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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI RAMIT KOCHAR
आयकर अपीऱ सं./I.T.A. No.7061/Mum/2017 (नििाारण वर्ा / Assessment Year: 2013-14) बिाम/ Geecee Fincap Ltd., DCIT 1(1)(2) (Formerly Known as GCIL 579, Aayakar Bhavan, Finance Ltd.), 209-210, M.K Road, v. Arcadia Bldg, 2nd Floor, Mumbai- 400020 195, Nariman Point, Mumbai 400021 स्थायी ऱेखा सं./ PAN: AADCG0600Q (अपीऱाथी /Appellant) (प्रत्यथी / Respondent) .. Revenue by: Shri. Ajai Pratap Singh (Sr. AR) Assessee by: Shri. R.C Jain सुनवाई की तारीख /Date of Hearing : 27.06.2019 घोषणा की तारीख /Date of Pronouncement : 19.08.2019 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member: These are two appeals . The first appeal is filed by Revenue being ITA No. 3092/Mum/2016 for assessment year 2012-13 , which is directed against appellate order dated 28.01.2016 in Appeal No. CIT(A)-2/IT/306/2014-15, passed by learned Commissioner of Income Tax (Appeals)-2, Mumbai (hereinafter called “the CIT(A)”), for assessment year(ay) 2012-13, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 13.02.2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for ay:2012- 13. 1.2 The second appeal being an appeal filed by the assessee in ITA no. 7061/Mum/2017 pertain to ay:2013-14 and is directed against appellate order dated 06.10.2017 passed by learned CIT(A) for ay: 2013-14, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 17.02.2016 passed by AO u/s 143(3) of the 1961 Act for ay: 2013-14.
The grounds of appeal
raised by Revenue in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) in ITA no. 3092/Mum/2016 for ay:2012-13, reads as under:- "Whether on facts and in the circumstances of the case and in Law, the Ld.CIT(A) erred in restricting the disallowance to Rs. 4,59,998/- as against Rs. 1,54,62,223/- made by the AO, without appreciating the fact that section 14A r.w. Rule 8D is squarely applicable in this case and disallowance has to be made as per the formula given in Rule 8D.” 2.2. The grounds of appeal raised by assessee in memo of appeal filed with the tribunal in ITA no. 7061/Mum/2017 for ay:2013-14, reads as under:-
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
The assessee being aggrieved by an assessment framed by the AO u/s 143(3) of the 1961 Act vide assessment orders dated 13.02.2015 filed first appeal before Ld. CIT(A) and submitted that majority of borrowings were directed towards Inter Corporate Deposits and investments in Debentures which generated interest income which was chargeable to income-tax. It was also submitted that some of the investments were made in Mutual Fund-Growth Scheme wherein no tax free income could have been received . It was also claimed that assessee has also earned an interest income of Rs. 532.92 lacs and net interest figure after setting off interest expenses against interest income, were to the tune of Rs. 68.53 lacs and bank charges were to the tune of Rs. 2000. The assessee submitted that expenditure of Rs. 2000 was direct expenditure which was incurred towards depository charges paid including annual charges for maintaining folio of holding the debentures, shares and mutual funds. The assessee claimed that total investments held in depository are Rs. 5800.10 lacs out of which investments in shares are to the tune of Rs. 540.80 lacs which is 9.32% of the investments. The assessee claimed that these depository charges are paid for earning both taxable and non taxable income and thus, disallowance u/r 8D(2)(i) of the 1962 Rules be made proportionately. Thus , the assessee prayed that disallowance should be made proportionately of approx. 10% of Rs. 2000 which comes to Rs. 200/- under Section 14A read with Rule 8D(2)(i) of the 1962 Rules. 4.2 Disallowance of Rs. 1,43,56,170/- towards interest. The assessee submitted before learned CIT(A) that the assessee has following non- interest bearing funds , as detailed hereunder:- Schedule 1 Equity share capital Rs. 375.00 Lakhs Schedule 2 Reserve & Surplus Rs. 968.42 Lakhs Total Rs. 1,343.42 lakhs 4.3 The assessee submitted that funds which are specifically borrowed for investing in Debentures , Bonds , Mutual Funds-Growth scheme and granting of loans , which yielded taxable income should be excluded while computing disallowance of expenses u/s 14A of the 1961 Act read with Rule 8D of the 1962 Rules . The assessee submitted before learned CIT(A) that it has received interest and paid interest under the following heads and net interest expenses were to the tune of Rs. 68.54 lacs which should be considered for disallowance , as detailed hereunder:-
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.
The learned CIT(A) observed that the assessee has earned dividend income of Rs. 83,48,000/- which was claimed as an exempt income. The assessee claimed before learned CIT(A) that it has interest free funds to the tune of Rs. 1343.42 lacs whereas long term investments made in shares are to the tune of Rs. 1127.11 lacs . The assessee also submitted that it has both interest income(Rs. 532.92 lacs) as well interest expenses ( Rs. 601.46 lacs) and the net interest expenses incurred by the assessee are to the tune of Rs. 68.54 lacs which should be considered for making disallowance u/s 14A of the 1961 Act. The assessee claimed that it has interest bearing borrowings as well as investments , as detailed hereunder:-
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.
Aggrieved by appellate order dated 28.01.2016 passed by learned CIT(A) , Revenue is in appeal before the tribunal and Ld. DR submitted before the tribunal that an ex-parte order was earlier passed by tribunal in the absence of the assessee , but later the assessee filed an MA and then appeared before the tribunal. Our attention was drawn to MA no. 393/Mum/2018 arising out of , wherein vide order in MA dated 20.02.2019, the Page | 9 I.T.A. No.7061/Mum/2017 tribunal has recalled its order in which order was passed by tribunal on 07.12.2017 and it was submitted by learned DR that is how this appeal in ITA no. 3092/Mum/2016 is fixed before the Bench now. The Ld. Dr submitted that assessee has received dividend income of Rs. 83.48 lacs and disallowance of expenses was made u/s 14A suo-motto of Rs. 4,59,998/- by assessee voluntarily in its return of income filed with tribunal. It was submitted that AO made disallowance of expenses u/s. 14A of Rs. 1,54,62,223/- and the suo-motto disallowance of Rs. 4,59,998/- made by the assessee was reduced from the aforesaid disallowance of expenses u/s 14A read with Rule 8D, and balance amount of expenses to the tune of Rs. 1,50,00,225/- was confirmed to be disallowed by the AO u/s 14A of the 1961 Act , which stood later deleted by Ld. CIT(A) except an amount of Rs. 2,000/- towards direct expenses . The learned DR would rely on the assessment order passed by the AO. 6.2. The Ld. Counsel for the assessee on the other hand submitted that AO has not recorded satisfaction before invoking provisions of Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules . The learned counsel for the assessee relied upon the decision of Hon’ble Supreme Court in the case of PCIT v. Moonstar Securities Trading and Finance Company Private Ltd., (2019)263 Taxmann 458(SC) , wherein SLP against judgment of Hon’ble Delhi High Court in the case of PCIT v. Moonstar Securities Trading and Finance Company Private Limited, (2019) 105 taxmann.com 274(Delhi) stood dismissed by Hon’ble Delhi High Court. The learned counsel for the assessee also relied upon decision of Hon’ble Bombay High Court in the case of CIT v. Jubilant Enterprises Private Ltd., in ITA no. 1512 of 2014, vide judgment dated 28.02.2017. The learned counsel for the assessee also relied upon decision of Hon’ble Gujarat High Court in the case of PCIT v. Nirma Credit & Capital Private Ltd., in Tax Appeal no. 409 and 514 of 2017,dated 31.08.2017.
We have considered rival contentions and perused the material on record including cited case laws. We have observed that the assessee has claimed itself to be NBFC engaged in the business of providing finance and making investments. We have observed that assessee has received dividend income of Rs. 83,48,000/- which was claimed as an exempt income. The assessee while making voluntary disallowance made suo-motto disallowance of expenditure of an amount of Rs. 4,59,998/- u/s. 14A of the 1961 Act r.w.r. 8D 2 (iii) of the 1962 Rules by computing disallowance @0.5% of the average investments. The AO has computed disallowance u/s. 14A of the 1961 Act r.w.r. 8D of the 1961 Act, of Rs. 1,54,62,223/- as under:-
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.