DY. COMMISSIONER OF INCOME TAX 1(1)(1), MUMBAI vs. M/S. GCIL FINANCE LTD., MUMBAI

1. "Whether on the facts and circumstances of the case and in law, the learned CIT (A) erred in not deleting the addition made by A.O without appreciating the facts that under clause a) treating Rs. 1,61,000/- as direct expense in place of Rs. 17,000/- and under I.T.A. No.7061/Mum/2017 clause b) computing disallowance out of interest Rs. 80.54 lakhs has not be made as per the formula given in section 14A r.w. rule 8D. 2. Whether on the facts and circumstances of the case and in law, the learned CIT (A) is erred in computing the proportionate interest under Rule 8D (b) without considering the facts of the case.” . 3. First , we will take up appeal of the Revenue in for ay: 2012-13.

3.2 The brief facts of the case are that the assessee has claimed itself to be an NBFC and is carrying on business of investments. During course of assessment proceedings conducted by the AO u/s. 143(3) r.w.s. 143(2) of the 1961 Act, it was observed by the AO that the assessee has earned dividend income from shares of Rs. 83,48,000/- which was claimed as an exempt income. The assessee has suo-motto voluntarily disallowed an expenditure of Rs. 4,59,998/- u/s. 14A of the 1961 Act purported to be incurred for earning an exempt income, wherein it disallowed 0.5% of Non-current investments by invoking Rule 8D(2)(iii) of the Income-tax Rules, 1962 r.w.s. 14A of the 1961 Act. The AO observed from Notes to accounts to Profit and Loss Account that the assessee has incurred bank charges to the tune of Rs. 2000/- and interest expenses to the tune of Rs. 601.46 lacs. The AO invoked provisions of Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules and made disallowance u/s. 14A r.w.r. 8D of the 1962 Rules, as detailed hereunder:

Sr.No Particulars (Amt in Rs.) 1) The amount of expenditure 2000 directly relating to income which does not part of total income (Bank Charges)

Interest attributable to exempt 2) income 1,43,45,170 A*B/C A = amount of expenditure by way of interest other than the amount of 601,45,709 interest included in clause (i) B = the average of value of investment Page | 3 (Non current investment in Equity Instruments and Current investments 22,08,10,671 in Mutual Fund) C = the average of total assets as 92,50,94,500 appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 0.5% of average of the value of investment, income from which does 11,04,053 not or shall not form part of the total income, as appearing in the 3) balance sheet or the assessee, on the first day and the last day of the previous year Total disallowance u/s. 14A 1,54,62,223 Since, the assessee had suo motu voluntarily disallowed an amount of Rs. 4,59,998/- u/s 14A of the 1961 Act, the AO disallowed balance amount of Rs. 1,50,02,225/- by invoking provisions of Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules, vide assessment order dated 13.02.2015 passed by the AO u/s 143(3) of the 1961 Act

Particulars Amount (Rs. in Lacs)

Interest Expenses (Note -17) Interest on loan taken 601.46 Interest Income on debentures & Advances (Note 532.92 -14)

Net interest expenses 68.54 4.4 The assessee also submitted that it has made additional investments in Properties and Debentures and hence no disallowance of interest expenses can be made by invoking provisions of Section 14A of the 1961 Act to the extent of these investments. The assessee relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd., 313 ITR 340. The assessee also submitted that for ay: 2010-11 on similar facts , the issue was decided by learned CIT(A) in favour of the assessee.

4.5 The assessee also submitted before learned CIT(A) that so far as administrative expenses being disallowed by invoking Rule 8D2(iii) of the 1962 Rules @0.5% , it was submitted by the assessee that the AO even included investments in Properties/Mutual Funds/Debentures & Bonds wherein no tax-free income is receivable which in any case should be excluded while computing disallowance of expenditure u/s 14A of the 1961 Act. The assessee claimed before learned CIT(A) that it has rightly made disallowance of expenditure to the tune of Rs. 4,59,998/- @ 0.5% of the average investments by invoking Section 14A read with Rule 8D(2)(iii) of the 1962 Rules.

S. No Particulars of Investments in Note no As on As on Mutual Funds 31/3/2012 31/3/2011 (Rs. In lacs) (Rs. In lacs) 1. Short Term Borrowing 4 8,040.90 7,592.27 2. Non current Investment 9 Investment in Properties 9 1350.00 In Debentures & Bonds 9 4,705.08 1954.48 Short Term advances 11 430.20 2,250.00 Sub total 6,485.28 4,204.48 5.2 The assessee also claimed before learned CIT(A) that additional borrowings of the assessee are to the tune of Rs. 448.63 lacs and additional investment generating taxable income are Rs. 2,280.80 lacs. The assessee claimed that additional borrowed funds are not invested in the securities from which the income are claimed to be exempt from Income tax.

5.3 So far as disallowance of administrative expenses @ 0.5%, the assessee claimed that it has following investments , as detailed hereunder:- Page | 7 S. Particulars of Investments Sub total As on As on No 31/3/2012 31/3/2011 Rs. In lacs Rs. In lacs 1. In Properties 1350.00 - 2. a In Shares 540.48 - b In Shares of Subsidiaries 99.00 - - c. In J M Financial Property Fund Venture 487.63 1127.11 712.88 capital fund 3. In Debentures & Bonds 4,705.08 1,954.48 Total 7,182,19 2,667.36 5.4 The assessee also claimed before learned CIT(A) that current investments made by the assessee are as under: s.No. Particulars of Investments in Mutual As on As on Funds 31/3/2012 31/3/2011 Rs. In lacs Rs. In lacs 1. Birla Sun life cash plus -Growth 77.13 2,499.09 2. Birla Saving Fund Cash Plus- 1101.00 Growth Total 77.13 3,600.09 5.5 The assessee submitted that the AO has computed disallowances of expenses as under: s.No. Particulars of Investments As on As on As On 31/3/2012 31/3/2011 Rs. In lacs Rs. In lacs 1 Investment in Mutual Fund(Note 77.13 2499.09 No.9) 2.a In Shares(Note-7) 540.48 b. In Shares of Subsidiaries 99.00 c. In J M Financial Property Fund 487.63 1127.11 712.88 Venture Capital fund Total 1204.24 3211.97 I.T.A. No.7061/Mum/2017 5.6. The assessee claimed that out of total investments of Rs. 7,182.19 lacs, the assessee has investments of Rs. 639.48 lacs in equity shares which is capable of generating dividend income which is not chargeable to tax and further it was submitted by assessee that it has investment of Rs. 487.63 lacs in Venture Capital Fund which is capable of giving investors by way of interest and dividend. The assessee claimed that investment as per Note No. 9 has been shown under Current Assets-Current Investments are not for earning tax free income. The assessee submitted before learned CIT(A) that income from growth fund is chargeable to tax as per normal provisions of the 1961 Act. The assessee also claimed that short term capital gains (without STT) of Rs. 1,99,63,962/- from sale of Investment in Growth Mutual Fund ( shown under current assets) is also chargeable to tax. The assessee submitted that investments in Growth Mutual Fund should not be taken for computing disallowance of expenses u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules and the amount of Rs. 4,59,998/- offered for disallowance u/s 14A read with Rule 8D(2)(iii) by the assessee be accepted. The learned CIT(A) observed as under:

The AO has worked out the disallowance u/s 14A r.w. Rule 8D at Rs.1,54,62,223/- as against the disallowance computed by Appellant Rs.4,59,998/- and the same has been already offered for taxation by the appellant company. Considering the Hon'ble High Court of Mumbai in the case of CIT vs. Reliance Utilities and Power Ltd. that the Appellant possessed interest free funds of its own generated in the course of relevant financial year and therefore no part of interest on borrowing can be disallowed u/s 36(1)(iii) of the Income Tax Act. Further relying on the above judicial decision, I am of the considered opinion that the disallowance made by the AO. u/s 14A r.w. Rule 8D of the Income Tax Act of Rs. 1,50,00,225/- is not warranted. However, the additions towards Direct expenses of Rs. 2,000/- was not pressed and hence it is confirmed.

Sr.No Particulars (Amt in Rs.) 1) 2000 The amount of expenditure directly relating to income which does not part of total income (Bank Charges)

Interest attributable to exempt 2) income 1,43,45,170 A*B/C A = amount of expenditure by way of interest other than the amount of 601,45,709 interest included in clause (i) B = the average of value of investment (Non current investment in Equity 22,08,10,671 Instruments and Current investments in Mutual Fund) C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last 92,50,94,500 day of the previous year. 0.5% of average of the value of investment, income from which does 3) not or shall not form part of the total income, as appearing in the balance sheet or the assessee, on the first day and the last day of the 11,04,053 previous year Total disallowance u/s. 14A 1,54,62,223 We have observed that several contentions were raised by the assessee during the proceedings before authorities below as well before us, which is to be adjudicated keeping in view progress made in law wrt provisions of Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules as interpreted by Hon’ble Courts/tribunal from time to time. The assessee contention that it has made investment in securities for trading purposes and the same should not be included for the purposes of computation of disallowance of expenditure u/s. 14A cannot be accepted as the issue is no more res-integra keeping in view Hon’ble Supreme Court decision in the case of Maxopp Investment Limited v. CIT , reported in (2018) 402 ITR 640(SC) . Similarly , the contention of the assessee that it has made strategic investments which should not be included for the purposes of computing disallowance of expenses u/s 14A of the 1961 Act cannot be accepted in view of decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited(supra). The assessee has made investments in properties and also made investments in Debentures, Bonds, Mutual Fund- Growth Fund, wherein it is claimed that these investments which yield taxable income cannot be included for the purposes of computing disallowance of expenses u/s 14A of the 1961 Act, we agree with this proposition of the assessee as it is only those securities and investments which are capable of yielding an exempt income is to be considered for making disallowances of expenditure I.T.A. No.7061/Mum/2017 u/s 14A of the 1961 Act.We also agree with the proposition that in case the assessee hold both interest free funds as also interest bearing funds and in the absence of specific co-relation of interest bearing borrowed funds with investments made, the presumption will apply that the assessee made investments in securities capable of yielding tax-free income out of interest free funds available with it. The decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited(supra) and CIT v. HDFC Bank Limited (2014) 366 ITR 505(Bom.) are relevant and applicable. The assessee has claimed to be NBFC and to be engaged in investment business . The said position is not controverted by authorities below as well by learned DR before the Bench. The assessee being NBFC is borrowing funds at interest and investing these funds in Debentures , Bonds , Loans etc wherein taxable interest income is received. We are in agreement with the assessee that in such scenario , only net interest expenditure be considered for the purposes of disallowance of the interest expenditure u/s 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rule. The decision of Hon’ble Gujarat High Court in the case of Nirma Credit and Capital Private Limited(supra) is relevant and applicable . The decision of Hon’ble Bombay High Court in the case of Jubiliant Enterprises Private Limited (supra) relied upon by assessee did not decided this issue on merit but rather held that since tribunal order in the case of Paresh K Shah in was not challenged by Revenue before Hon’ble Bombay High Court by filing an appeal u/s 260A, this became accepted by Revenue . This proposition is not accepted by Hon’ble Supreme Court in the case of CIT v. Goodwill Theatres Private Limited reported in (2017) 299 CTR 457(SC) and still Hon’ble High Court has to decide the issue on merits in accordance with law. Further, as held by Hon’ble Delhi High Court in the case of Joint Investments Private Limited v. CIT reported in (2015) 372 ITR 694(Del.) , the disallowance of expenditure u/s 14A cannot exceed exempt income. Further as laid down by Hon’ble ITAT ,Special Bench , Delhi in the case of ACIT v. Vireet Investment Private Limited reported in (2017) 165 ITD 27(Delhi-Trib.(SB) , only those investments are to be considered for making disallowance of expenditure u/s. 14A of the 1961 Act read with Rule 8D of the 1962 Rules, which has actually yielded tax free income during the year under consideration. So far as contention of the assessee that AO has not recorded satisfaction before invoking provisions of Section 14A of the 1961 Act, we have noted that the assessee has received exempt income by way of dividend to the tune of Rs. 83,48,000/- . The assessee has suo motu disallowed an expenses of Rs. 4,59,998/- u/s 14A of the 1961 Act . The assessee disallowed aforesaid expenses by applying 0.5% of the average investments.The onus is on the assessee to bring on record , the details of modus operandi adopted by it for making investments , arranging its affairs and managing investments which ought to be firstly brought by assessee before the AO in discharge of primary onus as is cast on the assessee. No such details are filed before us to prove that the assessee discharged its primary onus. The assessee rather made suo motu disallowance of expenditure u/s 14A of the 1961 Act , accepting and admitting applicability of Section 14A. It applied of its own 0.5% of average investments for making disallowance u/s 14A of the 1961 Act by invoking Rule 8D(2)(iii) of the 1962 Rules , towards administrative expenses . Now, to resile from its own admitted position at this stage is not warranted. The AO on its part has duly recorded satisfaction albeit cryptic in para 5.1 and 5.2 of its assessment order. Thus, under these factual matrix, the AO is directed to make disallowance of expenditure u/s 14A of the 1961 Act in accordance with our aforesaid directions. The assessee is directed to file complete details and modus operandi for making and managing investments to that effect before the AO in denovo proceedings. Needless to say that the AO shall grant proper and adequate opportunity of being heard to the assessee in denovo assessment proceedings and the evidences submitted by the assessee in its defence shall be admitted by the AO. Thus , we direct the AO make to disallowance of expenditure u/s. 14A in accordance with our aforesaid directions . We order accordingly.