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Income Tax Appellate Tribunal, DELHI BENCH “B” NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD, JUDICIAL & SHRIBRAJESH KUMAR SINGH
Assessee by Shri M.P. Rastogi, Adv. and Shri Shivam Malik Adv. Revenue by Shri Rajesh Kumar Dhanesta, Sr. DR 19.12.2024 सुनवाईक�तारीख/ Date of hearing: 18.03.2025 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R PER BRAJESH KUMAR SINGH, AM,
This appeal is filed by the assessee against the order of National Faceless Appeal Centre, Delhi, dated 20.03.2024 for the Assessment Year 2018-19, arising out of order u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act dated 17.02.2021.
The assessee has raised following grounds of appeal:-
The Learned Assessing officer and Learned CIT (Appeals) erred in calculating the expenses related to exempted income
Us 14A of the Income Tax Act, 1961, and also erred in enhancing the disallowance Us 14A by disallowing the following expenses: a) Portfolio Management charges in Clause (i) of rule 8D(2)Rs.56,86,865/- b) Disallowance of expenses in Clause (iii) of rule 8D(2)Rs. 3,08,64,419/- The appellant craves leave to alter, amend or withdraw all or any of the Grounds of Appeal herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary either before or during the hearing.
3. The assessee has also raised additional ground, which reads as under:-
"That in absence of satisfaction contemplated /s 14A(2) of the Income-tax Act, 1961 read with Rule 8D(1) of Income Tax Rules, 1962, the disallowance as made by the Assessing Officer and sustained by the CIT (Appeals) is arbitrary, unjust and bad in law." 3.1. We find that all the facts relevant for adjudication of the aforesaid additional ground is already on record. The additional ground raised by the assessee is purely legal in nature and goes to the root of the matter. Hence, in view of the decision of the Hon’ble Supreme Court in the case of NTPC Limited vs CIT 229 ITR 383(SC), the additional ground is hereby admitted and taken up for adjudication.
Brief facts of the case:- The case was selected for scrutiny under CASS to verify the reason “Expenditure debited to P & L for earning exempt income is very less in comparison to the investments made to earn exempt income.” The assessee is a non-banking finance company engaged in purchase and sale of units of various Mutual Funds. During the year, the assessee earned the following exempt income:-
i. Exemption u/s 10(34) for dividend income Rs.45,79,98,228/- ii. Exemption u/s 10(38) for Long Term Capital Gain (LTCG) on sale of shares:Rs.1,18,88,480/- 5. The AO noted that the assessee had suo moto disallowed a sum of Rs.9,75,502/- u/s 14A of the Act being the expenses incurred in relation to the above exempt income. The AO on perusal of the computation of the disallowance u/s 14A noted that the assessee had not debited any expenses incurred in respect of dividend amounting to Rs.45,50,35,455/- received from M/s Dabur India Limited which was 97% of the total dividend income received by the assessee. The AO noted that the assessee had given a working of Rs.9,75,502/- as under:-
Calculation of Expenses u/s 14A Amount Amount directly relating to exempt income (ii) 1% of annual average of the monthly averages of opening balances of investments, income from which does not or shall not 3,08,64,419 form part of total income Rs.3,08,64,41,916 Less expenses on account of income on which no activity has been done in the previous year Total exempt income Dividend received 45,79,98,228 Long Term Capital Gain 1,18,88,480 4698,86,708 Less dividend received from Dabur India Ltd. 45,50,35.455 ------------------ 97% of Dabur India Ltd. dividend on 2,98,88,917 exempted income 9,75,502 Disallowance u/s 14A Accordingly, the AO asked the assessee to submit complete working of disallowance u/s 14A r.w. Rule 8D. In response to the same, the assessee submitted a revised details of dividend earned, dividend script wise and also revised calculation of disallowance u/s 14A of the Act amounting to Rs.23,34,064/-.
5.1. The AO further noted that major part of its revenue (75.91% of the total revenue) was from the aforesaid exempt income and the assessee had invested 61.14% of the total assets in such exempt yielding investment. Accordingly, the AO rejected the claim of the assessee that earning dividend income and LTCG was never the objective of the company and held that the exempt income earned is not in the nature of passive activity having no input. According to the AO, in the present scenario, strategizing investments in various portfolios, timely investments holding such investment and timely exit from investment are well informed and well coordinated management decisions which involved not only inputs from various sources but also acumen of senior management functionaries. Therefore, according to the AO, cost is inbuilt into even so called “passive” investment and therefore, expenses incidental to the same are also absolute necessary.
5.2. The AO further noted that the assessee had not followed the relevant rules and provisions of the Act and has computed the disallowance regarding without deducting any expenditure in respect of dividend earned from M/s Dabur India Ltd. The AO held that there was no such basis because the said dividend income was also exempt u/s 10(34) of the Act and further the computation as per Rule 8D does not provide for any such deduction.
5.3. In view of taking note of the above facts, the AO recorded his satisfaction in para no.6.6 of its order, which is reproduced as under:-
“6.6. The above facts show that the assessee has failed to furnish any explanation for computing the disallowance u/s 14A at Rs. 9,75,502/- only when the major part of its income was claimed as exempt and its expenses ran into crores of rupees. In these circumstances, there is a reason to believe that the expenses relatable to exempt income are many times more than what has been added back by the assessee. Therefore, keeping in view the facts of the case, as enumerated above, I am not satisfied with the working of disallowance made by the assessee u/s 14A of the I.T. Act. 1961 and the disallowance is be made as per the method prescribed under section 14A(2), i.e. as per Rule 8D of the I.T. Rules, 1962.” 5.4. The AO disallowed the expenses of Rs.56,86,865/- debited under the head “portfolio management services” as it was held by the AO to have been incurred for the purposes of obtaining professional service relating to investment in shares under clause (i) of Rule-8(2). Thereafter, the AO disallowed a sum of Rs.3,08,64,419/- being 1% of the only average of the monthly average of opening and closing balance of the value of the investment under clause (iii) of Rule-8D. Thus, the disallowance worked by the AO was Rs.3.,65,51,284/- (Rs.56,86,865/- + Rs.3,08,64,419/-). After taking note of the fact that the assessee had disallowed a sum of Rs.9,75,502/- in its original return of income, the AO made the balance disallowance of Rs.3,55,75,782/- (Rs.3,65,75,782 - 9,75,502).
Aggrieved with the said order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) confirmed both disallowances made by the AO. Regarding the disallowance of PMS expenses, the ld. CIT(A) observed that notwithstanding that during the year majority of the dividend has been received from M/s Dabur India in which the assessee is a key promoter but the fact remains that the PMS provider manages the entire portfolio and provides advice with regard to balancing the portfolio and when to purchase and sell shares to ensure a good mix of shares which would promote the interests of the client assessee company. Further, the Ld. CIT(A) noted that capital gains have been earned on shares sold from this portfolio which is managed by the PMS providers. Accordingly, the ld. CIT(A) held the payment of Rs. 56,86,865/- made on account of Portfolio management Service charges is directly related to the exempted income and hence would qualify under clause (i) of Rule 8D for purposes of calculation the disallowance u/s 14A of the Act. Accordingly, the disallowance made by the Assessing Officer was confirmed.
6.1. Further, the ld. CIT(A) also confirmed the addition of Rs.3,08,64,419/- under clause (ii) of Rule-8(2) by observing inter-alia that as per the provisions of law once it is established that the assessee has earned exempt income then Rule 8D(2)(ii) provides a complete formula as to what expenses are to be taken into account for arriving at the disallowance. The Ld. CIT(A) observed that there was no justification in the action of the assessee in excluding the dividends received from M/s Dabur India Ltd. In view of these facts, the Ld. CIT(A) held that the reliance of the assessee on the decision of the Hon’ble Delhi High Court in the case of ACB India Ltd vs ACIT: 374 ITR 108 was misplaced since the investment in DIL is an investment which has actually yielded tax exempt income and as per the 6 decision of the Jurisdictional High Court, it must be taken into account for computing the average investments. The Ld. CIT(A) further held that the decision in the case of CIT vs Holcim India (P) Ltd was also not applicable to the present facts, as also noted by the A.O, since in that case the issue solely was whether the Tribunal was right in deleting the addition u/s 14A since the assessee had not earned any exempt income during the year which was certainly not in the case as far as the assessee company is concerned. Accordingly, he confirmed the addition made by the AO.
Aggrieved with the said order of the ld. CIT(A), the assessee is in appeal before us.
The Ld. AR submitted before us that the submission in respect of additional grounds are reiterated and since the AO had not recorded satisfaction which was required to be made u/s 14A(2)of the Act not have been made that the disallowance made by the AO was not justified and the same should be quashed.
8.1. In this regard, the ld. AR relied upon the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT 402 ITR 640 and of the Hon’ble Delhi High Court in the case of HT Media Ltd. vs PCIT 399 ITR 576. Further, the assessee relied upon the following decisions of the Tribunal on the proposition of non-recording of satisfaction as required u/s 14A(2) of the Act and consequently the deletion of the disallowance u/s 14A of the Act: i. Milky Investment and Trading Company vs ACIT (ITA No.5972/Del/2019) dated 28.11.2023 ii. Sh. Chowdry Associates vs ACIT (ITA No.6526/Del/2019) dated 14.09.2023 8.2. Further, it was submitted that Para-4.3 of the assessee’s written submission that the disallowance if any required to be made in terms of Rule8D(2)(ii) then it should be restricted to the extent of 1% income yielding shares and relied upon following decisions:- i. ACB India Ltd. vs ACIT 374 ITR 108 (Del.) ii. CIT vs Vireet Investment (P) Ltd. 165 ITD 27 (Del.)
8.3. Regarding the PMS charges paid to two concerns, it was submitted that the assessee earned exempt income amounting to Rs.1,18,88,480/- under the head Long Term Capital Gain on which STT was paid, whereas in respect of other Long Term Capital Gain on which no STT was paid as well as the Short Term Capital Gain were not claimed as exempt income. Similarly, out of the total dividend amounting to Rs.45,79,98,228/-, the dividend from M/s Dabur India Ltd. was Rs.45.50,35,455/- which almost constitutes 97% of the total dividend and on which no expenses have been incurred by the assessee. Such dividend from M/s Dabur India Ltd. constitutes 97% of the total exempt income.
8.4. The ld. Sr. DR relied upon the orders of the authorities below.
We have heard the rival submissions and perused the material available on record. The Ld. AR submitted that the AO had not recorded the satisfaction as required under Rule14A(2) of the I.T. Rules and therefore the disallowance made by the AO is bad in law. The above contentions of the ld. AR along with case laws relied upon by him have been carefully perused by us but not found to be acceptable. As noted above, in para no.5.3 of this order, the AO in para 6.6 of the assessment order had recorded the satisfaction; he had given reason why the suo moto disallowance made by the AO was not justified in the present case. Further, in this case, the assessee has itself revised the disallowance u/s 14A from Rs.9,75,502/- made in its return of income to Rs.23,34,064/- in the revised computation of income filed by the assessee before the AO during the assessment proceedings as discussed by the AO in Para No.6.3 of its order. Therefore, in the present case, the assessee itself agrees that the suo moto disallowance of Rs.9,75,502/- made under section 14A of the Act was not correct and therefore this itself is a sufficient ground to support the satisfaction recorded by him which justifies the satisfaction recorded by the AO for not accepting the suo moto disallowance made by the assessee in its return of income. Therefore, the additional ground filed by the assessee is dismissed.
9.1. The ld. AR further claimed that the disallowance made u/s 14A r.w.r. 8D(2)(iii) can be made only in respect of the average monthly value of the investment of the shares/investments which yielded the dividend income. In this regard, he relied upon the decisions as referred in para No. 8.2 of this order. The same has been carefully considered and found to be acceptable. Therefore, the AO is directed to restrict the disallowance @ 1% of the annual average of the monthly average opening and closing balance of the value of only such investments in respect of the shares from which dividend income being exempt was earned. Further, in the revised computation, it is seen that (as reproduced by the ld. CIT(A)on page 14 to 22 9 of his order) that the assessee had computed a sum of Rs.29,10,250/- at 1% of the annual average of the monthly average opening and closing balance of the value of the investments in respect of the shares from which dividend income being exempt was earned. As per revised computation, the assessee further stated that since it has already disallowed a sum of Rs.9,75,502/- in its original return of income and therefore further proposed disallowance u/s 14A of the Act was Rs.25,34,784/- whereas as per the statement noted by AO in the assessment order (para -6.3), such disallowance comes to Rs.23,34,064/-. Therefore, the AO is directed to reconcile the same and make disallowance after necessary verification as per law restricting the disallowance @ 1% of the annual average of the monthly average opening and closing balance of the value of the investments in respect of the shares from which dividend income being exempt was earned.
9.2. The submission of the assessee regarding its claim that the PMS expenses should not be disallowed has been carefully considered but not found to be acceptable. The assessee submitted that it had earned exempt Long Term Capital Gain on which STT was paid and whereas the Long Term Capital Gain on which no STT was paid and Short Term Capital Gain were also not claimed as exempt and the services rendered by the PMS manages were also utilized in respect of said taxable income. On perusal of the order of the Assessing Officer and the Ld. CIT(A), the facts regarding the specific purpose for which PMS expenses amounting to Rs.56,86,865/- was utilized has not been examined by both the lower authorities before making the disallowance and its confirmation by the Ld. CIT(A). The assessee has also not explained the same before us and the utilization of the PMS 10 expenses requires factual verification before its allowance or otherwise can be decided. Therefore, this issue is set-aside to the file of the Assessing Officer to decide the matter de novo after giving reasonable opportunity of being heard to the assessee and in accordance with law. Ground no.1 of the appeal is partly allowed.
In the result, the appeal of the assessee is partly allowed.