TD TOLL ROAD PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 15(3)(1), MUMBAI

O R D E R

PER RAMIT KOCHAR, Accountant Member:

“COMPUTATION OF INCOME UNDER THE NORMAL PROVISIONS OF THE INCOME-TAX ACT, 1961 ("the Act

): A. Disallowance of expenses under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 ( 1.

3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing interest of Rs. 15,17,548/- under Rule 8D(2)(ii) of the Rules. The Appellant submits that as the Appellant has own funds that are in excess of the total value of investments and therefore the interest disallowance is incorrect and the same ought to be deleted. Without prejudice to the above Grounds:

in respect of disallowance under section 14A of the Act is restricted to the exempt income earned by the Appellant. The Appellant submits that the disallowance under section 14A of the Act ought to have been restricted to the quantum of the exempt income of Rs. 10,67,974/- earned by the Appellant during the year under consideration.

5. Without prejudice to the above, the disallowance under section 14A of the Act worked out by the Assessing Officer is excessive and unreasonable and ought to be reduced substantially. COMPUTATION OF BOOK PROFIT U/S. 115JB OF THE ACT: B. ADDITION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT:

6. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the addition made by the Assessing Officer as expenses incurred in relation to exempt income while computing book profit under section.115JB of the Act to the extent of Rs. 17,50,083/-. The Appellant submits that the aforesaid addition to book profits is erroneous and the same ought to be deleted.

7. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the addition made by the Assessing Officer while computing book profit under section 115JB of the Act as per section 14A of the Act r.w.r. 8D of the Rules. The Appellant submits that the extension of the provisions of section 14A of the Act r.w. Rule 8D of the Rules for computation of book profit u/s. 115JB of the Act is not in accordance with law and the same ought to be deleted.

8. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the Assessing Officer in not following the decisions of Hon'ble Supreme Court in cases of Rajasthan State Warehousing (242 ITR 450) and Indian Bank Ltd. (56 ITR 77) in which the Hon'ble Supreme Court had held that apportionment of expenditure between exempt income and taxable income arising out of indivisible business cannot be made. The Appellant submits that the expenses allocated by the Assessing Officer towards the exempt income is contrary to the above decisions of Hon'ble Supreme Court and the said addition in the computation of book profit ought to be deleted.

9. Without prejudice to the above, the Appellant submits that addition of disallowance made under section 14A of the Act while computing book profit under section 115JB of the Act is excessive and the same ought to be reduced substantially. C. General:

10. The Appellant craves leave to add to amend, vary or alter, including by substitution, any of the above grounds of appeal.”

3. The assessee is engaged in the business of construction of roads on BOT basis , strengthening of the existing carriageway from Trichy Dindigul section of National Highway No. 45 in the State of Tamilnadu. The agreement was entered into between the assessee and National Highway Authority of India on 19.07.2007 and the assessee commenced commercial operations from 11.01.2012 in the form of Toll Collection. The assessee showed income from operations during the year under consideration of Rs. 45.22 crores and other income at Rs. 15.68 lacs. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the 1961 Act, the AO observed from computation of income that the assessee has earned dividend income of Rs. 10,67,974/- which was claimed as an exempt income. The AO observed that the assessee has not made any disallowance u/s. 14A r.w.r. 8D of the Income-tax Rules,1962 . The AO also observed that the assessee is not having any investments in equity share and mutual fund as on 01.04.2013 and 31.03.2014. The AO asked the assessee to furnish the details of disallowance in respect of interest and other expenses incurred towards investments in shares and Page | 4 mutual funds, income from which is exempt from Income Tax. The assessee submitted that it has earned dividend income of Rs. 10,67,974/- on its investments in mutual fund which was claimed as an exempt income u/s. 10(34) of the 1961 Act. It was submitted that assessee does not have any investments capable of earning tax free income as on first day and last day of the financial year. Thus it was submitted by the assessee that disallowance u/s. 14A r.w.r. 8D worked out to be Nil and hence no disallowance u/s. 14A was made in the computation of income while filing return of income. Without prejudice, it was submitted by the assessee that it has earned dividend income of Rs. 10,67,974/- from Mutual Funds which was claimed as an exempt income . It was submitted that assessee has owned interest free funds comprising of „Share Capital‟ and „Reserve & Surplus‟ , aggregating to Rs. 106.11 crores as at 31.03.2014 while the same was Rs. 105.63 crores as at 31.03.2013 which were more than investments made by the assessee which were capable of earning tax free income. It was explained that peak investments were to the tune of Rs. 5.36 crores. The details of Shareholders funds during the financial year ended 31.03.2014 and 31.03.2013 are reproduced hereunder:- Shareholders fund Particulars FY 2013-14 FY 2012-13 10,74,49,202 10,74,49,202 Share Capital Reserves and Surplus Securities Premium Reserve 96,71,50,800 96,71,50,800 Surplus/(deficit) in the -1,34,06,753 -1,82,11,525 Statement of profit and loss 95,37,44,047 94,89,39,275 Total 1,06,11,93,249 1,05,63,88,477 3.2 It was submitted that assessee‟s peak investments during the year stood at Rs. 5.36 crore . The assessee claimed that its shareholder funds are more than value of investments and hence disallowance u/s. 14A should be Nil. The assessee relied upon the decision of Hon‟ble Bombay High Court in the case of Reliance Utilities and Power Ltd., (2009) 178 Taxman 135(Bom.) and decision of Hon‟ble Bombay High Court dated 23.07.2014 in the case of CIT v. HDFC Bank Ltd. (2014) 366 ITR 505(Bom.) . The assessee also relied upon the other case laws to contend its view point that no disallowance u/s. 14A r.w.r. 8D(2)(ii) is warranted as its owned interest free funds available are more than value of investments . 3.3 So far as disallowance by invoking Rule 8D (2)(iii) read with Section 14A of the 1961 Act, it was submitted that disallowance can be made u/r 8D(2)(iii) of the 1962 Rules by taking average value of investments as on the first day and last day of the previous year as appearing in the Balance Sheet. The assessee submitted that it held Nil Investments in securities capable of yielding tax-free income as at the first day and last day of financial year as per its Balance Sheet and hence no disallowance of expenditure incurred in relation to earning of an exempt income is warranted u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules. Thus it was submitted that Rule 8D2(iii) of the 1962 Rules cannot be applied and hence disallowance u/s. 14A r.w.r. 8D2(iii) stands at Nil. Without prejudice, it was also submitted by assessee that disallowance u/s. 14A cannot exceed exempt income of Rs. 10,67,947/- received by the assessee. The assessee relied upon the decision of Hon‟ble Delhi High Court in the case of Joint Investments P. Ltd. v. CIT (2015) 372 ITR 694(Delhi). 3.4. The AO rejected the contentions of the assessee and worked out disallowance u/s 14A of the 1961 Act read with Rule 8D of the 1962 Rules. The AO observed that the investments in shares and mutual funds as on 31.03.2014 and 31.03.2013 are as under:-

Sr, Particulars As at HAS at NO. 31/03/2014 31/03/2013 Amt. in Rs. Amt. in Rs. Non-current investments 1 NIL NIL i) Equity Shares- Unquoted 2 Current Investments NIL NIL Reliance Liquid Fund - Direct Growth Plan- Growth Option NIL NIL 3.5 The AO also observed that borrowed funds and interest expenses claimed during the year under consideration for both the years are as under:-

Particulars As at As at 31/03/2014 31/03/2013 Sr. Amt. in Rs. Amt. in Rs. No. 'I Long Term Borrowings 1 2,30,08,20,000 2,35,03,00,000 Secured - Term Loan from Bank 2 69,75,00,000 7,12,500,000 Secured - from Financial Institutions 3 Sub Ordinate Debts 11,05,00,000 NIL Total: 3,10,88,20,000 3,06,28,00,000 Short Term II Borrowings NIL 8,00,00,000 Unsecured ICD Total Borrowings: 3,10,88,20,000 3,14,28,00,000 3.6 The AO also observed that the assessee is engaged in the business of construction of Highways on BOT(Built, Operate and Transfer) basis and the assessee has earned income by way of toll collection and shown income to the tune of Rs. 45,22,54,365/- . The AO observed that the assessee has earned exempt dividend income to the tune of Rs. 10,67,974/- and the assessee has failed to apportion interest and other expenses incurred towards investments in shares and mutual funds , income from which is exempt from tax. 3.7 It was also observed by the AO that while at the beginning of the year , the assessee had Nil investment in Mutual Fund and on 22.07.2013 , the assessee has invested in Reliance Liquidity Fund- Direct Daily Dividend Reinvestment Option an amount of Rs. 2,10,00,000/- . It was also observed by the AO that investments in Mutual Funds gradually increased during the year and the peak investment during the year stood at Rs. 5.36 crores. It was also observed that at the end of the year , the assessee did not hold any investment in Mutual Fund units which can fetch dividend income. The AO observed that the assessee is following peculiar pattern of holding investments so that the investments in securities capable of yielding an exempt income is at Nil value at the beginning of the year and also at the end of the year , so as to avoid any disallowance u/s. 14A of the 1961 Act. 3.8. The AO rejected the contentions of the assessee and held that Section 14A of the 1961 Act is applicable . The AO worked out disallowance u/s 14A by observing that the assessee has incurred total interest expenses to the tune of Rs. 35.14 crores and the borrowings stood at Rs. 310.88 crores . The AO made disallowances of interest expenses to the tune of Rs. 15,17,548/- , while disallowance under Rule 8D2(iii) of the 1962 Rules was worked out by the AO to the tune of Rs. 1,16,120/- , by taking average value of investments of 2,32,24,145/-, detailed as hereunder:- “6.6 Hence, disallowance u/s.14A is computed as discussed above: In respect in investments in Mutual Funds with Dividend Option Particulars Amount (In Rs.) 0 The amount of expenditure directly relating to income which does not form part of total income 35,14,31,503 Total Interest Paid (Other than interest directly relating to income which does not form part of Total Income) Disallowance in respect of interest paid (As calculated in 15,17,548 Annexurc A} 1,16,120 0.5% of average value of investment i.e. 2,32,24,145 (As calculated in Annexure A) Total disallowance u/s. 14A r.w.r. 8D 17,50,083 6.7 Accordingly, disallowance of Rs. 17,50,083/ - is worked out u/s. 14A, out of the total expenditure claimed at Rs. 35,14,31,503/- in respect of interest expenses.” 3.9 The AO based upon the above disallowances made u/s 14A read with Rule 8D of the 1962 Rules also made additions to the tune of Rs. 17,50,083/- u/s. 115JB of the 1961 Act while computing book profits. Thus, the AO made additions of Rs.17,50,083/- to book profits as per clause (ii) of the Explanation 1 to Section 115JB , with respect to expenditure of Rs. 17,50,083/- incurred in relation to earning of dividend income being exempt income , vide assessment order dated 30.12.2016 passed by the AO u/s 143(3) of the 1961 Act, by holding as under:- “ 7 Upon hearing, considering the submissions made, documents/evidences produced, and information available on record, as discussed hereinabove, the total income of the assessee is computed as under: Computation of Total Income Total Business Income (as per revised return) (12,26,25,952) Add: Disallowance u/s 14A r.w.r 8D of the Act 17,50,083 Page | 9 Short term capital Gain: 53,797 Total Assessed Income: (12,08,22,072) Tax @ 30%; NIL Computation of Total Income as per section 115JB Book Profit u/s. 115JB as per Revised Return 46,36,798/- Add: Disallowance u/s 14A r.w.r 8D of the Act 17,50,083/- Net Book Profit u/s. 115JB 63,86,881/- Tax @ 18.5% 11,81,573/- Since the tax on book profits u/s. 115JB is more than the tax on total income, the assessee is liable to pay tax on the Section 115JB provision of the Act, other than total income of the Assessee. 3.10. While working the aforesaid disallowance of expenditure incurred in relation to earning of an exempt income u/s 14A of the 1961 Act read with Rule 8D of the 1962 Rules, the average value of investment was worked out by AO of Rs. 2,32,24,145/- , which was annexed by the AO to assessment order vide Annexure-A, which is reproduced as hereunder:-

4. Aggrieved by an assessment framed by the AO vide assessment order dated 30.12.2016 passed u/s. 143(3) of the 1961 Act, the assessee filed first appeal with Ld. CIT(A). Detailed contentions were raised by the assessee before Ld. CIT(A) who was pleased to dismiss the appeal of the assessee in part by following appellate order passed by learned CIT(A) for AY 2013-14 , vide appellate order dated 31.01.2018 passed by learned CIT(A), by holding as under:- “ 4.2 I have examined the arguments taken by the assessee and the submissions filed by the assessee. The assessee has earned dividend income of Rs.10,67,974 Page | 11 during the year and claimed the same as exempt from tax. As per section 14A r.w. Rule 8D, the amount of disallowance is to be worked basis the actual amount of expenditure incurred to earn the exempt income, proportionate interest paid basis the average value of investment to the total asset and 0.5% of the average value of investments. 4.2.1 In this case, the assessee has contended that it has not incurred any direct expenses to earn the exempt dividend income which was not accepted by the Ld. AO. 4.2.2 It is noted that the assessee does not have had changed from Reliance Liquid Fund - Cash Plan Growth Options to Cash Plan Daily Dividend Option on 03.04.2012. The peak investment during the year stood at Rs.7.87 crores. The assessee has clearly invested these monies not merely for investment purposes but also with a view to earn dividend income. 4.2.3 The assessee has contended that it has utilized its own funds for investment purposes and accordingly, not borrowed any loans and proportionate interest disallowance should not be made. I have considered the submissions of the assesses and the AO's findings in the order. The assessee has invested huge amounts in the dividend option mutual funds. The assessee has also borrowed huge amounts on which interest is paid during the year, which the assessee claims to have borrowed for business purposes. Even for a while it is assumed that the investment is made out of its own surplus funds, it is pertinent to note that the assessee has borrowed monies on which interest is paid. Had the assessee not invested these monies, it might have not borrowed such huge loans, which are claimed for business and impacted the business activities. Thus, the argument of the assessee that it has invested monies out of its own funds is not tenable as on the other hand the assessee is borrowing monies for conducting its business activities. Hence, in my view, the AO has correctly computed the disallowance of the proportionate interest expenditure. New, corning to the third limb of the Rule 8D computation relating to 0.5% of the average value of investment. In this case, the assessee does not have opening and closing balance of the investment in the books of accounts. The AO relying on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. [2010] 323 ITR 81, has adopted two alternate methods of computing the average value of investments. The AO had adopted the average investment value by considering the first investment made and the Page | 12 last investment made / no. of days for which the assessee stayed invested. In this case, the said average investment is computed at Rs.2,32,24,145. 4,2.4 Identical issue has been decided by me in the appellant's own case for AY 2013-14 vide order dated 02.06.2017. There being no change in the facts and circumstances, following the decision for the said year, I hereby hold that the disallowance u/s. 14A r.w, Rule 8D should be Rs.16,33,669 (Rs 15,17,548 + Rs. 1,16,121) as against AO's computation of Rs.17.50,083/-. The addition made by the AO is accordingly restricted to Rs.16,33,669/- . These grounds of appeal are partly allowed. 4.2 . So far as disallowances of expenses u/s 14A and additions thereto to compute Book Profits u/s 115JB , the plea of the assessee was rejected by Ld. CIT(A) by following the decision of learned CIT(A) for AY 2013-14 , vide appellate order dated 31.01.2018 passed by learned CIT(A), by holding as under:- “ 5.2 I have considered the submissions of the assessee and the AO‟s order. It is held in Ground no. 1 to 6 above that disallowance of Rs. 16,33,669 is to be made u/s. 14A r.w. Rule 8D. Now, the question arises is whether this amount is to be added back while computing the book profits u/s. 115JB of the Act. 5.2.1 The assessee has contended that section 14A is specified under Chapter IV of the Act - Computation of Total Income and computation of book profit u/s. 115JB of the Act is specified under Chapter XII-B of the Act. Thus disallowance u/s. 14A of the Act is to be computed and only computed when computing the total income under chapter IV. 5.2.2 The provisions of section 115JB of the Act is a notwithstanding clause, i.e. the aforesaid provisions override all the other provisions of the Act and are to be read and applied setting aside all other provisions of the Act. Thus provisions under section 115JB of the Act are specific provisions to compute the taxable book profits considering the additions and reductions as specified in the aforesaid section and hence the provisions under section 14A, specified under a separate chapter of the Act, cannot be invoked when computing the bock profits under section 115JB of the Act.

5.2.3 However, it is to be noted that section 14A of the Act provides that it mandates disallowance of expenditure 'in relation‟ to the income which does not form part of the total income under the Act while clause (f) in explanation 1 to Section 115JB (2) of the Act mandates disallowance of expenditure „relatable' to the income to which Section 10 (other than Section 10(38) of the Act) or Section 11 or Section 12 of the Act applies. The close perusal of the both the above provisions reveals that more or less similar language is used in both the afore-stated provisions. The dividend income is declared on the mutual funds which is exempt u/s 10(34) (not Section 10(38)). As per clause (f) to explanation 1 to section 115JB(2) requires expenditure relatable to the exempt income to be disallowed provided the same is debited to Profit and Loss Account while section 14A(2) mandates that if the AO is not satisfied with the correctness of the claim of the assessee with regard to the expenditure incurred by the assessee in relation to the income which does not form part of the total income , then disallowance shall be computed in accordance with the prescribed method viz. Rule 8D of Income Tax Rules, 1962. 5.2.4 The assesses company has relied upon on the decision of Mumbai Tribunal in Reliance Industrial Infrastructure Ltd. v. Addl. CIT in & 70/ Mum/2009 whereby the Mumbai Tribunal held that disallowance u/s. 14A of the Act r.w. Rule 8D cannot be imported into clause (f) of the explanation 1 to Section 115JB of the Act, It is to be noted that this appeal pertained to AY 2005-06 and 2006-07 which are prior to assessment year 2008-09 from where the provisions of section 14A r.w. Rule 8D apply. 5.2.5 The assessee company has relied upon the decision of Apollo Tyres Limited 255 ITR 273{SC). The Hon'ble Supreme Court in above decision has held that the AO cannot tinker with the profit and loss prepared by the assessee company in accordance with the provisions of The Companies Act.1956 and which are certified by the statutory auditors and approved by the Company in Annual General Meeting and scrutinized by the Registrar of Companies to be so maintained in accordance with the Provisions of the Companies Act, 1956. Section 115JB of the Act reveals that tinkering with the Profit and Loss Account as prepared in accordance with the provisions of the Companies Act is permitted to the extent provided in explanation 1 to Section 115JB(2) of the Act. Clause (f) to explanation 1 to Section 115JB(2) of the Act permit the Book profit to be increased with the expenditure relatable to any income to which Section 10 (other than Section Page | 14 10(38) of the Act), Section 11 or Section 12 of the Act applies and hence the above decision in Apollo Tyres Limited in 255 ITR 273(SC) is not applicable to the facts of the case. 5.2.6 Identical issue has been decided by me in the appellant's own case for AY 2013-14 vide order dated 02.06.2017. There being no change in the facts and circumstances, following the decision for the said year, I hereby hold that the AO is rightly added the amount disallowable u/s. 14A r.w. Rule 8D while computing the book profits u/s. 115JB of the Act, however, the said amount of disallowance should be limited and restricted to Rs. 16,33,669. These grounds of appeal are dismissed.”

5. Aggrieved by an appellate order dated 31.01.2018 passed by learned CIT(A), the assessee has filed an appeal with tribunal. The Ld. Counsel for the assessee submitted that issue is covered in favour of assessee by assessee‟s own case in vide order dated 31.01.2019 passed by Mumbai-tribunal. It was submitted by learned counsel for the assessee that the disallowance of expenditure incurred in relation to earning of an exempt income was made by the authorities below u/s. 14A of the 1961 Act read with Rule 8D of the 1961 Act. Further it was submitted that additions were made while computing Book Profits u/s 115JB of the 1961 Act wherein disallowances of expenses as were made u/s. 14A of the Act read with Rule 8D were added to income to compute Book Profits u/s 115JB of the 1961 Act . It was claimed that opening and closing investments as at the beginning of the year and as at the end of the year were Rs. Nil. It was submitted that average investments were taken by AO by taking monthly averages of the investments which come‟s to Rs. 2,32,24,145/- which was annexed by the AO vide Annexure A to assessment order. It was submitted that computing monthly averages of investments for making disallowance u/s 14A is not permissible for the impugned assessment year i.e. 2014-15 as new Rule 8D wherein monthly average investments is to be computed for making disallowances u/s 14A has come into force from AY 2017-18 onwards.

It was submitted that interest free owned funds available with the assessee are Rs. 106.11crores as at 31.03.2014(apart from NHAI grant of Rs. 107.46 crores as at 31.03.2013 as well at 31.03.2014, which is found credited to Reserves and Surplus ) while the interest free owned funds were Rs. 105.63 crores as at 31.03.2013(excluding NHAI grant). Our attention was drawn to audited financial statements of the assessee for the year ended 31.03.2014 which is placed in file in the paper book at page 6-14. It was explained that while the investments in Mutual Fund at peak was Rs. 7.87 crores. It was submitted by learned counsel for the assessee that since own interest free funds available are more than investments made, no disallowances u/s 14A read with Rule 8D is warranted. It was also claimed that disallowances u/s 14A read with Rule 8D of the 1962 Rules cannot exceed an exempt income for the tune of Rs. 10,67,974/- which was dividend income from Mutual Fund claimed to be exempt u/s 10(34) of the 1961 Act . It was submitted by learned counsel for the assessee that suo motu disallowance of expenses incurred by the assessee for earning of an exempt income was made u/s 14A of the 1961 Act of Rs. Nil. Thus it was claimed that no disallowances of expenses are warranted u/s. 14A of the 1961 Act. 5.2 The Ld. DR on the other hand submitted that assessee had made investments in Mutual Fund during the year on which exempt income was received and disallowance was made towards interest expenses u/s 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rules and also disallowance of expenses were made of 0.5% of the average value of investments in the securities capable of yielding exempt income by invoking provisions of Section 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules.