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Income Tax Appellate Tribunal, MUMBAI BENCH “J” MUMBAI
Before: SHRI JOGINDER SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-14, Mumbai [in short CIT(A)] and arises out of the assessment completed u/s 143 (3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
raised by the assessee read as under: 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.27,75,141/- ,(being exempt income) made by the AO to the income of the Appellant by way of disallowing administrative expenditure claimed to have been incurred relating to exempt income invoking the provisions of section 14A r.w.r, 8D. b) The Ld. CIT(A) failed to appreciate that having regard to the accounts there is no reason and basis in reaching to dis-satisfaction with the correctness of the claim of the Appellant that no expenditure 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 overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
2. The Ld. CIT(A) erred in disposing the ground No. 3 raised disputing the levy of interest u/s/ 234B, 234C and 234D of the Income Tax Act, 1961.
3. Briefly stated, the facts of the case are that the assessee received dividend income of Rs.27,75,141/- on investment in shares/mutual funds and claimed it as exempt u/s 10(34)/10(35) of the Act. During the course of assessment proceedings, the Assessing Officer (AO) asked the assessee to show cause as to why the disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 (the ‘Rule’) should not be made. In response to it, the assessee vide letter dated 10.03.2015 filed a reply which has been extracted by the AO at page 2-3 of his assessment order dated 13.03.2015. However, the AO was not convinced with the said reply and relying inter alia on the judgment of the Hon’ble Bombay High Court in Godrej & Boyce v. DCIT [2010] 194 Taxman 203 (Bombay) made a disallowance of Rs.51,79,361/- u/s 14A r.w. Rule 8D.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) by following the order of the Tribunal in the case of Daga Global Chemicals Pvt. Ltd. (ITA No. 5592/Mum/2012) dated 01.01.2015 concluded that the disallowance should not exceed the exempt income. Thus the Ld. CIT(A) restricted the disallowance of Rs.51,79,361/- made by the AO to Rs.27,75,141/-.
5. Before us, the Ld. counsel of the assessee submits that the assessee is a holding company of various energy companies in the group. During the previous year, the assessee received dividend income of Rs.27,75,141/- on investment in shares/mutual funds and claimed dividend so received as exempt u/s 10(34)/10(35). We find that before the AO the appellant had filed a reply dated 10.03.2015 stating that there are borrowed funds as on 31.03.2012. The investment in shares of Rs.199.91 crores are covered by the shareholders’ funds of Rs.104.08 crores and balance out of borrowed funds. It is stated that the company declares dividend, sends the dividend by ECS or by post/courier to its shareholders. The assessee as a shareholder simply deposits the dividend warrant in its bank account. The only act which was performed by the assessee was to fill a bank slip along with other bank slips and to deposit the same in the bank account along with other bank slips of the business by the same staff. Thus it is submitted that no expenditure could be said to have been incurred by the assessee in earning such dividend income.
Relying on the decision in Garware Wall Ropes Ltd. v. Addl. CIT (ITA No. 5408/Mum/2012) dated 15.01.2014, it is stated before the AO that when the investments are in the group concerns, there is no reason to believe that the assessee would have incurred administrative expenses in holding these investments. Thus it is stated, that strategic investment are not considered for working out the disallowance u/s 14A.
On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A) and the decision in Maxopp Investment Ltd. v. CIT (2018) 91 taxmann.com 154 (SC).
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We begin with the disallowance of Rs.1,05,248/- made by the AO under Rule 8D(2)(ii). As mentioned hereinbefore, the assessee vide letter dated 10.03.2015 submitted before the AO that the investment in shares of Rs.199.91 crores are covered by the shareholders funds of Rs.104.08 crores and the balance out of borrowed funds. The rationale for enactment of section 14A was explained by the Hon’ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd (supra) as under: “Section 14A was enacted by the Parliament in order to overcome the judgments of the Supreme Court in the cases of CIT v. 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 widen 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 on 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 of taxable and non-taxable income, it would be necessary to apportion the expenditure incurred by the assessee. Only that part of the expenditure, which is incurred in relation to income which forms part 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. From this, it would follow that section 14A has within it implicit notion 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 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for.” Also in the same judgment their Lordships explained Rule 8D as under:
In the affidavit-in-reply that had been filed on behalf of the revenue, an Explanation has been provided of the rationale underlying rule 8D. It had been stated with reference to rule 8D(2)(ii) that it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken excluding any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery, etc.). As regards 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. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary.
7.1 In Godrej & Boyce Manufacturing Company Ltd. (supra), the Hon’ble Supreme Court has held that the literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income.
Thus the AO has rightly made the disallowance of Rs.1,05,248/- under Rule 8D(2)(ii). The same is confirmed. 7.2 Now we turn to the disallowance of Rs.50,74,113/- made by the AO under Rule 8D(2)(iii). In Maxopp Investment Ltd. v. CIT (supra), the Hon’ble Supreme Court at para 34-35 held: “34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non- taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. ** ** ** The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A."
The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non- taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed.” 7.3 We direct the AO to follow the above recent judgement of the Hon’ble Supreme Court and compute the disallowance as per Rule 8D(2)(iii).