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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
अपीलाथाी की ओर े / Appellant by : S/Shri Nitesh Joshi, Milin thakore & Jayesh Desai, ARs प्रत्यथाी की ओर े / Respondent by : Shri Rajeev K Gubgotra Smt Amrita Ranjan, DRs’ ुिवाई की तारीख / Date of hearing: 07.06.2019 घोर्णा की तारीख / Date of pronouncement : 03.09.2019 A a d o S a / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM: This appeal by the assessee is arising out of the Revision order of Pr. Commissioner of Income Tax [in short PCIT] Mumbai in Appeal No. Nil dated 21.03.2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle 2(3), Mumbai (in short ACIT/ AO) for AY 2009-10 vide dated 30.01.2014 under section 143(3) read with section of the Income-tax Act, 1961 (hereinafter ‘the Act’).
2. This appeal by assessee is against the revision order passed by PCIT -2, Mumbai revising the assessment on the issue of disallowance of expenses relatable to exempt income under section 14A of the Act read with Rule 8D of the Rules and on account of interest on loan given to Associate Enterprises (AE) and not considering the exchange rate prevailing at the end of the year to compute the additional interest income on loan extended to AE by setting aside the early average rate used by the Transfer Pricing Officer. As regards to the disallowance of expenses relatable to exempt income, the issues raised by assessee vide ground No. A as under: - “A. 14A Disallowance r.w.r. 8D: 1. On the facts and the circumstances of the case and in law, the learned Pr. CIT erred in directing to consider all investments which are capable of earning exempt income, irrespective of whether any income was earned or not in respect of these investments in the year under consideration.
On the facts and the circumstances of the case and in law, the learned Pr. CIT erred in not realizing that investment made in Subsidiaries, joint ventures and Associates are of strategic in nature and are of long term investments and no expenses were incurred for maintaining the portfolio of these investments or holding the same.
On the facts and the circumstances of the case and in law, the learned Pr. CIT erred in not appreciating that assessee's own funds were more than 6 time of average equity investments leading to exempt income which implies that no fund had been borrowed for these investments. 4. On the facts and the circumstances of the case and in law, the learned Pr. CIT erred in relying on CBDT Circular No.5 of 2014 dated 11th February, 2014. CBDT Circulars are binding on Authorities in the Administration of the Act and not on the Appellate Authorities, Tribunal, Court or Assessee.;” 3. The issue as regards to the disallowance of interest on loan given to its AE and applying the exchange rate in recasting loans, the assessee has raised the following ground No. B: - “B. Exchange rate in recasting loans:
1. On the facts and the circumstances of the case and in law, the learned Pr. CIT erred in passing order under section 263 of the Act by ignoring that the assessee has already preferred an appeal with respect to addition proposed by learned AC on account of interest on loan given to associated enterprise ("AE"). Thus order passed by the learned CIT contravenes the provision contended in clause C of Section 263 (1) and bad in law and shall be quashed.
2. On the facts and the circumstances of the case and in law, the learned Pr. CIT erred in acting beyond his jurisdiction and erred in passing the order under section 263 without issuing proper show cause notice and without justifying that how the order passed by the learned AO is erroneous and prejudicial to interest of revenue.
3. Without prejudice to the ground that order passed by the learned Pr. CIT is bad in law, beyond his jurisdiction and shall be quashed, the learned CIT erred in considering the exchange rate prevailing at the end of the year to compute the additional interest income (being litigated and under appeal) on loan extended to the AE by setting aside the yearly average rate used by the learned Transfer Pricing Officer (learned IPO").;”
The first issue in this appeal of assessee is as regards to the proposed disallowance in the revision order passed by PCIT under section 263 of the Act of expenses relatable to exempt income. Briefly stated facts are that the assessee claimed exempt income at ₹100,79,83,051/- on investment of ₹4274.77 crores, which claimed to be taxed free investments. The assessee has not made any disallowance of expenditure related to exempt income. The AO in the original assessment order under section 143(3) read with section 14C(3) of the Act vide order dated 30.01.2014 computed the disallowance under Rule 8D(2)(i) of the Act at nil, under Rule 8D(2)(ii) being interest disallowance at ₹ 30.55 crores and under Rule 8D(2)(iii) being administrative expenses i.e. an amount equal to 1.5% of average value investment at ₹ 7.26 crores. Thereby, the AO proposed the total disallowance under section 14A of the Act read with Rule 8D of the Rules at ₹37.81 crores. The AO also proposed the addition in regard to computation of book profit under section 115JB of the Act.
Subsequently, the PCIT-2, Mumbai vide notice issued under section 263 of the Act No CIT-2/263/2015-16 dated 20.11.2015 revising the assessment framed by AO issued this show cause notice in respect of expenses relatable to exempt income not properly calculated by the AO while computing the disallowance under section 14A of the Act read with Rule 8D of the Rules. The relevant show cause notice is enclosed at pages 39 and 40 of the Assessee’s Paper Book. The PCIT noted that the order of the AO is prejudicial to the interest of the Revenue and erroneous on the following reasons, which are given in Para 3 of the show cause notice read as under: - “3. The order passed by the AO is therefore prejudicial to the interest of the revenue in view of the following reasons:- (i) As per Rule 8D(2)(ii), B is the average of value of investments, 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. The value of investments would thus include all investments which give rise to tax free income, whether or not tax free income has been received during the year. (ii) The AO has simply accepted the computation given by the assessee and not given any reasons why the same has been accepted by him. No equity on this issue has been made. (iii) The AO has failed to take into consideration the directions given in Circular no 5/2014 which has clarified that provisions of Section 14A are applicable to investments which yield exempt income though no exempt income was received during the relevant previous year. (iv) The AO has failed to consider the decision In the case of Bellwether Microfinance Fund Pvt. Ltd vs ITO -ITA No 1743/Hyd/2013, where the ITAT, Hyderabad has stated that while computing disallowance under flute 8D(2)(iii), the average of the total investment of the assessee as appearing in the balance sheet on the first day and last day of the year irrespective of the fact whether it has yielded Income or not can be considered for the purpose or disallowance. (v) The AO has failed to consider the decision in the case of Technopack Advisors P ltd 1(2012)
50 SOT 102 (Delhi) (URO)], In which it is held that even lithe Investment in shares did not yield any dividend in the year under consideration. the disallowance u/s 14A on the expenditure incurred for earning income was disallowable, notwithstanding the fact that no such income was earned. (vi) The AO has failed to consider the decision in the case of Relaxo Footwear ltd [(2012) 50 SOT 31(Delhi)), in which it was hold that even if the assessee had not earned any income which was not includible in the total income the provisions could still be invoked to disallow the expenditure relatable to the income not includible in the total income.;”
The assessee before PCIT replied in response to show cause notice that first of all, this issue on disallowance of exempt income by invoking the provisions of section 14A of the Act read with Rule 8D(2) is in appeal before ITAT and AO after applying his mind made disallowance, which are subject matter of appeal before ITAT. Further, he argued that the assessee has not utilized the borrowed funds for earning this exempt income rather assessee’s own funds are more than the invested funds.
The learned Counsel for the assessee stated that the total investment giving rise to exempt income is to the tune of ₹4274.77 crores whereas the assessee’s own free funds in the shape of share capital is ₹221.44 crores, Reserve and Surplus is ₹7888.45 crores, which is available for use. The learned Counsel stated that neither the PCIT in his revision order nor AO in his assessment order has pointed out any nexus with the investment made in tax free exempt income and the interest bearing loans. In view of the above, the learned Counsel for the assessee stated that even otherwise in the Revision order he has not pointed out how these expenses are relatable to exempt income.
In regard to disallowance of interest expenses, the learned Counsel for the assessee stated that no disallowance can be made in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), wherein presumption was that once the assessee is having interest free funds available more than investments made giving rise to exempt income. In the present case before us, assessee has available interest free funds which is more than the investments made, giving rise to exempt income. Once this is the position, the assessee case is covered by the decision of HDFC Bank Ltd (supra).
Coming to the second issue as regards to the disallowance of administrative expenses, the learned Counsel for the assessee fairly conceded that the only disallowance can be restricted and direction can be given to AO that he should restrict the disallowance to the investments which give rise to exempt income for computing disallowance under Rule 8D(2)(iii) with the Rules. This issue is settled by Special Bench of this Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017] 58 ITR(T) 313 (Delhi - Trib.) (SB), hence, we direct the AO accordingly. This issue of the assessee’s appeal is partly allowed and partly the Revision order passed by PCIT under section 263 of the Act is sustained.
The next issue is as regards to the disallowance of interest and exchange difference recasting the loan given on the prevailing exchange rate at the year-end taken by the Transfer Pricing Officer. For computing the same the learned Counsel for the assessee first of all took us through the revision order of PCIT of Mumbai, wherein PCIT has dealt with the issue vide Para 5.2.2 as under: - “5.2.2 On examination of case record, it Is also found that in the Annual Report for the F.Y. 2008-09 of the assessee company in Schedule '3', point m(ii), page 64 that in respect of all monitoring assets in foreign currency are translated at the relevant rates of exchange prevailing at the year end. An exchange difference is prevalent in the P&L Account. Thus, though the assessee is recasting the loan given at the prevailing exchange rate as at the year end, the TPO took the yearly average instead of year end rate to arrive at the loan outstanding. Therefore, the TPO took the 3verje r3tc of 1USD equal to Rs.45.9139 as against 1USD equal; to Rs.50.8761 at the year end as on 31.03.2009 relevant to A.Y. 2Q09-10. Adoption of incorrect exchange rate resulted in computation of wrong loan outstanding. This has resulted in short adjustment of 22,87,03,825/- in the total income. Since the wrong rate has been plied by the TPO, it will be proper for the Assessing Officer to arrive at the correct amount of addition to be made In this regard In consultation with the TPC. For the purpose, the Assessing Officer will refer the matter to the IPO who will incorporate In the assessment order the reasons as well as the amount suggested by the TPO on reference made by the Assessing Officer.”
He then took us through the show cause notice issued by PCIT dated 20.11.2015 and read out the entire show case notice and stated that there was no such issue in the show cause notice and even, during the hearing of revision proceedings under section 263 of the Act, the PCIT has not raised this issue and suddenly, on the receipt of the Revision order under section 263 of the Act dated 21.03.2016 the assessee came to know about this issue. The learned Counsel for the assessee stated that similar proposition arose before co- ordinate Bench of this Tribunal in the case of Ambuja Cements Limited vs. CIT LTU vide order dated 10.11.2017 wherein Tribunal has considered that non-allowance of opportunity, which is essence of law. The Tribunal vide Para 10 has considered that the revision order passed by CIT is untenable by observing as under: - “10. The aforesaid proposition can also be understood in the present case from a different angle. As observed by us earlier, in the show cause notice the Commissioner considered the assessment to be erroneous in so far as it was prejudicial to the interests of the Revenue on the ground that the provision in question was capital in nature and, thus, the same was incorrectly allowed in the assessment order, dated 28.02.2014. Notably, while passing the impugned order, after considering the submissions of the assessee, the Commissioner find faults with the allowance of Provision because according to him there was no scientific basis for fixing the percentage for making the Provision. Notably, his earlier stand in the show cause notice of the Provision being capital in nature has been impliedly given a go-by. Ostensibly, the Commissioner found fault with the quantification/basis of making the Provision, which impliedly conveys that he accepted the plea of the assessee of the Provision being in the nature of revenue item charged to the Profit & loss account. Of course, the Commissioner is free to exercise his revisionary power u/s. 263 of the Act on any ground but what is of essence is that the assessee ought to have been allowed an opportunity to explain the circumstances on the ground formulated by the Commissioner to treat the assessment being erroneous in so far as it was prejudicial to the interests of the Revenue. The change in the stand of the Commissioner from that put to the assessee in the show cause notice and the basis which he has ultimately adopted to treat the assessment as erroneous and prejudicial to the interests of the Revenue, has not been put to the assessee and, thus, it is inconsistent with the understanding placed on section 263 of the Act by Hon’ble Supreme Court in the case of Amitabh Bachchan (supra), as detailed above. Therefore, the impugned order of the Commissioner is untenable in the eyes of law.;”