ANAND RATHI GLOBAL FINANCE LTD,MUMBAI vs. DCIT CEN CIR 5(1), MUMBAI

आदेश / O R D E R

PER RAVISH SOOD, JUDICIAL MEMBER:

1. The learned CIT(A) has erred in law and on facts in upholding the disallowance made by the Assessing Officer u/s. 14A of the Act read with Rule 8D of I.T. Rules, 1962.

2. The learned CIT(A) has erred, after giving clear finding of fact that the Assessing Officer has not given cogent reasons for rejecting voluntary disallowance of Rs.2,74,877/- made by the appellant u/s.14A of the Act, in holding that such omission is a procedural lapse on the part of the Assessing Officer.

3. The learned CIT(A) has erred in holding that, in the facts and circumstances of the case, satisfaction of the Assessing Officer is deemed to have arrived at through the exercise of examination of accounts.

4. The order passed by the learned CIT(A) is in violation of principles of natural Justice and bad in law.

P a g e | 3 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) 5. The appellant craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal

.”

2. Briefly stated, the facts of the case are that the assessee company is a NBFC engaged in the business of providing loan against shares, loan against commodity and investment activities. Search & seizure proceedings under Sec. 132(1) of the Act were conducted on 24.09.2013 in the case of Anand Rathi group and its associate concerns. The assessee filed its return of income for the year under consideration under Sec. 153A on 21.04.2015, declaring income of Rs. 6,35,33,610/-.

3. The assessee had during the year under consideration earned dividend income of Rs. 1,85,000/- which was claimed as exempt from tax. The A.O during the course of the assessment proceedings while deliberating on the working of the disallowance of Rs. 2,74,877/- by the assessee under Sec. 14A r.w Rule 8D, was however not persuaded to be in agreement with the claim of the assessee that the borrowed funds were not utilized for the purpose of investing in the investments yielding exempt income. The A.O further was of the view that the expenditure which was liable to be disallowed under Sec. 14A(1) took within its sweep all form of expenditure, regardless of whether they were fixed, variable, direct, indirect, administrative, managerial or financial, and after the insertion of Rule 8D it was no longer open to the A.O to work out the disallowance under Sec. 14A as per his discretion. The A.O reworked the disallowance under Sec. 14A r.w Rule 8D at Rs. 1,69,26,026/-, as under: (i). The amount of expenditure directly relating to income which does not .... Nil form part of total income. (ii). Proportionate of interest expenditure Rs. 1,59,01,481/-

P a g e | 4 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) computed in accordance with the (A X B/C) formula given in Rule 8D(2)(ii). (iii). Amount equal to one-half percent of 0.5% of Rs. Rs. 10,24,545/- the average of the value of 20,49,09,000/- investment, income from which does not or shall not form part of the total income as appearing in the Balance Sheet of the assessee, on the first day and the last day of the previous year. Total expenditure disallowed u/s 14A Rs.1,69,26,026/- Note (i). A=Interest (finance cost) debited to Profit & Loss a/c = Rs. 14,71,60,000/- B=Average of exempt income bearing investments = Rs. 20,49,09,000/- (ii). C= Average of total assets appearing in the Balance Sheet on the first and last day of (iii). the previous year = Rs. 189,63,27,000/-

4. Aggrieved, the assessee carried the order of the A.O in appeal before the CIT(A). The assessee assailed the reworking of the disallowance by the A.O under Sec. 14A r.w Rule 8D on multiple grounds, viz. (i). the A.O had failed to record any valid satisfaction for invoking Rule 8D having regard to the books of account; (ii). the A.O had erred in including the strategic investments held by the assessee in its subsidiaries and associate concerns while computing the disallowance under Sec. 14A r.w Rule 8D; (iii). the A.O while making the disallowance as regards the interest expenditure had lost sight of the fact that the self owned funds of Rs. 80 crores with the assessee were in excess of investment made in shares and securities; (iv). the A.O had erred by failing to appreciate that while making disallowance of interest under Rule 8D(2)(ii) only the net interest and not the gross interest was to be considered; (v). the A.O had erred by not appreciating that the disallowance under Sec. 14A was only to be P a g e | 5 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) made in relation to investments on which tax free income was earned during the year and that the disallowance under Sec. 14A could not have been made in excess of the exempt income; and (vi). the onus was cast on the A.O to establish that interest bearing funds were used in making investments which have yielded tax free income.

5. The CIT(A) after deliberating at length on the multiple grounds on which the disallowance made by the A.O under Sec. 14A r.w Rule 8D was challenged, observed that the assessee had during the year under consideration opening investments of Rs. 12.99 crores and closing investments of Rs. 27.99 crores in shares of its group and other companies. The CIT(A) observed that the assessee had during the year under consideration made fresh investments of Rs. 15 crores in shares of various companies. The CIT(A) further observed that the assessee had during the year debited interest expenses of Rs. 14,71,60,000/- in its Profit & loss account. It was also observed that the assessee was not maintaining separate accounts for the purpose of exempt income and had a mixed pool of funds which were utilized for the business and investment activities of the assessee. The CIT(A) observed that the assessee had incurred other administrative expenses of Rs. 1,25,29,000/- during the year under consideration. Thus, in the backdrop of the aforesaid facts the CIT(A) observed that though the invoking of the provisions of Sec. 14A was found to be justified, however, the A.O had failed to give any cogent reason for rejecting the disallowance of Rs. 2,74,477/- offered by the assesse under Sec. 14A in its return of income. However, the CIT(A) holding a conviction that as the powers vested with him were co-terminus with those of the A.O, therefore, after deliberating on the facts of the case concluded that having regard to the accounts of the assessee, the A.O would have no valid reason to be satisfied with the correctness of the P a g e | 6 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) claim of disallowance of Rs. 2,74,877/- under Sec. 14A, and was justified in determining the amount of the expenses attributable to the earning of the exempt income in accordance with the methodology prescribed in Rule 8D. The CIT(A) in the backdrop of his aforesaid observations concluded that it could safely be concluded that the satisfaction of the A.O as regards incorrectness of claim of disallowance of Rs. 2,74,877/- under Sec.14A of the assessee was deemed to have been arrived at through the exercise of examination of the accounts of the assessee carried out at the appellate stage.

6. The CIT(A) further relying on the judgment of the Hon’ble High Court of Delhi in the case of Maxopp Investment Ltd. Vs. CIT 347 ITR 272 (Del), observed that the investments made by the assessee in shares of its group companies/subsidiaries, income from which did not form part of the total income were also to be considered for the purpose of computing the disallowance under Sec. 14A r.w Rule 8D. Thus, in the backdrop of his aforesaid observations the CIT(A) rejected the claim of the assessee that the shares held as strategic investments were to be excluded while computing the disallowance under Sec. 14A r.w Rule 8D. The CIT(A) further deliberating on the claim of the assessee that as the investment in the shares etc. were made from its own funds, therefore, no disallowance of any part of the interest expenditure was called for under Rule 8D(2)(ii), observed that the said claim could not be accepted as the assessee had failed to show that the exempt income yielding investments, viz. shares, mutual funds etc. were acquired from its own funds. The CIT(A) observed that as the assessee was not maintaining separate accounts for the purpose of exempt income, therefore, in the case of mixed funds now when the assessee could not establish that there was no nexus between the exempt income and the interest expenditure, the disallowance of the P a g e | 7 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) same on a proportionate basis as provided in Sec. 14A r.w Rule 8D(2)(ii) was justified. The CIT(A) observed that the assessee had failed to demonstrate with the help of its bank statements etc. that the additions to the exempt income yielding investments were not made by utilizing interest bearing funds during the year. The CIT(A) was also not persuaded to subscribe to the claim of the assessee that as it had own interest-free funds to the extent of Rs. 80 crores which were far in excess of the investment in shares of Rs. 27.99 crores, therefore, no disallowance of the interest expenditure under Rule 8D(2)(ii) was called for in its hands. The CIT(A) observed that the aforesaid claim of the assessee could not be accepted for certain reasons, viz. (i). the assessee had not given any break-up of the interest free funds of Rs. 80 crores; (ii). that a perusal of the records revealed that the assessee had a). Share capital of Rs. 10.90 crores; b). general reserve of Rs. 1.84 crores ;and c). Opening accumulated surplus of Rs. 13.16 crores; AND (iii). the net profit of Rs. 4.16 crores earned by the assessee during the year under consideration was to be deemed to have accrued to the assessee only on the last day of the year under consideration. The CIT(A) on the basis of his aforesaid observations concluded that the assessee had self-owned funds only to the tune of Rs. 25.90 crores (i.e Rs. 10.90 crores + Rs. 1.84 crores + Rs. 13.16 crores) which could safely be held to be available with it for making investments in the exempt income yielding investments. Thus, the CIT(A) observed that as the interest free funds available with the assessee were to the extent of Rs. 25.90 crores while for its investments in shares stood at Rs. 27,99 crores, therefore, it could safely be concluded that the interest bearing funds were utilised by the assessee for making the investments. The CIT(A) further observed that the reserves aggregating to Rs. 47.24 crores, viz. Statutory reserves (Rs. 3.52 crores), Capital Redemption Reserve (Rs. 0.10 P a g e | 8 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) crores) and Securities Premium Account (Rs. 43.62 crores) were either statutory or capital reserves which could not at all be used for financing the acquisition of investments yielding tax free income. The CIT(A) while concluding as hereinabove, further observed that the assessee had not brought on record any provision of the Companies Act or RBI guidelines etc. under which the aforesaid reserves aggregating to Rs. 47.24 crores could be considered to be available for the purpose of investment in shares etc. yielding tax free income. The CIT(A) further fortifying his aforesaid view, observed that the amount of share premium and capital redemption reserve could only be used for the specific purposes described under Sections 78 (application of premiums received on issue of shares) and Sec. 80 (power to issue redeemable preference shares) of the Companies Act, 1956, and the investment in shares of Indian companies or Government securities did not figure among such specified purposes. The CIT(A) further observed that as the assessee had failed to produce the bank statements and other relevant evidence before the A.O in order to facilitate examination by him to verify as to whether the interest bearing funds were utilized for making investments in the shares etc., therefore, the disallowance of the indirect interest expenditure by the A.O under Rule 8D(2)(ii) could not be faulted with.

7. The CIT(A) also did not find favour with the claim of the assessee that the disallowance of the interest expenditure under Rule 8D(2)(ii) was to be made considering the net interest and not with reference to the gross interest expenditure. The CIT(A) further directed the A.O to disallow the demat expenses under Rule 8D(2)(i), as the same were directly attributable to the earning of the exempt income. However, the CIT(A) found favour with the claim of the assessee that while computing the disallowance under Sec. 14A r.w Rule 8D(2)(ii), P a g e | 9 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) 8D(2)(iii), only the investments from which the assessee had received exempt income were to be considered. Thus, in the backdrop of his aforesaid observations the CIT(A) directed the A.O that while calculating the disallowance as per Rule 8D(2)(ii) and Rule 8D(2)(iii), the average value of investment was to be worked out by taking into account not the entire opening and closing non-current investments, but only the investments in those shares which have yielded tax free income to the assessee by way of dividend during the year under consideration.

8. The assessee being aggrieved with the order of the CIT(A) had carried the same in appeal before us. The ld. Authorised representative (for short „A.R‟) for the assessee submitted that as the assessee had sufficient self owned funds to cover the value of the investments in the exempt income yielding investments, therefore, no disallowance under Sec. 14A r.w Rule 8D(2)(ii) in respect of the interest expenditure was called for in the hands of the assessee. The ld. A.R submitted that the CIT(A) had failed to appreciate the factual position as regards availability of self owned funds with the assessee in the right perspective and had erred to the extent he had sustained the disallowance of interest expenditure of Rs. 1,59,01,481/- made by the A.O under Rule 8D(2)(ii). The ld. A.R in support of his contention that now when the assessee had self owned funds available with to cover the value of investment in the investments yielding tax free income, therefore, no disallowance under Sec. 14A r.w Rule 8D(2)(ii) was called for in its hands, relied on the judgment of the Hon’ble High Court of Bombay in the case of Commissioner of Income-tax Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The ld. A.R submitted that the disallowance under Sec. 14A in the present case, as shown by the assessee in its return of income at Rs. 2,74,877/- was liable to be P a g e | 10 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) worked out as per Rule 8D(2)(iii), i.e. at one-half percent of the average of the value of only those investments as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, income from which received by the assessee during the year did not form part of its total income. The Ld. A.R further submitted that now when the CIT(A) after observing that the A.O had failed to give any cogent reason for rejecting the voluntary disallowance of Rs. 2,74,877/- made by the assessee under Sec. 14A, had thereafter erred in characterising such omission on the part of the A.O as a procedural lapse. Per Contra, the ld. Departmental representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that the CIT(A) while computing the disallowance under Rule 8D(2)(ii) had duly taken cognizance of the self owned funds which were available with the assessee during the year for making the investment. The ld. D.R submitted that the appeal of the assessee was devoid of any merit and was liable to be dismissed.

4. We do not agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs.43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs.313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs.398.19 crores. In view thereof, it was submitted that from the analysis of the balance- sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under :-

P a g e | 13 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) “If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest- free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.” (emphasis supplied) 5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.” We thus being of the view that as the issue that in case an assessee has sufficient interest free funds available with it, then it would have P a g e | 14 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) to be presumed that investment made by the assessee in the exempt income yielding investments from the interest-free funds available with assessee and no disallowance was warranted u/s 14A, is no more res integra in light of the aforesaid judgment of the Hon’ble High Court of jurisdiction in the case of HDFC Bank Ltd. (supra), therefore, the observation of the A.O holding to the contrary cannot be sustained.

17. One aspect needs to be mentioned during the asst. yr. 1995-96, apart from the loan given in August/September 1991, the assessee advanced P a g e | 15 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) interest free loan to its sister concern amounting to Rs. 5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee firm out of its own funds and, therefore, it was not entitled to claim deduction under s. 36(1)(iii). This finding is erroneous. The opening balance as on 1st April, 1994 was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lacs.

We thus in the backdrop of our aforesaid observations are unable to subscribe to the view of the CIT(A) that the net profit of Rs 4.16 crores earned by the assessee during the year under consideration, would not be available with the assessee to explain the investment in the shares during the year. We thus set aside the aforesaid observation of the CIT(A) and conclude that the net profit of Rs. 4.16 crore earned by the assessee would be available for explaining the investment to the said extent of the shares purchased by the assessee during the year.

14. We further find substantial force in the alternative contention of the ld. A.R that the disallowance under Sec. 14A r.w Rule 8D cannot be more than the exempt income itself. The ld. A.R in order to drive home his aforesaid contention had relied on the judgment of the Hon‟ble High Court of Delhi in the case of Joint Investment Private Limited Vs. CIT (2015) 372 ITR 694 (Del) and that of the Hon‟ble High Court of Punjab & Haryana in the case of Principal Commissioner of Income-tax Vs. Empire Package Pvt. Ltd. (2016) 286 CTR 0457 (P&H).

P a g e | 19 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) We are not oblivious of the fact that the claim of the assessee as regards capping the disallowance under Sec. 14A to the extent of the dividend income of Rs. 1,85,000/- received by it during the year would militate against the suo motto disallowance of Rs. 2,74,877/- offered by it in the return of income. We have deliberated on the aforesaid aspect and after perusing the facts of the case though find that such a proposition was not advanced by the assessee before the lower authorities, but then, keeping in view the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom), wherein the Hon‟ble Court had observed that the assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claim before them. The Hon‟ble High Court further observed that the appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. We further find that the Hon‟ble High Court of Bombay in the cases of Ahemadabad Electricity Company Vs. CIT and Godavari Sugar Mills Ltd. Vs. CIT , had by way of a common order, dated 30.04.1992 (1993) 199 ITR 351 (Bom) observed that the basic purpose of an appeal procedure in an income tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages, either by the Appellate Assistant Commissioner or before the Appellate Tribunal, the appellate authority can consider the proceedings before it and the material on record before it, for the purpose of determining the correct tax liability of the assessee. We further find that the issue under consideration that where the suo motto disallowance made by the assessee under Sec. 14A is found to be suffering from a legal infirmity, then in the course of the appellate P a g e | 20 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) proceedings such a mistake has to give way and has to be brought in conformity with the provisions of law, had been looked into and adjudicated in favour of the assessee by a coordinate bench of the Tribunal, viz. ITAT, “G” Bench, in the case of M/s Weizmann Ltd. Vs. ACIT, Range 1(3), Mumbai (ITA No. 7102/Mum/2014; dated. 04.08.2016). We thus in the backdrop of our aforesaid observations, keeping in view the aforesaid settled position of law, therein direct the A.O to subject the disallowance under Sec. 14A in the hands of the assessee to an upper capping of the amount of dividend of Rs. 1,85,000/- received by it during the year under consideration.

15. The appeal is partly allowed for statistical purposes. A,Y: 2012-13 16. We shall now take up the appeal of the revenue for A.Y. 2012-13, marked as ITA No. 7469/Mum/2016. The revenue assailing the order of the CIT(A) had raised before us the following grounds of appeal:

“1. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in excluding the value of investments that did not yield exempt income during the year for the purpose of calculation of disallowance as per rule 8D(2)(ii) and 8D(2)(iii) even after considering the fact that the said investment is an investment to earn tax free income.

P a g e | 21 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) 2. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in taking only closing investment of other companies at Rs. 5,49,75,323/- representing 'B' in the formula under Rule 8D(2)(ii) as being the average of the value of investment income from which is exempt instead of Rs. 20,49,09,000/-.

3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in holding that earning of exempt income from investment is a touchstone for making disallowance u/s 14A in spite of fact that section 14A deals with disallowance of expenditure incurred in relation to income not includible in total income. The appellant prays that the order of Commissioner of Income-tax (Appeal) on the above ground be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any grounds or add a new grounds which may be necessary.

18. The ld. D.R assailing the aforesaid observations of the CIT(A), submitted that as per the mandate of Rule 8D(2)(ii) and Rule 8D(2)(iii) , the disallowance under Sec. 14A was to be worked out after taking cognizance of the “average value of investments”, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and last day of the previous year. The ld. D.R averred that working out the “average value of investments” after excluding the exempt income yielding investments on which no exempt income was received during year, in the absence of any enabling proviso was not justified. Per contra, the ld. A.R relied on the order of the CIT(A). The ld A.R submitted that both Rule 8D(2)(ii) and Rule 8D(2)(iii) referred to the “average value of P a g e | 22 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) investments”, income from which does not or shall not form part of the total income. It was thus averred by the ld. A.R that now when no exempt income was received by the assessee on certain shares held by it, therefore, the value of such shares could not be considered for computing the average value of investments, as in the absence of any exempt income there would be no occasion to disallow any expenses in context of such investments which had not yielded any tax free income during the year. The ld. A.R in support of his contention relied on the judgment of the Hon’ble High Court of Delhi in the case of Cheminvest Ltd. vs. CIT 378 ITR 33 (Del).

19. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We shall before adverting to the controversy in hand, refer to Rule 8D as had been made available on the statute vide the Income-tax (Fifth amendment) Rules, 2008, w.e.f 24.03.2008, which contemplates the procedure for computing the disallowance of expenses incurred for earning o exempt income, as was available on the statute for the year under consideration, read as under:

“(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :— (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :— A x B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; P a g e | 23 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year." We have perused the aforesaid Rule 8D(2)(ii) and Rule 8D(2)(iii), and find that the methodology contemplated therein for computing the expenses incurred for earning of exempt income, clearly refers to the value of investments, income from which does not or shall not form part of the total income of the assessee. We are of the considered view that in the backdrop of the language used, it can safely and rather inescapably be concluded that the same refers to the investments from which the assessee had received exempt income during the year under consideration. We further find that our aforesaid view is fortified by the judgment of the Hon’ble High Court of Delhi in the case of Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Del), wherein the High Court observed that no disallowance u/s14A can be made in a year in which no exempt income was earned or received by the Assessee. The High Court observed that the expression „does not form part of the total income‟ in Section 14A envisaged that there should be an actual receipt of income, which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. It was thus concluded that Sec. 14A would not apply if no exempt income was received or receivable during the relevant previous year. We are of the considered view that if the contention of the ld. D.R that the value of the exempt income yielding investments from which no P a g e | 24 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) exempt income was received or receivable during the relevant previous year was to be included while computing the “average value of investment” as per Rule 8D(2)(ii) and Rule 8D(2)(iii), then the same would lead to disallowance of expenditure in respect of investments from which no exempt income was received or receivable by the assessee during the year. We are of the considered view that the aforesaid interpretation of the scope of Rule 8D(2)(ii) and Rule 8D(2)(iii) by the revenue, as averred before us by the ld. D.R, clearly militates against both the literal interpretation of the language used in the respective rules, as well as the settled position of law that Sec. 14A would not apply if no exempt income was received or receivable during the relevant previous year. We thus not being able to persuade ourselves to subscribe to the aforesaid view of the ld. D.R and finding ourselves as being in agreement with the view arrived at by the CIT(A), therefore, uphold the order of the CIT(A) in respect of the issue under consideration. The Grounds of appeal Nos. 1 to 3 raised by the revenue before us are dismissed.

“1. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in excluding the value of investments that did not yield exempt income during the year for the purpose of calculation of disallowance as per rule 8D(2)(ii) and 8D(2)(iii) even after considering the fact that the said investment is an investment to earn tax free income.

2. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in taking only closing investment of other companies at P a g e | 25 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) Rs. 9,19,46,374/- representing „B‟ in the formula under Rule 8D(2)(ii) as being the average of the value of investment income from which is exempt instead of Rs. 27,53,33,443/-.

3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in holding that earning of exempt income from investment is a touchstone for making disallowance u/s 14A in spite of fact that section 14A deals with disallowance of expenditure incurred in relation to income not includible in total income. The appellant prays that the order of Commissioner of Income-tax (Appeal) on the above ground be set aside and that of the Assessing Officer be restored.

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

(i). The amount of expenditure directly P a g e | 26 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) relating to income which does not .... Nil form part of total income. (ii). Proportionate of interest expenditure Rs. 1,69,11,436/- computed in accordance with the (A X B/C) formula given in Rule 8D(2)(ii). (iii). Amount equal to one-half percent of 0.5% of Rs. Rs. 13,76,667/- the average of the value of 27,53,33,443/- investment, income from which does not or shall not form part of the total income as appearing in the Balance Sheet of the assessee, on the first day and the last day of the previous year. Total expenditure disallowed u/s 14A Rs.1,82,88,103/- (wrongly mentioned in Asst. order as Rs. 27,53,334/-) Note (i). A=Interest (finance cost) debited to Profit & Loss a/c = Rs. 16,53,04,422/- B=Average of exempt income bearing investments = Rs. 27,53,33,443/- (ii). C= Average of total assets appearing in the Balance Sheet on the first and last day of (iii). the previous year = Rs. 269,13,05,265/-

25. The appeal of the revenue is dismissed.

ITA No. 7526/Mum/2016 AY: 2014-15

26. We shall now take up the appeal of the assessee for A.Y. 2014- 15, marked as ITA No. 7526/Mum/2016. The assessee assailing the order of the CIT(A) had raised before us the following grounds of appeal:

“Grounds of appeal against the order dated 31.08.2016 passed by the learned Commissioner of Income-tax (Appeals)-53, Mumbai. Following grounds of appeal are without prejudice to each other.

1. The learned CIT(A) has erred in law and on facts in upholding the disallowance made by the Assessing Officer u/s. 14A of the Act read with Rule 8D of I.T. Rules, 1962.

P a g e | 28 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) 2. The learned CIT(A) has erred, after giving clear finding of fact that the Assessing Officer has not given cogent reasons for rejecting voluntary disallowance of Rs.6,20,522/- made by the appellant u/s.14A of the Act, in holding that such omission is a procedural lapse on the part of the Assessing Officer.

22. Briefly stated, the facts of the case are that the assessee company had filed its return of income for the year under consideration on 26.12.2014, declaring loss of Rs. 13,34,40,990/-. The assessee had during the year under consideration earned dividend income of Rs. 18,12,730/- on shares of Indian companies, and interest of Rs. 21,19,504/- on Government securities/bonds which was exempt under Sec. 10(15) of the Act. The A.O during the course of the assessment proceedings while deliberating on the working of the disallowance of Rs. 6,20,522/- by the assessee under Sec. 14A r.w Rule 8D, was not satisfied with the claim of the assessee that the borrowed funds were not utilized for the purpose of investing in the investments yielding exempt income. The A.O further observing that the expenditure which was liable to be disallowed under Sec. 14A(1), took within its sweep all form of expenditure regardless of whether they were fixed, variable, direct, indirect, administrative, managerial or financial, and with the insertion of Rule 8D it was no longer open to the A.O to work out the disallowance under Sec. 14A as per his discretion, reworked the disallowance under Sec. 14A r.w Rule 8D at Rs. 1,48,26,105/-, as under:

(i). The amount of expenditure directly P a g e | 29 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) relating to income which does not .... Nil form part of total income. (ii). Proportionate of interest expenditure Rs. 1,15,00,505/- computed in accordance with the (A X B/C) formula given in Rule 8D(2)(ii). (iii). Amount equal to one-half percent of 0.5% of Rs. Rs. 33,25,600/- the average of the value of 66,51,19,950/- investment, income from which does not or shall not form part of the total income as appearing in the Balance Sheet of the assessee, on the first day and the last day of the previous year. Total expenditure disallowed u/s 14A Rs.1,48,26,105/- Note (i). A=Interest (finance cost) debited to Profit & Loss a/c = Rs. 7,66,85,548/- B=Average of exempt income bearing investments = Rs. 66,51,19,950/- (ii). C= Average of total assets appearing in the Balance Sheet on the first and last day of (iii). the previous year = Rs. 443,50,30,280/-

23. Aggrieved, the assessee carried the order of the A.O in appeal before the CIT(A). The CIT(A) while disposing of the appeal deliberated on the multiple grounds on the basis of which the assessee had assailed the disallowance made under Sec. 14A by the A.O. The CIT(A) after deliberating on the disallowance of interest expenditure of Rs. 1,15,00,505/- made by the A.O as per Rule 8D(2)(ii), observed that the assessee had during the year under consideration opening investments of Rs. 27.07 crores and closing investments of Rs. 105.95 crores in shares of its group and other companies. The CIT(A) observed that the assessee had during the year made fresh investments of Rs. 78.88 crores in shares of other companies as well as in Government securities yielding tax free income. The CIT(A) further observed that P a g e | 30 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) the assessee had during the year debited finance expenses of Rs. 7,66,85,548/- in its Profit & loss account. It was also observed that the assessee was not maintaining separate accounts for the purpose of exempt income and had a mixed pool of funds which were utilized for the business and investment activities of the assessee. The CIT(A) observed that the assessee had incurred other administrative expenses of Rs. 3,30,84,837/- (excluding debt servicing cost) during the year under consideration. Thus, in the backdrop of the aforesaid facts the CIT(A) observed that though the invoking of the provisions of Sec. 14A was found to be justified, however, the A.O had failed to give any cogent reason for rejecting the claim of disallowance of Rs. 6,20,522/- under Sec. 14A made by the assessee in its return of income. However, the CIT(A) holding a conviction that as the powers vested with him were co-terminus with those of the A.O, therefore, after deliberating on the facts of the case concluded that having regard to the accounts of the assessee, the A.O would have no valid reason to be satisfied with the correctness of the claim of disallowance of Rs. 6,20,522/- under Sec. 14A, as a result whereof he was justified in determining the amount of the expenses attributable to the earning of the exempt income in accordance with the methodology prescribed in Rule 8D. The CIT(A) in the backdrop of his aforesaid observations concluded that the satisfaction of the A.O as regards incorrectness of claim of disallowance of Rs. 6,20,522/- under Sec.14A of the assessee was deemed to have been arrived at through the exercise of examination of the accounts of the assessee carried out at the appellate stage.

24. The CIT(A) further deliberating on the claim of the assessee that as the investment in the shares etc. were made from his own funds, therefore, no disallowance of any part of the interest expenditure was P a g e | 31 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) called for under Rule 8D(2)(ii), observed that the said claim could not be accepted as the assessee had failed to show that the exempt income yielding investments, viz. shares etc. were acquired from his own funds. The CIT(A) observed that as the assessee was not maintaining separate accounts for the purpose of exempt income, therefore, in the case of mixed funds now when the assessee could not establish that there was no nexus between the exempt income and the interest expenditure, the disallowance of the same on a proportionate basis as provided in Sec. 14A r.w Rule 8D(2)(ii) was justified. The CIT(A) observed that the assessee had failed to demonstrate with the help of its bank statements etc. that the additions to the exempt income yielding investments were not made by utilizing interest bearing funds during the year. The CIT(A) was also not persuaded to subscribe to the claim of the assessee that as it had own interest-free funds to the extent of Rs. 114.82 crores which were far in excess of the investment in shares etc. of Rs. 105.95 crores, therefore, no disallowance of the interest expenditure under Rule 8D(2)(ii) was called for in its hands. The CIT(A) observed that the aforesaid claim of the assessee could not be accepted for certain reasons, viz. (i). the assessee had not given any break-up of the interest free funds of Rs. 114.82 crores; (ii). that a perusal of the records revealed that the assessee had a). Share capital of Rs. 12.90 crores b). general reserve of Rs. 1.84 crores ;and c). Opening accumulated surplus of Rs. 21.21 crores; AND (iii). the net profit of Rs. 9.90 crores earned by the assessee during the year under consideration was to be deemed to have accrued to the assessee only on the last day of the year under consideration. The CIT(A) on the basis of his aforesaid observations concluded that the assessee had self-owned funds only to the tune of Rs. 35.95 crores (i.e Rs. 12.90 crores + Rs. 1.84 crores + Rs. 21.21 crores) which could safely be held to be available with it for making investments in the exempt income P a g e | 32 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) yielding investments. Thus, the CIT(A) observed that as the interest free funds available with the assessee were to the extent of Rs. 35.95 crores while for its investments in shares stood at Rs. 105.95 crores, therefore, it could safely be concluded that the interest bearing funds were utilised by the assessee for making the investments. The CIT(A) further observed that the reserves aggregating to Rs. 68.24 crores, viz. Statutory reserves (Rs. 7.52 crores), Capital Redemption Reserve (Rs. 0.10 crores) and Securities Premium Account (Rs. 60.62 crores) were either statutory or capital reserves which could not at all be used for financing the acquisition of investments yielding tax free income. The CIT(A) while concluding as hereinabove, further observed that the assessee had not brought on record any provision of the Companies Act or RBI guidelines etc. under which the aforesaid reserves aggregating to Rs. 68.24 crores could be considered to be available for the purpose of investment in shares etc. yielding tax free income. The CIT(A) further fortifying his aforesaid view, observed that the amount of share premium and capital redemption reserve could only be used for the specific purposes described under Sections 78 (application of premiums received on issue of shares) and Sec. 80 (power to issue redeemable preference shares) of the Companies Act, 1956, and the investment in shares of Indian companies or Government securities did not figure among such specified purposes. The CIT(A) further observed that as the assessee had failed to produce the bank statements and other relevant evidence before the A.O in order to facilitate examination by him to verify as to whether the interest bearing funds were utilized for making investments in the shares etc., therefore, the disallowance of the indirect interest expenditure by the A.O under Rule 8D(2)(ii) could not be faulted with.

P a g e | 33 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) 25. The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The assessee had assailed before us the disallowance of the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii). It was averred by the ld. A.R that the issue involved in the present appeal of the assessee was the same as was involved in its appeal for A.Y. 2012-13, viz. . We have deliberated on the facts of the case in the backdrop of those involved in the appeal of the assessee for A.Y. 2012-13, viz. ITA No. 7527/Mum/2016 and find ourselves to be agreement with the aforesaid claim of the ld. A.R. We find that as similar issues were involved in the appeal of the assessee for A.Y. 2012-13 in ITA No. 7527/Mum/2016, as had been adjudicated by us hereinabove, therefore, direct that our order passed while disposing of the appeal of the assessee for A.Y. 2012-13 in ITA No. 7567/Mum/2016, shall apply mutatis mutandis for disposing of the present appeal of the assessee for A.Y. 2014-15, marked as ITA No. 7526/Mum/2016 before us. We thus as observed by us hereinabove, though uphold the order of the CIT(A) as regards validity of the disallowance under Sec. 14A in the backdrop of cogent reasons recorded by the CIT(A) for not accepting the voluntary disallowance of Rs. 6,20,522/- shown by the assessee in its return of income for the year under consideration, however, restore the issue to the file of the A.O for the limited purpose of reworking the disallowance under Sec. 14A r.w Rule 8D, in terms of our observations recorded while disposing of the issue under consideration in the appeal of the assessee for A.Y. 2012-13, marked as ITA No. 7527/Mum/2016. We may further clarify that as observed by us while disposing of the appeal of the assessee for A.Y. 2012-13, in ITA No. 7527/Mum/2016, the A.O is directed to restrict the disallowance under Sec. 14A in the hands of the assessee to an upper capping of the aggregate of the amount of dividend of Rs. 18,12,730/- on shares P a g e | 34 ITA Nos. 7514,7526,7527,7543,7544,7546 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) and interest of Rs. 21,19,504/- received on Government securities/bonds exempt under Sec. 10(15) of the Act.

ITA No. 7471/Mum/2016 AY: 2014-15

“1. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in excluding the value of investments that did not yield exempt income during the year for the purpose of calculation of disallowance as per rule 8D(2)(ii) and 8D(2)(iii) even after considering the fact that the said investment is an investment to earn tax free income.

3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in holding that earning of exempt income from investment is a touchstone for making disallowance u/s 14A in-spite of fact that section 14A deals with disallowance of expenditure incurred in relation to income not includible in total income. The appellant prays that the order of Commissioner of Income-tax (Appeal) on the above ground be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

17. The revenue had assailed before us the observations of the CIT(A) that for computing the disallowance under Sec. 14A of the Act, Rule 8D(2)(ii) and Rule 8D(2)(iii), “the average value of investments”

P a g e | 35 & 7469 to 7474/Mum/2016 M/s Anand Rathi Global Finance Ltd., Vs. DCIT Cen. Cir.-5(1) was to be worked out by taking into account not the entire opening and closing net current investments, but only the investments in those shares which had yielded tax free income to the assessee by way of dividend during the year under consideration.

Order pronounced in the open court on 03/01/2018.