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Income Tax Appellate Tribunal, “B”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
आदेश / O R D E R PER R.C.SHARMA (A.M):
These are the cross appeals filed by Revenue and assessee against the order of CIT(A)-22, Mumbai dated 04/09/2015 for A.Y.2011-12 in the matter of order passed u/s.143(3) of the IT Act.
5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., 2. Rival contentions have been heard and record perused.
Facts in brief are that assessee is engaged in the business of commodity and derivatives exchange. During the course of assessment, AO made disallowance u/s.14A and also did not give credit for TDS of Rs.18,57,273/- The AO also held that penalty of Rs.3,62,68,987/- collected by the assessee from its members was not in the nature of income.
By the impugned order CIT(A) deleted the addition made on account of penalty and treated the same as in the nature of assessee’s income. Revenue is in further appeal before us against the order of CIT(A) deleting the addition made by AO on account of amount received under the head ‘penalty’. We found that similar issue has been decided by the Tribunal in assessee’s own case in order dated 09/08/2017 The precise observation of the Tribunal was as under:- 7. We have heard the rival contentions on this issue and perused the record. We noticed that the learned CIT(A) deleted the addition with the following observations :- 3.3. I have considered the facts of the case. The appellant credited an amount of Rs.5.08 crores in the P&L account on account of penalty amount collected from the members. The appellant thereafter transferred this amount from P&L account to Investors Protection Fund account. During assessment proceedings, the appellant furnished its reply alongwith guidelines issued by Forward Market Commission. The A.O. has treated the penalty amount of Rs.5.08 crores collected by appellant, as income of the appellant stating that no explanation was furnished in respect of reduction of such income credited to P&L account. However, in the assessment order the A.O. has discussed in detail the guidelines issued by Forward Market Commission. In fact the answer to A.Os every question was contained in the guidelines issued by Forward Market Commission which were duly considered by the A.O.
5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., The Forward Market Commission was a Government/Statutory Body which was controlling the operations/activities of the appellant. As per statutory guidelines issued by Commission, the appellant collected penalty amounts totaling to Rs.5,08,10,000/- from its members for violation of such guidelines by the members. As per guidelines issued by commission, the appellant was to set apart this amount of penalty amount in a separate account "Investors Protection Fund" and as per such guidelines was required to utilize this amount for the benefits of investors only. In the facts and circumstances the amount collected by appellant was not in the nature of income. The appellant acting as a trustee collected the said amount of penalty from the members for onward transfer of same to the fund. Thus, there is force in appellant's argument that the income so collected diverted at source itself. The appellant's other argument is also correct that even if this penalty amount is required t be treated as income u/s. 28 of the Act, the amount so transferred to "Investors Protection Fund" will constitute an expenditure u/s. 37 of the Act.”
We noticed that the learned CIT(A) has taken conscious view of the matter after considering legal position and factual aspects. We also find merit in the contentions of the assessee that the penalty amount cannot be considered as income of the assessee as it has been diverted to the investors protection fund by overriding title. The case of the AO was that the assessee did not keep the collections in separate account. However it is stated by the assessee that they were kept in a separate account in the books of account and was shown as liability. The Ld A.R also stated that the said collections have been invested in mutual funds. These submissions of Ld A.R could not be disproved by the revenue. The Ld A.R also submitted that the Trust has ultimately been formed. Under these set of facts, we do not find any reason to interfere with the order passed by the learned CIT(A) on this issue. “
The facts and circumstances during the year under consideration are same, therefore, respectfully following the decision of the Tribunal consistently taken in the case of assessee for the A.Y.2007-08 to 2010- 11, we do not find any merit for the addition made by the AO. However, from the record, we observe that till the end of Financial Year under consideration, the assessee has not created the investor protection fund 5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., as per requirement of Forward Market Commission (FMC). It also appears that the money so collected was shown as liability in assessee’s balance sheet. It also appears that assessee has invested this money in mutual funds for earning some income. Since the investor protection fund has still not been created, it is not clear as to whether the income generated on such investment of fund by the assessee having been offered to tax either in the hands of assessee or in the hands of the fund. AO is directed the verify the same and decide as per law after giving due opportunity to the assessee.
In the assessee’s appeal, assessee is aggrieved for disallowance made by AO u/s.14A r.w.Rule 8D 2(iii) amounting to Rs.55,94,708/-. 7. Rival contentions have been heard and record perused. Facts in brief are that during the captioned year, assessee company earned dividend income of Rs.8,17,18,038/-. Disallowance made by AO u/s. 14A r.w.r. 8D(2)(iii) was confirmed by CIT(A). Assessee is before us against the said disallowance. 8. From the record we found that the AO denied the claim of the assessee company and made the diallowance of Rs. 67,69,839/- by invoking provisions of sec. 14A(2) r.w.r. 8D, thereby disallowed an additional amount of Rs. 56.19.248/- over and above the disallowance offered by the assessee suo motu. The CIT(A) deleted the disallowance as per Rule 8D(2)(i) and 8D(2)(ii) of Rs.11,70,591/- and Rs. 24,540/- respectively. However, the Ld. CIT(A) uphled the disallowance made as 5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., per Rule 8D2(iii) of Rs. 55,94,708/- against which assessee is in further appeal before us.
It was argued by learned AR that the assessee company has not incurred any specific direct cost for earning the said dividend income. However, to cover the certain overhead expenses that might have been indirectly incurred, the assessee has suo-moto disallowed proportionate administrative expense of Rs. 11,70,591/- u/s. 14A having regard to proportionate employee cost and other administrative cost being amount of expenditure incurred for earning the said dividend income. Our attention was also invited to Pg. 69 to 71 of the Paper book whereby the assessee has given explanation with regard to computation of the said proportionate employee cost and other administrative cost that might have been indirectly incurred for earning the said dividend income.
It was further argued by learned AR that assessee has made investments mostly in mutual funds only. Out of total investments of Rs.125.78 Crs assessee has made tax-free investments of Rs.51.78 Crs. Which comes to 41.17% of total investments. Considering the nature of transactions carried out by the assessee the Hon’ble coordinate bench in the assessment year 2008-09 has restricted the disallowance at Rs. 20 Lakhs u/s. 14A which comes to 0.87% of the dividend income earned during that year. The details of investments and dividend income for the AY's 2007-08 to 2011-12 were furnished, as Annexure 1. On perusal of the said tabulated details it shall be appreciated that the suo-moto disallowance u/s, 14A of Rs. 11,07,591/- made by the assessee comes to 5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., 1.36% of the exempt income for the relevant AY 2011-12, Thus, the percentage of suo- moto disallowance made by the assessee for the AY 2011-12 is higher than the percentage of disallowance determined by the Hon'ble tribunal for the AY 2008-09. Therefore, in light of the said facts it was argued that the disallowance made by the assessee is reasonable and no further disallowance is warranted in this year.
11. Further, reliance is also placed on the decision of Hon'ble Coordinate bench in the case of National Securities Clearing Corporation Ltd. for the AY 2008-09 and 2009-10 wherein after considering the similar nature of transactions of investments made in mutual funds, the Hon'ble Coordinate Bench directed the Id.AO to restrict the disallowance to 1% of the exempt income. Copy of the said ITAT order was furnished, as Annexure 2.
12. On the other hand, learned DR relied on the order of the AO and the CIT(A) and contended that relevant assessment year under consideration is 2011-12, therefore, Rule 8D is clearly applicable and AO has correctly computed disallowance in respect of expenditure incurred for earning exempt income as per formula given under Rule 8D(2)(iii) of the IT Act.
We have considered rival contentions and carefully gone through the orders of the authorities below. We had also perused the order of the Tribunal in assessee’s own case for the A.Y.2007-08 to 2010-11 dated 09/08/2017. Since the year under consideration is 2011-12, we are considering the decision taken by the Tribunal for the A.Y.2008-09, 2009- 5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., 10 and 2010-11, wherein Rule 8D is applicable. In the A.Y.2008-09, Tribunal have held as under:-
“19. We shall now take up the appeal filed by the assessee for AY 2008- 09. The first issue relates to the disallowance made u/s 14A of the Act. During the year under consideration, the assessee earned dividend income of Rs.22.86 crores and computed disallowance u/s 14A at Rs.8,67,632/-. The AO computed the disallowance under Rule 8D(2)(iii) @ 0.5% of average value of investments, which worked out to Rs.42,91,600/-. Before Ld CIT(A), the assessee contended that the average value of investments worked out by AO includes both taxable and non-taxable investments. Hence the Ld CIT(A) directed the AO to compute the disallowance under Rule 8D(2)(iii) on the value of non- taxable investments only. Still aggrieved, the assessee has filed this appeal before us.
The Ld A.R submitted that the assessee has worked out the disallowance u/s 14A in a scientific manner and the AO did not consider the same and he has also failed to record his dissatisfaction. However, we notice that the AO has discussed at length about the disallowance in the assessment order, which makes it clear that he was not satisfied with the workings of the assessee. Hence we are unable to agree with the assessee in this regard. We notice that the assessee has mainly purchased and sold the units of mutual funds. Further, during the year relevant to AY 2008-09, the assessee has sold most of the units of mutual funds from out of opening balance. We have observed in the preceding paragraph while dealing an identical issue in AY 2007-08 that the investments in mutual funds do not require much analysis. In this set of facts, we are of the view that there is no requirement of applying the rule 8D. We have also gone through the disallowance worked out by the assessee. We notice that the assessee has allocated a portion of salaries and expenses in a standard manner, without having regard to the volume of transactions carried out during the year under consideration. We have already discussed about the nature of transactions carried out by the assessee during the year under consideration. Hence, on a conspectus of the matter, we are of the view that the disallowance u/r 8D(2)(iii) may be determined at Rs.20.00 lakhs and in our view, the same would meet the requirements of sec. 14A. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A to Rs.20.00 lakhs.”
In the A.Y.2009-10, the Tribunal held as under:-
5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., “26. We have heard the parties on this issue. The Ld A.R strongly contended that there is no requirement of making any disallowance under Rule 8D(2)(ii) out of interest expenditure, as the assessee has not used any borrowed funds for making investments. He also relied upon the decision rendered by the Hon'ble Bombay High Court in the case of HDFC Bank Limited (383 ITR 529). The assessee has pointed out that the loan funds have been used for specific purposes. We notice that the Ld CIT(A) has not applied the ratio of the decision rendered by Hon'ble Bombay High Court. With regard to the disallowance made under Rule 8D(2)(iii) also, we notice that the assessee has mainly invested in units of mutual fund units, which fact has not been considered by the tax authorities. Accordingly we are of the view that this issue requires fresh examination at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh by applying the ratio laid down by the Hon'ble Bombay High Court in the case of HDFC Bank Ltd (supra) and also by considering the decision rendered by us in the preceding paragraphs on the identical issue urged in earlier years.”
In the A.Y.2010-11, Tribunal held as under:- “30. We shall now take up the appeal filed by the assessee for AY 2010- 11. The first issue relates to the disallowance made u/s 14A of the Act. We have set aside this issue to the file of the AO in AY 2009-10, since the assessee has claimed that the borrowed funds were not used for making investments and further its investments were made mainly in mutual funds. The facts, being similar in this year also, we restore this issue to the file of the AO with the direction to examine this issue afresh by following the directions given by us.”
13. It is clear from the order of the Tribunal that in the A.Y.2008-09, Tribunal after considering the facts of the case directed the AO to restrict the disallowance u/s.14A to the extent of Rs.20 Lakhs whereas during the year under consideration, assessee has merely offered for disallowance a sum of Rs. Rs.11,70,591/-, wherein exempt income was to the tune of Rs.8,17,18,038/-. However, we found that in the A.Y.2010-11 and 2009- 10, matter was restored back to the file of the AO for deciding afresh after 5814/Mum/2015 M/s. National Commodities & Derivatives Exchange Ltd., applying the decision of Bombay High Court in case of HDFC Bank Ltd., and also the decision of the Tribunal in the preceding years. In view of the above discussion, we restore the matter back to the file of the AO for deciding afresh after considering the nature of investment having been made by the assessee in the mutual funds etc., where no much efforts are required to be undertaken. We direct accordingly.
Assessee is also aggrieved for not granting credit for TDS of Rs.18,57,273/-, which was alleged to be short granted to the extent of Rs.1,45,416/-. In the interest of justice, we direct the AO to verify the factual figure and for deciding afresh. 15. The issue with regard to adding disallowance u/s.14A while computing book profit u/s.115JB is squarely covered by the decision of ITAT(Special Bench) in the case of M/s. Vireet Investment Pvt. Ltd., order dated 22/06/2017 and also by the decision of Bombay High Court in the case of M/s.JSW Energy Ltd., 60 Taxmann.com 303. Respectfully following the same, we direct the AO that no addition while computing book profit u/s.115JB is to be made with regard to amount in excess of what has been debited in the P & L account with respect to such exempt income. Meaning thereby, any disallowance made by the AO in excess of what has been claimed by the assessee should not be added while working book profit u/s.115JB. We direct accordingly.