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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-4 [in short ‘CIT(A)’], Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
2. The 1st ground of appeal 1. The CIT(A) erred in confirming disallowance of Rs.1,75,18,216, being interest to be attributed to earning exempt dividend income u/s. 14A by invoking the provisions of Rule 8D(2)(ii) as against NIL claimed by the Appellant.
Kotak Mahindra Investments
He erred in disregarding the accounts of the Appellant and ignoring the detailed submissions made regarding the correctness of the Appellant's claim.
3. He further erred in confirming the action of AO with respect to invoking Rule 8D without AO being recording any satisfaction regarding incorrectness of the Appellant's claim. 4. He further erred in disregarding the accounts of the Appellant and erred in invoking Rule 8D without recording his satisfaction on how the Appellant's calculation is incorrect ignoring the detailed submissions made regarding the correctness of the claim of expenditure incurred for earning exempt income. 5. He failed to appreciate and ought to have held that: a. having regard to the accounts and detailed submissions made by the Appellant, there was no basis for making a disallowance in accordance with Rule 8D to Section 14A, without first establishing that such expenditure was indeed incurred for earning exempt dividend income; b. having regard to the accounts and detailed submissions made by the Appellant, the Appellant has clearly established the direct nexus between availability of interest free funds and investments in Mutual Funds /shares of companies; c. the Appellant has not incurred any interest expenditure which was directly attributable towards earning of tax free dividend income and such disallowance cannot be made on the basis of presumptions and by applying rules mechanically; d. the Source of investment in Mutual Fund and Investment in shares of companies was out of interest free funds and the same were not out of borrowed funds and the net worth of the Appellant was far in excess of the investment made by it; Kotak Mahindra Investments e. the borrowings were made by the appellant was for its primary NBFC business of onward lending and not for investments.
6. The Appellant prays that the AO be directed to delete the disallowance of interest of Rs.1,75,18,216 made under section 14A r.w Rule 8D(2)(ii).
In a nutshell, the facts are that the appellant is a Non Banking Finance Company (NBFC) and engaged in the business of providing loans against shares, lending and investment. It is a wholly owned subsidiary of M/s Kotak Mahindra Bank Ltd. During the course of assessment proceedings, the Assessing Officer (AO) observed that the appellant had earned dividend income of Rs.34,52,754/-, against which it has made a disallowance suo motu of Rs.20,58,424/-. The AO has recorded that on the basis of account of the appellant, he was not satisfied with the correctness of its claim in respect of expenditure in relation to income which does not form part of the total income under the Act. Therefore, the AO made a disallowance of Rs.1,95,76,640/- u/s 14A r.w. Rule 8D of the Income Tax Rules 1962 (the Rules). The breakup of such disallowance is Rs.1,75,18,216/- under Rule 8D(2)(ii) and Rs.20,58,424/- under Rule 8D(2)(iii). After allowing the disallowance made by the appellant amounting to Rs.20,58,424/-, the AO made a disallowance of the balance amount of Rs.1,75,18,216/- 4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) agreed with the computation done by the AO and confirmed the above disallowance of Rs.1,75,18,216/-.
Kotak Mahindra Investments
Before us, the Ld. counsel of the appellant submits that the appellant had Rs.305.03 lakhs of share capital and Rs.22,728.34 lakhs of reserves and surplus, whereas the investments were of Rs.3782.02 lakhs as per its balance sheet as at 31.03.2010. Thus it is stated that the appellant’s own funds are in excess of tax-free income-yielding investments and there is a presumption that interest free funds are first deployed in earning tax-free income. Reliance is placed by him on the decision in Reliance Utilities and Power Ltd. 313 ITR 340 (Bom), HDFC Bank Ltd. v. DCIT (2016) 67 taxmann.com 42 (Bom) The Ld. counsel submits that there is a nexus between non- interest bearing funds and tax-free investments. It is stated that the taxable interest income is far in excess of interest expenditure. Relying on the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC), it is submitted that the action of both the AO and CIT(A) is contrary to the principles laid down therein that (i) there must be proof led by the department that the expenditure sought to be disallowed has actually been incurred in earning the dividend income, (ii) there must be a basis disclosed to establish a reasonable nexus between the expenditure disallowed and the exempt income, (iii) the disallowance cannot be made unless the above is proved by material and (iv) it is only after the AO is satisfied about the above that he can proceed to invoke Rule 8D. It is further stated that in any event, the disallowance cannot exceed the exempt income of Rs.34,52,754/-. In this regard the Ld. counsel refers to the decision in Joint Investments (P.) Ltd. v. CIT (2015)
Kotak Mahindra Investments 59 taxmann.com 295 (Delhi), Original Innovative Logistics India (P.) Ltd. v. JCIT (2016) 76 taxmann.com 364 (Chennai-Trib).
6. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A) confirming the disallowance of Rs.1,75,18,216/- made by the AO.
We have heard the rival submissions and perused the relevant materials on record. In the instant case, a perusal of the balance sheet as at 31.03.2010 clearly indicates that the appellant’s own funds are in excess of tax-free income-yielding investments. In HDFC Bank Ltd. (supra), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and Reliance Utilities & Power Ltd. (supra) held as under : “15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities & Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue in as much as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities & Power Ltd. (supra) in its application to Section 14A of the Act.” In view of the above position of law, the disallowance of Rs.1,75,18,216/- made by the AO under Rules 8D(2)(ii) is deleted.
Kotak Mahindra Investments 7.1 In Godrej & Boyce Mfg. Co. Ltd. (supra), the Hon'ble Bombay High Court has explained Rule 8D as under : “As regard Rule 8D(2)(iii), it had been submitted that some mechanism or formula had to be adopted for attributing part of the administrative / managerial expenses to tax-exempt investment income. The administrative expenses attributable to tax-free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment.” Facts being identical, we follow the ratio laid down in the above decision and restrict the disallowance u/s 14A r.w. Rule 8D to the amount of Rs.20,58,424/- suo motu disallowed by the appellant. Thus the 1st ground of appeal is allowed.
8. The 2nd ground of appeal
1. The CIT(A) erred in not deleting the addition of a sum of Rs.5,83,777 on account of transactions listed in Annual Information Report (AIR) of the Department.
2. He further erred in not deciding the issue and restoring back to the file of AO addition of a sum of Rs.5,83,777 on account of transactions listed in AIR of the Department.
3. He further erred in directing AO to re-examine the AIR data and to add un-reconciled item to the total income of the Appellant,
4. He further erred in putting onus of reconciliation on the Appellant rather than on Department.
5. He failed to appreciate and ought to have held that:
Kotak Mahindra Investments a. The Appellant has given reasonable explanation for the exclusion of the same and thus had discharged its onus; b. The revenue has not contravened the submission of the Appellant; c. There may be so many reasons for which the figures as per the AIR may not tally with the appellant records/accounts; d. In absence of any contrary material brought by the Department that the Appellant has received more than the income declared by the Appellant, no addition should have been made.
The Appellant prays that addition of Rs.5,83,777 on account of transaction reflected in AIR be deleted.
During the course of assessment proceedings, the AO provided the appellant a copy of the Annual Information Return (AIR) details for reconciliation. After going through the reply filed by the appellant, the AO observed that transactions worth Rs.5,83,777/- were still pending for reconciliation. As the assessment was to be made, the AO made an addition of the above sum of Rs.5,83,777/-.
Having heard the rival contentions and perused the relevant records, we are of the considered view that the above matter be reexamined by the AO, because he was running short of time while making the assessment u/s 143(3) on 25.02.2013. Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to make a fresh order, after giving (i) the relevant documents and (ii) reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. Thus the 2nd ground of appeal is allowed for statistical purposes.
Kotak Mahindra Investments
The 3rd ground of appeal
1. The CIT(A) erred in not allowing credit for TDS certificates amounting to Rs.31,93,706/- for A.Y. 2010-11.
2. He further erred in not in not giving findings to allow the credit of TDS certificates amounting to Rs.31,93,706 for the AY 2010-11.
3. He failed to appreciate and ought to have held that the Appellant has offered income pertaining to TDS Certificate in AY 2010-11 and in accordance with the provisions of Section 199 of the Act, credit should have been granted in the year in which income in respect of the such TDS Certificates are offered to tax.
4. The Appellant prays that the AO be directed to grant additional TDS credit of Rs.31,93,706.
12. We have perused the records and considered the matter carefully. The dispute is regarding credit for TDS. A similar issue arose before the ITAT ‘C’ Bench Mumbai in Citicorp Finance (India) Ltd. v. Addl. CIT (ITA No. 8532/Mum/2012) for AY 2007-08 and the Tribunal vide order dated 13.09.2013 held at para 4 as under: “4. We have perused the records and considered the matter carefully. The dispute is regarding credit for TDS. The credit of TDS has been denied to the assessee on the ground that the claim for TDS was no reflected in the computer generated form 26AS. The difficulty faced by the tax payer in the matter of credit of TDS had been considered by the Hon’ble High Court of Bombay in case of Yashpal Sahwney Vs. DCIT (Supra) in which it was held that even if the deductor had not issued TDS certificate, the claim of the assessee has to be considered on the basis of evidence produced for deduction of tax at source as the revenue was empowered to recover the tax from the person responsible if he had not deducted tax at source or after deducting failed to deposit with Central Government. Hon’ble High Court of Delhi in case of Court On Its Own Motion Vs. CIT (Supra) have also directed