DCIT CIR 3(2)(1), MUMBAI vs. J.M. FINANCIAL PRODUCTS LTD, MUMBAI

This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-8, Mumbai [in short CIT(A)], in appeal No. CIT(A)-8/IT-590/14-15 dated 15.02.2016. The Assessment was framed by the Dy. Commissioner of Income Tax, Circle-3(2), Mumbai (in short ‘DCIT’) for the A.Y. 2011-12 vide order dated 20.03.2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

“1. Whether on the facts and in the circumstances and in law the Ld. CIT(A) is right in deleting the disallowance of expenses made by the AO u/s. 14A r.w.r 8D at Rs. 18,41,43,609/- and upholding the suo moto disallowance made by assessee at Rs. 58,51,272/-?"

2. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in deleting the disallowance of expenses made by the AO u/s. 14A at Rs. 18,41,43,609/- without appreciating the fact that as per the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Ltd., disallowances of expenses for AY 2008-09 onwards are to be made under rule 8D2 only?

3. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in deleting the disallowance of expenses u/s 14A by accepting the claim of the assessee that investments were made from own funds without actually verifying the sources of such investments, without appreciating that the assessee had not proved it before the Assessing Officer or in appeal proceedings that investments were actually made from own funds.?”

“5.1.4 In the instant case, I find that the Assessing Officer has not given any justification for rejecting the detailed and scientific methodology of computing expenses attributable to earning of exempt income submitted by the appellant nor has he given any specific reasons for rejecting the computation of indirect expenses as submitted by the appellant He has also not taken into consideration the fact that the appellants own funds by way of share capital of Rs. 544,50,00,000/- and reserves of Rs. 210,8481087/- were more than the investments made Moreover. I find that my Ld. Predecessor has given relief to the appellant on account of interest expenditure under rule 8D(2)(ii) for AY. 2010-11 vide order dated 26.03.2015 Therefore, in view of the facts and circumstances of the case and the ratio of various judicial pronouncements as mentioned above the Assessing Officer is directed to accept suo moto disallowance of ₹ 58,51,200/- made by the appellant under section 14A and the balance disallowance is deleted. These grounds of appeal are therefore allowed.”

Aggrieved, now Revenue is in appeal before Tribunal.

5. Before us, the learned Sr. Departmental Representative Shri Abhijit Patankar drew our attention to suo moto disallowance made by assessee and pointed out that the AO has not gone into the investment made by the assessee and financial position of the assessee company i.e. loan liability. He particularly drew our attention to the balance sheet and stated that in view of the accounts of the assessee it is clear that the suo moto disallowance made by the assessee is not commensurate with the exempt income. On the other hand, the learned Counsel for the assessee argued that the investment made in exempt income, the total investment giving tax exempt income is Rs. 117.01 crores and interest free capital / funds that the assessee company to the tune of ₹ 755.35 crores in the share of share capital reserves available with the assessee. He argued that this was explained before AO vide letter dated 12-03-2014, which is reproduced in the assessment order, clearly states that the assessee’s investment in giving rise to tax free income, is much less than the interest free capital as narrated above. Further, the learned Counsel referred to the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC) wherein the Hon’ble Supreme Court has held that the positive satisfaction is to be recorded by the AO for making disallowance. Hon’ble Supreme Court held as under: -

“41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the AO.”

“6. We have heard the rival contentions and gone through the facts and circumstances of the case. As regards to Revenue’s appeal in & 3941/Mum/2015 for the AY 2010-11, we find that in the case of JM Financial Products Ltd. in ITA No. 3941/Mum/2015, the AO has disallowed the interest of Rs. 8,80,69,042/-. The assessee before CIT(A) and the AO argued that assessee has sufficient own funds to make investment and he filed complete chart in his paper book, which is read as under: -

7. Similarly, we find that in the case of JM Financial Investment Managers Ltd. in the AO has disallowed the interest of Rs. 77,89,257/-. The assessee before CIT(A) and the AO argued that assessee has sufficient own funds to make investment and he filed complete chart in his paper book, which is read as under: -

8. In view of the above facts and circumstances, assessee has share capital and resources which is much more than the investment of tax free incomes and once assessee has sufficient own funds for making investment, then the presumption will be that no disallowance can be made on account of interest. This view of ours is supported the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd. (supra) and Reliance Utilities Ltd. (supra). Accordingly, we are of the view that the CIT(A) has rightly deleted the addition in both the years and we confirm the same. This common issue of both the appeals of Revenue is dismissed.

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10. In the present case also the assessee in the case of JM Financial Investment Managers Ltd. has made suo moto disallowance of Rs. 30,09,078/- on account of employees’ compensation cost, interest cost and security transactions tax. Similarly, in the case of JM Financial Products Ltd., the assessee earned exempted income of Rs. 6,49,62,982/- on a total investment during the year at Rs. 414,26,11,058/-. The assessee suo moto disallowed a sum of Rs. 28,64,511/- on account of compensation cost of employees as well as administration cost. The AO in both the cases has not rejected the computation of disallowance made by assessee and once the assessees’ disallowance

held to be incorrect, the AO cannot invoke the provision of Rule 8D of the Rules. Accordingly, we delete the disallowance and allow the appeal of the assessee.”

“4. Whether on the facts and circumstances and in law the Ld. CIT(A) is right in deleting the disallowance of expenses u/s. 14A of Rs. 18,41,43,609/- made by assessing officer while computing book profit u/s I I5JB of the IT. Act?

Order pronounced in the open court on 31-05-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 31.05.2018 kao kI ga[- .