FORTUNE FINANCIAL SERVICES (INDIA) LIMITED ,MUMBAI vs. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 4(1), MUMBAI

During assessment proceedings, it was noted that the assessee reflected exempt dividend income of Rs.19.07 Lacs, which called for disallowance u/s 14A. The assessee had not made any suo-moto disallowance against the same in the return of income. The assessee defended the same vide submissions dated 11/03/2015. However, not convinced, Ld. AO, applying Rule 8D worked out aggregate impugned disallowance of Rs.60.08 Lacs which comprised-off of interest disallowance u/r 8D(2)(ii) for Rs.19.60 Lacs and expense disallowance u/r 8D(2)(iii) for Rs.40.47 Lacs.

Aggrieved, the assessee contested the same with partial success before Ld. CIT(A) vide impugned order dated 14/03/2017 wherein the assessee, inter-alia, submitted that own funds in the shape of Share Capital & Reserves were much more than the investments made by the assessee. It was further submitted that only income yielding investments were to be considered while arriving at the disallowance. Finally the matter was concluded in the following manner:-

ITA.No.4555/Mum/2017 Fortune Financial Services (India) Limited Assessment Year-2012-13 5.3.1 I have considered the facts of the case as well as assessment order passed by the AO and the submissions made by the appellant. It is seen that the AO has made disallowance under rule 8D(2)(ii) amounting to Rs.19,60,658/- and Rs.40,47,377/- under rule 8D(2)(iii) of the IT Rule 1962. 5.3.2 Regarding disallowance of interest under rule 8D(2)(ii), the appellant has explained that there were certain expenses which were for the purpose other than earning exempt income or other than investment in shares. Therefore, the AO is directed to exclude such expense on which interest were paid but was for purpose other than investment in shares. Further, the appellant has submitted that the appellant had sufficient fund. Accordingly, the AO is directed to verify from the record regarding the availability of funds and subject to factual satisfaction of the AO, the interest disallowance under rule 8D(2)(ii) is directed to be deleted. Accordingly, this part of ground of the appellant is Allowed. 5.3.3. As regards disallowance under rule 8D(2)(iii), there is no dispute that the investment in shares, etc., was made for the strategic purpose of the appellant company. In this regard, I would like to refer and place my reliance on the recent decision of the Hon’ble ITAT, Kolkata in the case of CIT VS. Coal India Limited and ITA NO. 1238/KOL/2012 order dated 13/05/2015 where the Hon’ble ITAT after considering all the relevant judgments has observed and decided the issue as under: “The assessee claimed that no disallowance u/s 14A and Rule 8D could be made as (i) the disallowance made by the AO in a mechanical and automatic manner without recording reasons for his satisfaction that the assessee’s claim is incorrect and (ii) the assessee made the investment for the purpose of holding controlling stake in the group concern and not for the purpose of earning dividend. It was claimed that the assessee has not incurred any expenses to earn the dividend income and therefore Rule 8D(iii) is not applicable. HELD by the Tribunal: (i) The contention that no satisfaction as to be correctness of the claim made u/s 14A read with 8D(iii) has been recorded by the AO as well as the CIT(A) is not acceptable. The AO has complied with the requirement of section 14A of the Act by observing that as to why he is not satisfied with the correctness of claim of the assessee that no expenditure was incurred. The AO has recorded the findings that earning of dividend was not an automatic process and the assessee was required to keep regular control over the investments made; (ii) The contention that the assessee earned dividend income of Rs.262907.86 lakhs without incurring any expenses does not convince us at all. The term ‘expenditure’ as per section 14A would include the expenditures that are related to investments made i.e. expenditures on administration, capital expenses, travelling expenses, operating expenses etc. It is difficult to accept that the assessee company was making investments decisions to the tune of Rs.6,31,637/- lakhs of public money without incurring a single penny out of its pocket. Such decisions are highly strategic in nature and are required to be made by highly qualified and experienced professionals. The same would ITA.No.4555/Mum/2017 Fortune Financial Services (India) Limited Assessment Year-2012-13 also require market research and analysis. The assessee company by acquiring controlling interest in the subsidiary companies would also be required to attend board meetings and make policy decisions with regard to the aforesaid huge amount of investments made. By no stretch of imagination, it can be assumed that such activities were done without incurring any expenditure. It is pertinent to mention here that even the assessee did not rebut the findings of AO that the assessee was required to supervise and administer all the investments made; (iii) In a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the Assessing Officer has to follow the consequences stated in the statute.” From the above judgment, it can be very well concluded that there is always certain expenses in various forms including administrative expense to maintain the investments portfolio. As per the assessment order, the appellant has earned dividend income of Rs.19,07,777/-. Keeping in view of the facts and circumstances of the case, the judicial pronouncements relied upon by the Ld. AR is distinguishable on facts and the decision of the Hon’ble Kolkata ITAT in Coal India Ltd., is more closer to the facts of the present case. Accordingly, the disallowance made by the AO u/s 14A r.w.r. 8D (2) is upheld. In the result, this part of the ground of the appellant is Dismissed. Aggrieved, the assessee is in further appeal before us.

The Ld. Authorized Representative for Assessee [AR], Shri. Anuj Kisnadwala, at the outset placed reliance on the order of Tribunal in assessee’s own case for AY 2011-12 dated 18/12/2017 and submitted that no fresh investments were made during the year and therefore interest disallowance was not justified. Regarding expense disallowance, it was submitted that only income yielding investments were to be considered to arrive at the said disallowance in terms of decision of Delhi Tribunal (Special Bench) rendered in ACIT Vs. Vireet Investment (P.) Ltd. [82 Taxmann.com 415], a copy of which has been placed on record. The same has been controverted by Ld. DR, Ms.

We have carefully considered the rival contentions and perused relevant material on record including the cited decision of Tribunal in assessee’s own case for immediately preceding AY 2011-12. In the said order, the Tribunal has recorded a finding that own funds in the shape of Share Capital & Reserves of Rs.10004.10 Lacs were much more than investment of Rs.8094.70 Lacs and therefore, interest disallowance was not justified in terms of various judicial pronouncements. Upon perusal of financial statements of impugned AY, as placed on record, we find that there is no change in the figures of investment and the same remain static at Rs.8094.75 Lacs. This being the position, interest disallowance as made by Ld. AO stand deleted and the grounds raised