ELEPHANT INDIA FINANCE PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE- 11(1), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘SMC’, NEW DELHI Before Sh. N. K. Saini, Accountant Member ITA No. 4115/Del/2017 : Asstt. Year : 2012-13 Elephant India Finance Pvt. Ltd., Vs DCIT, 4th Floor Punjabi Bhawan, 10, Circle-11(1) Rouse Avenue, New Delhi New Delhi-110002 (APPELLANT) (RESPONDENT) PAN No. AAACE0472F Assessee by : Sh. M. P. Rastogi, Adv. Revenue by : Ms. Ashima Neb, Sr. DR Date of Hearing : 12.04.2018 Date of Pronouncement : 10.07.2018 ORDER This is an appeal by the assessee against the order dated 14.03.2017 of ld. CIT(A)-3, Delhi. 2. Following grounds have been raised in this appeal: “1. That both the Ld C1T(A) and Ld AO erred similarly in law and in facts that the investment advisory fees paid to Tusk Investment Fund 1 and Tusk Investment Fund 2 of Rs 60,46,010 respectively is without any basis and hence cannot be allowed deduction u/s 37(1) of the Income-tax Act. 2. That both the Ld CIT(A) and Ld AO erred similarly in law and in facts that the investment advisory fees paid to Tusk Investment Fund 1 and Tusk Investment Fund 2 of Rs 60,46,010 respectively is for earning tax free income and hence cannot be allowed deduction u/s 14A of the Income-tax Act. 3. That the Ld. CIT(A) erred in holding on facts that the assessee failed to provide any service details/ or logic or

2 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. basis why the payment was made to Tusk Investment Fund 1 and Tusk Investment Fund 2 of Rs 60,46,010 each. Consequently, the order passed the Ld CIT(A) is incorrect and without any basis. 4. The Assessee craves to leave to alter, amend or withdraw any grounds of appeal which is necessary in the interest of justice.” 3. From the above grounds, it is gathered that the only grievance of the assessee relates to the sustenance of addition of Rs.60,46,010/- made by the AO by making the disallowance out of the expenses of Rs.1,20,92,020/- i.e. Rs.60,46,010/- each on account of payment made to Tusk Investment Fund 1 and Tusk Investment Fund 2.

3 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. claimed payment of Rs.60,46,010/- each to the Tusk Investment fund 1 and Tusk Investment Fund 2 respectively totaling to Rs.1,20,92,020/-. The AO asked the assessee to explain the service received from those two parties. According to the AO, the assessee failed to bring on record any detail in this regard. The AO pointed out that there was no change in the shareholding pattern of the assessee company as well as the long term borrowing which was basically the loan taken from the related parties. He also pointed out that on the assets side, no amount was shown as inventory or stock in trade and there was no opening as well as closing stock, hence, no business activities were undertaken by the assessee during the year under consideration except investments in quoted and unquoted shares on which, it had earned dividend income and claimed it exempted u/s 10 of the Act which required disallowance under the provisions of Section 14A of the Act. The AO held that the expenses of Rs.1,20,92,020/- claimed by the assessee were related to the investment, income from which did not or shall not form part of the total income for the taxation. Therefore, the amount of Rs.1,20,92,020/- was not allowable expense under the provisions of Section 14A of the Act. He, therefore, disallowed the said amount and as the assessee in the computation of income had suo motto made disallowance of Rs.29,44,969/- u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962. Therefore, the AO made a further disallowance of Rs.91,47,051/- (Rs.1,20,92,020- Rs.29,44,969).

4 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. 5. Being aggrieved the assessee carried the matter to the ld. CIT(A) and furnished the written submissions which have been incorporated by the ld. CIT(A) in para 2 of the impugned order which read as under: “This paper book submissions made before Your Honour is due to grievance caused to Appellant against the assessment order passed u/s 143(3) of the Income-tax Act 1961 by the id. AO for the AY 2012-13. The Ld AO vide assessment order dated 03 November 2014 u/s 143(3) of the Act had made additions u/s 14A of Rs 91,47,051/-. Against the said assessment order the Appellant had filed an appeal with Your Honour's office on 12 December 2014 u/s 246A of the Income-tax Act, 196. The Ld AO had made a single addition for the expenses totaling Rs 120,92,020 presumably incurred for earning tax free returns under section 14A of the Act. The Appellant had challenged this addition and filed an appeal u/s 246A of the Act. The various grounds of appeal are dealt below: 1. Grounds of Appeal 1 -Addition of Rs.120,92,020 - 14A 1.1 The Appellant contends that the Ld AO has defaulted in application of section 14A of the Income- tax Act, 1961 by disallowing a sum of Rs.1,20,92,020/-. In the assessment proceedings the Ld AO called for the details of Legal Professional Fees totaling to Rs 121,8,827 out of which Rs.120,92,020 was paid to two Mauritian Companies after the deduction of tax. The AO was of view the two Mauritian- Companies i.e. Tusk Investment 1 and Tusk Investment 2 acted as management advisor for the investments made in India by the Appellant, hence any amount paid by the Company for the purpose of investment in India to such management advisors would be disallowed u/s 14A of the Act In doing so, the Ld AO held as follows:

5 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd.

"In the present case, the assessee has claimed expense of Rs. 1,20,92,020/- on account of payment made to Tusk Investments Fund 1 and Tusk Investments Fund 2 against the management fee towards the cost of managing and receiving advice in relation to the investment made. Section 14A of the IT Act, 1961 regulates the expenditure which was incurred in relation to exempt income. By virtue of this section no deduction is allowed in respect of expenditure incurred by the assessee on account of income which does not form part of the total income under the Act. Further, the CBDT vide circular No, 5/2014 dated 11.02.2014 has clarified that disallowance of expenses u/s 14A of the Act, 1961 shall be made even in the cases where corresponding exempt income has not been earned during the year. The relevant portion of the circular is reproduced below for reference: Considering the facts mentioned above, it is imperative to held that the expense of Rs. 1,20,92,020/- claimed by the assessee are related to the investment, income from which does not or shall not form part of total income for the taxation. Therefore the amount of Rs. 1,20,92,020/- is not an allowable expense under the provisions of Section 14A of the Income Tax Act, 1961. Hence the amount of Rs. 1,20,92,020/- is disallowed u/s 14A of the Act As the assessee in the computation of income has sub motto made disallowance of Rs. 29,44,969/- u/s 14A r. w. Rule 8D, therefore the balance amount of Rs. 91,47,051/- is hereby added to the total income of the assessee for the year under consideration". 1.2 The from above, it can seen that the id. AQ disallowed a sum of Rs 120,92,020 as paid by the company to the foreign ponies who were investment advisors of the company stating that the entire expenses

6 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. paid were for the purpose of exempt income u/s 10 and thus no expenses incurred primarily for earning such income shall be allowable for tax deduction. While coming to this conclusion the id AO failed to take the following into consideration. 1.3 Not all the investments made had earned tax free incomes and that the Appellant was in the business of financial services holding a NBFC registration with the RBI of India. The Company had an investment of Rs 60.99 crores out of which dividend received was only Rs 18.5 lakhs. It's impossible to imagine that an investment of magnitude of Rs 61 crores would be invested just to earn tax free dividends Rs 18.50 lakhs i.e. 0.3% less than 1% every year. Even an investment in savings bank would have given an assured return of 4-6% gross. Thus, to conclude that the Appellant had invested 61 crores just to earn tax free returns in form of dividends is an argument devoid of any merits. It is to be noted, earning dividends is not an assured activity, no business man will ever incur a recurring expenditure in anticipation of non assured returns esp dividends. The receipt of dividend is totally a feature which depends on lots of factors and there cannot be guarantee just as in case of interest The Mandate of section 14A requires to disallow such expenses which were incurred for the purpose of earning tax free dividends. The Ld AO has not given any reasons why he considers expenses of Rs 120,92,020 is for the purpose of earning dividends, In the purpose of the Appellant was not only earn dividends based on past records it could have very well invested Rs 61 crores only in dividend paying companies such as SBI, ONGC and others. On the contrary, Companies like Amar Chitra Katha, Mahindra and others in losses are nor paid any dividends. The investments made by the Appellant is thus a strategic investment with an eye to acquire more holding in such companies. During the subject assessment year 2012-13, the Appellant had not sold any investments and earned any

7 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. long term or short term capital gains. The investment made by the Appellant was long term in nature with a strategic eye on each of investments as follows: Particulars Dividend Date of No. of Amount (Rs.) for AY 2011-12 holding Shares received in AY & 12-13 2012-13 2008 4,24,87,974 NA 169830 1. Mahindra CIE Automotive Limited 2008 & 2009 8,50,25,171 6,78,173 2. EIH Limited 753526 2008 2,87,929 6,87,19,167 1,43,965 3. Nitco Limited Not known 100 10,000 NA 4. Param Investments Private Limited 15,042 4,23,37,399 NA 2010 & 2011 5. Amar Chitra Katha Private Limited 7,357 3,22,01,074 NA 2011 6. Air Works (I) Engineering Private Limited 51,31,280 33,91,77,608 10,26,256 7. RBL Bank 2010 & 2011 Limited 60,99,58,393 18,48,394 Not Applicable

1.5 The perusal of above chart reveals that the Appellant on investment of Rs 61 crores in different listed and unlisted equities have earned only Rs 18.50 lakhs as dividends from only three companies. As already stated, the status of dividend is not something which the Appellant was assured off for which he could have planned his expenditure. The income by way of dividend is purely by chance, however investing in the company with long term view calls for more understanding the environment of business and other facts such as expertise of top management etc. The objective of the Appellant in investing in these equities was that of a private equity investor with a view of long term gains and possible exit once the valuation becomes attractive or may be to pit more investments in order have a management say. Further, the income tax taxation on exit from this investment of both listed and unlisted equities might attract taxation. However, such an event has not

8 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. happened in this year, hence there can be no question of any disallowance. The payment was made to the Mauritian Companies to act as guide and giving their say about the kind of investments to be made in the Indian equity market Thus, the cost incurred to be paid to the Mauritian companies was genuine expenses tax deductible u/s 37 of the IT Act. There can be no question of disallowance if any u/s 14A of the Act, as no tax free returns has been shown by the AO to be received by the Appellant from sale of such of shares. As stated, equity dividend cannot be a yard stick to disallow the total business expenditure. At this juncture it is important to note that what Hon’ble Delhi High Court has held in case of CIT vs Holcim India (P) Ltd., ITA Nos. 486/2014 and 299/2014 (Annexure) - ''Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax”. 1.6 Further, In Holcim India's case (supra), Hon’ble Delhi High Court has held that AO was wrong is disallowing the entire expenditure as if there was no expenditure incurred by the respondent assessee for conducting business. The expenditure had to be incurred to protect the investment made. The genuineness of the expenditure for the business activities has not been doubted by the AO and thus in given circumstances there is no merit in disallowing such expenses. 1.7 Elucidating further, the Hon’ble Delhi Court in Holcim India's case (supra) held that Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a

9 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. 1.8 The, above ruling of Hon'ble Delhi High Court is a land mark judgment as per the Appellant, as the facts of the case are same or similar to the Appellant. In the above ruling the quashed the disallowance u/s 14A of Rs 8.61 crores for AY 2007-08 and Rs 6.60 crores for AY 2008-09 holding that no expenses can be disallowed as the Ld AO has not shown any tax free income earned in the income schedule. The Hon' High Court also held that dividend income is an discretionary item of income and what would be important is whether any tax free return is earned on sale of shares. In case of the Appellant, to no tax free returns have been earned from sale of shares and discretionary dividend income alone cannot be made the basis to disallow substantial income of Rs 120,92,020. In net summary, the Appellant prays before to quash the additions of Rs 120,92,020 made the AO. 1.9 The Appellant states dividend earning was never the objective of the Company and thus finding has not been given by the Ld AO as to what was motive of the company of the invests Rs 61 crores. The Appellant has already stated that dividend earning was not its motive as dividends does not assure a definite return, thus no definite expenditure can be incurred on regular basis purely on windfall income under dividend category. Thus, the Ld AO has failed to clearly point out the expenses incurred by the Appellant to earn the dividends. Given that, the AO is guilty of disallowing a genuine business expenses of Rs 120,92,020 payable to investment advisor. Moreover, Hon'ble High Court in Holcim India's case has rebutted the theory of dividends and upheld that taxability of shares to be taken as basis to allow or

10 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. disallow the expenses u/s 14A of the Act. Moreover, time and again it has been held by various tribunals that strategic investment would fall outside the purview of 14A, Till 31 March 2015, the Appellant has not disposed any holding in investments of Rs 61 crores. Given the long term holding, it cannot be said that the Appellant was holding the shares to earn the dividends. For the period of 5 years, the investments has fairly shown a high returns, still the Appellant has not sold its stake in such companies. Thus, when stakes are with a view of long term, no disallowance can be made of genuine expenses made u/s 14A. The appellant pleads that the order of the AO may kindly be quashed being void ab initio as it is evident that the disallowance u/s 14A made by the AO is not justifiable and against the tenets of law and hence, should kindly be deleted.” 6. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee vide order sheet entry dated 17.08.2015 was directed to establish the rendering of services by bringing on the record genuinity and capability of the investment advice in the field of the equity market and the complete details of work executed in India. In response, the assessee submitted that it had debt free funds and intended to maximize returns in India from the equity market, despite having some knowledge about the Indian Equity Market but was not sure how it can reliably and in well informed manner maximize value from the Indian Equity Market. It was further stated that the assessee became aware of some FIIs who had an investment strategy in Indian Equity Market with an projected investment of Rs.400 crores in year 2008 and was keen to get associated that FIIs and entered into agreement for the portfolio

11 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. management advisory and agreed to pay 2% fees to two companies, namely, Tusk Investment Fund 1 (T1) and Tusk Investment Fund 2 (T2) based in Mauritius and that by going on the advice of T1 and T2, the assessee invested a sum of Rs.60 crores for which the assessee had paid a sum of Rs.1,20,92,020/- after the compliance of tax laws and claimed the same as deduction u/s 37(1) of the Act. The ld. CIT(A) also observed that the analysis of the investment made by the assessee company revealed that mostly the money had been invested in the privately held companies, there was nothing on record to show the role played by the management companies for making the investment in the Indian Companies. He further observed that the assessee had not submitted any documentary evidence in support to establish the experience of Tusk Investment Fund 1 and Tusk Investment Fund 2 regarding the Indian market. He, therefore, asked the assessee to bring on the record, the evidences regarding the experience and management services provided to other companies in India. The ld. CIT(A) held that the onus to proof was on the assessee to prove each of the following ingredients before expenditure can be allowed as deduction: “(a) The item of expenditure not being of the nature described under ss. 30 to 36 (b) the item of expenditure must not be in the nature of capital or personal expenses of the assessee; (c) the expenditure must be laid out wholly and exclusively for the purpose of business or profession.” 7. The ld. CIT(A) was of the view that the mere fact that the accounts of the assessee contain debit entry and that the debit had been duly authorized on behalf of the assessee will not make the

12 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. expenses deductible from the taxable profits. He observed that the assessee had not submitted any evidence regarding the rendering of services, experience regarding the investment climate in India and the reasonableness of the payment made to the Tusk Investment Fund 1 & 2, Mauritius which was obligatory on the part of the assessee to prove the reasonableness of the amount. He also observed that the mere fact that the payment had been made under a contract/agreement was not conclusive of the expenditure being laid out wholly and exclusively for the purpose of business. Accordingly, the disallowance made by the AO was sustained.

13 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. Jurisdictional High Court in the case of Joint Investment (P.) Ltd. Vs CIT reported at (2015) 373 ITR 694 (Del.).

14 ITA No. 4115/Del/2017 Elephant India Finance Pvt. Ltd. “Section 14A or rule 8D of the Income-tax Rules, 1962, cannot be interpreted so as to mean that the entire exempt income is to be disallowed. The window for disallowance was indicated in section 14A and was only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the exempt income surely cannot swallow the entire amount. The order of the Assessing Officer was set aside.” 11. In the present case, since the assessee suo motto made the disallowance of Rs.29,44,969/- u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962, more than the exempt income claimed at Rs.18,48,394/-. Therefore, no further disallowance was called for. In that view of the matter, the impugned disallowance made by the AO and sustained by the ld. CIT(A) is deleted.

Sd/- (N. K. Saini) ACCOUNTANT MEMBER Dated: 10/07/2018 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR