WELSPUN ENERGY P.LTD,MUMBAI vs. DCIT 8(3)(2), MUMBAI

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.

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."