ASST CIT 1(3), MUMBAI vs. STCI LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH “E”, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No.6321/Mum/2014 (Assessment Year- 2010-11) STCI Finance Limited The DCIT (OSD) -1(2), A/B 1-802, A Wing, 8th Floor, Aayakar Bhavan, Churchgate, Marathon Innova, Marathon Mumbai-400020. Nextgen Compound, Off Vs. Ganpatrao Kadam Marg, Lower Parel (W), Mumbai-400013 PAN: AAGCS9709K (Appellant) (Respondent) ITA No.6125/Mum/2014 (Assessment Year- 2010-11) The DCIT (OSD) -1(2), STCI Finance Limited A/B 1-802, A Wing, 8th Floor, Aayakar Bhavan, Churchgate, Mumbai-400020. Marathon Innova, Marathon Vs. Nextgen Compound, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai-400013 PAN: AAGCS9709K (Appellant) (Respondent) Assessee by Shri Karthik Natrajan and : Ms. Hetal Vora, (AR) Revenue by : Shri V. Justin (Sr. DR) Date of hearing : 22.08.2017 Date of Pronouncement : 29.09.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. These two appeal u/s 253 of the Income-tax Act (the Act) are directed against the order of ld. CIT(A)-2, Mumbai dated 14.06.2014 for the Assessment Year (AY)

ITA No.6321 & 6125/M/2014- STCI Finance Limited

2010-11. The assessee in ITA No. 6321/Mum/2014 has raised the following

grounds of appeal.

“Being aggrieved by the order passed by the Commissioner of Income tax (Appeals) - 2, Mumbai (hereinafter referred to as "the CIT(A)") under section 250 of the Income tax Act, 1961 ('the Act'), the appellant submits the following grounds of appeal for your consideration: 1. The learned CIT(A) erred in confirming the action of the AO in making disallowance of INR 1,18,58,000/- under section 14A of the Act r.w. Rule 8D(2)(iii) of the Income Tax Rules, 1962. 2. The learned CIT(A) erred in confirming the action of the AO in making disallowance of INR 1,18,58,000/- under Rule 8D(2)(iii) on entire investment made by the appellant, without excluding strategic investment made which were not for the purpose of earning exempt income. 3. The learned CIT(A) erred in confirming the disallowance under section 14A without appreciating the fact that the AO while applying Rule 8D had not recorded any finding that the claim of the appellant of not incurring any expenditure in earning dividend income was incorrect. 2. The Revenue in ITA No. 6125/Mum/2014 has raised the following grounds of

appeal:

“Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that section 14A(2) and 14A(3) of the I.T. Act and Rule 8D of I.T. Act cannot be imported into section 115JB of the I.T. Act and the book profit cannot be increased accordingly?” 3. Brief facts necessary for disposal of the grounds of appeal raised by respective

parties are that assessee is a Non-Banking Finance Company, filed its return of

income for relevant AY on 23.09.2010 declaring total income at Rs. Nil. The

assessee-company has paid tax on book profit under section 115JB at

Rs.28,76,22,310/-. The assessment was completed on 12.03.2013 under section

143(3). During the year, the assessee has shown the exempt income of

Rs.83,32,692/-. The Assessing Officer (AO) while framing assessment order

invoked the provision of section 14A and applied Rule 8D and worked out the

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disallowance of Rs. 1,18,58,00/- being .5% of the average investment. The AO

further added the same amount to the book profit under section 115JB of the Act.

On appeal before the ld. CIT(A), the addition under section 14A was sustained.

However, on the book profit under section 115JB, the AO was directed not to

consider the disallowance under section 14A for the purpose of book profit. Thus,

being aggrieved by the order of ld. CIT(A), both the parties have filed their cross

appeal. The assessee has challenged the validity of disallowance under section

14A. Similarly, the Revenue has challenged the action of ld. CIT(A) that Rule 8D

cannot be imported into section 115JB of the Act. 4. We have heard the ld. Authorized Representative (AR) of the assessee and ld.

Departmental Representative (DR) for the Revenue and perused the material

available on record. The ld. AR of the assessee argued that application of section

14A read with rule (r.w.r) 8D is not mandatory. The application of section cannot

be applied prior to recording the reasons for dissatisfaction of claim made by

assessee in support of his submission, the ld. AR of the assessee relied upon the

decision of Godrej & Boyce vs. DCIT (328 ITR 81 (Bom. H.C.), CIT vs. Hero

Cycles (323 ITR 518) (P & H High Court), Maxopp Investment Ltd. (2012) (374

ITR 272) (Delhi HC). It was further argued that the investments made by assessee

are strategic in nature and have been held for more than decade. The dividend has

been directly credited to the ECS Account and declaration of dividend is not under

STCI influence. Thus, strategic investment ought to be excluded while computing

disallowances under section 14A r.w.r 8D of the Act. Assessee has not expenses

incurred any expenses during the impugned AY for earning the dividend income.

ITA No.6321 & 6125/M/2014- STCI Finance Limited

For supporting his submission, the ld. AR relied upon the decision of Fiduciary

Euromax Global Markets Ltd. (ITA No. 1349/M/2012) (Mumbai ITAT),

Videocon Industries (2017) (49 CCH 0057) (Mum. ITAT), Garware Wall Ropes

Ltd. (2014) (65 SOT 86) (Mum. ITAT), JM Financial Ltd. (ITA No.

4521/M/2012) (Mum. ITAT) and Vakrangee Ltd. (ITA No. 6988/M/2014 (Mum.

ITAT). 5. In alternative plea, the ld. AR of the assessee submitted that the only investments

which have yielded dividend income during the year ought to be considered for

the purpose of Rule 8D of the Act. The Revenue has disallowed the amount

holding that all investment held by assessee shall be considered for the purpose of

calculating the disallowance under section 14A r.w.r 8D of the Act. However, the

contention of ld. AR of the assessee is that average of the value of investment

which has given rise to the income which form part of total income to be

considered and not the total investment at the beginning of the year and at the end

of the year. In support of his submission, the ld. AR of the assessee relied upon the

decision of ACB India Ltd. vs. ACIT (TS-176-HC-2015 Del-O) and REI Agro

Ltd. vs. DCIT (2014) 160 TTJ 107 (Kol. Trib). In third alternative argument, the

ld. AR submits that the disallowance ought to be restricted to the actual dividend

received during the year. The ld. AR of the assessee argued that disallowance

under section 14A r.w.r 8D cannot exceed the dividend received during the year to

buttress his submission, the ld. AR of the assessee relied upon the decisions of

Cheminvest Ltd. vs. CIT(ITA No. 749/2014 (Del.HC), Joint Investments vs.

ACIT (TS-92-HC-2015 Del.O), Daga Global Chemicals Pvt. Ltd.

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vs. ACIT (Mum. ITAT), Tata Industries vs. ITO (Mum. ITAT) (181 TTJ 0600)

and CIT vs. Empire Package Pvt. Ltd. (P & H High Court). On the other hand, the

ld. DR for the Revenue supported the order of authorities below. It was argued

that for earning the exempt income, the assessee must have incurred some

expenses for earning such exempt income. The assessee has invested substantial

amount in share and securities. 6. We have considered the rival submission of the parties and have gone through the

orders of authorities below. The AO while working the disallowance under section

14A r.w.r 8D observed that assessee has made the substantial investment in share

and securities. The assessee has shown the dividend income of Rs. 83.33 Lakhs

which was claimed exempted under section 10(34) of the Act. The assessee was

issued show-cause notice dated 28.08.2012 as to why the disallowance under

section 14A r.w.r 8D be not made and be added to the book profit under

(Minimum Alternate Tax (MAT) under section 115JB of the Act. The assessee

furnished its reply dated 18.10.2012. After considering the contention of the

assessee, the AO made the following working of disallowance under section 14A

r.w.r 8D:

Sr. PARTICULARS Amount Amount Amount No. (Rupees in (Rupees (Rupees in Lakhs) in Lakhs) Lakhs) I. Rule 8D(2)(i) Nil Nil Directs expenditures – Demat Charges etc. II. Rule 8D(2(ii) Interest expenditure incurred during the year (stated that investment out of won funds) Amount of expenditure by way of interest Nil Total Finance charges (stated related with the finance business only) A Nil Nil Average value of investment B 23716.00 On first day of balance sheet 19679.00

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On last day of balance sheet 27753.00 Average value of assets C On first day of balance sheet 82119.39 On last day of balance sheet 110188.93 A X B /C (o x 237.16 / 96154.16) Nil III. Rule 8D(2)(iii) An amount of equal to one half percent of average of the value of investment. Avg. Value of investment 23716.00 On first day of balance sheet 29679.00 On last day of balance sheet 27753.00 ½ % of 23716.00 Lakhs 1,18,58,000 1,18,58,000 Total Disallowance expenditures u/s. 14A 7. The AO further added the disallowance under section 14A to the book profit under

section 115JB of the Act. The ld. CIT(A) sustained the addition under section 14A

r.w. Rule8D holding that assessee has shown the investment of Rs. 296.79 Crore

for earning dividend income of Rs. 83.32 Lakhs and it is necessary to have

manpower to maintain these investment. The assessee is making expenses like

Telephone, Stationary, and Bank Charges etc. for maintaining these investments

and earning dividend income from the account maintained by assessee. It is not

possible to find out such expenditure and while following the decision of his

predecessor in AY 2009-10 upheld the addition. 8. We have seen that neither the AO nor the ld. CIT(A) recorded for the reasons for

their dissatisfaction for the claim made by the assessee. There is no dispute that

the assessee has made investment of Rs. 296.79 Crore for earning dividend

income of Rs. 83.32 Lakhs. The lower authorities has not disputed that the

investment made by assessee are not strategic in nature. The lower authority has

not disputed that investment have been made for more than decade. From the

Profit & Loss A/c we have seen that the assessee has surplus fund than the

investment as on 31.03.2010. The AO have not made any disallowance on

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account of interest expenses as investment made for earning the exempt income is

less than the interest free funds available with assessee. The AO has not disputed

the exempt income. The Hon’ble Delhi High Court in case of Joint Investments

Pvt. Ltd. vs. CIT in ITA No. 117/2015 dated 25.02.2015 held that by no stretch of

imagination section 14A or Rule 8D be interpreted so as to mean that entire tax

exempt income is to be disallowed. The window for disallowance is indicated in

Section 14A is only to the extent of disallowing expenditure “incurred by the

assessee in relation to the tax exempt income”. The proportionate or portion of the

tax exempt income surely cannot swallow the entire amount. Hence, we accept the

third alternative plea of the ld. AR of the assessee that disallowance ought to have

been restricted to the actual exempt income earned during the relevant AY. Thus,

considering the facts of the present case and the submission made by ld. AR of the

assessee, we restrict the disallowance under section 14A for to the extent of

exempt income earned by the assessee. The AO is directed accordingly. 9. In the result, appeal of the assessee is allowed.

ITA No. 6125/Mum/2015 by Revenue 10. The ground of appeal raised by revenue relates to not allowing the addition of

disallowance of section 14A in the book profit under section 115JB. The ld. DR

for the Revenue supported the order of AO. It was argued that disallowance under

section 14A was not required to be added in the book profit under section 115JB

of the Act. The direction of ld. CIT(A) to AO not to consider the disallowance

under section 14A for the purpose of computation of book profit under section

115JB of the Act is wrong. In support of this submission, the ld. DR for the

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Revenue relied upon the decision of Tribunal in DCIT vs. Viraj Profiles Limited

(ITA No. 4439/Mum/2013) dated 21.10.2015. On the other hand, the ld.AR of the

assessee argued that the special bench of Delhi Tribunal in ACIT vs. Vireet

Investment Pvt. Ltd. (ITA No. 502/Del/2012) dated 16.06.2017 held that the

disallowance under section 14A r.w.r 8D cannot be added while computing book

profit as per section 115JB. 11. We have considered the rival submission of the parties. We have noted that the

Special Bench of Delhi Tribunal in Vireet Investment Pvt. Ltd. (supra) held that

while making computation under clause (f) of Explanation 1 to section 115JB(2),

is to be made without resorting to computation as contemplated under section 14A

read with rule 8D. The decision relied by ld. DR for the Revenue is not helpful in

view of the latest decision of the Special Bench in Vireet Investment Pvt. Ltd.

(supra). Hence, we direct the assessing officer to apply the decision of Special

Bench in case of Vireet Investment (supra) and redetermine the amount as per

clause (f) of Explanation (1) to Section 115JB of the Act. Hence, the Ground of

appeal raised by Revenue is allowed for statistical purpose. 12. In the result, appeal filed by the assessee is allowed and appeal of the Revenue is

allowed for statistical purpose. Order pronounced in the open court on 29th day of September 2017.

Sd/- Sd/- (G.S. PANNU) (PAWAN SINGH) ACCOUNTNAT MEMEBR JUDICIAL MEMBER Mumbai; Dated 29/09/2017 S.K.PS Copy of the Order forwarded to : 1. The Appellant 8

ITA No.6321 & 6125/M/2014- STCI Finance Limited