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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI D.T. GARASIA & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-24, [in short ‘CIT(A)’] Thane and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience.
SBI Capital Markets Ltd.
Facts being identical, we begin with the assessment year 2008-09. We deal together the 1st, 2nd, 3rd and 4th ground of appeal
together as they address a common issue. The grounds of appeal are that the Ld. CIT(A) erred in (i) confirming the disallowance of interest and other expenses of Rs.95,17,503/- attributed to tax-free income u/s 14A of the Act, (ii) not appreciating that provisions of Rule 8D can be applied by the Assessing Officer (AO) only if he is not satisfied with the correctness of claim of expenditure made by the assessee ; further, the CIT(A) has erred in holding that the disallowance is required to be worked out by the mandatory method prescribed in Rule 8D(2)(iii); (iii) not accepting the contention that where there are mix funds, it cannot be presumed that the borrowed funds are utilized for earning exempt income and (iv) holding that appellant has not been able to establish that no expenditures were incurred to earn exempt income; further, he erred in holding that the appellant has inevitably incurred the expenses for earning exempt income.
3. In a nutshell, the facts of the case are that the appellant has received the following exempt income during the year under consideration Particulars of Exempt Income U/s Amount (Rs.) Divided Income 10(34)/(35) 15,04,54,778 Interest from tax free securities 10(15) 1,81,03,267 Long Term Capital Gain 10(38) 5,04,96,859 Total 21,90,54,904 SBI Capital Markets Ltd. ITA No. 4064/Mum/2013 The AO, then following the decision in Rajasthan State Warehousing Corporation v. CIT 244 ITR 450 (SC) and Godrej & Boyce v. DCIT (2010) 194 Taxman 203, disallowed expenditure of Rs.1,23,37,149/- u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 (the Rules). The break-up is Rs.48,97,979/- under Rule 8D(2)(i), Rs.1,02,810/- under Rule 8D(2)(ii) and Rs.73,36,360/- under Rule 8D(2)(iii). Since, the appellant-company had suo motu disallowed Rs.28,19,646/-, the AO made a further addition of Rs.95,17,503/- to the total income.
4. Aggrieved by the order of the AO, the appellant filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) agreed with the reasons given by the AO and dismissed the appeal.
5. Before us, the Ld. counsel of the appellant submits that no reason has been recorded by the AO for dissatisfaction of the correctness of the claim of the assessee and therefore, Rule 8D cannot be invoked. In this regard, reliance is placed by him on the decision in (i) Godrej & Boyce Manufacturing Company Ltd. v. DCIT [2017] 81 taxmann.com 111 (SC), (ii) PCIT v. Reliance Capital Asset Management Ltd. [2017] 86 taxmann.com 200 (Bombay), (iii) H.T. Media Ltd. v. Principal CIT, [2017] 85 taxmann.com 113 (Delhi.), (iv) Eicher Motors Ltd. v. CIT [2017] 86 taxmann.com 49 (Delhi), (v) ACIT v. Sachin R. Tendulkar, (2017) 77 taxmann.com 305 (Mumbai - Trib.) and (vi) Exim Scrips Dealers (P.) Ltd v. DCIT [2017] 77 taxmann.com 158 (Kolkata - Trib.).
SBI Capital Markets Ltd. It is stated by him that Rule 8D(1) states more or less what section 14A(2) states. It requires the AO to first examine the accounts of the appellant and then record that he is not satisfied with the correctness of the appellant’s claim of expenditure. It is thus stated by him that Rule 8D cannot be invoked as no reason for dissatisfaction of the correctness of the claim was recorded by the AO in his assessment order dated 30.12.2010 passed u/s 143(3). 5.1 The Ld. counsel further submits that no direct expenditure has been incurred specifically by the appellant to earn the exempt income. Therefore, the suo motu disallowance made by the appellant pertains to the indirect expenses apportioned on a scientific basis. It is stated by him that the expenses allocable to Treasury and Investment Group (TIG) Department are considered by the ACIT as direct expenditure under Rule 8D(2)(i) whereas, the same should have been considered as indirect expenditure under Rule 8D(2)(iii). As per him, Rule 8D(2)(iii) gives a notional formula to arrive at the indirect expenditure earned for earning the exempt income. Thus the disallowance should be restricted to Rs.45,16,714/- [Rs.73,36,360/- minus Rs.28,19,646/-]. 5.2 The Ld. counsel further submits that the appellant had sufficient own funds and non-interest bearing funds to make the said investments in tax-free bonds, shares of domestic companies and the same have been used for investment purpose. Reliance is placed by him on the decision in (i) CIT v. HDFC Rank Ltd [2016] 67 taxmann.com 42 (Bom. HC), (ii) CIT v. Karnataka State Industrial & Infrastructure Development Corpn. Ltd. [2016] 65 taxmann.com 295 (Karnataka), (iii) Integrated Coal SBI Capital Markets Ltd. Mining Ltd. v. DCIT [2016] 67 taxmann.com 260 (Kolkata), (iv) CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom. HC), (v) Oswal Industries v. ACIT (2000) 109 Taxman 279 (Mum. ITAT), (vi) Maruti Udyog Ltd. (92 ITD 119) (Del. ITAT), (vii)Hero Cycles Ltd. (323 ITR 518) (P&H HC) and (viii)Bunge Agribusiness (India) (P.) Ltd. v. DCIT 132 ITD 549 (Mumbai ITAT). 5.3 The Ld. counsel finally submits that strategic investments should be excluded while calculating average value of investment. It is stated that investments of Rs.63,96,30,000/- outstanding as on March 31, 2009 and Rs.60,00,00,000/- outstanding as on March 31, 2008 should be excluded for the purpose of calculating average investment for working the disallowance u/s 14A r.w. Rule 8D as the same pertains to strategic investments where dividend has been received and shares of foreign company wherein dividend is taxable. Reliance is placed by him on the decision in (i) M/s JM Financial Limited v. Additional CIT, ITA No. 4521/Mum/2012, A.Y. 2009-10, (ii) Garware Wall Ropes Limited v. Additional CIT, ITA No. 5408/Mum/2012, A Y. 20O9-10, (iii) ACIT v. M/s Oriental Structural Engineers (P) Ltd. ITA No.4245/Del/2011, A.Y. 2008- 09 and (iv)DCIT v. Binani Industries Ltd., [2017] 82 taxmann.com 320 (Kolkata - Trib.).
SBI Capital Markets Ltd. The Ld. counsel thus submits a calculation as under:
Total Long Term Investment As on March 31 As on March considered by the Ld. by the Ld. ACIT 2008 (Rs.) 31,2007(Rs.) 1,485,295,383/- 1,449,246,916/- Less: Strategic Investments SBI DFHI Ltd. 100,000,000/- 100,000,000/- SBICAP Securities Ltd. 500,000,000/- 500,000,000/- Less : Shares of Foreign Company – ONGC Mittal Energy Ltd. 39,630,000/- Net Investments 845,665,383/- 849,246,916/- As per the Ld. counsel, the average investment would come to Rs.847,456,150/-.
Per contra, the Ld. DR relies on the order of the Ld. CIT(A). He submits that the AO has recorded reasons, having regard to the accounts of the assessee, as placed before him that it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the appellant. Thereafter, the AO has applied the provisions of section 14A(2) and (3) r.w. Rule 8D.
The Ld. DR also submits that the AO has correctly made a disallowance of Rs.95,17,503/- to the total income shown by the assessee.
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below.
SBI Capital Markets Ltd. We begin with the contentions of the Ld. counsel that the AO has not recorded the reasons for dissatisfaction of the correctness of the claim of the appellant. In the case of Godrej & Boyce Manufacturing Co. Ltd. (supra), the Hon’ble Supreme Court held at para 37 : “ We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable” Let us go through the assessment record to see the situation. During the course of assessment proceedings, the AO observed at para 3 (page 2) of the assessment order dated 30.12.2010 that the appellant is engaged in various activities like (i) Broking i.e. buying and selling share on behalf of clients, (ii) Management consultancy & financing i.e. undertaking various project studies and purchase and arranging the finance in respect of the same, (iii) Trading in shares viz., regular purchase and sale of shares as stock-in-trade for the purpose of earning SBI Capital Markets Ltd. profits and (iv) Investing in shares with a longer perspective with a view of earning by way of dividends and capital appreciation. The AO further observed that while the income under (i), (ii) and (iii) categories will be taxable under the head ‘Profits and Gains from Business of Profession’, the income falling under (iv) category will be taxable under the head ‘Capital Gains’ and ‘Income from Other Sources’. The AO has mentioned at para 3 (page 2) of his assessment order that on the issue of allowability of expenses on exempt income, the assessee, vide letter dated 15.10.2010 relied upon notes to computation of income wherein it is stated that it had made investment out of its own funds, that no specific borrowings have been made for such purpose and that no substantial expenses have been incurred for such activities. Having examined the submission of the assessee, the AO noted that in the return of income, while computing the taxable income, the assessee has reduced the income arising on account of capital gains and dividends from the head ‘Profits and Gains from Business or Profession’, as reflected in the P&L account and offered them for tax separately at the required rates. For this purpose, the long term capital gains and dividends have been claimed as exempt and concessional rate of the taxes has been applied in respect of short term capital gains. The assessee has claimed entire expenditure incurred from the company as a whole against the remaining first three heads of income as mentioned above.
SBI Capital Markets Ltd. Then the AO observed “An important issue which arises is that where four activities are being carried out by the assessee and expenses are incurred in respect of all activities together, whether the expenses relating to each activity should not be matched with the income earned from that activity as per the matching principle of accounting and further where any part of the income is exempt then whether the corresponding matching expenses should not be disallowed u/s 14A or otherwise, if they are not allowable under the head of the income in which the income is being assessed. The accounting conventions and standards postulate that only the expenses relatable to the earning of income should be matched with it.” We find in the instant case that the AO, having regard to the accounts of the assessee, as placed before him, has come to a finding that he is not satisfied with the correctness of the appellant’s claim of expenditure. Thereafter, he has invoked Rule 8D. This is evident from the relevant paras of the assessment order we have mentioned hereinbefore. We also find that the same is in conformity with para 37 of the decision in Godrej & Boyce Manufacturing Co. Ltd. (supra). As it conforms to the above decision by the Hon’ble Supreme Court, we are not adverting to the other decisions relied on by the Ld. counsel. In view of the above, we dismiss the ground raised by the appellant in this appeal that no reason was recorded for dissatisfaction by the AO of the correctness of the claim of the appellant. 7.1 We now turn to the disallowances made by the AO. We find that the appellant had sufficient own funds and non-interest bearing funds to SBI Capital Markets Ltd. make the said investment in tax-free bonds, share of domestic companies and the same have been used for investing purpose. This is evident from the balance sheet of the appellant company as at March 31, 2008. In HDFC Bank Ltd (supra), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and Reliance Utilities & Power Ltd. (supra)held as under : “15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities & Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue in as much as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities & Power Ltd. (supra) in its application to Section 14A of the Act.” In view of the above position of law, we delete the disallowance of Rs.1,02,810/- made by the AO under Rule 8D(2)(ii). 7.2 We now turn to the disallowance of Rs.48,97,979/- made by the AO under Rule 8D(2)(i) and Rs.73,36,360/- made under Rule 8D(2)(iii).
SBI Capital Markets Ltd. We find merit in the submissions of the Ld. counsel that the expenses allocable to TIG Department are considered by the AO as direct expenditure under Rule 8D(2)(i), whereas the same should have been considered as indirect expenditure under Rule 8D(2)(iii). We are of the considered view that Rule 8D(2)(iii) gives a formula to arrive at the indirect expenditure earned for earning the exempt income. Thus we delete the disallowance of Rs.48,97,979/- made by the AO under Rule 8D(2)(i). 7.3 Finally we come to the disallowance of Rs.73,36,360/- made by AO under Rule 8D(2)(iii). We are also of the considered view that strategic investments made by the appellant in its subsidiaries which are capable of yielding exempt income i.e. by way of dividend etc. shall be included while computing disallowance u/s 14A of the Act. 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 SBI Capital Markets Ltd. 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 SBI Capital Markets Ltd. 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.” 7.3.1 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. 7.3.2 The statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A. Our decision is fortified by the decision of the Hon’ble Karnataka High Court in the case of United Breweries vs. DCIT in ITA No. 419/2009 vide order dated 31.09.2016.
SBI Capital Markets Ltd. As we have relied on the decision of the Hon’ble High Court, we are not adverting to the order of the Tribunal on the same issue. In view of the above, we hold that strategic investment made by the appellant are not be excluded while calculating average value of investment. We order accordingly. 7.3.3 Then we turn to the claim of the Ld. counsel that shares of foreign company i.e. ONGC Mittal Energy Ltd. be excluded while calculating the average value of investment as the dividend arising out of it is taxable. In ITO v. Strides Arcolab Ltd. (2012) 24 taxmann.com 89 (Mum- Trib.), it is held that disallowance u/s 14A is conceivable in respect of investment made in the shares of domestic companies and not foreign companies. As the above details were not examined either by the AO or the Ld. CIT(A), we restore the matter to the file of the AO to make a fresh order on disallowance under Rule 8D(2)(iii) only, after examining the shares of the appellant in the foreign company vis-a-vis its taxability and allowing the same for the purpose of working out the average investment. We direct the appellant to file the details of shares in foreign company before the AO. Needless to say, the AO would give a reasonable opportunity of being heard to the appellant before finalizing the order. Also the AO is directed to allow the benefit of Rs.28,19,646/- suo motu disallowed by the appellant. 7.4 In view of the above, the grounds of appeal in respect of disallowance under Rule 8D(2)(i) and Rule 8D(2)(iii) are allowed, SBI Capital Markets Ltd. ITA No. 4064/Mum/2013 whereas, the appeal under Rule 8D(2)(iii) is allowed for statistical purposes.
8. In the result, the 1st, 2nd, 3rd and 4th ground of appeals are partly allowed.
9. The 5th ground of appeal relates to the depreciation of leased assets. During the course of hearing, both the Ld. counsel and the Ld. DR agree that the issue may be sent back to the AO for verification. Having perused the relevant materials on record, we restore the matter on claim of depreciation on leased assets to the file of the AO to verify the same and allow as per the provisions of the Act, after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. Thus the above ground of appeal is allowed for statistical purposes.
10. In the result, the appeal for the AY 2008-09 is partly allowed.
11. Facts being identical, our decision for AY 2008-09 applies mutatis mutandis to AY 2009-10.