TATA PROJECTS LTD,MUMBAI vs. DCIT CIRCLE - 2(3)(1), MUMBAI

आयकर अपीऱीय अधिकरण “E” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपीऱ सं./I.T.A. No.329/Mum/2018 (नििाारण वर्ा / Assessment Year : 2013-14 बिाम/ Tata Projects Limited, DCIT Circle-2(3)(1) 2nd,3rd and 4th Floor, Aayakar Bhawan Transocean House, M K Road v. Lake Boulevard Road, Mumbai-400020 Hiranandani Gardens MHADA Colony Powai, Mumbai-400076 स्थायी ऱेखा सं./ PAN: AAACT4119L (अपीऱाथी /Appellant) (प्रत्यथी / Respondent) .. Assessee by: Shri. R.R. Vora & Shri. Vipual Soni Revenue by: Shri. D.G. Pansari (DR) सुनवाई की तारीख /Date of Hearing : 26.03.2019 घोषणा की तारीख /Date of Pronouncement : 29.03.2019 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member: This appeal, filed by assessee, being ITA No. 329/Mum/2018, is directed against appellate order dated 27.10.2017 in appeal no. CIT(A)-6/IT-52/2016-17, passed by learned Commissioner of Income Tax (Appeals)-6, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2013-14, the appellate proceedings had arisen before learned CIT(A) from the assessment order dated 24.02.2016 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 2013-14.

I.T.A. No.329/Mum/2018

I.T.A. No.329/Mum/2018

8D, strategic investments of Rs 9.57 crores should be excluded from the computation of total investments. 7. Without prejudice to the above, disallowance under section 14A if any, should be restricted to reasonable percentage of dividend income towards administrative expenses not exceeding 3% of the dividend income. The above grounds of appeal are distinct and separate and without prejudice to each other. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

I.T.A. No.329/Mum/2018

3.2 The assessee has also submitted an application along with the aforesaid affidavit praying for condonation of delay in filing this appeal before the tribunal late by 1 day beyond the time stipulated u/s 253(3) of the 1961 Act. The assessee also relied on the following judgment in an application filed with tribunal praying for condonation of delay, as under:- MST Katiji & Others (1987) 167 ITR 471 (SC), Sterlite Industries (India) Ltd. (2006) 102 TTJ (Mumbai) 53 Balkrishnan v. M. Krishnamurthy (1998) 7 SCC 123 Lala Mata Din v. A Narayan AIR 1970 (SC) 1953

3.3 The learned DR fairly left the matter to be decided by the Bench in accordance with law. 3.4 After hearing both the parties and perusing the material on record, we are of the considered view that delay of one day in filing this appeal with tribunal late beyond the time stipulated u/s 253(3) of the 1961 Act need to be condoned in the interest of justice. The delay on part of the asssessee is not intentional and sufficient reasons have been shown by the assessee in its affidavit explaining delay of one day. When technicalities are pitted against substantial justice, the Courts will lean towards substantial justice unless malafide or gross

I.T.A. No.329/Mum/2018

negligence on the part of litigant is shown. At best by admitting this appeal, the issue will be decided on merit in accordance with law instead of shutting the doors of justice to the litigant at threshold by dismissing the appeal on short ground of being filed with tribunal beyond the time prescribed u/s 253(3) of the 1961 Act , which will be contrary to cannon’s of justice and equity. Thus, in the interest of substantial justice and in exercise of our powers as are provided u/s 253(5) of the 1961 Act, we condone delay of one day in filing this appeal late by the assessee beyond the time stipulated u/s 253(3) of the 1961 Act and admit this appeal to be decided on merits in accordance with law. We order accordingly. 4. The brief facts of the case are that the assessee is engaged in the business of erection and turnkey contracts including supply of material, providing technical services and manufacture of towers. It was observed by the AO during the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the 1961 Act that the assessee has earned an exempt income in the form of dividend of Rs. 10,96,66,355/- . The assessee had made suo-moto disallowance of Rs. 26,83,723/- u/s. 14A of the 1961 Act towards expenditure incurred in relation to earning of an exempt income in the return of income filed with Revenue. The assessee was show caused by the AO that disallowance of expenses incurred in relation to earning of an exempt income was not made as per Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules. The assessee claimed that it had made disallowance of Rs. 26,83,723/- u/s 14A of the 1961 Act as expenses incurred in relation to earning of an exempt income and no further disallowance is warranted. The break-up of these expenses were furnished by the assessee before the AO, as detailed hereunder: Sr No. Nature of expenses Amount (in Rs)

1 1,00,000 Telephone Expenses 2,30,000 2 Stationery

I.T.A. No.329/Mum/2018

3 23,53,723 Salaries (based on proportionate time spent by certain employees) 26,83,723 Total

The amount of salary is arrived at as under: Name of Employee Amount (Rs) Sr. Cost to Proportion of time No Company spent on earning exempt income (Rs) 1 K. S. Krishnan 48,66,966 20% 9,73,393 2 R Balasubramaniuam 20,35,900 50% 10.17,950 3 N Ramamurthy 18,11,900 20% 3 62 380 23,53,723 Total

The rationale for the disallowance of salary expenses were given by the assessee before the AO as that once investments are made, nothing further needs to be done as dividend is directly reinvested into the investment/credited to the bank account and no other transactions are affected. The rationale for disallowing proportionate salary was given and it was submitted that small amount of overhead were also disallowed correctly. 4.2 The AO went through the submissions of the assessee as to assessee’s claim that it incurred Rs. 26,83,723/- as an expenses in relation to earning of an exempt income by way of dividend of Rs. 10.97 crores which needed to be disallowed u/s 14A of the 1961 Act. The AO observed that the assessee has an average investment of Rs. 9,386.55 lacs as on 31.03.2013 from which an exempt income by way of dividend is earned. It was also observed by the AO that the assessee has also made fresh investments during the year. The AO observed that these investments cannot be managed unless several expenses are incurred for managing these investments for which analysis and expertise is required . The AO observed that substantial

I.T.A. No.329/Mum/2018

time and costs are required towards salary, conveyance, travelling, telephone/mobile bills, stationary etc. and it is difficult to ascertain these expenses on quantitative basis, while approximation has to be done for computing disallowance The AO also observed that the assessee would be in receipt of various daily reports , fortnightly reports and monthly reports at regular intervals so that the assessee can take informed decision regarding deployment/redemption of its investments. The AO also observed that since AY 2008-09 onwards , Rule 8D of the Income-tax Rules, 1962 is applicable as held by Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited (2010) 328 ITR 81(Bom.) . Thus, the AO had claimed to have recorded satisfaction in the aforesaid manner as is contemplated u/s 14A(2) of the 1961 Act 4.3 The AO , however, did not make any disallowance u/s. 14A of the 1961 Act read with Rule 8D2(ii) of the 1961 Act by following decision of Mumbai-tribunal in assessee’s own case for AY 2008-09 to 2010- 11, as the assessee had demonstrated before the AO that owned funds available with the assessee are sufficient to cover investments made during the impugned assessment year under consideration. 4.4 The AO however made disallowance of administrative expenses of Rs. 46,93,278/- u/s. 14A of the 1961 Act read with Rule 8D2(iii) of the 1962 Rules , while the assessee had suo-moto disallowed Rs. 26,83,723/- u/s 14A of the 1961 Act , vide assessment order dated 24.02.2016 passed by the AO u/s 143(3) of the 1961 Act. The AO while making disallowance of expenses u/s 14A of the 1961 Act by applying Rule 8D(2)(iii) of the 1962 Rules also considered order of Mumbai Tribunal in assessee’s own case for AY 2008-09 to 2010-11 , wherein tribunal held that certain expenses are bound to be incurred for managing such huge investments. 5. Aggrieved by an assessment order dated 24.02.2016 framed by the AO u/s 143(3) of the 1961 Act, the assessee filed first appeal with

I.T.A. No.329/Mum/2018

learned CIT(A) who was pleased to dismiss the appeal of the assessee vide appellate order dated 27.10.2017, wherein learned CIT(A) held that the assessee has not adopted any scientific basis for disallowance of expenses relatable to earning of an exempt income nor exact expenses which were incurred for earning of an exempt income was worked out by the assessee. The learned CIT(A) upheld the decision of the AO in invoking Rule 8D of the 1962 Rules and it was held that the additions so made by the AO u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules are in accordance with Mumbai-tribunal order in assessee’s own case for AY 2008-09 to 2011-12. 6. Still Aggrieved by the appellate order dated 27.10.2017 passed by learned CIT(A) , the assessee has filed second appeal with tribunal. 7. The Ld. Counsel for the assessee submitted that the issue in this appeal concerns disallowance of expenses incurred in relation to earning of an exempt income, u/s 14A of the 1961 Act. It was submitted that no disallowance were made towards interest expenditure by invoking Rule 8D(2)(ii) of the 1962 Rules read with Section 14A of the 1961 Act, while administrative expenses were disallowed to the tune of Rs. 46,93,278/- by applying Rule 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act. It was submitted that the assessee had given complete details of the expenses incurred by it toward earning of an exempt income which were to the tune of Rs. 26,83,723/- , while the disallowance was made u/s. 14A of the 1961 Act by applying Rule 8D2(iii) of the 1962 Rules @0.5% of the average investments, which led to disallowance to the tune of Rs. 46,93,278/-. It was submitted by learned counsel for the assessee , without prejudice , that even if Rule 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act is to be invoked, then only those investments are to be taken into account while computing average investments which actually yielded an exempt income in view of decision of Special Bench of ITAT, Delhi in the case of ACIT v. Vireet Investment Private Limited (2017) 165 ITD 27(Del. SB-trib.). It was

I.T.A. No.329/Mum/2018

conceded by learned counsel for the assessee that in view of decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited v. CIT reported in (2018) 402 ITR 640 (SC), now even strategic investments in associated concerns/subsidiaries are also to be covered for making disallowance u/s 14A read with Rule 8D of the 1962 Rules for computing average investments held by the assessee. It was submitted that no independent satisfaction was recorded by the AO while invoking Rule 8D of the 1962 Rules as is mandated u/s 14A(2) of the 1961 Act. Reference was made to the decision of Hon’ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT (2017) 394 ITR 449(SC). It was submitted that assessee’s appeal for AY 2008-09 to 2010-11 were decided by the tribunal in assesse’s own case in ITA no. 544 & 1677 /Mum/2012 for AY 2008-09, ITA no. 1718/Mum/2013 & CO No. 09/Mum/2013 arising out of ITA No. 1718/Mum/2013 for AY 2009-10 and ITA no. 5881 & 6641/Mum/2013 & CO. No. 10/Mum/2013 for AY 2010-11, vide common order dated 21.02.2014, wherein the tribunal was pleased to hold that Rule 8D is applicable for the impugned assessment year’s and certain expenses are bound to be incurred for earning of an exempt income. The directions were given by the tribunal to the AO to compute the total expenditure incurred by the assessee toward earning of an exempt income. 7.2 It was submitted by learned counsel for the assessee that while deciding appeal of the assessee for AY 2011-12 in ITA No. 1018/Mum/2015 vide order dated 17.10.2016 on the issue of disallowance of administrative expenses , the tribunal has set aside the issue to the file of the AO by following aforesaid decision of co- ordinate bench of the tribunal in assessee’s own case for AY 2008-09 to 2010-11. 7.3 Our attention was drawn by learned counsel for the assessee to the decision of co-ordinate benches of the tribunal in the case of ACIT v. Cyrus Investments Private Ltd., in ITA no. 6414/Mum/2016 for AY

I.T.A. No.329/Mum/2018

2012-13 vide orders dated 09.05.2018 wherein one of us being Accountant Member was part of the Division Bench who decided the said appeal. It was submitted that the additions were deleted on the grounds that AO had not recorded satisfaction u/s. 14A(2) as to why disallowance made by the assessee voluntarily is not a correct disallowance and the disallowance of expenditure u/s 14A so made by the assessee suo moto were upheld. It was submitted by Ld. Counsel for the assessee that no independence satisfaction was recorded by the AO as is required u/s 14A(2) in the instant case before us. Reliance is placed on the decision of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd.(supra) , and it was submitted that in case no independent satisfaction is recorded by the AO , addition as were made u/s 14A cannot be sustained. It was submitted that the assessee make investment on the direction of the Tata Mutual Fund. It was submitted by learned counsel for the assessee that AO did not ask any question with respect to submissions made by the assessee regarding breakup of the expenses claimed to be incurred for earning of an exempt income. It was submitted that there was no rebuttable by Revenue with respect to suo moto disallowance made by the assessee. Our attention was also drawn to para 6.3 and 6.5 of the appellate order passed by the Ld. CIT(A). It was submitted by learned counsel for the assessee that tribunal orders for AY 2008-09 to 2010-11 were misread by both AO as well by Ld. CIT(A). The learned counsel for the assessee submitted that learned CIT(A) referred to non submission of calculation of disallowance based on scientific method for working of disallowance of the expenses incurred in relation to earning of an exempt income , which it is claimed is now been submitted by the assessee before the Bench, as under:- “Disallowance of expenditure attributable to exempt income under section 14A Revenue Amount (In crores)

I.T.A. No.329/Mum/2018

3,530.68 Total taxable receipts (a) (excluding dividend income) 10.97 Total exempt income (b) (grouped under other income) 3,541.64 Total receipts : (c ) = (a) + (b) Nature of expense Amount (in crores) Total expenses related to operations (d) 3,384.14 Expenses related to composite activities 20.04 Rent 4.82 Postage, telephone, Telegram & telex 2.62 Printing & stationery 0.00 Amortisation for diminution in investment value 14.73 Miscellaneous expenses 42.21 Total expenses related to composite activities (e)

3,426.35 Total expenses debited to profit and loss account (f) Disallowance under section 14A Particulars Amount (in crores) Composite expenses apportioned to exempt income : (g) = (e) * (b) / (c) 0.13 0.24 Employee cost apportioned to exempt income : (h) 0.37 Total expenses apportionable to exempt income: (i) = (g) + (h) Disallowance as per Rule 8D(iii) made in Assessment order dated 16 March 2015 passed under section 143(3) of the Act 45.50 Opening value of investments: (j) 142.23 Closing value of investments: (k) 93.87 Average value of investments : (1) = [(j) + (k)]/2 0.47 Disallowance of 0.5% of the average value of investments : (m) = (1) * 0.5% 0.27 Amount already disallowed in return of income : (n) 0.20 Additional Disallowance under section 14A read with Rule 8D : (o) = (m) - (n) 0.10 Excess disallowance under section 14A as per Rule 8D (p) = (m) - (1)

I.T.A. No.329/Mum/2018

It is submitted that as per above calculations , additional disallowance of expenditure incurred in relation to earning of an exempt income having regards to accounts of the assessee of approx. Rs. 10 lacs is further required to be made u/s 14A of the 1961 Act .

7.4 Without Prejudice, It is claimed that if Rule 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act is invoked, then in that case only those investments should be considered for making disallowance u/s 14A of the 1961 Act which actually yielded an exempt income. The Reliance is placed on the decision of Special Bench of Delhi-tribunal in the case of ACIT v. Vireet Investment Private Limited (2017) 165 ITD 27(Del. SB-trib.). The learned counsel for the assessee submitted before the Bench details of the investments on which it is claimed that exempt income by way of dividend income was earned during the year, which is placed in file.

7.5 it was submitted by learned counsel for the assessee that assessee had discharged its onus in the course of proceedings before the authorities below and disallowance u/s 14A be restricted to Rs. 26,83,723/-. It was claimed that the AO as well learned CIT(A) misread the appellate order passed by tribunal in assessee’s own case for AY 2008-09 to 2010-11. 8. The Ld. DR on the other hand submitted that Rule 8D is to be applied as the assessee has not adopted any scientific basis/method for computing disallowance of expenses incurred in relation to earning of an exempt income u/s. 14A of the 1961 Act, having regards to the accounts of the assessee. The learned DR also relied upon appellate order passed by Ld. CIT(A).The learned DR submitted that matter can be restored to the file of the AO for verification of the computation of disallowances claimed to be submitted by the assessee now before the Bench. The learned DR also submitted that the tribunal for all the years i.e. AY 2008-09 to 2011-12 had restored the issue to the file of the AO and for this year also it is claimed by learned DR that the

I.T.A. No.329/Mum/2018

issues in this appeal may also be restored to the file of the AO with similar directions. 9. We have considered rival contentions and have perused the material on record . We have observed that the assessee is engaged in the business of erection and turnkey contracts including supply of material, providing technical services and manufacture of towers. The assessee has earned an exempt income in the form of dividend of Rs. 10,96,66,355/- during the previous year relevant to the impugned assessment year . The assessee made suo-moto disallowance of Rs. 26,83,723/- u/s. 14A of the 1961 Act towards expenditure incurred in relation to earning of an exempt income in the return of income filed with Revenue. The break-up of these expenses which were offered for disallowance u/s 14A of the 1961 Act were furnished by the assessee before the AO, as detailed hereunder: Sr No. Nature of expenses Amount (in Rs)

1 1,00,000 Telephone Expenses 2 Stationery 2,30,000 3 23,53,723 Salaries (based on proportionate time spent by certain employees) Total 26,83,723

The amount of salary is arrived at as under: Name of Employee Amount (Rs) Sr. Cost to Proportion of time No Company spent on earning exempt income (Rs) 1 48,66,966 20% 9,73,393 K. S. Krishnan 2 20,35,900 50% 10.17,950 R Balasubramaniuam 3 18,11,900 20% 3 62 380 N Ramamurthy Total 23,53,723

I.T.A. No.329/Mum/2018

On being show caused by the AO as to justify that disallowance of expenses as were made by the assessee is in accordance with Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules, the assessee justify that it had correctly made disallowance of expenses incurred in relation to earning of an exempt income u/s 14A of the 1961 Act and no further disallowance of expenses is warranted. The rationale for the disallowance of salary expenses were given by the assessee before the AO as that once investments are made, nothing further needs to be done as dividend is directly reinvested into the investment/credited to the bank account and no other transactions are affected. The rationale for disallowing proportionate salary was given and it was submitted that small amount of overhead were also disallowed correctly. The authorities below were of the view that the assessee has not adopted scientific method/basis for making disallowance of expenses incurred in relation to earning of an exempt income u/s 14A having regards to accounts of the assessee. The authorities below observed that the assessee earned exempt income by way of dividend of Rs. 10.97 crores. The assessee has an average investment of Rs. 9,386.55 lacs as on 31.03.2013 from which an exempt income by way of dividend is earned. The assessee has also made fresh investments during the year. The authorities below observed that these investments cannot be managed unless several expenses are incurred for managing these investments for which analysis and expertise is required . The authorities below had observed that substantial time and costs are required towards salary, conveyance, travelling, telephone/mobile bills, stationary etc. and it is difficult to ascertain these expenses on quantitative basis, while approximation has to be done for computing disallowance The authorities below had observed that the assessee would be in receipt of various daily reports , fortnightly reports and monthly reports at regular intervals so that the assessee can take informed decision regarding deployment/redemption of its investments. The authorities below concluded that no scientific method/basis was adopted by the assessee for making disallowance of

I.T.A. No.329/Mum/2018

expenses incurred in relation to earning of an exempt income u/s 14A of the 1961 Act. The authorities below were of the view that the assessee has not given exact expenses incurred by the assessee for earning of an exempt income which needed to be disallowed u/s 14A of the 1961 Act and the disallowance of expenses offered by the assessee u/s 14A was rejected by the authorities below. The authorities below invoked Rule 8D of the 1962 Rules and made disallowance of administrative expenses of Rs. 46,93,278/- u/s. 14A of the 1961 Act read with Rule 8D2(iii) of the 1962 Rules . However, no disallowance of interest expenditure were made by authorities below by invoking Rule 8D(2)(ii) of the 1962 Rules read with Section 14A of the 1961 Act. The Mumbai tribunal while adjudicating assessee’s own appeal for AY 2008-09 to 2010-11 in ITA no. 544 & 1677 /Mum/2012 for AY 2008-09, ITA no. 1718/Mum/2013 & CO No. 09/Mum/2013 arising out of ITA No. 1718/Mum/2013 for AY 2009-10 and ITA no. 5881 & 6641/Mum/2013 & CO. No. 10/Mum/2013 for AY 2010-11, vide common order dated 21.02.2014, held that Rule 8D of the 1962 Rules is applicable for assessment year’s 2008-09 TO 2010-11 and certain expenses are bound to be incurred for earning of an exempt income. The directions were given by the tribunal to the AO to compute the total expenditure incurred by the assessee toward earning of an exempt income , by holding as under:- “ 9. As regard, the disallowance of administrative expenses, the ld. AR of the assessee has submitted that the assessee suo-moto disallowed Rs.10.17 lakh which are sufficient considering the nature and volume of the transaction. He has further submitted that the AO has not given the finding that the assessee has incurred any expenditure for earning the exempt income therefore, the provisions of section 14A cannot be invoked. Alternatively, the ld. AR has submitted that the disallowance in earlier years has been restricted to 5% of the exempt income and the same can be disallowed for these years on account of administrative expenses. On the other hand, the ld. DR has relied upon the orders of the Assessing Officer and CIT(A) and submitted that when Rule 8D is applicable for 15

I.T.A. No.329/Mum/2018

the year under consideration then the disallowance has to be computed as per the formula provided in Rule 8D. 10. We have considered the rival submissions as well as relevant material on records. As regards, the disallowance of expenditure u/s 14A, the assessee has claimed that no borrowed fund was used for investment in mutual funds on which the dividend income has earned by the assessee. .................... As regards the administrative expenses, there is no denial that certain expenses are bound to be incurred for managing such huge investment by the assessee. Even the assessee itself has disallowed a sum of Rs.10.17 lakhs on this account. The assessee claimed that the suo moto disallowance made by the assessee is sufficient considering the nature and volume of the transactions. It is to be noted that Rule 8D is applicable for the year under consideration therefore, the disallowance of administrative expenses has to be computed as per the formula provided in Rule 8D. However, the disallowance work out under Rule 8D cannot exceed the total expenditure claimed by the assessee which can be apportioned to the exempt income. Thus we set aside this issue to the record of AO for the limited purpose of computing the total expenditure incurred by the assessee for the composite/indivisible activities in which taxable and non-taxable income is received and if the disallowance work out under Rule 8D on account of administrative expenses exceeds the total claim of expenditure incurred for the composite activities resulting taxable or non-taxable income then the disallowance should be restricted to the said actual total claim of expenditure. 11. Accordingly, the AO is directed to recomputed the disallowance after considering the above aspect.”

Similarly , while deciding appeal for AY 2011-12 in assessee’s own case in ITA No. 1018/Mum/2015 vide order dated 17.10.2016 on the issue of disallowance of administrative expenses , the tribunal has set aside the issue to the file of the AO by following aforesaid decision of co-ordinate bench of the tribunal in assessee’s own case for AY 2008- 09 to 2010-11 , by holding as under:

I.T.A. No.329/Mum/2018

“5.We have heard the rival contentions and perused the record. We noticed that an identical issue has been restored to the file of the Assessing Officer in assessee’s own case by the Coordinate Bench in A.Y. 2008-09 to 2010-11 (referred above) with following directions: 'It is to be noted that Rule 8D is applicable for the year under consideration therefore, the disallowance of administrative expenses has to be computed as per the formula provided in Rule 8D. However, the disallowance worked out under Rule 8D cannot exceed the total expenditure claimed by the assessee which can be apportioned to the exempt income. Thus we set aside this issue to the record of AO for the limited purpose of computing the total expenditure incurred by the assessee for the composite/indivisible activities in which taxableand non-taxable income is received and if the disallowance work out under Rule 8D on account of administrative expenses exceeds the total claim of expenditure incurred for the composite activities resulting taxable or non-taxable income then the disallowance should be restricted to the said actual total claim of expenditure." 6. Consistent with the view taken by the coordinate bench, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer for considering the issue afresh by duly considering all the types of contentions that may be raised and all the materials that may be produced by the assessee. 7. In the result, appeal filed by the assessee is treated as allowed for statistical purposes.” The assessee has during the course of hearing before us has submitted a chart wherein it is claimed that it represents detailed working of disallowance of expenditure incurred in relation to earning of an exempt income u/s 14A of the 1961 Act having regard to the accounts of the assessee and claim is made that this represent scientific basis/method for computing disallowance u/s 14A of the 1961 Act. The said working as submitted by the assessee is reproduced by us in preceding para’s of this order. This claim of the assessee requires verification by the authorities below and we are inclined to set aside and restore the issue back to the file of the AO for fresh adjudication to work out disallowance of expenditure incurred in relation to earning of an exempt income having regards to accounts of the assessee u/s 14A of the 1961 Act. We would like to clarify that in case the AO after going through the workings as are now submitted by the assessee and which are claimed to be an expenditure incurred in relation to earning of an exempt income having regards to the 17

I.T.A. No.329/Mum/2018

accounts of the assessee , has to resort to Rule 8D(2)(iii), then in that situation only those investments shall be considered which yielded an exempt income during the year under consideration as laid down by Special Bench of ITAT, Delhi in the case of Vireet Investment Private Limited(supra). At this stage , we are reminded of the observations of Hon’ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Limited(supra) although it was given in context of assessment years prior to introduction of Rule 8D of the 1962 Rules, wherein Hon’ble Supreme Court observed as under: “37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub- sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.” So far as contention of the assessee that strategic investments made in associated concerns/subsidiaries etc. should not be included while computing disallowance of expenditure incurred in relation to earning of an exempt income u/s 14A of the 1961 Act, we are afraid that this proposition cannot be accepted in view of decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited v. CIT reported in(2018) 402 ITR 640(SC) . The assessee has also fairly conceded to be governed by aforesaid decision of Hon’ble Supreme Court and the said plea stood withdrawn. At this stage, it is important to refer to decision of tribunal in the case of Cyrus Investments Private Limited(supa), to which one of us being Accountant Member was part of the DB pronouncing the said order. This case was decided on its own facts as in this case, the tax-payer 18

I.T.A. No.329/Mum/2018

has debited only Rs. 15.03 lacs to Profit and Loss Account, out of which the taxpayer has voluntarily disallowed Rs. 4.13 lacs expenses which were never claimed as an expenses from the income computed within provisions of the 1961 Act . Out of the remaining expenses of Rs. 10.90 lacs, the tax-payer further voluntarily disallowed an amount of Rs. 5.45 lacs as an expenditure incurred in relation to earning of an exempt income within contemplation of Section 14A of the 1961 Act, which was 50% of the expenses claimed by the tax-payer. The Revenue went ahead and disallowed Rs. 2.41 crores u/s 14A albeit the tax-payer never claimed expenses of that magnitude. The AO did not recorded any satisfaction as to what is basis of disallowing expensed to the tune of Rs. 2.41 crores u/s 14A of the 1961 Act , while the total expenses debited to Profit and Loss Account (net of voluntary disallowance of Rs. 4.13 lacs) was only Rs. 10.90 lacs. Based on peculiar factual matrix of the case, the said appeal was decided by tribunal vide its order dated 08.05.2018 wherein suo moto disallowance of 50% of the total expenses offered for disallowance u/s 14 of the 1961 Act by the tax-payer voluntary in the return of income filed with the Revenue was accepted by the tribunal, while the factual matrix in assessee’s case is entirely different as we have discussed in details in preceding para’s of this order. Thus, Based on our detailed discussions in the preceding para’s of this order, we are restoring the issue back to the file of the AO for fresh adjudication of disallowance of expenditure incurred in relation to the earning of an income which does not form part of the total income having regard to the accounts of the assessee. The assessee is directed to produce before the AO for verification its working of computing disallowance of expenses u/s 14A being incurred in relation to earning of an exempt income having regard to accounts of the assessee. The assessee is also directed to produce before the AO complete details as to how its investments portfolio in securities is managed and handled. Needless to say that the AO shall give proper

I.T.A. No.329/Mum/2018

and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The evidences/explanations submitted by the assessee shall be admitted by the AO and shall be adjudicated on merits in accordance with law. This disposes of ground no. 1 to 7 raised by the assessee in its memo of appeal filed with tribunal. We order accordingly. 10. In the result , appeal of the assessee in ITA no. 329/Mum/2018 for AY 2013-14 is allowed for statistical purposes. Order pronounced in the open court on 29.03.2019. आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 29.03.2019 को की गई Sd/- Sd/- (SANDEEP GOSAIN) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, dated: 29.03.2019

Nishant Verma Sr. Private Secretary

copy to… 1. The appellant 2. The Respondent 3. The CIT(A) – Concerned, Mumbai 4. The CIT- Concerned, Mumbai 5. The DR Bench, 6. Master File // Tue copy// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI