WHITEPIN TIE-UP LTD.,HOWRAH vs. ITO, WD-1(4), KOLKATA, KOLKATA

आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-1, Kolkata dated 05.02.2016. Assessment was framed by ITO Ward-1(4), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 10.03.2014 for assessment year 2011-12. The grounds raised by the assessee per its appeal are as under:- “1. For that under the facts & circumstances of the case the ld. Commissioner of Income Tax Appeals erred, both in law as well as on facts in confirming the total disallowance of Rs.1,46,78,485/- u/s. 14A of the Act as computed by the ld. A.O wrongfully applying rule 8D of the IT Rules, 1962, even without

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 2 considering the fact that the appellant company earned taxable income also besides earning exempt income. 2. For that under the facts and circumstances of the case, the ld. CIT(A) erred both is law and on facts in confirming the computation of Book Profit U/s 115JB of the Act by the AO at Rs.6,23,61,520/- in place of Rs.4,83,61,590/- computed by the appellant company by wrongfully adding back to the Net Profit, the entire disallowance of expenses u/s. 14A of Rs.1,46,78,485/- without segregating the expenses relatable to earning of Long Term Capital Gain which were not to be so added in terms of clause (i) below second proviso to sub sec.(2) of sec.115JB of the Act. 3. Your appellant craves leave to add, alter, modify and substantiate the grounds of appeal at the time of hearing of appeal.” Shri S. M. Surana, Ld. Advocate appeared on behalf of assessee and Shri S. Dasgupta, Ld. Departmental Representative appeared on behalf of Revenue. 2. It was noticed that the AO has made the disallowances under section 14A read with rule 8D of Income Tax Rule as detailed under:- Sr Rule Particulars Amounts (in Rs) No. 1 8D(2)(i) Direct expenses 1,83,544/- 2 8D(2)(ii) Interest expenses 1,36,70,746/- 3 8D(2)(iii) Disallowance 13,68,095/- Total 1,52,22,385/-

At the outset the learned Counsel for the assessee before us submitted that he does not want to challenge the disallowances made by the AO under rule 8D(2)(i) and 8D(2)(ii) of Income Tax Rules for Rs.1,83,544.00 and 1,36,70,746.00 respectively. Thus the limited issue requires to be adjudicated relates to the disallowances made under rule 8D(2)(iii) of the Income Tax Rule for Rs.13,68,095.00. 3. The first issue raised by the assessee in this appeal is that the Learned. CIT(A) erred in confirming the order of Assessing Officer by sustaining disallowance of Rs.1,46,78,485/- u/s 14A r.w.r. 8D of I.T Rules 1962.

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 3 assessee during the year has earned dividend income of Rs.74,10,551/- and Long Term Capital Gain of Rs.4,51,20,300.00 which was claimed as exempted income u/s. 10(34) & 10(38) of the Act respectively. The assessee made the disallowance of the expenses incurred in relation to such exempted income under section 14A of the Act for Rs.66,99,516.00 only. However the AO was not satisfied with the disallowance made by the assessee under section 14A of the Act. Therefore the AO invoked the provisions of rule 8D r.w.s. 14A of the Act and made the following disallowances:- Sl Rule Particulars Amounts (in Rs.) No. 1 8D(2)(i) Direct expenses 1,83,544/- 2 8D(2)(ii) Interest expenses 1,36,70,746/- 3 8D(2)(iii) Indirect expenses 13,68,095/- Total 1,52,22,385/-

The AO further observed that the assessee has claimed total expenses to the tune of Rs.1,46,78,485.00 in its profit & loss account, therefore he limited the disallowance to the tune of Rs.1,46,78,485.00 only. As the assessee has already made the disallowance of Rs.66,99,516.00, thus the AO disallowed the remaining expenses of Rs.7,78,969.00 (Rs.1,46,78,485.00 – 66,99,516.00) and added to the total income of the assessee.

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 4 However, the ld. CIT(A) disregarded the contention of the assessee and accordingly partly confirmed the order of Assessing Officer by observing as under: “As regards the issue of disallowance of administrative expenditure under Rule 8D(2)(iii), the A.O is found to have made the disallowance of Rs.13,68,095/-. Hence, there is no infirmity in the AO's computation of disallowance by invoking provision under Sec. 14A r.w Rule 8D is confirmed. However, it is found that there is some substance in the claim that the depreciation expenses of Rs.84,333/- cannot be held as relating to earring exempt income. The A.O. is directed to verify the appellant’s claim in this regard ad exclude the depreciation in case the appellant’s claim is to be correct.” Being aggrieved by the order of the ld. CIT(A), the assessee filed second appeal before us. 6. The ld.AR before us field financial statements, computation of income and other details which are running from Pages 1 to 11 and reiterated the submissions that were made before the ld. CIT(A). The ld.AR also submitted that the expenses under Rule 8D(2)(iii) of I.T Rules cannot exceed the expenses actually claimed by it in the P & L A/c. The actual administrative expenses claimed by the assessee in its profit & loss account are for Rs.1,72,372.00 only. The details of the expenses stand as under : SCHEDULE: 12 ADMINISTRATIVE OTHER EXPENSES: Rent 1,324 Rates & Taxes - Riling Fees 3,560 Professional tax - General Expenses 675 Printing & Stationery 464 Postage & Telegram - Books & Periodicals - Legal 7 Professional Charges 151,349 Auditors Remuneration : -Audit Fees 15,000 172,372 The ld.AR also submitted that depreciation and legal & professional charges should not be considered for the purpose of the disallowance under rule 8D(2)(iii) of Income Tax Rules. On the contrary the ld. DR vehemently supported the order of lower authorities.

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 5 7. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the disallowance made by the AO u/s 14A r.w.r. 8D(2)(iii) of the I.T Rules which was subsequently confirmed by ld. CIT(A). 8. From the above discussion, we note that Assessing Officer can resort to make the disallowance u/s.14A of the Act r.w.r 8D of the IT Rules, 1962 after having regard to the accounts of the assessee and feels dissatisfied with the correctness of the claim of the assessee. Thus, it is clear that the AO can make the disallowances of the expenses incurred in relation to exempt income in pursuance to the provisions as specified u/s. 14A of the Act. On perusal of the facts of the present case, we note that the assessee has claimed indirect/administrative expenses during the year to the tune of Rs.1,72,372/- only which was inclusive of audit fees and legal & professional charges for Rs.15,000.00 and 1,51,349.00 only. The details of the legal & professional expenses are placed on page 10 of the compilation filed by the assessee. These expenses in our considered view do not attract the provisions of section 14 of the Act. Thus, it is undoubtedly clear that actual expenses claimed by the assessee are much less then the expenses disallowed under Rule 8d(2)(iii) of the I.T rules by the AO. In the backdrop of the present case we are of the view that the expenses to be disallowed under Rule 8D(20(iii) cannot exceed the actual expenses incurred by the assessee. However, the AO has made the disallowance of the expenses under rule 8D(iii) exceeding the actual expenses. 9. The act of making the disallowance by the AO under rule 8D(iii) shows that no reference has been made to the books of accounts of the assessee. In such a situation we are of the view that the disallowance u/s. 14A v-z-a-viz Rule 8D of the I.T. Rules has been made without complying the provisions of law. Thus the addition cannot be sustained in the instant case. Thus, we direct the Assessing Officer to delete the impugned addition. Thus, first issue in grounds of appeal filed by the assessee is partly allowed. 10. The second issue raised by assessee is that learned CIT-A erred in sustaining the addition of Rs.1,46,78,485.00 made under section 14A of the Act while computing the income under the head 115JB of the Act.

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 6 The assessee while computing the book profit under section 115 JB of the Act has made the addition of Rs.9,45,104,00 only for the expenses relating to dividend income. The contention of the assessee was that out of total addition of expenses made under section 14A of the Act for Rs.66,99,516 represents a sum of Rs.9,45,104.00 incurred towards the dividend income and the balanced amount of expenditure for Rs.57,54,412.00 relate to long term capital gain. Therefore only the sum of Rs.9,45,104.00 is as inadmissible under section 14A of the Act relating to dividend income which would be eligible for addition while computing the book profit under section 115JB of the Act. As per the AO the amount of addition made under section 14A of the Act relates to the dividend income, therefore the same i.e. 1,46,78,485.00 should be added while computing the profit under section 115JB of the Act. 11. Aggrieved assessee preferred an appeal to learned CIT-A. The assessee before the learned CIT-A submitted that the expenses relatable to the long term capital gain cannot be added for working out the book profit in pursuance to the provisions of clause (iii) below the proviso of sub section (2) of section 115JB of the Act. The assessee also submitted the expenses incurred in relation of exempted income should be divided in two components, firstly, relating to dividend income and secondly and long term capital gain income. the assessee has divided such expenses in proportion to the income as detailed under:- Proportion Distribution of exps. Relatable to Exempt Income as Calculated to the company Exempt dividend 74,10,551 14.10 9,45,104/- income Exempt Long Term 4,51,20,300 85.90 57,54,412/- Capital Gain Total exempt 5,25,30,851 100 66,99,516/-

The assessee also submitted that expenses in relation to long term capital gain were claimed as per the provisions of section 115JB of the Act. However, the learned CIT-A rejected the claim of the assessee and confirmed the order of AO by observing as under:-

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 7 “In this ground, the appellant has contended that the A.O has erred in taking reduction of expenditure relatable to exempt long term capital gain for the actual expense to book profit u/s. 115JB. It was claimed that the amounts allowable as deduction from capital gains have relevance for computation of profit u/s.48 of the Act and have nothing to do the book profit u/s. 115JB, which is altogether a different scheme for computation and the items to be reduced for book profit are specifically described u/s. 115JB. The appellant’s AR has also stated that specific exclusion of section 10(38) no explanation u/s. 115eJB signifies its long term capital gain is the only exempt income than no adjustment in computing book profit means neither any taken is allowable long term capital gain nor any expenses relatable to such long term capital would be add back for computing book profit and that the A.O may be directed to exclude a such part of expenses relating to Long Term Capital Gain for computing u/s. 115JB. IT is observed that the method for deduction of book profit u/s. 115JB is a self-contend Code. Further, under the scheme of section 115JB the profit and loss account of the assessee is to be treated in accordance with provisions of Part II & III of Schedule, Rule-6 to the company’s act and the net profit shown therein as book profit is to be treated after making certain adjustment specifically provided in the explanation thereof. Such permissible adjustment in the form of addition and deductions are provided the explanation to section 115JB. No deductions, rebates or allowances apart from what are stipulated in the explanation are available for computation of book profit. From finding of facts, admittedly the long term capital gain earned by the appellant was included in the net profit determined as per profit and loss account prepared as per Part II & III of Schedule-VI of Company’s Act. Therefore, since long term capital gain is part of profits included in the profit and loss account expenditure relatable thereto cannot be excluded net profit unless profit for specifically no explanation to section 115JB for the computation of book profits. The appellant’s AR has in his written submission on page no.4 in point no. 6 admitted that no adjustment is allowable if there ios only exempt income under LTCG, then no expenses are allowable, which is found to be contradictory. Further, merely because long term capital gain is not allowable to be taxed under normal provisions of the Act It does not follow the expenditure relatable to long term capital gain is also to be reduced for the purpose of computing deduction u/s. 115JB when the explanation to section 115JB does not provide for any such deduction. CIT Vs. Veekay Lal Investment Co.(P) Ltd.(2001) 249 ITR 597 (Bombay) and GK Ltd. Vs. CIT 2011 TIOL 508 (HC) Kol. 80. In view of the above discussion and the facts of the case, it is held that there is no infirmity in the order of the A.O and the A.O’s finding is confirmed. This ground of appeal is dismissed.” Being aggrieved by the order of learned CIT-A, assessee is in 2nd appeal before us. 12. The learned AR before us submitted that there has to be apportionment of the expenditure between the dividend income and the long term capital gain. The learned

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 8 AR in support of his claim has relied on the order of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT in civil appeal no. 104-109 of 2015 vide order dated 12th February 2018. On the other hand the learned DR vehemently supported the order of authorities below. 13. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the addition of the expenditure attributable to long term capital gain. The argument of the learned AR is that the expenditure which are directly incurred in connection with the transfer of capital asset only those expenditure should be considered for the purpose of determining the capital gain income therefore the expenses which have been disallowed under section 14A of the Act cannot be attributed to such on germ capital gain income. However, we note that in similar facts and circumstances the Hon'ble Supreme Court in the case of M/s Maxopp Investment Limited (supra) has decided the issue in favaour of assessee. The relevant extract of the order is reproduced below: “34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non- taxable. In this scenario, if expenditure is incurred on earning the divine income that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind the said provision has to be interpreted, particularly, the word ‘in relation to the income’ that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. ‘The next phrase is, “in relation to income which does not form part of total income under the Act.” It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A…xxx.xxx…

ITA No.603/Kol/2016 A.Y. 2011-12 Whitepin Tie-up Ltd. Vs. ITO Wd-1(4) Kol. Page 9 From, the above order we note that the apportionment of the expenses between the dividend income and the long term capital gain becomes relevant while determining the profit under section 115JB of the Act. Therefore respectfully following the aforesaid order we are inclined to reverse the order of Authorities Below. Hence the ground of Appeal of the assessee is allowed. 14. In the result, the appeal of the assessee is partly allowed. Order pronounced in open court on 14/06/2018 Sd/- Sd/- (�या%यक सद'य) (लेखा सद'य) (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp, Sr.P.S )दनांकः- 14/06/2018 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-Whitepin Tie-Up Ltd. 251, G.T. Road, Jindal Mansion Liluah, Howrah-711 204 2. ��यथ�/Respondent-ITO, Ward-1(4), Aykar Bhawan, 7th Floor, P-7, Chowringhee Square, Kolakta-69 3. संबं,धत आयकर आयु-त / Concerned CIT 4. आयकर आयु-त- अपील / CIT (A) 5. .वभागीय �%त%न,ध, आयकर अपील�य अ,धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड2 फाइल / Guard file. By order/आदेश से, /True Copy/ Sr. Private Secretary Head of Office/DDO आयकर अपील�य अ,धकरण, कोलकाता