DCIT,CIRCLE-12(1), KOLKATA, KOLKATA vs. M/S DALMIA SECURITIES PVT. LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH KOLKATA BEFORE SHRI N. V. VASUDEVAN, JM & DR. A.L.SAINI, AM आयकरअपीलसं./ITA No.1937/Kol/2016 (िनधा�रणवष� / Assessment Year: 2011-12 Dalmia Securities (P) Ltd. Vs. D.C.I.T, Cir-12, Kolkata Ideal Plaza, 4th Floor, 11/1 Sarat Bose AayakarBhawan, P-7, Rood, Kolkata – 700 069. Chowrighee Square, Kolkata – 700 069. �थायीलेखासं./जीआइआरसं./PAN/GIR No. : AABCD1813G (Assessee) .. (Revenue/Department) आयकरअपीलसं./ITA No.2078/Kol/2016 (िनधा�रणवष� / Assessment Year: 2011-12 D.C.I.T, Cir-12, Kolkata Vs. Dalmia Securities (P) Ltd. AayakarBhawan, P-7, Ideal Plaza, 4th Floor, 11/1 Chowrighee Square, Kolkata – Sarat Bose Rood, Kolkata – 700 069. 700 069. �थायीलेखासं./जीआइआरसं./PAN/GIR No. : AABCD 1813 G (Revenue/Department) .. (Assessee) िनधा�रतीकीओरसे /Assessee by : Shri Asim Choudhury, Advocate राज�कीओरसे /Revenue by :Shri SallongYaden, ACIT, DR सुनवाईकीतारीख/ Date of Hearing : 16/08/2017 घोषणाकीतारीख/Date of Pronouncement: 31/08/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: The captioned two cross-appeals filed by the Assessee and Revenue pertaining to Assessment Year 2011-12, is directed against the order passed by the Ld. CIT(A), Kolkata in Appeal No.499/CIT(A)-18/11-12/Cir- 12(1)/Kol, dated 08.08.2016, which is turn arises out of an order passed by the Assessing Officer u/s143(3) of the Income Tax Act, 1961,(herein after referred to as the ‘Act’), dated 21.02.2014. 2. These two cross-appeals filed by the Assessee and Revenue respectively relate to the same assessee, same Assessment Year, identical

2 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 issues are involved. Therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 3. The Grounds of appeal raised by the assessee in ITA No.1937/Kol/2016, are as follows: “1.For that the Commissioner of Income Tax(Appeals) erred in confirming the disallowance of interest amounting to Rs.7,95,442/- under section 14A of the Income Tax Act, 1961 read with Rule 8D. 2.For that the CIT(A) erred in not appreciating the fact that the capital and reserves of the assessee were much more than the investment made by the assessee and that the assessee was having diverse businesses having taxable income and as such the CIT(A) should have deleted the interest in its entirety. 3.For that the confirmation of disallowance of Rs.8,18,239/- under Section 14A of the Act read with Rule 8D(iii) of the lncome Tax Rules at ½% of the average value of the holding of the investment is illegal without jurisdiction and authority of law. No disallowance under section 14A of the Act could be made on a notional basis which is not with reference to any expenditure incurred whether directly or indirectly.” 4. The Grounds of appeal taken by Revenue in ITA no.2078/Kol/2016 are as follows: “1.That in facts and in the circumstances of the case and in law, the Ld. CIT(A) is erred by stating that disallowance u/s. 14A should be made with respect to only dividend earning shares and ignoring the facts that the assessee was failed to bifurcate the investments between the taxable income bearing investments and non-taxable income bearing investments during the assessment proceedings." 2.That in facts and circumstances of the case and in law, the Ld. CIT(A) is erred by stating that disallowance u/s. 14A of the Act net interest expense should be taken and ignoring the facts that the assessee was failed to establish utilization of funds for making investments & total amount of income incurred for making investments. 3.That in facts and circumstances of the case and in law, the Ld. CIT(A) is erred by ignoring the fact that as per Rule 8D(2)(iii) of I.T. Rules, 1962, the expenditure in relation to income which does not form part of the total income shall be an amount equal to one half percent of the average of the value of the investment which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first

3 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 day and last day of the previous year. Hence, Rule 8D also does not state that the disallowance should be made of only investment which has yielded exempted income during the current year. 4.That in facts and circumstances of the case and in law, the Ld. CIT(A) is erred by ignoring the fact that as per Rule 8D(2)(ii) of I.T. Rules, 1962, for making calculation of disallowance u/s. 14A of the Act the interest expenditure which is not directly attributable to any particular income or receipt is taken. Hence, Rule 8D(2)(ii) also does not state that for making disallowance u/s. 14A of the Act net interest expenses should be taken." 5.That in facts and circumstances of the case and in law, the Ld. CIT(A) is erred by ignoring the fact that Section 14A of the Act does not use the word "income of the year" but "income under the Act" and also indicate that for invoking disallowance under section 14A, it is not material that the assessee should have earned such exempt income during the financial year under consideration." 5.In these two cross-appeals, the main grievance of the Assessee as well as Revenue is that the disallowance computed under section 14A read with Rule 8D (2) (ii) and Rule 8D (2) (iii) are not as per the provisions of the Act. 6.The brief facts qua the issue are that the assessee filed its return of income for the assessment year 2011-12 declaring total income of Rs. Nil on 28.09.2011. The said return was processed on 27.02.2013 under section 143(1) of the Income tax Act. Thereafter, the assessee’s case was selected for scrutiny under section 143(2) and the Assessing Officer has completed the assessment by making addition of Rs.50,89,392- u/s 14A read with Rule 8D. During the assessment year under consideration, the assessee company earned income in the form of dividend from share and mutual fund which are exempt under the Act. The assessee declared total exempt income of Rs.20,98,25,735/- and declared expenses for earning exempt income of Rs.30321/-. It was noticed by AO that the assessee entered into a number of transaction in shares and units

4 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 of Mutual Funds for earning exempt income. This would have inevitably entailed utilization of its facilities and manpower for managing theses investments. The AO therefore observed that Company`s claim that merely a sum of Rs.30,321/- was incurred for earning exempt income, was not tenable and therefore the expenses incurred by assessee for earning exempt income should be determined as per section 14A of the Act read with Rule 8D of Income-tax Rules. l962. The AO had computed the disallowance under Rule 8D (2) (i), Rule 8D (2) (ii), and Rule 8D (2) (iii) as follows: (i) Direct expense Nil (ii) Proportionate interest expense Rs.39,77,067/- Total interest X Avg. Value of investment Avg. Value of assets 2,88,24,292/- × 2,22,464,925/- 16,12,343,440/- (iii) 0.5% of total investment 0.5% (Rs.14,74,16,712/- + Rs.29,75,13,139/-) Rs.11,12,325/- 2 Total disallowance under section 14A Rs.50,89,392/- Therefore, a sum of Rs.50,89,392/- was disallowed by AO, as expenses incurred for earning exempt income. Assesseecompany has already disallowed Rs.30321/- u/s.14A read with Rule 8D (2) (i). Accordingly, difference amount of Rs.50,59,071/- [(50,89,392/-) – (30,321/-)] was added back to total income of the assessee.

5 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 7. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A) who has allowed the assessee’s appeal partly. The ld. CIT(A) observed that so many decisions have come on the issue of disallowance u/s 14A and still the issue has not attained finality. The contentions of the assessee that no interest was incurred for making investment is not acceptable because assessee has still paid net interest of Rs.82,92,760/-. The ld CIT(A) noted that as held by Hon'ble Punjab and Haryana High Court in the case of Abhishek lndustries ltd., 286 ITR 1, all the funds of a Company, be it from share capital, loans, sales receipts etc. go in a common kitty. Thus it is very difficult to say which fund has been invested in shares. Was it assessee's own fund or it was out of the loans and advances taken? Besides assessee has not provided details which would conclusively establish one to one correspondence between assessee's own fund and the funds invested in shares. In the case of Distributors [Baroda] Pvt. Ltd. -vs- UOI 155 ITR 120, Hon'ble Supreme Court had held that some administrative expenses are definitely involved in earning dividend. This judgement was followed by Bombay High Court in the case of CIT-vs-MaganlalChaganlal Pvt. Ltd., 236 ITR 456. Therefore, the Ld. CIT(A) held that under the circumstances assessee's submission that no cost was involved in making investment in shares, is not acceptable. The ld CIT(A) noted that, so far the quantum of disallowance is concerned, theassessee's contentions regarding considering of net interest expenses and only investment earning dividend, are acceptable in view of several case laws cited by the assessee. Accordingly, the average investment for applying Rule BD would be Rs.15,90,88,475/-, and net interest expenses of Rs.82,92,760/- should be considered, Taking these factors into account disallowance under Rule 8D(2)(ii) would come to Rs.8,18,239/- and

6 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 disallowance under Rule 8D(2)(iii) would be Rs.7,95,442/-.Thus total disallowance u/s 14A works out to be Rs. 16,13,681/-. Assessee has already made suomotu disallowance of Rs.30321/-. Hence after considering suomotu disallowance made by assessee, disallowance u/s14A was restricted to Rs.15,83,360/-. 8. Not being satisfied with the order of the ld. CIT(A), the Assessee as well as Revenue, both are in appeal before us. 9. The ld. Counsel for the assessee has submitted, before us, that this is squarely covered by the order of Hon’ble ITAT “C” Bench Kolkata in assessee’s own case in ITA No.325/Kol/2014, the Assessment Year 2009-10 dated 08.02.2017 wherein it was held that no interest bearing funds were utilized to acquire shares during the year, income from which is exempt and does not form part of Total Income and, therefore, no interest can be disallowed under rule 8D(2)(ii).The ldCIT(A) worked out the disallowance under Rule 8D(2)(ii) at Rs.8,18,239/- (vide para 3.1 of CIT (A)`s Order) which is arbitrary and bad in law. The Ld Counsel pointed out that during the appellate proceedings, the assessee submitted before the CIT(A) that the assessee company had sufficient own funds and he had not incurred any interest expenses in respect of investment made (vide para 3.1 of CIT (A)`s Order). However, inspite of this, the CIT(A) worked out the disallowance under Rule 8D(2)(ii) at Rs.8,18,239/-, which is arbitrary and not as per the facts of the assessee`s case under consideration, therefore, the same needs to be deleted. 9.1 Regarding the disallowance under Rule 8D(2) (iii) the ld ITAT held that for making disallowance under r.w.rule 8D (2) (iii), in respect of income which is

7 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 exempt and does not form part of total income, the only investment which has given rise to the exempt income should be taken into consideration and not the entire investment made by the assessee.The said principles were also held by the Hon`ble ITAT Kolkata in the case of REI Agro Ltd. vs. DCIT.:-ITAT (Kolkata), I.T.A No-1331/Kol/2011 ,Dated-19.06.2013. The ld. CIT(A) in assessee`s case under consideration had taken only those investments which are earning dividend. Therefore, ld Counsel submitted that there is no any infirmity in the order passed by the ld CIT(A) and it is in the line of assessee`s own case cited in para 9 of this order (supra). 10. On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 11. We have heard both the parties and perused the materials available on record, we are of the view that contentions of the assessee that no interest was incurred for making investment is acceptable because assessee had pointed out during the appellate proceedings that they had sufficient own fund and they had not incurred any interest expenses in respect of investments made. We observe that CIT(A) computed net interest expenses to the tune of Rs. 82,92,760/-, which we do not accept because there is no disallowance under Rule 8D (2) (ii), at all, the reason being the assessee had its own sufficient funds to make investments therefore, the disallowance made by the CIT(A) under Rule 8D (2) (ii) of Rs.8,18,239/-, is deleted. Regarding addition made by CIT(A) under Rule 8D (2) (iii) at Rs.7,95,442/- we accept it because the CIT(A) had taken into account only those investments which are earning dividend income and which is as per the judgment of ITAT

8 Dalmia Securities (P) Ltd. ITA No.1937 & 2078/Kol/2016 Assessment Year: 2011-12 Kolkata in the case of REI Agro Ltd. vs. DCIT:-ITAT (Kolkata), I.T.A No- 1331/Kol/2011 ,Dated-19.06.2013.Therefore, considering the factual position as discussed above, we delete the addition under Rule 8D(2)(ii) determined by the CIT(A) at Rs.8,18,239/- and confirmed the addition made under Rule 8D(2)(iii) by CIT(A) at Rs.7,95,442/-. 13. In the result, the appeal filed by the assessee ( in ITA no.1937/Kol/2016) is partly allowed, and appeal filed by the revenue (in ITA no.2078/Kol/2016) is dismissed. Order pronounced in the open court on this 31/08/2017. Sd/- Sd/- (N.V. VASUDEVAN) (DR. A.L.SAINI) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER कोलकाता /Kolkata; िदनांक Dated 31/08/2017 RS SPS आदेशकी�ितिलिपअ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Assessee-Dalmia Securities (P) Ltd. 1. ��थ�/ The Revenue/Department-D.C.I.T, Cir-12, Kolkata 2. आयकरआयु�(अपील) / The CIT(A), :Kolkata. 3. आयकरआयु�/ CIT 4. िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, कोलकाता/ DR, ITAT, 5. Kolkata गाड�फाईल / Guard file. 6. स�ािपत�ित //True Copy// By Order Senior Private Secretary, Head of Office/D.D.O, I.T.A.T., Kolkata Benches, Kolkata