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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
O R D E R PER BENCH:
These four cross appeals, two by the assessee and two by the Revenue are arising out of the different orders of CIT(A)-8, Mumbai, in appeal No. CIT(A)- 8/IT-158&159/14-15 even dated 26-03-2015. The Assessment was framed by DCIT circle-3(2), Mumbai for the A.Y. 2010-11 vide order dated 08-03-2013 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only common issue in & 4062/Mum/2015 for the AY 2010-11 of assessees’ appeals is as regards to the orders of CIT(A) confirming the action of the AO for disallowing the expense relatable to exempted income by invoking the provisions of section 14A of the Act read with Rule 8D(2)(iii) of the Rules without recording any satisfaction as to the correctness of the claim of the assessee. These two assessees have raised identical worded grounds and facts and circumstances are exactly identical in both the cases. The ground has raised in ITA No. 4061/Mum/2015 for AY 2010-11 reads as under: -
“A) Disallowance under section 14A read with rule 8D(2)(iii) Rs. 43,18,185/-
1) The learned Commissioner of Income Tax (Appeals) 8, Mumbai CIT(A) erred on facts and in law in confirming the order of the Deputy Commissioner of Income Tax 3(2), Mumbai (AO) making a disallowance u/s. 14A as per Rule 8D(2)(iii) Rs.43, 18,185/- by holding that there is no merit in the contention of the Appellant that any satisfaction as to the correctness of the claim of the Appellant.
2) The Appellant prays that the disallowance u/s.! 4A read with Rule 81D(2)(iii) of Rs.43, 18,185/- as made by the AO and as upheld by the CIT(A) may be deleted.”
,4062,3940&3941/Mum/2015 JM Financial Investment Managers Ltd & JM Financial Products Ltd; AY: 10-11
Similarly, Revenue has also raised common issues in & 3941/Mum/2015 for AY 2010-11 regarding deletion of disallowance of expenses relatable to exempt income qua the disallowance of interest by invoking the provision of section 14A of the Act read with rule 8D(2)(ii) of the Rules and for this identically worded grounds are raised and the grounds raised for AY 2010- 11 is reads as under: -
“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in deleting disallowance of Rs. 77,89,257/- holding that the assessee has own interest free funds available more than the investment made in tax free securities without appreciating the fact that as per section 14A of the Act, the relation has to be seen between the exempt income and expenditure incurred in relation to it and not vice versa.
2. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 77,89,257/- relying on the decision of the Hon’ble Bombay High court in the case of CIT vs. Reliance Utilities and Power Ltd. without appreciating the fact that the decision is in the context of disallowance of interest expenditure u/s 36(1) (iii) of the Act and has no direct application for disallowance.
At the outset, the learned Counsel for the assessee stated that the assessee JM Financial Investment Managers Ltd has earned exempted income at Rs. 1,25,14;618/- on the total investment made by company of Rs. 90,44,15,132/-. The assessee made suo moto disallowance of Rs. 30,09,078/- on account of employees’ compensation cost, interest cost and security transactions tax. Similarly, in the case of JM Financial Product Ltd., the assessee earned exempted income of Rs. 6,49,62,982/- on a total investment during the year at Rs. 414,26,11,058/-. The assessee suo moto disallowed a sum of Rs. 28,64,511/- Page 3 of 9 ,4062,3940&3941/Mum/2015 JM Financial Investment Managers Ltd & JM Financial Products Ltd; AY: 10-11 on account of compensation cost of employees as well as administration cost. The learned Counsel for the assessee stated that in both the cases the AO’s order is identical worded para wise except the quantum of disallowance of amount on investment. The learned Counsel for the assessee stated that the suo moto disallowance has been reproduced by the AO in both the cases. He drew our attention to assessment order and stated that the AO has given theoretical reasoning to reject the working of the assessee and he read out the reasons given in Para 5.2 of both the orders. The learned Counsel for the assesse stated that no defects was pointed out or it was not pointed by the AO that whether the accounts of the assessee are incorrect or the computation of disallowance made by assessee is incorrect and if that is the case, then how, and the satisfaction was not at all reached by the AO. In the absence of the same, the learned Counsel for the assessee relied on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom).
But the AO made disallowance on account of interest by invoking Rule 8D(2)(ii) and 0.5% of average value of investment by invoking Rule 8D (2)(iii) of the Rules. Aggrieved assessee preferred the appeal before CIT(A) in both the cases. The CIT(A) confirmed the disallowance on 0.5% of average value of investment in both the cases, whereas deleted the balance disallowance on account of interest made by AO by relying on the decision of Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) and also CIT vs HDFC Bank ltd (2014) 366 ITR 505 (Bom) When it is held that in the case of assessee is able to prove that its own funds are more than the investment made by assessee to earn exempted income, the presumption will be that the same is made out of interest free funds in the absence of any finding by the AO that there is no nexus between interest bearing fund invested in tax free investments. Aggrieved, against the action of the CIT(A) in sustaining the 0.5% average value of investment disallowance confirmed under Rule 8D(2)(iii), assessee came in appeal and against deletion of disallowance by CIT(A) of interest relying on the decision of Hon’ble Bombay ,4062,3940&3941/Mum/2015 JM Financial Investment Managers Ltd & JM Financial Products Ltd; AY: 10-11 High Court in the case of HDFC Bank Ltd (supra) and Reliance Utilities and power Ltd. (supra) Revenue came in appeal of both the cases.
We have heard the rival contentions and gone through the facts and circumstances of the case. As regards to Revenue’s appeal in & 3941/Mum/2015 for the AY 2010-11, we find that in the case of JM Financial Products Ltd. in ITA No. 3941/Mum/2015, the AO has disallowed the interest of Rs. 8,80,69,042/-. The assessee before CIT(A) and the AO argued that assessee has sufficient own funds to make investment and he filed complete chart in his paper book, which is read as under: -
Year Ended Share Capital Investment 31 March , 2009 6,72,87,73,548 2,09,34,91,521 31 March, 2010 7,13,80,61,021 4,22,63,74,510 7. Similarly, we find that in the case of JM Financial Investment Managers Ltd. in the AO has disallowed the interest of Rs. 77,89,257/-. The assessee before CIT(A) and the AO argued that assessee has sufficient own funds to make investment and he filed complete chart in his paper book, which is read as under: -
Year Ended Share Capital Investment 31 March , 2009 11,52,56,543 82,70,32454 31 March, 2010 118,75,46,437 90,44,15,132 8. In view of the above facts and circumstances, assessee has share capital and resources which is much more than the investment of tax free incomes and once assessee has sufficient own funds for making investment, then the presumption will be that no disallowance can be made on account of interest. This view of ours is supported the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd. (supra) and Reliance Utilities Ltd. (supra). Accordingly, we are of the view that the CIT(A) has rightly deleted the addition in both the years and we confirm the same. This common issue of both the appeals of Revenue is dismissed.
,4062,3940&3941/Mum/2015 JM Financial Investment Managers Ltd & JM Financial Products Ltd; AY: 10-11
As regards to both the appeal of assessee on the issue of satisfaction, we find that this issue is also covered, in the given facts and circumstances of the case, in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd.(supra), wherein Hon’ble Bombay High Court as held as under: -
“……….What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the Rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure Page 6 of 9 ,4062,3940&3941/Mum/2015 JM Financial Investment Managers Ltd & JM Financial Products Ltd; AY: 10-11 which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the Rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act………”
In the present case also the assessee in the case of JM Financial Investment Managers Ltd. has made suo moto disallowance of Rs. 30,09,078/- on account of employees’ compensation cost, interest cost and security transactions tax. Similarly, in the case of JM Financial Products Ltd., the assessee earned exempted income of Rs. 6,49,62,982/- on a total investment during the year at Rs. 414,26,11,058/-. The assessee suo moto disallowed a sum of Rs. 28,64,511/- on account of compensation cost of employees as well as administration cost. The AO in both the cases has not rejected the computation of disallowance made by assessee and once the assessees’ disallowance held to be incorrect, the AO cannot invoke the provision of Rule 8D of the Rules. Accordingly, we delete the disallowance and allow the appeal of the assessee.
As regards to the issue of disallowance u/s 14a of the Act read with Rule 8D of the Rules with respect to computation of book profit u/s 115JB of the Act, both the assessees’ vide letter dated 08-05-2017 requested for deciding the issue in favour of assessee due to no tax implication on the said ground. Both the assessee written letter and the content of one of the letter reads as under: -
“Re: & 4062/Mum/2015, before ‘H’ Bench, for AY 2010-11, JM Financial Products Ltd. PAN: AAACJ1236G ,4062,3940&3941/Mum/2015 JM Financial Investment Managers Ltd & JM Financial Products Ltd; AY: 10-11
Sub: Ground Regarding section 115JB
In connection with Department’s ground No.3 and Assessee’s Ground B (3 & 4) i.e. regarding applicability of section 14A with respect to computation of Book Profits u/s. 115JB, we submit that for the year under consideration, we are liable to tax as per normal provision of the Act and not as per the provision of section 115JB. As there is year under consideration, we have no objection if the said ground is decided in favour or the Department. However, the said concession is only for the year under consideration and should not be a precedent for other years.”
Similar is the content of the letter in & 4061/Mum/2015 for AY 2010-11 of JM Financial investment Managers Ltd.
In term of the above letter, we allow this issue in favour of Revenue and against assessee. But this concession will not be treated as precedent for any other year. This issue of the assessees’ appeal is dismissed and that of the Revenue is allowed.
In the result, appeals of assessees’ are allowed and that of Revenue’s are partly allowed. Order pronounced in the open court on 31-05-2017.