TATA INVESTMENT CORPORATION LTD,MUMBAI vs. ASST CIT 2(3), MUMBAI

This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-6, [in short ‘CIT(A)’] Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).

We deal with the 1st, 2nd, 3rd and 4th ground of appeal

We have heard the rival submissions and perused the relevant material on record. In Vireet Investment (P.) Ltd. (supra), the Special Bench of the ITAT, Delhi has held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A r.w. Rule 8D and only those investments are to be considered for computing average value of investments which yielded exempt income during the year. Facts being identical, we follow the above decision and direct the AO to delete the addition of Rs.2,49,38,699/- made by him u/s 14A while calculating book profit u/s 115JB. 8.1 We now turn to the disallowance of Rs.2,49,38,699/- made by the AO u/s 14A in the normal computation of income. On a perusal of the balance sheet of the appellant as at 31st March 2011, we find that it had its own funds of Rs.1,63,968.62 lacs which exceed total investment of Rs.1,29,088.44 lacs. 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 CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) 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 direct the AO to delete the disallowance of Rs.50,45,000/- made by him under Rule 8D(2)(ii). 8.2 Finally we come the disallowance made by the AO under Rule 8D(2)(iii) in the normal computation of income. We may refer here to the decision cited by the Ld. counsel. In Holcim India (P.) Ltd. (supra), the issue before the Hon’ble High Court was the following: “Whether the Income Tax Appellate Tribunal was right in deleting the disallowance u/s 14A of the Income Tax Act, 1961 amounting to Rs.8,61,50,315/- in Assessment Year 2007-08 and Rs.6,60,93,678/- in assessment year 2008-09 holding that no dividend income was earned by the assessee ignoring the provisions u/s 14A.” This is not so in the instant case, as the appellant herein has received exempt income during the year under consideration as mentioned at para 4 hereinbefore. In a similar vein, the decision in Cheminvest Ltd. (supra) relied on by the Ld. counsel is distinguishable as it says that ‘section14A will not apply if no exempt income is received or receivable during the relevant previous year.’ Regarding the disallowance made by the AO under Rule 8D(2)(iii), we find that the appellant had filed before the AO a submission dated 15 January 2014 stating that without prejudice to the disallowance of Rs.2,91,97,301/- made by it, the working of expenses under Rule 8D(2)(iii) comes to Rs.490.91 lacs (0.5% of Rs.98182.68 lacs. viz. the value of investment on which tax-free incomes are receivable). The appellant had filed the details as ‘Annexure (II)’ before the AO. In respect of the disallowance made by the AO under Rule 8D(2)(iii), we are guided by the Hon’ble Bombay High Court explaining the rationale for enactment of section 14A in Godrej & Boyce v. DCIT (2010) 194 Taxman 203 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