ACIT 7(2), MUMBAI vs. RUPEE FINANCE AND MANAGEMENT P.TLD, MUMBAI

Ground 1: In this ground, the assessee has agitated the disallowance of Rs.2,49,01,301 made by the AO U/S 14A r.w.r. 8D.

The brief background is that the assessee is a Non Banking Financial Company (i.e. NBFC). In the return filed for the impugned assessment year, the assessee suo moto made disallowance u/s 14A for an aggregate amount of Rs.2.51 crores comprising of Rs.2.49 crores on account of interest u/r 8D(2)(ii) and Rs.2.25 lakhs on account of administrative expenses u/r 8D(2)(III). However, subsequently it was found by the assessee that the disallowance has been wrongly offered by it in the return of income. Therefore, the assessee contested the issue before Ld. CIT(A) and submitted in detail that income has been wrongly returned by the assessee and, therefore, before Ld. CIT(A) assessee resiled from the return of income filed by it. However, Ld.CIT (A) was not satisfied with the submission of the assessee on the ground that assessee had himself made the disallowance in the return of income filed by it, therefore, no relief can be given to the assessee. Thus, he confirmed the disallowance made by the AO and dismissed the grounds of the assessee in this regard.

During the course of hearing before us, Ld. Counsel of the assessee made detailed submissions in support of its claim that the disallowance has been wrongly offered by the assessee. Thus, the income and tax computed thereon are not in accordance with law. He placed reliance on many judgements in support of his proposition that the income should be computed strictly in accordance with law irrespective of the treatment given by the assessee. He vehemently relied upon the judgements of the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Ltd vs CIT 82 ITR 363 (SC), CIT 4 Rupee Finance & Management Pvt Ltd vs India Discount Co Ltd 75 ITR 191 (SC), CIT vs Shoorji Vallabhdas & Co 46 ITR 144 (SC) and Taparia Tools Ltd vs JCIT 372 ITR 605 (SC).

With regard to the illegality in the disallowance made u/s 14A, it was submitted at length by the Ld. Counsel that the law in this regard has evolved subsequent to the filing of return and thus as on date, the disallowance made in the hands of the assessee is contrary to law and cannot be upheld. It was submitted by him that the disallowance made u/s 14A is illegal for inter-alia, following reasons:- (i) The investment made for earning tax free income has been made for strategic reasons in group companies which cannot be considered for making disallowance u/s 14A, as per the latest position of law, (ii) The disallowance could not have been made more than the amount of dividend received by the assessee, (iii) The disallowance of interest can be made on the basis of net basis only and not on gross basis and (iv) No proper satisfaction was recorded by the AO before making the disallowance.

In view of the aforesaid submissions, it was requested by the Ld. Counsel that the issue should be sent back to the file of the AO for examining this issue afresh and making this disallowance strictly in accordance with law irrespective of the treatment given by the assessee in the return of income.

Per contra, the Ld. DR vehemently opposed the submissions of the assessee and placed reliance upon the judgment of Hon’ble Supreme Court reported in the case of State of Karnataka vs Selvi J. Jayalalitha & Others and K Anbazhagan 67 ITR 106 (SC) for the proposition that once assessee has himself made a disallowance, then he cannot seek relief for the same at a subsequent stage. It was submitted by him that CIT(A) has rightly confirmed the impugned 5 Rupee Finance & Management Pvt Ltd disallowance and the orders passed by the lower authorities should be confirmed.

We have gone through the orders passed by lower authorities and submissions made by both the sides before us. It is well settled and has been echoed so at number of occasions by Hon’ble Supreme Court and many other courts of our country that objective of the income-tax proceedings is to determine the taxable income of the assessee and tax payable thereon, fairly and as per law only. It is also noted that Article 265 of Constitution of India also provides in express terms that no tax can be collected without authority of law. It is also noted by us that way back in 1955, the Central Board of Revenue (now called as Central Board of Direct Taxes) had issued a circular wherein guidance was given to the AOs that they should assess taxable income and compute the tax liability of the taxpayers in accordance with law only and they should not take undue advantage of ignorance of the assessee. In case, any deduction is omitted to be claimed by an assessee and if same is allowable to the assessee as per law, then the AO should, in all fairness, give an opportunity to the assessee to claim it in accordance with law. Further, on this issue, our attention has rightly been drawn upon the judgment of Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd (supra) wherein it was observed by Hon’ble Supreme Court that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view, which the assessee may take and nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. Similarly, in the case of CIT vs India Discount Co Ltd (supra), it was inter-alia observed by Hon’ble Supreme Court that it is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee wrongly credited it to the P & L 6 Rupee Finance & Management Pvt Ltd Account. Similar view has been taken in other judgements relied upon by the Ld. Counsel. Thus, in our considered view, if assessee is able to show that income has been wrongly offered by him to tax in his return of income, then the assessee has legal right to resile from his return so long as assessee is able to demonstrate that the income returned by him is not in accordance with law and requisite facts in this regard are placed on records. This very issue was decided by Hon’ble Delhi High Court also in the case of Bharat General Insurance Co. 81 ITR 303 (Del). Thus, in our considered view, the assessee must be given an opportunity in the interest of justice and fair play to demonstrate and establish that disallowance made u/s 14A is not in accordance with law.

Ld. Counsel has raised various issues to show that disallowance made u/s 14A is contrary to law on account of many reasons which have been tabulated above, in our order. We also find that the law in regard to the disallowance u/s 14A has evolved quite recently and subsequent to passing of impugned assessment order. Ld. DR was unable to prima facie rebut the issues raised by the Ld. Counsel before us. Under these circumstances, we find it appropriate to send this issue back to the file of the AO where the assessee shall be free to raise all legal and factual issues with regard to the disallowance u/s 14A and shall file requisite evidences to establish its claim, as may be required by the AO from time to time. The AO shall decide this issue afresh after considering the material and the arguments as may be brought on record by the assessee on objective basis and shall be free to decide this issue independent of the voluntary disallowance made by the assessee in the return of income. The AO would be well within his powers to assess the income below the amount offered by the assessee in the return of income, if the facts of this case and law applicable thereon so demands. Thus, with these directions, this issue is sent 7 Rupee Finance & Management Pvt Ltd back to the file of the AO and may be treated as allowed, for statistical purposes.

Ground 2: The assessee is aggrieved by the action of lower authorities in making disallowance of interest u/s 36(1)(iii) amounting to Rs.2,13,47,579/-.

The brief background of the case is that assessee was engaged during the year in finance business being a Non Banking Financial Company. It had taken loan from various parties (lenders) and gave it to certain other parties (i.e. borrowers). It was noted by the AO that assessee had paid interest to its lenders amounting to Rs.10,49,34,035 whereas it earned interest income from its borrowers amounting to Rs.5,77,17,962. Thus, the entire activity of raising loans and giving them to other parties resulted in net interest loss of Rs.4,721,16,073. Under the aforesaid circumstances, AO was of the view that no prudent business man would incur loss in this manner. According to him, no prudent person will borrow loans on higher rate of interest and give it on lower rate of interest. Therefore, proportionate disallowance was made out of the interest expenses.

During the course of appeal before Ld. CIT(A), it was submitted that due to decline in the market, the rate of interest was decreased by the borrowers but due to some reasons assessee could not negotiate and reduce the rate of interest from its lenders. Due to certain strategic reasons, the assessee had to continue with these transactions and, therefore, loss was incurred in this year. It was also submitted that nothing in-genuine has been found by the AO and all the transactions stood duly confirmed. Under these circumstances, no disallowance could have been made on notional basis. However, Ld. CIT(A) was not satisfied with the submissions of the assessee, therefore, he endorsed the view of the AO and confirmed the disallowance.

Per contra, Ld. DR vehemently supported the orders of the lower authorities and submitted that no prudent businessman would carry on the business in this manner. Reliance was placed on the judgment of Hon’ble Madras High Court in the case of Coimbatore Salem Transport (P) Ltd 61 ITR 480 (Mad) for the proposition that taxpayers are expected to carry out the business in a prudent manner.

We have gone through the orders passed by the lower authorities. It is noted by us that assessee had taken loans from well established and duly identified financial institutions. The factum of borrowing of amount and payment of interest from these well established companies has neither been doubted nor denied by the AO. Similarly, the assessee gave loans to corporate entities. The factum of earning of interest income from these companies was also duly verified by the AO and nothing could be brought on record by the AO to negate or even doubt if any amount of interest higher than the amount shown by the assessee in its accounts was received by the assessee. Thus, the entire transaction of taking of loan & payment of interest thereon and giving of 9 Rupee Finance & Management Pvt Ltd loan & earning of interest income there from was duly established and substantiated. Nothing ingenuine has been found by either of the lower authorities. The only grievance of the lower authorities was that there was no prudence in carrying out the activity in such a manner which culminated into incurring of net interest loss. We have carefully considered the action of the AO. In our view, the doubt noted by the AO with respect to incurring of loss could have at the best be it a triggering point for further investigation but that itself cannot be a conclusive ground to make disallowance in the hands of the assessee. Unfortunately, the AO failed in carrying out any investigation to contradict the transaction. In fact, it also appears to us that AO did make some verification but nothing ingenuine or wrong was noted by him. Rather, the transactions were duly substantiated. Similarly, at the stage of Ld. CIT(A) also nothing wrong or ingenuine could be brought on record by him. Under these circumstances, we find that disallowance has been made merely on the basis of whims and fancies, surmises & conjectures and doubts & suspicion made by the lower authorities. It is well settled law that a revenue officer cannot sit in the armchair of a businessman and dictate how a business is to be carried out. Thus, taking into account the totality of facts and circumstances of the case, we find that the AO had no material in his possession so as to enable him to make the impugned disallowance. Thus, the disallowance made by him on mere suspicion is not sustainable in law and therefore, it is deleted.

As a result, this appeal is partly allowed.

Now we shall take up appeal filed by the assessee for AY 2010-11 in ITA No.4835/Mum/2014. The only ground raised in this appeal is with regard to the disallowance made u/s 14A. It was jointly stated by both the parties that facts and circumstances in this year are identical to ground 1 of appeal for AY 2009-10. Therefore, following our order, this issue is sent back to the file of the 10 Rupee Finance & Management Pvt Ltd AO. The AO shall follow the directions given by us in ground 1 of assessee’s appeal for AY 2009-10. This appeal may be treated as partly allowed for statistical purposes.

Now we shall take up appeal filed by the revenue in AY 2010-11.

The only issue agitated in this appeal is with regard to deletion of disallowance made by the AO on account of interest u/s 36(1)(iii) of the Act. It was jointly stated that the facts and circumstances of this ground are identical to ground 2 of appeal of the assessee for AY 2009-10. We have already deleted the said disallowance in our order for AY 2009-10. Therefore, we find that Ld. CIT(A) has rightly deleted the disallowance in this year. Therefore, no interference is called for in his order and the same is upheld. Thus, grounds raised