IDFC CAPITAL LATD,MUMBAI vs. DCIT CIR 10(1), MUMBAI

The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

1. Under the facts & in Law, the Learned CIT(A) , has erred in confirming disallowance of Rs. 5,58,104/- u/s 14A of Income tax 1961 r.w.Rule 8D(2)(iii) of the I.T.Rules, 1962.

It was observed by the Assessing A.O. during the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act that dividend income of Rs.54,83,240/- was earned by the assessee which was claimed exempt by the assessee. The assessee was asked by the AO to furnish details of expenses incurred in relation to the said income. Further, the assessee was asked to explain as to why disallowance u/s. 14A r.w.Rule 8D should not be made considering the claim of exempt income. The assessee in reply submitted that capital and reserves as well as income earned during the year had no other application except investment in subsidiaries companies and mutual funds. It was also submitted that there were no borrowings made and also the assessee had not incurred any interest expenditure. It was submitted that all the expenses incurred by the assessee were mainly administrative in nature which were required for operation of business and none of these expenses were incurred for making investment which are earning exempt income. The assessee made voluntary disallowance of Rs.1,09,665/- being expenses to earn exempt income, which the assessee claimed to be made based on manpower employed and reasonable overhead expenses which are attributed for the investment in Mutual Funds. The assessee also submitted that the onus is upon the AO to prove that assessee has incurred expenses to earn tax free income. The assessee also further submitted that if the AO is not satisfied with the correctness of the claim 6446/M/14 IDFC Capital Limited made by the assessee in relation to income which does not form part of the total income of the assessee, then only, provision of Rule 8D of the 1962 Rules can be invoked by the Assessing Officer. The AO considered the submission of the assessee and held that Section 14A of the 1961 Act was introduced by Finance Act ,2001 was applicable from retrospective effect and it mandates that expenditure incurred in relation to income not includible in total income shall not be allowed. The AO invoked Rule 8D of Income-tax Rules, 1962 to make disallowance u/s 14A of the 1961 Act. The AO held that the assessee had earned exempt income of Rs.54,80,240/- from investments which are exempt from tax. The AO rejected the working of disallowance submitted by the assessee u/s. 14A r.w. Rule 8D of the 1962 Rules keeping in view the ratio of decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg.Ltd.(328 ITR 81) . The AO made disallowance @0.5% of average value of investment u/r 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act wherein disallowance of Rs.6,67,769/- was confirmed . The assessee was allowed credit by the AO of suo-motu disallowance of Rs.1,09,665/- made u/s 14A of the 1961 Act and difference of Rs.5,58,104/- was added to income and brought to tax under Rule 8D(2)(iii) of the 1962 Rules r.w.s. 14A of the 1961 Act., vide assessment order dated 25-03-2013 passed by the AO u/s 143(3) of the 1961 Act.

Being aggrieved by the assessment order dated 25-03-2013 passed by the AO u/s 143(3) of the 1961 Act, the assessee filed an appeal before the learned CIT(A). The assessee submitted before learned CIT(A) that the assessee is merchant banker registered with SEBI carrying on professional business of merchant banking. It was submitted before learned CIT(A) that the assessee is not a trader and that it does not require huge capital and it has no bank borrowings. The assessee submitted that as per SEBI requirement, the assessee is required to have minimum net worth and hence the assessee has minimum capital which is not required for business purposes as there is no alternative investment opportunities and hence was parked in investments. The assessee submitted before learned CIT(A) that it did not required much capital and income mainly arose from professional 6446/M/14 IDFC Capital Limited services rendered for which professional fees were received from clients. The assessee further submitted copies of financial accounts and submitted that it has made investment in mutual funds and mainly administrative expenses were incurred. It was submitted that the assessee has not incurred any interest expenditure as there were no bank borrowings or other interest bearing borrowings. It was submitted before the learned CIT(A) that the AO had mechanically applied Rule 8D of the 1962 Rules read with Section 14A of the 1961 Act . It was submitted that the onus was on the AO to prove that the assessee has incurred any expenses to earn tax-free income. The contentions of the assessee were rejected by the learned CIT(A) and the additions made by the AO in the assessment order dated 25-03-2013 by invoking Rule 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act was confirmed by learned CIT(A), vide appellate order dated 03-07-2014 passed by the learned CIT(A) . 6.Aggrieved by the appellate order dated 03-07-2014 passed by learned CIT(A), the assessee filed an appeal before the Tribunal .

At the outset it was submitted by the learned Authorised Representative (AR) of the assessee that this matter needs to be restored back to the file of the AO as the AO has not properly appreciated the suo moto disallowance of Rs.1,09,665/- made by the assessee u/s.14A of the Act. It was submitted if the matter is restored to the file of the AO , then the assessee will duly explain the disallowance to be worked out keeping in view the mandate of section 14A(2) of the 1961 Act. The learned Departmental Representative (DR) relied upon the order of the learned CIT(A) and contended that proper satisfaction was recorded. It was submitted by learned DR that assessee had not given complete details before the AO as to the working of Rs.109665/- hence, AO rejected the disallowance made by the assessee u/s.14A and invoked Rule 8D(2)(iii) of the 1962 Rules.

We have considered rival submissions and perused the material on record. We have observed that the assessee company is engaged in the business of Financial Services, the assessee being a category I Merchant Banker engaged in the business of providing a full range of services from private placements and public offerings to advisory services and mergers, 6446/M/14 IDFC Capital Limited acquisitions and debt syndication. The assessee had earned dividend income of Rs.54,83,240/- which was claimed as exempt by the assessee. The assessee has submitted that it has no interest bearing borrowings and hence no interest expenditure was incurred .The assessee has submitted that it has incurred administrative expenses of Rs.1,09,665/- towards earning of exempt income which is to be disallowed u/s 14A of the 1961 Act but no details were given by the assessee of the said proposed disallowance with reference to the accounts of the assessee as is contemplated u/s. 14A(2) of the 1961 Act. In the absence thereof of the relevant details ,the AO invoked Rule 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act. Section 14A of the Act which was introduced by Finance Act, 2001 with retrospective effect from 01.04.1962 clearly stipulates that for the purpose of computing total income , no deduction will be allowed of the expenditure incurred in relation to earning of income which does not form part of total income and which is claimed as exempt by the tax-payer. The assessee has earned dividend income of Rs. 54,83,240/- which is claimed as an exempt by the assessee. As per section 14A of the Act where any expenditure is incurred by the assessee in relation to the income which is not includible in total income of the assessee , such expenses shall not be allowed as expenditure. Thus, disallowance of such expenditure incurred in relation to earning of income which does not form part of total income under provisions of this Act shall be computed having regard to accounts of the assessee as provided in section 14A(2) of the Act. Hon'ble Supreme Court in a very recent decision pronounced on 8th May, 2017 in the case of Godrej & Boyce v. DCIT (Civil appeal No.7020 of 2011) wherein the Hon’ble Supreme Court has upheld the disallowance of expenditure incurred in relation to earning of income which is not includible in the total income as is contemplated u/s 14A of the 1961 Act. The primary onus is on the assessee to work out the disallowance of expenditure incurred in relation to earning of the income which is not forming part of total income of the assessee having regards to the accounts of the assessee. These are facts which are especially in the knowledge of the assessee and primary onus/burden is on the assessee to bring those facts before the AO of having incurred expenditure in relation to 6446/M/14 IDFC Capital Limited earning of income which does not form part of the total income having regards to the accounts of the assessee. Thereafter, the onus shifts to the Assessing Officer to work out the disallowance of expenditure incurred in relation to earning of income which does not form part of total income, keeping in view the accounts of the assessee as is contemplated u/s 14A(2) of the 1961 Act . If the Assessing Officer is not satisfied with the correctness of the disallowance of expenditure suo motu offered by the assessee being incurred in relation to earning of income which does not form part of the total income having regards to the accounts of the assessee if the same could not be worked out from the manner in which accounts are made by the assessee, the Assessing Officer can invoke Rule 8D of the 1962 Rules r.w.s. 14A of the 1961 Act and apply method prescribed u/r 8D of the 1962 Rules for making disallowance of expenditure incurred in relation to earning of income which does not form part of the total income. We are of the considered view that the assessee did offer the suo motu disallowance but did not relate the same to the accounts of the assessee as is contemplated u/s 14A(2) of the 1961 Act and in the absence thereof the AO applied Rule 8D of the 1962 Rules r.w.s. 14A of the 1961 Act to make disallowance of expenditure incurred in relation to income which does not form part of the total income . The learned counsel for the assessee has conceded that if one more opportunity is granted the assessee will explain disallowance of expenditure incurred in relation to income which does not form part of the total income having regards to the accounts of the assessee before the AO and injustice caused to the assessee by invocation of Rule 8D of the 1962 Rules r.w.s. 14A of the 1961 Act can be removed . Keeping in view facts and circumstances of the case , in our considered view the matter needs to be set aside and restored to the file of AO for re-computing the disallowance u/s. 14A of the 1961 Act of the expenditure incurred in relation to the earning of income which does not form part of the total income having regards to the accounts of the assessee . The assessee is directed to produce working of disallowance of expenditure incurred in relation to the earning of income which does not form part of the total income having regards to the accounts of assessee as is contemplated u/s 6446/M/14 IDFC Capital Limited 14A of the 1961 Act. The primary onus/burden is on the assessee to produce such working as the said facts are especially in the knowledge of the assessee. If the AO is not satisfied with the working as is submitted by the assessee as such disallowance cannot be worked out keeping in view accounts of the assessee, the AO will be justified in invoking Rule 8D of the 1962 Rules. Needless to say, proper and adequate opportunity of hearing should be granted by the AO to the assessee in accordance with principles of natural justice. The Assessing Officer is directed to admit necessary evidences and explanation filed by the assessee in its defense which shall be admitted and adjudicated on merits.We order accordingly. 9.In the result, appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 17th May, 2017. आदेश क" घोषणा खुले "यायालय म" "दनांक 17 मई, 2017 को क" गई । (महावीर "सह / Mahavir Singh ) (Ramit Kochar) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई/Mumbai,"दनांक/Date: 17/05/2017 व.िन.स.Jv.Sr.PS.