FINEOTEX CHEMICAL LTD,MUMBAI vs. ASST CIT CIR 12(2)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “G”, BENCH MUMBAI BEFORE SHRI C. N. PRASAD, JM &DR. A.L.SAINI, AM आयकरअपीऱसं./ITA No.5412/Mumbai/2016 (निर्धारणवषा / Assessment Year: 2012-13) Finotex Chemicals Ltd. Vs. ACIT, Circle-12(2), Mumbai 43/43, Manorama Chambers, S.V. Road, Bandra(west), Mumbai- 400050. स्थायीऱेखासं./ जीआइआरसं./ PAN/GIR No. :AAACF8360M (Appellant) .. (Respondent) Appellant by :Ms. HetalMaru, FCA Respondent by :ShriV. Vidhyadgav, DR सुनवाईकीतारीख/ Date of Hearing : 20/02/2018 घोषणाकीतारीख/Date of Pronouncement : 27/02/2018 आदेश / O R D E R Per Dr. ArjunLalSaini, AM:

The captioned appeal filed by the Assessee, pertaining to Assessment Year 2012-13, is directed against an order passed by the Commissioner of Income Tax-(Appeals)-20, Mumbai, in Appeal No.CIT(A)- 20/ACIT-12(2)(1)/IT-19/2015-16, dated 27.05.2016, which in turn arises out of an order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟).

Finotex Chemicals Ltd. 2.1 The brief facts apropos this issue are that while making assessment u/s 143(3) of the Act, the Assessing Officer noticed that the assessee has earned a dividend income of Rs.14,79,630/- in the assessment year under consideration. At the same time, the assessee has claimed interest expenses of Rs.29,09,739/-. The assessee has shown non-current investments at Rs.8,38,68,940/- and investments of Rs.19,57,15,948/- in its balance sheet as on 31.03.2012. During the assessment proceedings, the assessee was asked to justify its claim of various expense,as per the provisions of section 14A r.w.r 8D of the Income Tax Act, 1962, in its Profit &Loss account. In response to that, the assessee submitted its reply on 26.02.2015. After going through the reply of the assessee, the AO found that assessee has incurred expenditure in relation to earning of exempt income, therefore, provisions of section 14A r.w.r 8D would be applicable. The assessing officer noted that for the purpose of applicability of section 14A, it is not necessary that the assessee should have actually earned exempt income during the year. All the income frominvestments which does not or shall not form part of total income are to be included for working out this disallowance. This way, the assessing officer, considering all the investments, consisting funds generating exempt income and funds not generating exempt income,worked out disallowance as per Rule 8D(2)(iii), which is given below: Opening balance of investments as on 31.03.2011 5,90,67,943/- Closing balance of investments as on 31.03.2012 19,57,15,948/- Average value of investments 12,73,91,946/- Disallowance as per Rule 8D(iii) being 0.5% of average investments Rs.6,36,960/- Therefore, the AO has disallowed Rs.6,36,960/- u/s 14A r.w.r 8D of the Income Tax Act, 1962.

2.2 On appeal, the ld. CIT(A) has confirmed the disallowance made by the assessing officer u/s 14A read with rule 8D(2)(iii) of the Act. The ld. CIT(A) observed that a company cannot earn dividend income without its existence and management, therefore, some expenses must have incurred by the assessee, in order to take the investments Page | 2

Finotex Chemicals Ltd. decisions. Therefore, CIT(A) held that the AO had correctly applied Rule 8D(2) (iii) and worked disallowance u/s 14A of the Act to the tune of Rs.6,36,960/-.

2.3 Not being satisfied with the order of the ld. CIT(A), the assessee is in further appeal before us. The ld. Counsel for the assessee submitted before us that assessee-company has not incurred any expenses in relation to earning of exempt income. The counsel pointed out that a financial advisor was appointed by the mutual fund and the said financial advisor is paid commission by the mutual fund directly therefore, company is not incurring any expenditure to maintain the investments and to take the day to day decisions about sale and purchase of investments. The ld. Counsel for the assessee also pointed out that the AO was erred in taking into account the funds which were not generating exempt income, that is, the funds which were not generating exempt income should not be considered for the purpose of disallowance under Rule 8D(2)(iii). The ld. Counsel submitted before us, the details of funds generating exempt income and funds not generating exempt income, and, also submitted the opening and closing balance as on 31.03.2011 and 31.03.2012 which are given below: Details of Mutual Funds as on 31st March 2011 – Opening Investments

Sl. No. Particulars Amount (Rs.) A Funds generating Exempt Income i. Debt Oriented Mutual Funds 1 Kotak Credit Opportunities Fund 51,50,436 ii Equity Oriented Mutual Funds 1 Birla Sunlife Dividend Yield Plus - Growth 20,82,612 2 HDFC Equity Fund – Growth 17,35,230 3 Kotak Mid Cap – Growth 4,67,226 4 Pramerica Dynamic Fund – Growth 29,34,000 5 Reliance Growth Fund Retail Plan 3,50,123 Sundaram Select Midcap Appreciation Fund 20,02,717 Total(A) 1,47,22,343 B Funds not generating Exempt Income i. Debt Oriented Mutual Funds 1 Birla Sunlife Cash Manager – Growth 1,50,50,418 2 Birla Sun Life Capital Protection Oriented Fund 30,00,000 Page | 3

Finotex Chemicals Ltd. ITA No.5412/Mumbai/2016

Series 1 – Growth 3 Birla Sun Life Monthly Income - Growth 41,76,261 4 DWS Short Maturity Fund - Growth Plan 40,00,000 5 HDFC Cash Management Fund - Treasury Advantage 1,50,49,917 Retail Growth Reliance Regular Savings Fund Debt Plan - Growth 30,69,004 Fund 4,43,45,600 Total(B) 5,90,67,943/- Total Mutual Funds (A+B)

Details of Mutual Funds as on 31st March 2012 – Closing Investments

Sl. No. Particulars Amount (Rs.) A Funds generating Exempt Income i. Equity Oriented Mutual Funds 1 Birla Sunlife Dividend Yield Plus – Growth 63,00,000 2 HDFC Equity Fund-Growth 58,58,590 3 ICICI Prudential Focused Bluechip Equity Retail Growth 25,00,000 4 Kotak Mid Cap-Growth 4,69,849 5 Pramerica Dynamic Fund-Growth 27,54,000 6 Reliance Growth Fund Retail Plan 3,16,839 7 Sundaram Select Midcap Appreciation Fund 58,55,473 Total(A) 2,40,54,751/- B Funds not generating Exempt Income ii. Debt Oriented Mutual Funds 1 Birla Sunlife Cash Manager Weekly Dividend - Growth 3,32,86,845 2 BNP Paribas Bond Fund (349610/31) - Regular Growth 25,00,000 3 BNP Paribas Bond Fund (349611/28) - Regular Growth 70,00,000 4 Birla Sun Life Capital Protection Oriented Fund Series 1 – 30,00,000 Growth 5 DWS Premier Bond Fund - Regular Plan Growth 20,00,000 6 DWS Short Maturity Fund - Growth Plan 22,84,544 7 HDFC Cash Management Fund - Treasury Advantage Retail 5,16,80,076 Growth 8 ICICI Prudential Regular Savings Fund Growth 95,00,000 9 Kotak Bond (Regular) Growth 2016612/54 55,00,000 10 Kotak Credit Opportunities Fund Growth 54,09,733 11 SBI Dynamic Bond Fund 13424221 - Growth 15,00,000 12 UTI Bond Fund Growth Plan – Regular 80,00,000 13 UTI Treasure Advantage Fund – Growth Plan 4,00,00,000 Total(B) 17,16,61,197 Total (A+B) 19,57,15,948 The ld. Counsel for the assessee, thereafter, contended that in any event, if any disallowance is to be made under Rule 8D(2)(iii), then it should be in relation to funds generating exempt income. Based on the funds generating exempt income, the counsel submitted before us that the disallowance u/s 14A r.w.r 8D(2)(iii) vis-à-vis the disallowance Page | 4

Finotex Chemicals Ltd. made by the AO in his assessment order are analyzed and compared, which aregiven below: Disallowance u/s.14A SN Particulars As per Assessing Officer As per Appellant Amount Amount Amount Amount (Rs.) (Rs.) (Rs.) (Rs.) i. Rule 8D(i) – Direct Expenses - - ii. Rule 8D(ii) – Interest expenses - - iii. Rule 8D(iii) – administrative expenses Opening balance of Investment as 5,90,67,943 1,47,22,343 on 31st March, 2011 Closing balance of investment as 19,57,15,948 2,40,54,751 on 31st March, 2012 Average investment 12,73,91,946 1,93,88,547 0.5% of average investment – Rule 6,36,960 96,943 8D(iii) disallowance Total Disallowance under Rule 6,36,960 96,943 8D(i+ii+iii) The ld. Counsel submitted before us that total disallowance under Rule 8D (2) (iii) should be only to the tune of Rs. 96,943/-, as computed in the above table which is based on those funds which generate exempt income. The funds which do not generate exempt income should not be considered in computing the disallowance under rule 8D (2) (iii), therefore, the assessing officer was erred in taking into account those funds which are not generating exempt income. Hence, thedisallowance, if any, to be made, should be in relation to the funds generating exempt income.

2.4 On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the assessing officer which we have already noted in our earlier para and is not being repeated for the sake of brevity.

2.5 We have given a careful consideration to the rival submissions, and perused the materials available on record, we note that the disallowance u/s 14A r.w.r8D(2)(iii) should be in relation to funds generating exempt income only. In respect of provisions of Rule 8D(2)(iii), which is the subject matter of the appeal in the assessee‟s Page | 5

Finotex Chemicals Ltd. case under consideration, a perusal of the said provision shows that what is disallowable under Rule 8D(2)(iii) is the amount equal to ½% of the average value of investment, the income from which does not and shall not form part of the total income. Thus, under Rule 8D(2)(iii) what is disallowable is ½% of the dividend bearing securities or funds generating exempt income. Therefore, not all investments become the subject matter of consideration while computing disallowance u/s 14A r.w Rule 8D(2)(iii). The disallowance u/s 14A r.w.Rule 8D(2)(iii) is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investments which has given rise to this income which does not form part of the total income.

We note that as far as Rule 8D(2)(iii) of the Rules is concerned, it has been held by the Hon‟ble ITAT Kolkata Bench in the case of DCIT vs REI Agro Ltd. In dated 14.05.2013 that it is only the investment which yielded tax free income that should be considered for working out the average value of investment while applying the Rule 8D(2)(iii) of the Rules. This order of the tribunal has been confirmed by the decision of Hon‟ble Calcutta High Court in G.A. No.3022 of 2013 Judgement dated 23.12.2013. In view of the aforesaid legal position we are of the view that the order of the CIT(A) on this issue cannot be sustained. It has also been held by the Hon‟ble Delhi High Court in the case of Cheminvest Ltd vs CIT (2015) 378 ITR 33 (Del) that when there is no exempt income then there can be no question of disallowance u/s 14A of the Act. In the light of the judicial pronouncements, we are of the view that the plea of the assesseeto exclude funds which are not generating exempt income, that is, which had not yielded any exempt dividend income during the previous year while working out the average value of investments for the purpose of applying Rule 8D(2)(iii) of the Rules, should be accepted. Page | 6

Finotex Chemicals Ltd. However, we do not accept the plea of the assessee that commission of financial advisor was paid by the Mutual Fund directly therefore no any expenses have been incurred by the company to maintain the investment portfolio. Ultimately, the directors of the company or top management instructs the financial advisor, about how much investment is to be done, how much is to be sold or retained.

Considering the ratio of above cited judgmentsof coordinate Bench of ITAT Kolkata and Hon'ble Kolkata High Court (supra),we restore the present issue to the file of the assessing officer for computation of disallowance u/s 14A r.w. Rule 8D(2)(iii) and we direct the assessing officer to consider only funds generating exempt income to compute the disallowance under Rule 8D(2)(iii) of the I.T.Rules.

2.6 In the result, the appeal filed by the assessee (Ground No.2), is allowed for statistical purposes.

3.Ground No.3 raised by the assessee relates to addition of income of Rs.25,000/- made by the AO under the head of “profit and gains of business or profession”, while computing the tax liability.

The ld. Counsel for the assesseepointed out that assessing officer, while going through the income-tax computation form, has taken the amount of Rs.7,15,07,112/- as “profit and gains of business or profession”. However, in the assessment order, the AO after making disallowance u/s 14A has correctly computed income under the head “profit and gains of business or profession” at Rs.7,08,45,144/-, therefore, the difference of Rs.25,008/- is to be rectified as per the assessee`s reconciliation given below:

(i) Income-tax computation: 7,15,07,112/- (ii)AO‟s order after taking disallowance u/s 14A: 7,09,45,144//- Page | 7

Finotex Chemicals Ltd. Balance 76,19,68/- Less: Disallowance u/s 14A: 63,69,60/- Balance Difference 25,008/- Therefore, the ld. Counsel for the assessee requested the Bench to direct the AO to correct typographical error. Having gone through the facts and figures explained above, we note that anarithmetic error committed by the assessing officer to the tune of Rs.25,008/- needs to be rectified. Therefore, we direct the AO to examine the figures and facts referred above and rectify the mistake as per provisions of law.

3.1 In the result, Ground No.3 raised by the assessee is allowed for statistical purposes.

Order is pronounced in the open court on 27.02.2018.