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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI RAJENDRA, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-2, Mumbai, dated 24.08.2015, which in itself arises from the assessment order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 14.12.2012, for the A.Y 2010-11. The revenue assailing the order of the CIT(A) had raised before us the following grounds of appeal:
P a g e | DCIT Vs. M/s GCIL Finance Ltd. “1. Whether on the facts and in the circumstances of the case and in Law, the CIT(A) was correct in confirming the disallowance only to the extent of Rs. 36,665/- on investment in share of Rs. 73,33,050/- @ O.5% thereof thus making the provisions of Section 14A r.w. Rule 8D applicable whereas the CIT(A) himself in his order has stated that d i s a l l o w a n c e U / s 1 4 A r . w . R u l e 8 D o f t h e I . T . A c t o f R s . 6 5 , 0 3 , 8 8 6 / - is not warranted and is thus contradictory.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in not allowing the disallowance @ 0.5% of Rs.48,06,76,492/- which is assessee's stock in trade, despite the fact that in the case of D&H Securities Pvt. Ltd. vs. DCIT 4(1), Mum as decided by the Hon'ble ITAT, Mumbai on the same issue in revenue's favour? The appellant craves leave to add to, amend or withdraw the aforesaid ground of appeal
2. Briefly stated, the facts of the case are that the assessee which is a Non Banking Financial Company (for short „NBFC‟) had e-filed its return of income for A.Y 2010-11 on 04.10.2010, disclosing an income of Rs.88,05,804/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2).
3. During the course of the assessment proceedings the A.O observed that though the assessee had earned dividend income of Rs. 17,32,723/-, however, the same was not claimed as exempt in the return of income. The A.O called upon the assessee to explain the basis for not claiming the dividend income as exempt and as to why the expenses incurred for earning of the same may not be disallowed under Sec.14A of the Act. The assessee in its reply submitted before the A.O that it was incorporated as 100% subsidiary of M/s Gee Cee Ventures Ltd. for carrying out the business in security trading and to make strategic investments in shares of some companies, and not for earning of tax free income. It was further submitted by the assessee that no part of the interest expenditure was attributable to the P a g e | DCIT Vs. M/s GCIL Finance Ltd. investments in equity shares. The assessee in order to drive home its contention that now when no expenditure was incurred in earning the dividend income, therefore, no part of the same was liable to be disallowed under Sec. 14A, took support of the following judicial pronouncements:
(i) CCI Ltd. Vs. Joint Commissioner of Income-tax (2012) 250 CTR 291 (Kar) (ii) DCIT Vs. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011). (iii) CIT Vs. Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom). However, the A.O after deliberating on the submissions of the assessee did not find favour with the same by observing as under:
“1. The assessee has made an assumption that only the investments made in shares earn exempt income. The assesse e in AY under consideration has earned a dividend income of Rs. 17,32,724/- from Mutual Funds and the assessee has not claimed the same to be exempt. Since the income earned is exempt U/s 10(35), the assessee has chosen to offer it for tax to circumvent the provisions of Sec 14A. As per Sec. 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. Clearly, the assessee has earned exempt income and has incurred interest expenditure and other administrative expenditure in earning the same. Thus, to avoid tile applicability of the provisions of Sec 14A the assessee has not claimed exemption on the exempt dividend income earned. Thus, the dividend income earned by the assessee has to be treated as exempt and corresponding disallowance of expenditure has to me made as per provisions of Sec. 14A.
The assessee has stated that it is an NBFC and has been incorporated to carry the business in trad ing and to make strategic investment in shares of some companies not for earning tax free income. This clearly is a misrepresentation of facts. The word „strategic investment' in itself includes carefully planning and investing the f und s in wh ich give the max imu m Ou tpu t. While makin g strategic investments, one would look out for the maximum returns in the Minimum time P a g e | DCIT Vs. M/s GCIL Finance Ltd. and the returns could be in the form of LTCG. STCG and Dividend. Dividend payout is also an important factor while considering the Mutual Funds in which strategic investments are to be made. Thus, the assessee's argument is flawed to the extent that it did not make the investments for earning tax free income. It's a matter of fact that the assessee compan y has traded in mutual funds and the investments in mutual funds have been made out of borrowed funds and dividend income has been earned on the same. Thus, Sec 14A read with Rule 8D is clearly applicable in this case.
The assessee has stated that it possessed interest free funds out of the share capital issued and free reserve of Rs. 322.53 Lacs and no part of the interest on borrowing can be disallowed. From the Audited Balance Sheet of the assessee it can be seen that the sources of funds include Share Capital of Rs. 250.00Lacs, Reserves and Surplus of Rs. 72.53 Lacs and an interest bearing Unsecured Loan of Rs. 9372.43 Lacs. The assessee has shown an amount of Rs. 1823.33 as Investment' and the remaining funds have been used to buy Mutual Funds and to Extend Loans to other entities. The total amount of Loans and Advances which are interest bearing are to the tune of Rs.3000.00 Lacs and the assessee has Purchased MF's to the tune of Rs. 24152.82 Lacs. It is clear that the assessee has utilized the borrowed interest bean hg funds for buying MFs which are held as stock in trade.
The assessee has stated that the assessee made certain strategic investments in MFs not for earning tax free income. Here it is important to note that the object or purpose of investment does not affect the operation of Sec 14A. This view was affirmed by the Hon‟ble Kerala HC in the case of CIT Vs State Bank of Travancore 16 Taxmann 289 Ker]. The assessee bank had borrowed certain funds which were invested in the purchase of tax-free bonds for meeting SLR requirements of RBI. The AO disallowed interest on amount borrowed U/s 14A. The HC held that even though the purchase of tax free bonds was for meeting SLR requirements, interest and other expenditure incurred on borrowings for investment ill tax free bonds was to be disallowed.
In the case of Daga Capital Management Vs ITO, ITAT held that the words "in relation to" in Sec 14A encompass not only the direct expense hut also the indirect expense which has any relation to the exempt income. The argument that the words contemplate a direct and immediate connection" between the expenditure and the exempt income cannot be accepted. Accordingly the argument that s. 14A cannot apply to shares held as stock- in -trade cannot be accepted. The fact that the dividend income is incidental" to the purchase of shares is also irrelevant. The P a g e | DCIT Vs. M/s GCIL Finance Ltd. Hon'ble ITAT held that the reference in Rule 8D is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock -in-trade' or 'Investment'. The word "investment" in this rule refers to the making of purchase of shares and not holding it as investment. The view of Hon‟ble ITAT has been affirmed by the ITAT in the case of ITO Vs. Sanatan Textrade Ltd [2010] 4 ITR (Trib) 593 (Mum).
The assessee has stated that as per the decision of ITAT Mumbai in the case of Manish D Innai Vs ACIT, the disallowance U/s 14A should not exceed the dividend income. The argument of the assessee is not acceptable in the light of the fact that even the actual earning of income is not a prerequisite for earning the dividend income., In the case of Technopak Advisors (P) Ltd Vs AddICIT 18 taxmann 146 [Delhi] the Delhi ITAT has held that actual earning of income is not a sine qua non for deciding deduction of expenditure laid out of expended wholly or exclusively for the purpose of earning of such income. It was held that where investment had been made in shares which did not yield any dividend in the year under consideration, expenditure incurred for earning the income was deductible notwithstanding the fact that no such income had been earned. In the case of Cheminvest Ltd Vs ITO 124 TTJ 577(Del) it was held that if the expenditure is incurred in relation to income which does not form part of total income, it has to suffer disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. When prior to introduction of Sec 14A, an expenditure both under sections 36 and 57 was allowable to an asses see without such requirement of earning or receipt of income, such condition cannot be imported when it comes for disallowance of the same expenditure u/s 14A. In coming to this conclusion, the bench relied on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Rajendra Prasad Moody 115 ITR 519 SC. The A.O on the basis of his aforesaid observations concluded that as the assessee was doing no other business other than trading in securities and mutual funds, therefore, the expenditure incurred for earning of the exempt income was clearly liable to be disallowed under Sec. 14A r.w. Rule 8D. The A.O on the basis of his aforesaid view made a disallowance of Rs. 65,03,886/- under Sec. 14A of the Act.
P a g e | DCIT Vs. M/s GCIL Finance Ltd.
4. Aggrieved, the assessee assailed the assessment before the CIT(A). Before the CIT(A) it was submitted by the assessee that as it had neither claimed any exemption of the dividend income earned from the investments made in the debt mutual fund, nor any part of the expenses for earning of the said dividend income was attributable to the same, therefore, the A.O was in error in applying the provisions of Sec. 14A and disallowing an amount of Rs.65,03,886/-, disregarding the judicial pronouncements on which reliance was placed by the assessee before him. The assessee assailed the disallowance made by the A.O under Sec. 14A, by observing as under:
(i) That as regards the disallowance of Rs.1,48,684/- made by the A.O under Rule 8D(2)(i) in respect of the depository charges paid by the assessee on the trading of shares and mutual fund units, the assessee submitted that as it was carrying on the business of trading in shares and mutual funds, therefore, the income earned from the same was offered for taxes. That in the backdrop of the aforesaid facts it was the contention of the assessee that now when the depository charges of Rs.1,48,648/- were incurred for earning of taxable business income, therefore, the A.O was in error in disallowing the same under Sec. 14A r.w Rule 8D(2)(i).
(ii) That as regards the disallowance of interest expenditure of Rs.39,15,155/- made by the A.O under Sec. 14A r.w Rule 8D(2)(ii), it was submitted by the assessee that as interest free funds of Rs.3,22,53,065/- were available with it during the year under consideration, viz. (i) equity share capital: Rs.2,50,00,000/- and (ii) reserve and surplus: Rs.72,53,065/- ,which sufficiently explained the source of investment in P a g e | DCIT Vs. M/s GCIL Finance Ltd. shares of Rs. 73,33,050/-, therefore, no disallowance in respect of any part of the interest expenditure was called for in the hands of the assessee.
(iii) That as regards the disallowance of Rs.24,40,047/- made by the A.O under Sec. 14A r.w Rule 8D(2)(iii), i.e @ 0.5% of the aggregate value of the shares held by the assessee as investment and stock in trade, it was submitted by the assessee that no disallowance under Sec. 14A was called for in respect of the shares which were held as stock in trade. It was the claim of the assessee before the CIT(A) that the maximum amount which could be disallowed under Rule 8D(2)(iii) was liable to be restricted to Rs.18,333/- ,i.e. 0.5% of the average of the value of the investment in shares on the first and last day of the previous year.
5. The CIT(A) after deliberating on the contentions raised by the assessee before him, observed that though the assessee company had earned dividend income of Rs.17,32,723/-, but however, the same was not claimed as exempt. The CIT(A) after perusing the memorandum of association of the assessee company was persuaded to be in agreemet with the claim of the assessee that it was a NBFC which was incorporated as 100% subsidiary of M/s Gee Cee Ventures Ltd. to carry out the business of security trading and making strategic investment in shares of some companies, and not for earning of tax free income. The CIT(A) deliberating on the contention of the assessee that as it had substantial interest free funds to the extent of Rs.3,22,53,065/- which sufficiently explained the source of the investment made in shares of Rs.73,33,050/-, therefore, no disallowance of the interest expenditure was called for in its hands, P a g e | DCIT Vs. M/s GCIL Finance Ltd. observed that the said claim of the assessee was fortified by the judgement of the Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), wherein it was held that where the assessee possessed interest free funds, it could safely be presumed that the investments made by the assessee were out of interest free funds and no part of interest on borrowings could be disallowed for the reason that the said investments were to be taken to have been made from the interest bearing funds. That as regards the claim of the assessee that no disallowance under Sec 14A was called for in a case where the assessee was trading in securities, it was observed by the CIT(A) that the said claim of the assessee was fortified by the judgment of the Hon’ble High Court of Karnataka in the case of CCI Ltd. Vs. Joint Commissioner of Income-tax (2012) 250 CTR 291 (Kar). The CIT(A) observed that a similar view that no disallowance under Sec. 14A r.w Rule 8D could be made in respect of shares, mutual funds and securities which were held by an assessee as stock in trade was also taken by the Hon’ble High Court of Punjab & Haryana in the case of Commissioner of Income Tax Vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H). The CIT(A) further relied on the order of the ITAT „B‟ bench, Mumbai, dated 21.08.2012 in the case of Manish D. Innani Vs. ACIT-Range 4(1) (ITA No. 861/Mum/2012) for AY 2008-09, wherein the Tribunal had observed that the amount of disallowance under Sec. 14A cannot be permitted to exceed the amount of the dividend income.
6. The CIT(A) on the basis of his aforesaid observations did not find favour with the working of the disallowance of Rs.65,03,886/- made by the A.O under Sec. 14A r.w Rule 8D, as against the dividend income of Rs.17,82,724/-. The CIT(A) on the basis of his aforesaid deliberations further observed that as the jurisdictional Tribunal in P a g e | DCIT Vs. M/s GCIL Finance Ltd. the case of Manish D. Innani (supra) had concluded that the disallowance under Sec. 14A cannot exceed the amount of the dividend income earned by the assessee company, therefore, the disallowance of Rs.65,03,886/- made by A.O under Sec. 14A r.w. Rule 8D could not be accepted. However, the CIT(A) concluded that the disallowance under Sec. 14A in respect of the investment in the shares made by the assessee was liable to be restricted to the extent of Rs.36,665/-, i.e 0.5% of Rs. 73,33,050 (average value of shares held by the assessee as investment).
The revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The ld. Departmental Representative (for short „D.R‟) during the course of hearing of the appeal relied on the order passed by the A.O. It was submitted by the ld. D.R that as the assessee had earned dividend income of Rs.17,32,723/-,therefore, the A.O had rightly worked out the disallowance under Sec. 14A. Per contra, the ld. A.R relied on the order of the CIT(A). It was submitted by the ld. A.R that as the assessee which was a NBFC engaged in the business of security trading had offered the income therefrom for tax, therefore, no disallowance was called for in its hands under Sec. 14A in respect of the shares held as stock in trade.
We have heard the authorized Representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present case had been sought to adjudicate upon the validity of the disallowance worked out by the CIT(A), as against that made by the A.O under Sec. 14A of the Act. We find that the revenue is aggrieved with the order of the CIT(A) on two grounds, viz. (i) that as to whether the CIT(A) was P a g e | DCIT Vs. M/s GCIL Finance Ltd. correct in observing that no disallowance was called for in the hands of the assessee under Sec.14A r.w.r. 8D (2)(iii) i.e @ 0.5% in respect of the shares of Rs.48,06,76,492/- which were held by the assessee as stock in trade; and (ii) that as to whether the confirming by the CIT(A) of the disallowance of Rs. 36,665/- under Sec. 14A r.w. Rule 8D(2)(iii) @ 0.5% of the average value of investment in shares of Rs.73,33,050/- , was in itself in contradiction of his view that the disallowance of Rs. 65,03,886/- made by the A.O under Sec.14A r.w. Rule 8D was not warranted.
We have deliberated on the contention of the revenue that the observation of the CIT(A) while confirming the disallowance under Sec. 14A r.w.r. 8D (2)(iii) to the extent of Rs.36,665/- in respect of the investment in shares of Rs.73,88,050/- @ 0.5% , militated against his observation that the disallowance made by the A.O under Sec. 14A r.w.r. 8D of Rs.65,03,886/- was not warranted. We have given a thoughtful consideration to the aforesaid contention so raised before us and are unable to persuade ourselves to be in agreement with the same. We find that the CIT(A) though had concluded that no disallowance under Sec. 14A r.w Rule 8D(2)(iii) was called for in respect of the shares held by the assessee as stock in trade, but however, had rightly upheld the disallowance under Rule 8D(2)(iii) in respect of the shares of the value of Rs.73,33,050/- which were held by the assessee as an investment. We are unable to persuade ourselves to be in agreement with the contention raised by the revenue that the disallowance to the extent of Rs.36,665/- sustained by the CIT(A) under Sec. 14A r.w.r. 8D (2)(iii) is found to be in contradiction of the view arrived at by the CIT(A) while dislodging the disallowance of Rs.65,03,886/- made by the A.O under Sec. 14A. We thus not finding any infirmity in the order of the CIT(A) in respect of the issue under P a g e | DCIT Vs. M/s GCIL Finance Ltd. consideration and finding no force in the aforesaid contention of the revenue, therefore, uphold the same. The Ground of appeal
no. 1 raised by the revenue before us is dismissed.
10. We further find that the observations of the CIT(A) that no disallowance under Sec.14A was called for in respect of the shares held by the assessee as stock in trade, as observed by him, is squarely covered by the judgment of the Hon’ble High Court of Karnataka in the case of CCI Ltd. Vs. JCIT (2012) 250 CTR 291 (Kar), wherein the Hon‟ble High Court had held as under:
5. When no expenditure is incurred by the assessee m earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived there from is offered to tax as business income. The remaining 37% of the shares are retained. it has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act.
We find that a coordinate bench of the Tribunal, viz. ITAT “I”, Bench, Mumbai, in the case of DCIT Vs. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011), dated 14.09.2012, following the aforesaid judgment of the Hon‟ble High Court of Karnataka in the case of CCI Ltd. (supra) had concluded that no disallowance under Sec. 14A was called for in respect of shares held by the assessee as stock in trade. The aforesaid order of the Tribunal had thereafter been upheld by the Hon’ble High Court of Bombay in the case of CIT Vs. India Advantage Securities Ltd. (2016) 380 ITR 0471 (Bom). We further find that in a recent judgment of the Hon’ble High Court of Punjab & P a g e | DCIT Vs. M/s GCIL Finance Ltd. Haryana in the case of Principal Commissioner of Income-tax Vs. State Bank Of Patiala (2017) 98 CCH 35 (P&H), the Hon‟ble High Court observing that no disallowance under Sec. 14A is called for in respect of shares held as stock in trade by the assessee, had held as under:
The question then is whether the assessee can be said to have incurred any expenditure at all or any part of the said expenditure in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee‟s stock-in-trade. The answer must be in the negative. The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in-trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same.
We thus in the backdrop of our aforesaid observations are of the considered view that the CIT(A) had rightly concluded that no disallowance under Sec. 14A was called for in respect of the shares of Rs.48,06,76,492/- held by the assessee as stock in trade. We thus finding ourselves to be in agreement with the view taken by the CIT(A), therefore, uphold his order in context of the issue under consideration. The Ground of Appeal no. 2 raised by the revenue before us dismissed.
11. The appeal of the revenue is dismissed. Order pronounced in the open court on 02.02.2018 Sd/- Sd/- (Rajendra) (Ravish Sood) ACCOUNTANT MEMBER JUDICIAL MEMBER भुंफई Mumbai; ददनांक 02.02.2018 Ps. Rohit Kumar P a g e | DCIT Vs. M/s GCIL Finance Ltd.