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Income Tax Appellate Tribunal, MUMBAI BENCHES “SMC”, MUMBAI
Before: SHRI SHAMIM YAHYA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against the order dated 01.02.2018 passed by the Commissioner of Income Tax (Appeals)-14 (for short ‘the CIT (A)’), Mumbai, for the assessment year 2013-14, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).
Brief facts of the case are that the assessee company filed its return of income for the assessment year under consideration declaring the total income of Rs. 8,17,780/-. Since, the case was selected for scrutiny to AO issued notices u/s 143 (2) and 142 (1) of the Act along with explanations calling details. In response thereof the Authorized Representative (AR) appeared before 2 Assessment Year: 2013-14 the AO and submitted the details called for. It was noticed that the assessee had received dividend income of Rs. 28,87,873/-, which was claimed to be exempt u/s 10(34)/10(35) of the Act. The AO asked the assesee to explain as to why the disallowance u/s 14A read with Rule 8D of the Income Tax Rules should not be made, the AR inter alia submitted that the assessee had incurred total administrative and other expenses to the tune of Rs. 19,69,473/- in relation to the business of investments and even it is presumed that certain part of these expenses could have been incurred in relation to the exempt income, then there could be disallowed of nominal part out of the total expenses incurred by the assessee. However, the AO rejected the contention of the assessee and determined the disallowance u/s 14A read with Rule 8D at Rs. 31,05,773/-. The AO challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee partly allowed the appeal of the assessee and restricted the addition to Rs. 10,08,531/-. Aggrieved by the order of the Ld. CIT (A), the assessee has filed the present appeal.
The assessee has preferred the present appeal by raising the following effective grounds: 1. a) On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in confirming the addition to the extent of Rs. 10,08,531/- made by the AO to the income of the Appellant by way of disallowing administrative expenses at flat rate alleged to have been incurred relating to exempt income invoking the provisions of section 14A r.w.r 8D(2)(iii) mechanically. b) The Ld. CIT (A) failed to appreciate that there is no reason and basis in reaching to dis-satisfaction with the correctness of the claim of the Appellant that no expenditure other than STT of Rs. 1,55,281/- and Demat charges of Rs. 39,462/- was incurred in relation to dividend income which does not form part of the total income. c) In reaching to the conclusion and confirming such addition the Ld. CIT (A) omitted to consider relevant factors, considerations, principles and evidences while he was 3 Assessment Year: 2013-14 overwhelmed, influenced and prejudiced by irrelevant considerations and factors. d) In any case the disallowance u/s 14A r.w.r. 8D as confirmed by the ld. CIT (A) is excessive and unreasonable. e) The Ld. CIT (A) erred in holding that levy of interest u/s 234B of the Income Tax Act, 1961 is consequential. The Appellant denies its liability for such interest.”
Before us, the Ld. counsel for the assessee submitted that the Ld. CIT (A) has wrongly sustained the addition of Rs. 10,08,531/- u/s 14A read with Rule 8D (2)(iii) of the Income Tax Rules. Since, the assessee did not incur any expenditure for earning exempt income, no disallowance u/s 14A read with Rule 8D was required to be made. The Ld. counsel further pointed out that the total administrative expenses incurred during the relevant period was Rs. 19,69,473/- and in case any, disallowance was to be made, the same was required to be made from the said expenses and not as per the provisions of rule 8D (2)(iii) of the Rules.
On the other hand, the Ld. Departmental Representative (DR) relying on the order passed by the Ld. CIT (A) submitted that since the Ld. CIT (A) has sustained the disallowance by computing the disallowance as per the provisions of law, there is no merit in the appeal of the assessee.
We have heard the rival submissions and also gone through the material on record in the light of the rival contentions of the parties. The only grievance of the assesee is that the Ld. CIT (A) has wrongly sustained the addition u/s 14A read with Rule 8D (2)(iii) of the Rules ignoring that the assessee had not incurred any expenditure for earning exempt income. The Ld. CIT (A) has sustained the addition of Rs. 10,08,531/- holding as under:-
“4.1 The second ground of appeal is in respect of disallowance amounting to Rs. 31,05,773 made by the AO under section 1 4A of the IT Act. So far as the submission of the appellant that expenditure incurred by an assessee in one and indivisible business, which produces taxable as well as exempt income,
4. Assessment Year: 2013-14 cannot be disallowed under section 14A of the IT Act is concerned, the same is not acceptable in view of the findings of honourable Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT [2010] 194 Taxman 203 (Bombay) in which honourable Bombay Fs held that "Section 14A was enacted by the Parliament in order to overcome the judgments of the Supreme Court in the case of CIT vs. Indian Bank Ltd .AIR 1965 SC 1473, CIT v Maharashtra Sugar Mills Ltd [1971]
82. ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145, in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and non-taxable income, it is impermissible to apportion the expenditure between what was laid out for the earning of taxable income as opposed to non- taxable income. The effect of section 14A is to wider the theory of the apportionment of expenditure. Prior to the enactment of section 14A, where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and non-taxable income, the expenditure incurred or, earning non- taxable income could not be allowed as a deduction as against the taxable income. As a result of the enactment of section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Hence, even in the case of a composite and indivisible business, which results in the earning at taxable and non-taxable income, it would be necessary to apportion the expenditure incurred by the assessee. Only that port of the expenditure which is incurred in relation to income which forms port of the total ;income, can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed, i7rorn this, it would follow that section 14A has within it implicit not on of apportionment. The principle of apportionment which prior to the amendment of section 14A would not have applied to expenditure incurred in a composite and indivisible business which results in taxable and non-taxable income, must, after the enactment of the provisions, apply even to such a situation. The expression 'expenditure; incurred’ in section 14.4 refers to 5. Assessment Year: 2013-14 expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for. [Para 43]"
In view of the findings quoted above, it is clear that the so-called dominant objective of the expenditure is not relevant. If the expenditure results in taxable as well as exempt income, disallowance under section 14A is called for. It is also the claim of the appellant that this investment should be taken out of the purview of section 14-A of the IT Act because purpose of making this investment is to have control over the management of these Companies and the purpose is not to earn dividend, I am not able to Convince myself to agree to this proposition. No such evidence has been submitted. Moreover, whenever a private limited company is floated by somebody, he will be having the control of the company unless he himself decides to induct other majority shareholders. Therefore, to claim that the purpose of the investment in share capital is for the purpose of acquiring the controlling interest in the company is a misleading statement. One can also have controlling interest by keeping the share capital to the minimum and issuing all shares to himself. Therefore, the contention of the appellant that the purpose of investment in subsidiaries is to have controlling interest in them is rejected. Only regular income the appellant can earn from investment in a company is in the form of dividend which is exempt. Moreover, except for making a verbal claim that the investment is part of business strategy and commercial expediency, the appellant has not furnished even an iota of evidence to show as to how the investment is beneficial/ commercially expedient for the business being carried out by the appellant. Therefore, I'm of the opinion that investment in the subsidiaries is required to be considered for the purpose of making disallowance under section 14A of the IT Act. Reliance in this regard is placed on the decision of ITAT, Mumbai in the case of Tata Industries Ltd. Vs ITO [2016] [18] TTJ 600 (Mumbai-Trib) where it has been held that even in the 'investment and finance companies whose business is to promote companies, investment in subsidiaries is to be considered for the purpose of making disallowance u u/s 14A of the IT Act.
6 Assessment Year: 2013-14 Reliance is also placed on the decision of ITAT, Mumbai in the case of Deputy Commissioner of income -tax OSD), Mumbai Vs Saraswat Co-operative Rank Ltd [2017] 79 taxmann.com 305 (Mumbai - Trib.) where it has been held by the honourable Tribunal that:- "The AO shall compute disallowance u/s 14A of the Act with respect to expenditure incurred in relation to earning of exempt income having regard to the accounts of the assessee as per mandate of Section 14A (2) of the Act. The primary onus is on the assessee to bring on record details of expenses incurred in relation to earning of exempt income as provided u/s 14A of the Act having regards to the accounts of the assessee. In the failure thereof the assessee to discharge primary onus the AO shall record satisfaction and apply Rule 8D of Income-tax Rules, 1962 to compute disallowance u/s 14A of the Act of the expenditure incurred in relation to the earning of exempt income. We are also of the considered view, that strategic investment made by the assessee in its subsidiary Saraswat. Infotech Limited as well in the other securities which are capable of yielding exempt income i.e. by way of dividend etc. which are exempt from tax shall be included while computing disallowance u/s 14A of the Act as per the scheme of the Act as contained in provisions of Section 14A of the Act as the statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A of the Act and hence the investment made by the assessee in subsidiary company M/s Saraswat Infotech Limited and all other securities which are capable of yielding exempt income by way of dividend etc. shall be included for the purposes of disallowance of expenditure incurred in relation to the earning of exempt income as stipulated u/s 14A of the Act. Our decision is fortified by the recent decision of Hon’ble Karnataka High Court in the case of United Breweries Ltd. v. Dy. CIT [2016] 241 Taxmann 299/72/taxmann.com 102 (Kar) and also decision of the tribunal in the case of ACIT v. Uma Ploymers Ltd. (IT Appeal No. 5366 (Mum) of 2012 and CO No. 234 (Mum) of 2013] vide orders dated 30.09.2015.”
7 Assessment Year: 2013-14 The appellant has claimed that no interest disallowance under rule 8D(2)(ii) was called for because it has earned net interest only and there is no net interest outgo. Moreover, it is having sufficient own interest free funds (Rs.27,35,85,726) for making investment of Rs.20,17,06,198. I am in agreement with the claim of the appellant. Since the appellant was having sufficient interest free funds of its own, which were more than the investment made, no interest disallowance under rule 8D(2)(ii) is called for. Reliance in this regard is placed on the decision of honourable Bombay High Court in the case of HDFC Bank Ltd. Vs DCIT [2016] 383 ITR 529 (Bombay). Accordingly, the AO is directed to delete the disallowance of Rs. 20,97,242 made under rule 8D(2)(ii). So far as disallowance made by the AO under rule: 8D(2)(.iii) in respect of administrative and other expenses is concerned, the appellant has stated that except for the demat charges of Rs. 39,462, it is not incurred any direct expenditure in maintaining long-term investments made by it. It is the claim of the appellant that the investment in the group companies is long term, therefore, it is not required to periodically review the same. I'm not in agreement with the claim of the appellant. Even if the investment is in group companies, a periodical review would he required, though it may not as frequent as in the case of investment in market instruments. This will require management related expenses as well as establishment related expenses. Expenses would also be required to monitor the dividend income as Well as the demat charges debited in the bank account because somebody from the finance team would monitor it. It is not the case of the appellant that nobody is bothered about correctness of dividend received and the demat charges paid and any amount credited/debited by the bank would be accepted.
In the case of Punjab Tractors Ltd. Vs CIT [2017] 78 taxmann.com 65 (Punjab & Haryana)/2017) 246 Taxman 31 Punjab & Haryana)/[201] 393 ITR 223 (Punjab & Haryana) / [2017] 293 CTR 50 (Punjab & Haryana) , honourable Punjab and Haryana High Court has held that where assessee had earned tax free dividend income, the AO was justified in presuming that assessee had in curred expenditure towards administrative activities 8 Assessment Year: 2013-14 necessary to earn said income and, thus, he was entitled. to resort to rule 8D. The head note of the decision is reproduced hereunder:- “Section NA of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Conditions precedent Assessment year 2008-09 - Whether determination of amount of expenditure in relation, to exempt income under rule 80 would only come into play when Assessing Officer rejects claim of assessee and records that having regard to accounts of assessee he is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to said exempt income –Held yes- Whether where assessee had earned tax free dividend income, Assessing Officer was justified in presuming that assessee had incurred expenditure towards administrative activities necessary to earn said income and therefore, he was entitled to resort rule 8D - Held yes [Paras 15, 16, 19, 21, 35, 38 and 74] [ In favour of revenue]”. 1n view of the reasons given and the decision quoted; it is held that the claim of the appellant that except for the demat charges payment of Ps. 39,462 no other expenditure was incurred by it in earning dividend income is not correct. Therefore, disallowance out of administrative expenses is required to be computed as per Rule 8D(2)(iii). In view of this, disallowance of Rs. 10,08,531 made by the AO under Rule 8D(2)(iii) is upheld. Accordingly, second ground of the appeal is partly allowed.”