DCIT CIR. 3(3)(1), MUMBAI vs. RELIANCE CAPITAL LTD., NAVI MUMBAI

order dated 25/01/2016of CIT(A)-8, Mumbai the Assessing Officer (AO) has filed the present appeal.Assessee-company,engaged in the business of leasing,investment in shares/stocks,merchant and investment banking,iled its return of income on 30/09/2011 declaring loss of Rs.173.73 crores under normal provisions and book loss of Rs.212.75 crores.Later on,a revised return was filed,declaring loss of Rs.159.60 crores and book loss of Rs.79.97 crores.

2.First two Grounds of appeal are about section 14A r.w.r. 8D of Income tax Rules (Rules). First Ground of appeal is about deleting addition of Rs.23.78 crores made by the AO u/s. 14A of the Act r.w.r.8D(2)(ii)of the Rules.The second Ground deals with disallowance made under rule 8D(2)(iii). In the appellate proceedings,the First Appellate Authority (FAA) had held that for the purpose of disallowance only those investments have to be considered which would yield exempt income.It was brought to our notice that identical issue was dealt with by the Tribunal while deciding appeal of the assessee for AY.2012-13(ITA/4008/Mum/2016 dtd.7/11/2017).we would like to reproduce the relevant portion of the order and it reads as under :- “4.During the course of assessment proceedings, the Assessing Officer observed that in the original and revised computations of income the assessee had claimed exempt income of Rs.1,95,13,01,536/- namely share of profit in partnership firm, dividend and long term capital gain of Rs.30,39,27,298/-, Rs.1,55,78,52,561/-and Rs.8,95,21,677/- respectively. The assessee made suo moto made disallowance u/s.14A of Rs.15,61,02,809/- towards interest expenses and Rs.8,57,73,798/- towards other administrative expenses i.e. 0.5% of average investment. Thus, the assessee worked out the aggregate disallowance u/s. 14A to Rs.24,18,76,607/- in the computation. Therefore, the Assessing Officer asked the assessee to 2341/M/16 M/s. Reliance Capital Ltd. furnish details regarding the working of expenditure incurred for earning exempt income as per the provisions of section 14A r.w. Rule 8D and also to submit fund flow statements to prove that the investments were made out of their own funds and not out of borrowed funds. The assessee filed submissions but the Assessing Officer found it to be not satisfactory. The Assessing Officer worked out the disallowance as per the formula laid down in Rule 8D and based on the total investments yielding exempt to Rs.32,45,55,590/-. Thus, the Assessing Officer made disallowance of Rs.32,45,55,590/- u/s. 14A r.w. Rule 8(D)(2)(iii) of expenses other than interest and since the assessee had suo motto disallowed as sum of Rs. 8,57,73,798/-, the balance amount of Rs. 23,87,81,792/- was disallowed being administrative cost for earning exempt income. The Assessing Officer made further disallowance u/s. 14A r.w. Rule 8D of Rs.26,46,62,753/- (2,58,80,961 + 23,87,81,792) i.e. the difference of attributable interest, which is over and above the suo moto disallowance made by the assessee and added it back to the total income of the assessee.

5.The assessee while computing the book profit u/s. 115JB of the Act made an addition of Rs.15,61,02,809/- towards interest being expenditure relating to exempt income. The Assessing Officer did not accept the working of the attributable expenditure towards interest and computed the same at Rs.18,19,83,770/-. Accordingly, the difference of attributable interest of Rs.2,58,80,961/- was considered as per Rule 8D(2)(iii) for computation of book profit u/s. 115JB of the Act. The assessee had also not computed the administrative expenses as per provisions of Rule 8D(2)(iii) while computing the book profit thought the same was considered while computing the 'normal income'. The assessee made submissions for non disallowance of expenditure under Rule 8D(2)(iii) for computation of book profit u/s. 115JB and relied on various case laws. The Assessing Officer considered the submissions of the assessee but did not accept the same. The Assessing Officer calculated the disallowance under section 14A as per the formula laid down in Rule 8D and this computation of disallowance was used as a base to the disallowance u/s. 115JB also by calculating the expenditure on a basis i.e., the ratio of incomes granted exemption u/s. 115JB and in normal computation. Thus, the Assessing Officer worked out the disallowance by taking disallowance u/s. 14A read with Rule 8D as the base and made further disallowance of Rs.30,96,65,651/- while computing the book profit u/s. 115JB. 6.Against the above order, the assessee appealed before the ld. CIT(A).

7.As regards the disallowance u/s. 14A in the normal computation of income, the ld. CIT(A) followed his order for assessment year 2011-12 and held as under:

5.1.4 The same issue had been decided by me in the appellant's case in theirappeal for assessment year 2011-12. The relevant part of that decision is quoted below: "6.2.10 I have considered the submissions of the appellant and the order of Assessing Officer. The Assessing Officer has applied the decision of Special bench in case of Cheminvest Ltd. The decision of Cheminvest Ltd. has been reversed by Delhi High Court. The appellant has relies upon the various decisions in support of their contention that the investments which have not yielded any exempt income during the year should be excluded in computing average investments. In other words, as per the appellant only those investments on which the exempt income is received during the year should be considered for computing average investments for the purpose of applying 0.5% under Rule 8D(2)(iii). Respectfully following the various decisions pointed by learned AR of the appellant, I agree that disallowance under Rule 8D(2)(iii) should be computed with reference to those investments on which exempt income is received during the year and excluding those investments n which no exempt income is received during the year. The Assessing Officer is directed to do so. These grounds of appeal are allowed." 5.1.5 In view of my decision for assessment year 2011-12 quoted above, disallowance under Rule 8D(2)(iii) should be computed with reference to those investments on which exempt income is received during the year and excluding those investments on which no exempt income is received during the year. The Assessing Officer is directed to do so. These grounds of appeal are allowed.

2341/M/16 M/s. Reliance Capital Ltd.

8.As regards the disallowance u/s. 115JB in consequence to disallowance u/s. 14A, the ld. CIT(A) found that the Assessing Officer has worked out the disallowance at Rs.30,96,65,651/- . He referred to earlier decision for the proposition that Rule 8D u/s. 14A cannot be applied for computing profit u/s. 115JB, the ld. CIT(A) directed the Assessing Officer to estimate the expenses directly relatable to exempt income at Rs.40 lacs, instead of the addition made by the Assessing Officer based upon Rule 8D of section 14A. 9.Against the above order, the Revenue is in appeal before us. 10.The ld. Departmental Representative relied upon the grounds of appeal and the orders of the Assessing Officer. 11.Per contra, the ld. Counsel of the assessee submitted that both the issues are covered in favour of the assessee by the Special Bench decision in the case of Asst. CIT vs. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Del – Trib.) (SB) and also several other decisions of tribunal, wherein the Special bench decision has been followed as above. 12.We have carefully considered the submissions and perused the records. We find that the Revenue’s grievance in ground no. 1 is against the ld. CIT(A)’s directions that disallowance u/s. 14A has to be computed only with reference to the investment on which exempt income has been earned during the year. We find that this issue is covered in favour of the assessee by the Special Bench decision as referred above. The Special Bench has expounded that only investments has to be considered for computing the average value of investment on which exempt income is earned during the year. Since the ld. CIT(A)’s directions on this issue is to consider only those investment on which exempt income is received, the same is in accordance with the above said Special Bench decision. Hence, we do not find any infirmity in the same and, accordingly, we uphold the same. 13.As regards the disallowance u/s. 115JB is concern, we find that the Revenue’s grievance is that the ld. CIT(A) has erred in directing that the principle as applied u/s. 14A r/w Rule 8D is not applicable while computing profit u/s. 115JB. 14.In the preset case, we find that the assessee has already made disallowance of Rs.15,61,02,809/- towards interest being expenditure relating to exempt income. The Assessing Officer proceeded to apply the provisions of Rule 8D u/s. 14A and accordingly based upon these calculation made further disallowance of Rs.30,96,65,651/-. 15.Upon the assessee's appeal, the ld. CIT(A) increased the disallowance in this regard by Rs.40 lacs. In this regard, the ld. Counsel of the assessee has submitted before us that no disallowance u/s. 14A read with Rule 8D has to be done while computing book profit u/s. 115JB. We find that this proposition draw support from the Special Bench decision in the case of Vireet Investment (P.) Ltd. (supra). The same ratio has been followed by the Tribunal in the several other decisions following the above said Special Bench decision. In the present case, we note that the assessee has already made an addition of Rs.15,61,02,809/- towards disallowance of expenditure relating to exempt income. The ld. CIT(A) has further enhanced it by Rs.40 lacs. The Revenue has not made any submission as to how this disallowance does not suffice. The only plea which has been raised is that the disallowance adopted by the Assessing Officer following Rule 8D in section 14A should be upheld. Since this proposition is not in accordance with the Special Bench decision as above and the total disallowance in this regard is sufficient, we are of the considered opinion that there is no merit in this ground raised by the Revenue. Hence, the same stands dismissed.” Respectfully following the above,Grounds No.1 and 2 are decided against the AO.We would also like to mention that in case of Vireet Investment (P) Ltd. (82taxmann.com415),the Special Bench of the Tribunal has held that for computing average value of investment, for 2341/M/16 M/s. Reliance Capital Ltd. the purpose of disallowance u/s. 14A r.w. Rule 8D only those investments could be considered which would yield exempt income.