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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
AadoSa / O R D E R महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
These cross appeals are arising out of the order of the Commissioner of Income Tax (Appeals)], in appeal No. CIT(A)-6/IT- 176/76/2016-17, dated 06.11.2017. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle-1(3)(2) Mumbai (in short DCIT/ITO/ AO) for the A.Y. 2013-14 vide order dated 28.12.2016, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).
2. The first common issue in these cross appeals is as regards to the disallowance of expenses relatable to exempt income by the AO by invoking the provisions of section 14A read with Rule 8D of the Rules. The CIT(A) restricted the disallowance under Rule 8D(2)(iii) being 0.5% of average value of investments and the disallowance was Rs. 28.20 lakhs. For this assessee has raised the following two grounds: - “1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the AO in making disallowance of ₹ 28,20,000/- being 0.5% of average investment, under section 14A of the Act read with Rule 8D(2)(iii) towards administrative and other expenditure.
ITAs No.669 & 500/Mum/2018
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not appreciating the fact that it was only by virtue of investments in the securities held as stock-in-trade that the dividend had accrued to your Appellant and it was settled law that provisions of section 14A & Rule 8D were not applicable to such case.”
The Revenue has raised the grounds against the deletion of addition being interest expenditure under Rule 8D(2)(ii). For this Revenue has raised the following ground No. 2 and 3: -
2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in relying on Hon’ble Bombay High Court judgement of HDFC Bank Ltd. 366 ITR 505 which is about disallowance under section 14A prior to Rule 8D and in instant case AO has correctly applied Rule 8D, hence the said judgment is not applicable.
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in relying on Hon’ble Bombay High Court judgement of Reliance Utilities & Power Ltd. which is in context of disallowance of interest expenses under section 36(1)(iii) of the Act.”
4 ITAs No.669 & 500/Mum/2018 4. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the first dispute is regarding disallowance of interest expenditure incurred by assessee for earning of exempt income under the provision of section14A of the Act read with Rule 8D(2)(ii) of the Rules, amounting to ` 4,08,90,000/-. The AO made the addition despite the fact that the assessee has explained before him the details of investment in shares on which tax free dividend has been earned and tax free funds available with the bank. The AO in the assessment order has nowhere stated that the assessee has invested the interest bearing funds in the instruments giving rise to exempt income. The CIT(A) deleted the addition after going through the fund position of the assessee and investment made. The relevant details are available in the order of CIT(A) which read as under: - Particulars Amount (Rs.) (in crores) Net profit after tax [can be seen from audited Profit & 1,061.18 Loss Account] Net worth as on March 31,2013 [can be seen from 7,619.54 audited Balance sheet] Investment in shares and in subsidiaries and/ or joint 58.53 ventures (Rs.50 lakhs) and investments in shares (Rs. 58.03 crores), which could yield tax-free incomes [can be seen from schedule 8- investments of the audited balance sheet] We also noted that the assessee’s interest free funds available are more than the investment made in the instruments giving tax free income i.e. the dividend. It is also a fact that the assessee has 5 ITAs No.669 & 500/Mum/2018 earned dividend income of ` 2,95,87,087/-. Hence, in view of the above fund position we are of the view that in view of the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd vs. DCIT (2014) 366 ITR 505 (Bom HC), the presumption of investment in instrument giving rise to exempt income is out of interest free funds available with the assessee is in favor of assessee. Hence, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same.
As regards to the issue of assessee’s appeal regarding disallowance of expenses relatable to exempt income under section 14A of the Act read with Rule 8D(2)(iii) of the Rules, being administrative expenses, we remand this issue back to the file of the AO, who will examine the facts of the case and will disallow the expenses relatable to exempt income by computing 0.5% of average value of investment under Rule 8D(2)(iii) of the Rules, only qua the investments which give exempt income. The AO will restrict the disallowance to that extent only. The issue of the assessee’s appeal is restored back to the file of the AO.
The next issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made on account of interest income on accrual basis instead of due basis. For this Revenue has raised the following ground No. 1: - “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.
6. ITAs No.669 & 500/Mum/2018 86,25,94,874/- made by the AO on account of interest income on accrual basis instead of due basis.
At the outset, we noted that AO in the assessment order noted the fact that the assessee has credited interest to the profit and loss account by an amount of Rs. 1282,49,77,646/- but in the computation of income, the assessee reduced the same amount and added a sum of Rs. 1196,23,82,772/- being income / interest due/ received on investment during the year under consideration. The assessee treated the differential amount of Rs. 86,25,94,772/- attributable to the interest that accrued but did not become due. The AO did not accept the contention of the assessee and stated the matter is taken in further appeals before the High Court. The CIT(A) allowed the claim of assessee by relying on the decision of Hon’ble Bombay High Court on assessee’s own case as well as on various Tribunal judgments in assessee’s own case vide Para 6.6 and 6.7 as under: - “6.6 The above issue has been decided in favour of the appellant for A.Y.2006-07 and A.Y. 2008-09 following the appellant's own order for A.Y.2005-06. Further, Hon'ble Bombay High Court vide orders bearing 2011 dated 12.02.2013, ITA No.2641 of 2011 dated 16.04.2014 and ITA No.2396 of 2011 dated 04.03.2013 has dismissed the appeal of the revenue in appellant's own case for A.Y.2000- 01. A.Y.200203 and A.Y.2004-05 respectively.
7 ITAs No.669 & 500/Mum/2018 Further, my learned predecessor CIT(As) have also decided this issue in favour of the appellant vide order bearing No. CIT(A)-6/IT-136/ Rg.2(3)112-13 dated 27.02.2014 for A.Y.2010-1 I and order bearing Nos. ClT(A)-6/lT-1891 2013- 14 and CIT(A)-6/IT-56/2015-16 dated 24.03,2017 for AX.2011-12 and A.Y.201213 respectively by relying on the decision of Hon’ble Bombay High Court for A.Y. 2000-01 A.Y.2002-03 & A.Y.2004-05 and also the decision of Ld. CIT(A) for A.Y.2009-10. 6.7 Respectfully following the decision of Hon'ble ITAT as well as the decision of my Ld. predecessor CIT(As), the addition of Rs.86,2594,874/- made by the AO is deleted and appeal of the assessee on this ground is allowed.”
Now, the learned Counsel for the assessee relied on the decision of Hon’ble Bombay High Court. We are noted that the CIT(A) has already dealt with the issue noting the details of various High Court orders in assessee’s own case and Tribunal’s order. Consequently, we find that there is no infirmity in the order of CIT(A)and the appeal of Revenue is dismissed on this issue.
The next issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of broken period interest which 8 ITAs No.669 & 500/Mum/2018 was added as capital expenditure by the AO. For this Revenue has raised the following ground No. 4: -
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 29,32,55,778/- on account of broken period interest which was treated as capital expenditure by the AO in view of the decision of the Supreme Court in the case of Vijaya Bank.”
Briefly stated facts are that the AO noted in the assessment order that broken period interest paid by the assessee is nothing but part of the price paid for the securities for acquiring shares. He noted that whatever be the reason that prompted the assessee to purchase the securities, the price paid for the same is in the nature of capital outlay only and no part of it can be said of as expenditure against interest accruing on these securities. Hence, the AO required the assessee to explain as to why the same should not be disallowed i.e. broken period interest. The assessee made claim of deduction of Rs. 15,36,24,791/- being amount of broken period interest out of the disallowance for assessment year 2012-13 in the case of securities sold during that year. The AO noted that the assessee is not entitled for the claim of deduction as Revenue is contesting the appeal before the Hon’ble High Court on this issue. The CIT(A) considering the decision of Hon’ble Supreme Court in the case of CIT vs. Citi Bank NA in civil appeal No. 1549 of 2006 dated 12.08.2008 and also Hon’ble Bombay High Court in the case ITAs No.669 & 500/Mum/2018 of American Express vs. CIT (258 ITR 601) allowed the claim of assessee by observing in Para 9.4 to 9.8 as under: - 9.4 I have carefully considered the facts of the case. discussion of the AO in the impugned order as well as oral contention and written submission of the appellant. I find that the issue of broken period interest has been decided in favour of the assessee by the Hon’ble Supreme Court in the case of CIT vs Citi Bank NA in Civil Appeal no. 1549 of 2006 dated 12.08.2008 wherein the decision of Bombay High Court in the case of American Express vs CIT (258 ITR 601) was discussed in detail and the Supreme Court had agreed with the view expressed in the same.
9.5 Further, my Ld. predecessor in the appellant's own case for A.Y.2007-08 AY 2008- 09 and A.Y.2009-10 had allowed the issue in favour of the Bank relying on the above Supreme Court decision with the following observation:
….It is observed that both the CIT(A) as well as ITAT have followed the judgement of the Bombay High Court in the case of American Express International Banking Corporation 258 ITR 601 (Born). The Hon'ble Court did not find any merit in the ITAs No.669 & 500/Mum/2018 appeal of revenue and accordingly dismissed it. in the appellant's own case, the Hon'ble ITAT in (supra) has dismissed the ground of appeal raised by the revenue. in respect of claim for broken period interest by relying on the decision of Bombay High Court in the case of American Express International Banking Corporation (supra). I also find that the issue has been decided in favour of the assessee by the Hon'ble Supreme Court in the case of Citibank NA Civil appeal no 1549 of 2006 dated 12.08.2008. Respectfully following these decisions it is held that the broken period interest paid by the appellant is allowable as deduction in computing the total income of the assessee. The ground is accordingly allowed.
9.6 My learned predecessor has followed the above decision even for A.Y.2011-12 and 2012- 13 vide order bearing Nos. CIT(A)-6/IT- 189/2013-14 and ClT(A)-6/lT-56/2015-16 dated 24.03.2017 for A.Y.2011-12 and A.Y.2012-13 respectively Respectfully following the above decisions, it is held that the broken period interest paid by the appellant is allowable as deduction. Accordingly, addition of ITAs No.669 & 500/Mum/2018 Rs.29,32,55,778/- made by the AO on account of broken period interest is deleted and appeal of the assessee in respect of Ground No.6 is allowed.
9.7 Ground No.7 is in respect of not allowing deduction of Rs. 15,36,24,791/-being broken period interest disallowed in A.Y.2012-13. In this regard, it is stated that the issue of broken period interest has been set aside by the ITAT in the Banks own case for A.Y 2010-11 vide order bearing to the file of the AO with the direction to follow the Bombay High Court decision in case of HDFC Bank Ltd. For the sake of ready reference, the relevant portion of Hon’ble ITAT's order is reproduced as under:
Referring to Ground no. 5, LA Counsel for the assessee submitted that the same relates to the broken period interest debited to the Profit & Loss Account and the same is required to be adjudicated in view of the judgment of the Hon'ble jurisdiction High Court in the case of GT vs. HDFC Bank Ltd in Income Tax Appeal No.330 of 2012, dated 23.7.2014. After hearing both the parties on this issue, we remand the Ground No.5 to the file of the AO as desired by the Id Representatives ITAs No.669 & 500/Mum/2018 of both the parties for fresh adjudication. AO is directed to adjudicate this issue in the light of the said judgment of Hon'ble High Court (supra) complying with the ratio laid down in the said judgment on the issue under consideration. Accordingly, Ground no.5 raised by assesse is allowed for statistical purpose.
9.8 Similar issue has also been decided by my learned predecessor CIT(A) vide order barring Nos. CIT(A)-6/IT-189/2013-14 for A.Y.2011-12 and AY 2012-13 respectively wherein he has stated that since Hon’ble ITAT has set aside the said issue to the file of the AO with the direction to follow the decision of Hon'ble Jurisdictional High Court in the case of CIT vs HDFC Bank Ltd., the AO is directed to follow the directions issued by Hon’ble ITAT. Accordingly, AO is directed to follow the directions issued by Hon’ble ITAT even for the year under consideration.”
Aggrieved, Revenue is in appeal before us.
We have noted that this issue of broken period interest is covered in favour of assessee by following the ITAT in assessee’s own case for ITAs No. 4486 & 4464/Mum/2017 & 3875 & 3876/Mum/2017 for AY 2011-12 and 2012-13 respectively, vide order dated 28.02.2019 in Para 15 and 16 read as under: - 13 ITAs No.669 & 500/Mum/2018 “15. After hearing both the parties and perusing the material on record, we find that the Ld. CIT(A) allowed the issue in favour of the assessee by following the order of his predecessor in assessee’s own case for A.Y. 2007-08, 2008-09 & 2009-10 by following the decision of the Hon’ble Supreme Court in the case of CIT vs. Citi Bank NA in CA No.1549 of 2006 dated 12.08.2008. 16. We, therefore, are of the view that issue is squarely covered in favour of the assessee and accordingly the ground No.3 of the Revenue is dismissed by upholding the order of Ld. CIT(A).”
Hence, respectfully following the Tribunal decision in assessee’s own case for earlier years, we upheld the order of CIT(A) deleting the disallowance of broken period interest. This issue of Revenue’s appeal is dismissed.
In the result, the appeal of assessee is partly allowed and the appeal of the Revenue is dismissed.
Order pronounced in the open court on 24.07.2019. (एन. के. प्रधान/ NK PRADHAN) (महावीर ससंह /MAHAVIR SINGH) (लेखा सदस्य / ACCOUNTANT MEMBER) (न्याययक सदस्य/ JUDICIAL MEMBER) मुंबई, ददनांक/ Mumbai, Dated: 24.07.2019. दीप रकार, व.यनजी धिव / Sudip Sarkar, Sr.PS