ACIT CIR 6(1), MUMBAI vs. AFTAB INVESTMENT CO. LTD, MUMBAI

Aggrieved by the assessment order dated 28-11-2008 passed by the AO u/s 143(3), the assessee filed an appeal before the learned CIT(A) , who held vide appellate order dated 10-12-2010 , as under:-

We have considered rival contentions and have perused the material on record . We have observed that the assessee is an investor and dealer in shares & securities. The assessee earned its income from short term and long term investments in share, mutual fund, equities and investment in real estate. The assessee is 100% subsidiary of the Tata Power Company Ltd. The AO observed from the perusal of Profit and Loss Account that the assessee earned total dividend of Rs. 4,04,09,057/- which the assessee claimed to be an exempt income u/s. 10(34) . The assessee disallowed expenditure of Rs. 3,64,34,450/- being interest on ICD incurred for earning the exempt income u/s. 14A . The AO made disallowance by invoking Rule 8D , wherein total disallowance of expenditure u/s 14A r.w.r. 8D was worked out at Rs. 4,10,78,401/-. The AO considered interest on ICD as well administrative expenses for making disallowance u/s 14A r.w.r. 8D while the assessee only considered interest on ICD for disallowance. The learned CIT(A) directed the A.O to adopt reasonable basis on the method consistent with all the relevant facts and circumstances of the case to compute disallowance u/s. 14A . We have also observed that the tribunal in assessee‟s own case in and 8981/Mum/2010 for AY 2004-05 and 2005-06 , vide common orders dated 11th May, 2016 has given relief to the assesses by holding as under: “ 2. The assessee company is engaged in the business of investing and dealing in shares and securities. The company derives its income from short term and long term investments in shares, mutual fund, equities and investment in real estate. The assessee company is a 100% subsidiary of the Tata Power Company Ltd. The assessee company invested in the subsidiary company and earned exempt income but the contention of the assessee is that the expenditure incurred upon the strategic investment is not liable to be added in the income of the assessee. But the Assessing Officer assessed the same as income of assessee and the learned CIT(A) confirmed the order of Assessing Officer therefore the assessee filed an appeal for the above mentioned assessment year before us. ,1812/M/2011, 4284/M/2014,7069/M/2013, 6546/M/2014,6573/M/2014, 7128/M/2014 3. However, the assessee has raised number of issues but the learned representative of the assessee only raised the issue u/s.14A of the Income Tax Act, 1961( in short "the Act") wherein the learned CIT(A) confirmed the disallowance the interest expenditure to the tune of Rs.8,42,08,035/- for A.Y.2004-05 and Rs.9,70,012/- for A.Y.2005-06. The learned representative of the assessee has argued that the assessee expended the money for strategic investment with the object to control the stake in group concern and not to earn the income, therefore, in the said circumstances no disallowance of any kind is required in connection with the expenditure incurred if any for the said investment in view of the law settled in [2014] 46 taxmann.com 18, Income Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1), [2009] 183 taxman 159 (Bom) in case of Commissioner of Income Tax - 8 Vs. Srishti Securities Pvt. Ltd. and [2013] 35 taxmann.com 210 (Delhi) High court of Bombay in case Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd.. However, on the other hand learned departmental representative has refuted the said contention. In the instant case investment made in subsidiary company for strategic investment i.e. for commercial expediency or investment or stock in trade is in question. Assessing Officer disallowed the interest expenditure to the tune of Rs.84,20,803/- for A.Y. of 2004-05 and an amount of Rs.7,70,012/- for the A.Y.2005-06. But in connection with the strategic investment in the subsidiary company the law is not quite clear that if any company made an investment in subsidiary company for commercial expediency or investment or stock in trade for any purpose of controlling interest in other companies then interest paid to such parties would not be taxable u/s.36(1)(iii) of the Act. In view of the above mentioned law appeal of the appellant are hereby allowed and Assessing Officer is hereby directed to re-calculate the expenditure incurred towards the dividend income by excluding the investment made for controlling interest in the other companies while computing average value of investment. The law settled in [2014] 46 taxmann.com 18, Income Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1), [2009] 183 taxman 159 (Bom) in case of Commissioner of Income Tax - 8 Vs. Srishti Securities Pvt. Ltd. and [2013] 35 taxmann.com 210 (Delhi) High court of Bombay in case Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd. in accordance with law. 4. In result the both the appeal of the assessee are hereby allowed for statistical purpose.” It is also brought on record that the department has already passed an order giving effect to the afore-stated tribunal orders dated 11-05-2016 and the addition made u/s 14A stood deleted , vide AO order giving effect dated 05- 06-2017 to tribunal passed by the AO which is placed in file , wherein it is held by the AO as under:- “ Name of Assessee Af-Taab Investment Co. Ltd, 9

The aforesaid shows that the Tribunal after holding in principle the applicability of Sec. 14A, has further directed the Assessing Officer to ascertain from the facts of the case as to how much interest bearing borrowings was utilized to acquire shares in the companies and the matter is relegated to the Assessing Officer. As per the language in Sec.14A, the enquiry has to be undertaken by the Assessing Officer which has been so ordered by the Tribunal. Hence, it can be said that the Tribunal has exercised the discretion where rights of both sides are kept open for admissible deduction under Sec.14A. When such a discretion is exercised and the rights of the appellant-assessee is also kept open to satisfy the Assessing Officer, it cannot be said that any substantial questions of law would arise for consideration, as sought to be canvassed. In our view, at the stage of enquiry under Sec.14A, it is open to the Assessing Officer to independently consider the matter for admissibility of the interest on borrowings and if yes to what extent. Hence, when the question at large is further to be considered by the Assessing Officer, we do not find that any further observations are required to be made in this regard. In any case, the question of law as sought to be canvassed would not arise for consideration at this stage on the said aspects as sought to be canvassed.”

Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that sub-sections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income. Insofar as the appellant- assessee is concerned, the issues stand concluded in its favour in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier to the introduction of sub-sections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment. In all the aforesaid assessment years referred to above it was held that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question. In the appeals arising out of the assessments made for some of the assessment years the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of sub-sections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the assessee was entitled to the benefit of full exemption claimed on account of dividend income.

We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 12 ,1812/M/2011, 4284/M/2014,7069/M/2013, 6546/M/2014,6573/M/2014, 7128/M/2014 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC). "We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."

In the above circumstances, we are of the view that the second question formulated must go in favour of the assessee and it must be held that for the Assessment Year in question i.e. 2002-2003, the assessee is entitled to the full benefit of the claim of dividend income without any deductions.”

Therefore, these transactions were analysed and in the backdrop of the business of the assessee, the Tribunal concluded that there was no necessity to apply the formula prescribed in Rule 8D(2)(iii) of the Rules. We are, therefore, not in agreement with Mr. Suresh Kumar that Rule 8D(2)(iii) has been overlooked or ignored by the Tribunal completely. In the peculiar facts and circumstances of the assessee's case and the nature of its investments made, the Tribunal concluded that the disallowance worked out by the assessee should have been accepted. However, it did not accept the figure of disallowance worked out by the assessee. That although the Tribunal, in one line or sentence in para 8, says that the disallowance to be made under Rule 8D is determined at Rs.3,50,000/-, we are not in agreement with Mr. Suresh Kumar that the Tribunal has accepted the applicability of this Rule/sub-rule/clause. This one sentence or one line cannot be read in isolation and out of context. Once the formula prescribed in Rule 8D(2)(iii) of the Rules could not have been applied is the essential conclusion, then, merely because the Tribunal did not accept the working of disallowance by the assessee in its entirety, does not mean that the appeal raises a substantial question of law. We do not think that the Tribunal's exercise can be termed as totally erroneous or illegal. It is neither perverse. The Tribunal's order cannot be said to be vitiated by an error of law apparent on the face of the record. We do not think that the working by the Tribunal or the determination of the disallowance at Rs.3,50,000/- does not meet the ends of justice. It is restricted bearing in mind the facts and peculiar to the assessee's case. Partly the assessee's arguments have been accepted and the appeal allowed by setting aside the order of the Assessing Officer and that of the Commissioner of Income Tax (Appeals). We do not think that the question proposed by Mr. Suresh Kumar is a substantial question of law.” The decision of Hon‟ble Bombay High Court in the case of CIT v. Srishti Securities Private Limited reported in (2010) 321 ITR 498(Bom.) wherein Hon‟ble Bombay High Court has held that interest on funds borrowed by an investment company for making investment in shares which may be held as investment or stock in trade or for the purposes of controlling interest in ,1812/M/2011, 4284/M/2014,7069/M/2013, 6546/M/2014,6573/M/2014, 7128/M/2014 other companies shall be allowed as deduction u/s 36(1)(iii). . The assessee has voluntarily suo motu disallowed an interest expenditure on ICD to the tune of Rs.3,64,34,451/- u/s 14A which disallowance was raised by the AO to Rs. 4,10,78,401/- , wherein administrative expenses were also considered by the AO for making disallowance u/s 14A r.w.r. 8D which was not considered earlier by the assessee. The matter need to be set aside and restored to the file of the AO for computing disallowance u/s 14A afresh and the ratio of aforesaid decisions of Hon‟ble Courts read with provisions of Section 14A and 36(1)(iii) shall be applied by the A.O. to factual matrix of the case while computing disallowance u/s 14A keeping also in view the claim of the assessee that it is an investment company holding more than 99% investments in subsidiaries companies/strategic investments and also that the assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. We order accordingly.

In the result appeal of the Assessee and Revenue in and ITA no. 1807/Mum/2011 respectively for AY 2006-07 are allowed for statistical purposes. We order accordingly.

In the result appeal of the Revenue in AY 2007-08 is allowed for statistical purposes. We order accordingly Assessee’s Appeal- for AY 2009-10

From the perusal of Balance Sheet of the assessee during the course of assessment proceedings u/s 143(3) r.w.s. 143(2), it was observed by the AO that the assessee is investor and dealer in shares and securities . The assessee is having investments in shares and mutual fund. The assessee earned dividend income of Rs. 6,69,80,635/- during the previous year relevant to the impugned assessment year which was claimed as an exempt income . The assessee was asked by the AO to explain why disallowance u/s. 14A r.w.Rule 8D should not be made . The assessee made following submissions:- “As per assessee company’s P&L A/c total expenses amount to Rs. 38,04,573/- of which expenses incurred for earning of exempt dividend income of Rs.6,69,80,635/- consisting of the following: 1. Dematerialisation charges Rs. 36,910/- 2. Transaction tax on sale of investment Rs.54,738/- 3. Transaction tax on purchase of investment Rs.43,719/-__ Rs.1,35,367/- Out of balance amount of Rs.36,69,206/- expenses like rates and taxes, professional fees, directors sitting fees, legal expenses, insurance premium internal audit fees, auditors remuneration, maintenance charges, or electricity charges have no relation or nexus to dividend income. Therefore, proposed disallowance of the above expenses as being attributable to earning of dividend income is unfair” The A.O observed that all the expenses which are connected with the exempt income have to be disallowed u/s. 14A regardless of whether they are direct or indirect , fixed or variable and managerial or financial and the same is to be worked out as per the mechanism laid down in 14A(3) in accordance with ,1812/M/2011, 4284/M/2014,7069/M/2013, 6546/M/2014,6573/M/2014, 7128/M/2014 the method as prescribed under Rule 8D . The AO worked out disallowance of direct expenditure being dematerialisation expenses to the tune of Rs. 36,910/- under Rule 8D(2)(i) r.w.s. 14A and disallowance at the rate of 0.5% of average investments was worked out by the AO under Rule 8D(2)(iii) r.w.s. 14A , which led to aggregate disallowance to the tune of Rs. 41,39,108/- vide assessment order dated 31-10-2011 passed by the AO u/s 143(3), as against disallowance of Rs. 1,35,367/- worked out by the assessee.

Aggrieved by the assessment order dated 31-10-2011 passed by the AO u/s 143(3), the assessee filed first appeal before learned CIT(A) who gave part relief to the assessee by holding as under, vide appellate orders dated 27-09-2013:- “3.3 The Assessing Officer's order, submissions made for the appellant and materials on records have been considered. The case pertains to A.Y. 2009-10. It is fairly settled that section 14A r.w.r. 8D is applicable. Section 14A of the I.T. Act is a special provision and provides for disallowances of expense relatable to exempted income. Section 14A(i) stipulates that for the purposes of computing the total income under Chapter. IV, no deduction shall be allowed in respect of an expenditure "incurred" by the assessee "in relation to" an income which does not form part of the total income under the Income tax Act. 3.3.1 It is pertinent to note that as per Section 14A(2) of the Act if the AO is not satisfied with the correctness of the claim of the taxpayer of the expenditure related to exempt income, then the AO shall calculate the expenditure ay applying Rule 8D of the Rules. There is no discretion to the Assessing Officer for restricting the disallowance to the extent of exempt income as he has to follow the formula provided in Rule 8D. It may be stated here that, the issues arising out of application of sec.14A and Rule 8D now stand settled by Godrej and Boyce Mfg. Ltd. vs DCIT(2010) 43 DTR 177 (Bom) in which it was decided that the provisions of Rule 8D are not ultra vires the provisions of section 14A and do not offend Article 14 of the Constitution. Further, in view of the clear enunciation in Memorandum explaining the provisions of the Finance Bill, 2006 and further clarification by CBDT vide Circular No.14 of 2006, sub section (2) of section 14A is applicable from A.Y.2007-08 onwards. The Hon. Bombay High Court in the case of Godrej and Boyce Mfg. Ltd., has held that the provisions of Rule 8D shall apply w.e.f. A.Y.2008-09. Therefore, it is evident that all expenses connected with the exempt income have to be disallowed u/s.14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. It is further evident that deduction in respect of expenditure incurred by the assessee in relation to exempt income and taxable income has to be determined as per the mechanism laid down in sub-section (B) of section 14A and the method as ,1812/M/2011, 4284/M/2014,7069/M/2013, 6546/M/2014,6573/M/2014, 7128/M/2014 prescribed under Rule-8D. Therefore, the Assessing Officer was justified in invoking the provisions of Rule 8D. 3.3.2 If one reads subsection (3) along with subsection (2), it simply means that in a case where the assessee claims that no expenditure has been incurred in respect of the exempt income, the AO shall determine the amount of expenditure incurred in relation to such income in accordance with the method as may be prescribed in view of the provisions of subsection (2). Therefore, since from assessment year 2008-09, rule 8D is applicable, the AO shall be free to compute the disallowance of expenditure as per this rule in respect of the exempt income in all such cases where the assessee claims that no expenditure has been incurred in respect of the said income and no suo-mote disallowance of expenditure has been made by the assessee. This is quite logical as well, because it cannot be the case of any investor that he has not incurred even a single penny for making such investment and earning of exempt income there-from. This is exactly the case of the appellant, where accounts are kept on a mixed fund basis, and for the purpose of investment in shares, mutual funds etc, separate accounts have not been kept. Although the appellant has given a number of arguments based on the facts of its case, still, in spite of that, due to reasons cited above, it cannot be accepted that the appellant has not incurred even a single penny for making investment, maintaining the investment portfolio and thereby earning exempt income. Even if the requirement of AO's satisfaction in this regard is considered necessary, the very knowledge of the fact on the part of the AO that the appellant has not disallowed any expenditure suo-moto was sufficient for her to compute the disallowance under rule 8D read with section 14A of the Act. 3.3.3 The argument of the appellant that on strategic investment no dividend is earned cannot be accepted. The appellant has made investment in all big public limited companies when the said company declare dividend the appellant will earn exempt. 3.5.4 The argument of the assessee that the disallowance may be restricted to the amount debited in the P&L a/c. of Rs.38,04,573/- is found to be in order. The A.O. is directed to restrict the disallowance at Rs.38,04,573. 3.5.5 The second argument of the appellant that on investment on debentures no exempt income is earned. Therefore they should be excluded while calculating 5% (sic.0.5%) of average investment made by appellant merits consideration income from investment in debentures are chargeable to tax. Therefore, while calculating average value of investment they should be excluded. The A.O, is therefore directed to exclude the investment in debentures as it earns taxable income and recalculate the disallowance under 5% (sic.0.5% )of average investment.”

Aggrieved by the appellate order dated 27-09-2013 passed by learned CIT(A) , the assessee has come in appeal before the tribunal . 18 The Ld. Counsel for the assessee submitted that the assessee has incurred expenses of Rs.1,35,367/- towards earning of exempt income as is referred to in Section 14A . It was submitted that the A.O. has adopted 0.5% of average investments while computing disallowance u/s 14A which led to the disallowance of Rs. 41,76,018/- (including disallowance of direct expenses of Rs. 36,910/-) which is higher than the total expenses of 38,04,573/- claimed by the assessee in its P&L A/c as an expense for the entire year. It was submitted that strategic investments/stock in trade are to be excluded for computing disallowance under 14A . It was submitted that strategic investments were more than 91% of the total investment . It was also submitted that no satisfaction was recorded by the A.O as is contemplated u/s 14A(2). It was submitted that Rule 8D is applied and disallowance have been made more than the expenses debited to the P&L Account which is not permissible. However, it is submitted that learned CIT(A) gave the relief on this account by restricting disallowance to the actual expenditure incurred by the assessee as claimed in Profit and Loss Account.

We have considered rival contentions and perused the material on record. We have observed that the assessee is investor and dealer in shares and securities . The assessee is having investments in shares and mutual fund. The assessee earned dividend income of Rs. 6,69,80,635/- during the previous year relevant to the impugned assessment year which was claimed as an exempt income . The assessee has incurred total expenditure of Rs. 38,04,573/- which was debited to Profit and Loss account . The assessee claimed to have incurred following expenses in relation to the earning of exempt income:-

In the result appeal of the assessee in for AY 2009-10 is allowed for statistical purposes.

Our decision in for AY 2009-10 shall apply mutatis mutandis to the assessee‟s appeal in ITA No.6546/Mum/2014 for AY 2010-11. With respect to the stock-in-trade being shares and securities held by the assessee , we are of the considered view that the said stock-in- trade cannot be included for the purposes of disallowance u/s. 14A as the same are held as business asset for trading purposes and not for earning of exempt income. The assessee has rightly relied on the decision of Hon‟ble Punjab and Haryana High Court in the case of Pr. CIT v. State Bank of ,1812/M/2011, 4284/M/2014,7069/M/2013, 6546/M/2014,6573/M/2014, 7128/M/2014 Patiala (2017) 78 taxmann.com 3 (P&H HC) and we agree with the said proposition advanced by the assessee. The Hon‟ble Court in the case of State Bank of Patiala(supra) held as under:

In the result, the assessee‟s appeal is allowed for statistical purposes while Revenue appeal is dismissed. Assessee’s appeal in

Our decision in ITA no. 6546/Mum/2014 for AY 2010-11 shall apply mutatis mutandis to appeal in ITA no. 7128/Mum/2014 for AY 2011-12 as facts are similar. We order accordingly.

In the result appeal in ITA no. 7128/Mum/2014 for AY 2011-12 is allowed for statistical purposes.