DCIT CEN CIR 5(4), MUMBAI vs. WADHAWAN GROUP HOLDINGS P.LTD, MUMBAI

1. The present cross appeals filed by the assessee and the revenue are directed against the order passed by the CIT(A)-53, Mumbai, dated 29.07.2016, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 28.03.2015 for A.Y 2012-13. That as a common issue is involved in the cross appeals, therefore, they are being taken up and disposed of together. The assessee assailing the order of the CIT(A) had raised before us the following grounds of appeal:-

The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.”

Briefly stated, the facts of the case are that the assessee company which is engaged in the business of a builder, engineer and contractor had e-filed its return of income for A.Y 2012-13, declaring an income of Rs. 18,59,47,770/- on 30.09.2012. 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).

That during the course of the assessment proceedings the A.O inter alia observed that the assessee company had made investments in tax free income yielding investments in partnership firms and subsidiary companies amounting to Rs.602,56,27,913/-. The A.O in P a g e | 4 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd the backdrop of the aforesaid facts called upon the assessee to explain as to why the provisions of Sec. 14A r.w. Rule 8D may not be applied in its case. The assessee submitted before the A.O that it had during the year under consideration only received share of loss from the partnership firm, viz. M/s Club Acquaria and the same was not claimed as a deduction in view of Sec. 10(2A) of the Act. The assessee further submitted that it had not received any exempt income from the other investments. The assessee submitted before the A.O that as against the total own funds of Rs.1002.33 crore it had invested only an amount of Rs.608.83 crore in the exempt income yielding investments, therefore, no part of the interest expenditure was liable to be allocated and resultantly disallowed for earning of the tax free income. The assessee in support of its aforesaid contention relied on the judgments of the Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) and CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The assessee further submitted before the A.O that as the investments in the shares of its wholly owned subsidiaries/associate companies were made with the purpose of having strategic control in the said companies, therefore, no disallowance under Sec. 14A in respect of the said strategic investments was liable to be made.

Interest on 45,870,189/- Loan specifically These Expenses are Term taken for incurred do not have Loans Construction nexus to earning of Purpose of the exempt income and Project Viceroy are treated as Park and Solitaire incurred for from Bank of business for the Baroda, HDFC purpose of earning and India bulls. taxable income and hence not considered for disallowance U/s 14A. (Sanctions enclosed) 2. Interest on 15,816,711/- Loan taken Considered for 14A Unsecured Debited to project disallowance. Loan Viceroy Park

The A.O after deliberating on the aforesaid contentions of the assessee was however not persuaded to accept the same. The A.O was of the view that the assessee could not have earned the exempt income without systematic management of its investment portfolio, because,

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee assailed the validity of the disallowance made by the A.O under Sec. 14A r.w. Rule 8D before the CIT(A) on multiple grounds, viz. (i) that the A.O had made the disallowance under Sec. 14A r.w. Rule 8D without recording his satisfaction with respect to the correctness of the disallowance offered by the assessee; (ii) that the disallowance under Sec. 14A r.w. Rule 8D could not exceed the exempt income earned by the assessee; (iii) that only the investments yielding tax free income from which the assessee during the year under consideration was in receipt of exempt dividend income could only be considered for working out the disallowance under Sec. 14A r.w. Rule 8D; and (iv) the disallowance worked out under Sec. 14A was not to be added to the “book profit” for computing the tax liability of the assessee under Sec. 115JB of the Act.

The CIT(A) deliberating on the contention of the assessee that the A.O without recording his dissatisfaction with respect to the correctness of the disallowance under Sec. 14A of Rs.5,83,352/- claimed by the assessee, had however dislodged the same observed P a g e | 11 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd that the A.O before resorting to the provisions of Sec. 14A r.w. Rule 8D remained under a statutory obligation to have objectively recorded his dissatisfaction as regards the claim of disallowance of the assessee on the basis of the books of account and the facts and circumstances of the case. However, the CIT(A) being of the view that the lapse or omission on the part of the A.O in failing to record his satisfaction before dislodging the claim of disallowance of the assessee was a procedural lapse and could not be said to be fatal to the making of the disallowance in the hands of the assessee. The CIT(A) observed that as the powers vested with the first appellate authority were co-terminus with those of the assessing officer, therefore, the failure of the A.O to record his satisfaction while dislodging the disallowance claimed by the assessee under Sec. 14A could safely be cured at the stage of the first appeal. The CIT(A) fortified his aforesaid view by taking support of the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC). The CIT(A) in the backdrop of his aforesaid conviction deliberated on the disallowance of Rs.5,83,352/- offered by the assessee under Sec. 14A in its return of income in the backdrop of the facts available on record and the accounts of the assessee. The CIT(A) after necessary examination of the accounts of the assessee, observed that as the same did not inspire any confidence as regards the correctness of the disallowance of Rs.5,83,352/- made by the assessee under Sec. 14A, therefore, the A.O would had no valid reasons to be satisfied with the same and would have justifiably required determination of the expenses attributable to earning of the exempt income in accordance with the method prescribed in Rule 8D. The CIT(A) on the basis of his aforesaid observations concluded that the satisfaction of the A.O as regards the incorrectness of the claim of disallowance of Rs.5,83,352/- under Sec.

The CIT(A) further adverted to the contention of the assessee that as the investments in the shares were in the nature of strategic investments with the purpose of acquiring and retaining control of the operating company, therefore, as the expenditure incurred in relation to acquisition of such shares did not have a dominant and immediate connection with the earning of the dividend income, which was merely incidental, thus no disallowance under Sec. 14A was liable to be made. The CIT(A) was however not persuaded to accept the aforesaid claim of the assessee. The CIT(A) was of the view that for the purpose of working out the disallowance under Sec. 14A, what was relevant was not the dominant purpose or intent behind making of investment in shares, but rather, the potential of such investments yielding tax exempt income in the form of dividend. That in the backdrop of his aforesaid observations the CIT(A) concluded that since the investments made by the assessee in the shares of its group companies had the potential of fetching tax free income by way of dividend income etc., therefore, the said investments could by no means be excluded for the purpose of computing the disallowance under Sec. 14A r.w. Rule 8D. The CIT(A) in support of his aforesaid observations relied on the judgment of the Hon‟ble High Court of Delhi in the case of Maxopp India Ltd. Vs. CIT (2012) 347 ITR 272 (Del).

The CIT(A) further deliberating on the claim of the assessee that the disallowance contemplated under Sec. 14A r.w. Rule 8D cannot exceed the exempt income was however not persuaded to accept the P a g e | 14 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd same. The CIT(A) was of the view that not only any such embargo or restriction as regards the quantification of the disallowance was provided in Sec. 14A or Rule 8D, but rather, the fact that the methodology for quantification of the disallowance in itself was contemplated in Rule 8D nullified the aforesaid contention of the assessee. The CIT(A) adverting to the disallowance of the indirect interest expenses under Rule 8D(2)(ii), further observed that now when the assessee had admitted that interest on unsecured loan of Rs.1,58,16,711/- could be considered for disallowance under Sec. 14A, therefore, the entire interest expenditure of Rs.1,58,16,711/- was to be taken into account for apportionment as per the formula prescribed in Rule 8D(2)(ii). The CIT(A) observed that once the assessee had accepted that the unsecured loan had been utilized for the purpose of business (Project Viceroy Park) as well as investment activities, it was thereafter not permissible on the part of the assessee to have excluded a part of the said interest on the ground that the same was relatable to its business. The CIT(A) was of the view that if the aforesaid view of the assessee was to be accepted, then the remaining amount of the interest expenditure would clearly partake the nature of direct interest expenditure liable for disallowance under Rule 8D(2)(i).

However, the CIT(A) did find favour with the alternative plea of the assessee that for the purpose of computing the disallowance under Sec. 14A r.w. Rule 8D, only those investments from which exempt income was received by the assessee were to be considered. The CIT(A) relying on the judgment of the Hon‟ble High Court of Delhi in the case of Cheminvest Ltd. Vs. CIT (2015) 378 ITR 33 (Del), observed that for the purpose of calculating the disallowance as per Rule 8D(2)(ii) and Rule 8D(2)(iii), the average value of investment was not to be P a g e | 15 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd worked out by taking into account the value of the entire opening and closing investment of shares of group companies held by the assessee, but rather, only the average value of investment in the partnership firm, viz. M/s Club Acquaria Enterprises, which during the year under consideration had yielded exempt income under Sec.10(2A) to the assessee was to be considered. The CIT(A) on the basis of his aforesaid observations restricted the disallowance under Sec. 14A r.w. Rule 8D(2)(ii) in respect of the indirect interest expenses at Rs. 10,80,850/-. The CIT(A) on the basis of his aforesaid observations also reworked the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) in the hands of the assessee at Rs.33,31,162/- i.e. 0.5% of average value of investments of Rs.66,62,32,434/-. Thus the CIT(A) on the basis of his aforesaid deliberations restricted the disallowance under Rule 8D to Rs.44,11,512/- [Rs.10,80,350/- (+) (Rs.33,31,162/-], as against Rs.3,52,80,510/- computed by the A.O.

Aggrieved, both the revenue and the assessee had carried the matter in appeal before us. That as the issue involved in both of the appeals revolve around a common issue, viz. quantification of disallowance under Sec. 14A, therefore, they are being taken up and disposed of together. The ld. Authorized Representative (for short A.R) for the assessee at the very outset submitted that the CIT(A) had erred in upholding the disallowance in respect of indirect interest expenditure made by the A.O under Sec. 14A r.w. Rule 8D (2)(ii). It was submitted by the ld. A.R that now when the assessee had substantial interest free funds available with it, therefore, it could safely be concluded that the investment made in the exempt income yielding investments by the assessee were out of the said self owned funds. The ld. A.R taking us through the facts to the extent relevant to the issue under consideration, submitted that as total interest free P a g e | 16 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd own funds of Rs.1002.33 crores were available with the assessee, therefore, it could safely be concluded that the same were utilized by the assessee for making of investments aggregating to Rs. 608.83 crore in the shares of the subsidiary companies and partnership firm. The ld. A.R in support of its aforesaid contention relied on the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). It was further submitted by the ld. A.R that now when during the year under consideration the assessee had not earned any exempt income, therefore, no disallowance under Sec. 14A was called for in its hands. Per contra, the ld. Departmental Representative (for short D.R) relied on the order of the A.O.

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 is sought for adjudicating the quantification of the disallowance in the hands of the assessee under Sec. 14A r.w Rule 8D in respect of the dividend income earned by it. We have given a thoughtful consideration to the contentions raised by the authorized representatives for both the parties in the backdrop of the facts available on record. We find substantial force in the contention of the ld. A.R that now when the assessee company was having substantial interest free funds of Rs.1002.33 crore, therefore, it could safely be concluded that the investment in the shares of Rs.608.83 crore made in the shares of the subsidiary companies and the partnership firm by the assessee were out of the said own funds of the assessee. We are unable to persuade ourselves to be in agreement with the observations of the CIT(A) that as the assessee had failed to establish that the investments in the tax free income yielding investments were made P a g e | 17 ITA No. 6357 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd from its self owned interest free funds, therefore, the A.O had rightly made the disallowance in the hands of the assessee under Sec. 14A r.w. Rule 8D(2)(ii). We find that the issue that where the own funds of the assessee are higher than the investments made in tax free securities, it would have to be presumed that the said investments were made by the assessee out of such interest free funds and no disallowance would be warranted in the hands of the assessee, is no more res integra pursuant to the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), wherein the Hon‟ble High Court had observed as under:

We find that as observed by the CIT(A), though the assessee had during the course of the assessment proceedings admitted that interest on unsecured loans amounting to Rs. 1,58,16,711/- could be considered for proportionate disallowance in accordance with the formula prescribed in Rule 8D(2)(ii), however, it had thereafter by reducing interest expenditure claimed to be relatable to an ongoing project, viz. Viceroy Park, had taken into account balance interest expenditure of Rs. 76,77,431/- only for working out the disallowance under Sec. 14A r.w Rule 8D(2)(ii). We find that the CIT(A) had deserved that if the contention of the assessee as regards relating of part of the interest expenditure out of Rs. 1,58,16,711/- to the business of the assessee was allowed, than the remaining interest expenditure of Rs. 76,77,431/- would partake the nature of direct interest expenditure liable for disallowance under Rule 8D(2)(i). We have deliberated on the aforesaid observation of the CIT(A) and are not persuaded to accept P a g e | 19 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd the same. We find that the assessee had sought exclusion of interest expenditure of Rs. 81,39,280/- [i.e Rs. 1,58,16,711/- (-) Rs. 76,77,431/-], on the ground that the same was related to its business (Project Viceroy Park). However, as regards the remaining interest expenditure of Rs. 76,77,431/- the assessee had never claimed that the same was exclusively related to the investments made by the assessee in the exempt income yielding investments. We thus are unable to persuade ourselves to accept the view of the CIT(A) that the entire interest expenditure of Rs. 1,58,16,711/- was liable to be considered for working out the disallowance of the indirect interest expenditure under Sec. 14A r.w Rule 8D(2)(ii). However, as the veracity of the claim of the assessee that interest expenditure of Rs. 81,39,280/- (supra) was related to its business (Project Viceroy Park) is not borne from the records, therefore, we restore the matter to the A.O for making necessary verification as regards the said claim of the assessee. Needless to say, if the claim of the assessee that the interest expenditure of Rs. 81,39,280/- (supra) is related to its business (Project Viceroy Park) is found to be in order, then the A.O shall work out the disallowance of the indirect interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) on the amount of Rs. 76,77,431/-. The A.O shall in the course of the set aside proceedings afford an opportunity to the assessee to substantiate its aforesaid claim.

We now advert to the contention of the assessee that the CIT(A) had erred in sustaining the disallowance made by the A.O without recording of satisfaction on his part for rejecting the disallowance of Rs. 5,83,352/- claimed by the assessee under Sec. 14A. We have given a thoughtful consideration to the aforesaid contention of the assessee. We though are in agreement with the assessee that the A.O who before resorting to the provisions of Sec. 14A r.w. Rule 8D P a g e | 20 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd remained under a statutory obligation to have objectively recorded his dissatisfaction as regards the claim of disallowance of the assessee on the basis of the books of account and considering the relevant facts and circumstances of the case, had failed to satisfy the said statutory obligation as was so cast upon him. We however find that the CIT(A) taking cognizance of the said lapse of the A.O and being of the view that the powers vested with the first appellate authority were co- terminus with those of the A.O had deliberated on the disallowance of Rs.5,83,352/- offered by the assessee under Sec. 14A in its return of income in the backdrop of the facts available on record and its books of account. We find that the CIT(A) after necessary examination of the books of accounts of the assessee, observed that as the same did not inspire any confidence as regards the correctness of the disallowance of Rs.5,83,352/- made by the assessee under Sec. 14A, therefore, the A.O would had no valid reasons to be satisfied with the same and would have justifiably required determination of the expenses attributable to earning of the exempt income in accordance with the method prescribed in Rule 8D. We find that the CIT(A) on the basis of his aforesaid observations had concluded that the satisfaction of the A.O as regards the incorrectness of the claim of disallowance of Rs.5,83,352/- under Sec. 14A by the assessee was deemed to have been arrived at in the course of the appellate proceedings. We have deliberated on the aforesaid observations of the CIT(A) and are persuaded to be in agreement with the view taken by him. We find that the CIT(A) after deliberating on the facts and the accounts of the assessee had recorded cogent reasons for not accepting the claim of disallowance of Rs. 5,83,352/- offered by the assessee under Sec. 14A. We are of the considered view that as held by the Hon‟ble Supreme Court in the case of CIT Vs. Kanpur Coal Syndicate (1964) 53 ITR 225 P a g e | 21 & 6268/Mum/2016 AY: 2012-13 M/s Wadhwan Group Holdings Pvt. Ltd. Vs. DCIT CC-5(4) DCIT Vs. M/s Wadhawan Group Holdings Pvt. Ltd (SC) that the CIT(A) has powers which are co-terminus with that of the A.O, therefore, the CIT(A) by exercising such powers in the present case had rightly undone the lapse on the part of the A.O as regards recording of satisfaction while dislodging the claim of disallowance of Rs. 5,83,352/- offered by the assessee under Sec. 14A. We thus in the backdrop of our aforesaid observations, finding no infirmity in the order of the CIT(A) in context of the issue under consideration, therefore, uphold his order. The Ground of appeal