the services which were provided by him as an overseas advisor in Japan for exploring opportunities for the assessee in the overseas market. It was submitted by the ld. A.R, that the said person had created the awareness about the assessee company and its products, and also coordinated on behalf of the assessee with the Japanese business contacts. In order to fortify his aforesaid claim that the abovementioned person viz. Mr. Arata Nambu had rendered services to the assessee, the ld. A.R took us through the relevant pages of the assesses paper book (for short „APB‟) viz. Page 104 – 110, which clearly revealed the correspondences of the aforesaid person viz. Mr. Arata Nambu with the assessee company, nature of payments remitted to him, declarations made by the assessee under the FEMA Act, 1999 etc. As regards the grievance of the revenue, that the CIT(A) had exceeded his powers in restoring the issue as regards the commission claimed by the assessee to have been paid to M/s Galaxy Automobile Pvt. Ltd. & M/s IKON Solutions, it was submitted by the ld. A.R, that the assessee had furnished the complete supporting documentary evidence, and the CIT(A) after perusing the same had only forwarded it to the A.O for making necessary verifications. Accordingly, it was submitted by the ld. A.R that no infirmity did emerge from the order of the CIT(A), who remaining well within the realm of his jurisdiction, had merely restored the matter with a specific direction to the A.O to allow the assesses claim of deduction after making necessary verifications of the documents which were furnished by the assessee before him.

P a g e | 14 & 1098/Mum/2013 AY. 2009-10 Tata Capital Limited Vs. Asst. Commissioner of Income Tax-2(3) 15. We have given a thoughtful consideration to the issue before us in the backdrop of the contentions advanced by the authorized representatives for both the parties. As regards the disallowance of the professional fees of Rs.43 lacs claimed by the assessee to have paid Mr. Arata Nambu, an unrelated Japanese citizen, is concerned, we find substantial force in the claim of the ld. A.R that the said payments were made to him for the services which were rendered by him as a business advisor. As is discernible from the documentary evidence to which our attention was drawn by the ld. A.R, it can safely be gathered, that the aforesaid person had rendered his services as an overseas advisor in Japan, and had explored opportunities in the overseas market for the assessee. We find substantial force in the claim of the ld. A.R that the payments made to the said person were for the services which were rendered by him viz. creating awareness about the assessee company and its products amongst the foreign parties, supporting it in its marketing efforts, arranging meetings with Japanese business contacts, and also assisting in translation and supplying of information. We find that the aforesaid documentary evidence which had been relied upon by the ld. A.R to support the aforesaid claim of expenses debited by the assessee in its profit and loss account for the year under consideration, had neither been dislodged by the lower authorities, nor anything proving to the contrary had been placed on our record by the ld. D.R in the course of the hearing of the appeal. Accordingly, finding no force in the claim of the revenue that the CIT(A) was in error in deleting the disallowance of the consultancy charges of Rs.43 lacs that was paid by the assessee company to Mr. Arata Nambu, we uphold his order to the said extent.