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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER Rajendra A.M.- अनुसार Challenging the order,dated 23/06/2016 of the CIT(A)-33,Mumbai the assessee and the Assessing Officer(AO)have filed cross appeals for the year under consideration.Assessee, an investment- trust, filed its return of income on 30/09/ 2012,declaring loss of Rs. 16.05 crores. The AO completed the assessment u/s. 143 (3) of the Act,on 30/03/2015, determining its income at Rs. 11.29 Crores. ITA/4948/Mum/2016: 2.Effective ground of appeal is about confirming the disallowance of Rs.33.48 Crores u/s.14 A read with Rule 8D of the Income Tax Rules,1962(Rules).During the assessment proceed- ings, the AO found that assessee had made investment in shares in mutual funds to the tune of Rs.3,56,02,88,582/-as on 31/03/2012, that it had received exempt income in form of dividend of Rs. 1.12 Crores,that it had on its own disallowed interest cost of Rs. 16.94 lakhs,that it had debited interest on Pass Through Certificate(PTC) of Rs. 21.95 Crores and premium PTC of Rs.13.89 Crores as expenses in the income and expenditure account,that in working of disallowance u/s.14A it adopted total interest expenditure at Rs. 21.95 Crores,that actual interest expenditure incurred by the assessee was Rs.35.84 Crores which included interest on PTC of Rs. 21.95Crores and premium on PTC redemption to the tune of Rs.13.89 Crores.Accordingly, vide his order sheet dated 26/08/2014,the AO asked the assessee to
4948&5590/M/16-Maytas Investment explain as to why the interest on PTC and premium on PTC redemption should not be considered for working out disallowance u/s. 14 A of the Act.After considering the submission of the assessee,he worked out the quantum of disallowance u/s.14A r.w.Rule 8D at Rs.35.37 Crores.Since the assessee had already disallow -ed Rs. 1.17 Crores u/s. 14 A, he restricted the disallowance two Rs. 34.39 Crores and added the same to the total income the assessee for the year under consideration.
3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee made elaborate submissions and relied upon certain case laws. After considering the submission of the assessee and the assessment order,he held that the assessee had earned profit on sale of Unlisted securities amounting to Rs.18.53 Crores and on sale of listed securities at Rs.77, 571/-,that it had earned income on sale of in its of mutual fund amounting to Rs.8.72 lakhs,that the total taxable income offered for taxation by the assessee was Rs.18.82 Crores,that the profit on sale of securities had been treated by it as business income chargeable to tax, that the total interest and premium on borrowing amounted to Rs. 35.84 Crores, that the AO had held that premium paid on borrowings were also of the nature of interest,that the assessee had not controverted the said argument of the assessee, that the main issue to be decided was as to whether the provisions of section 14A of the Act would apply to the case even where tax-free dividend income was earned on investments held as stock in trade. Referring to the cases of the Damani Estates and Finance Private Ltd.(41taxmann.com. 462) and D.H.Securities Private Ltd.(41 taxmann. com.352),he held that the purpose for which the investments were purchased and held would not in any manner impact the applicability of section 14A,that the provisions of the section would get attracted on incurring the expenditure in relation to tax exempt income,that there was no infirmity in the action of the AO entreating entire interest and premium payment on borrowing for the purpose of provisions of section 14A r.w.Rule 8D of the Rules disregarding the purpose for which the investments were purchased and held, that it would not change the scenario whether the investments were held as stock in trade giving rise to taxable business income.He upheld the disallowance, amounting to Rs. 33.14 Crores u/s. 14 A r.w.r. 8D(2)(ii) of the Rules. 3.1.With regard to the disallowance made under Rule 8D(2)(iii) of the Rules, the FAA held that the expenditure debited to profit and loss account and claimed as deduction can only be disallowed if it was attributable to earning exempt income,that if the assessee had not incurred any expenditure or claimed any expenditure the AO could not disallow the expendi - 2
4948&5590/M/16-Maytas Investment ture arbitrarily and on ad hoc basis, that the provisions of the Rule 8D (2) (iii) of the Rules were only in relation to a situation where the admitted give expenditure was incurred and the assessee had on exempt income is an taxable income and the expenditure could not be identified to any separate activity,that if the assessee did not claim any deducction the AO could not disallow any amount which had no direct relationship with the amount incurred by the assessee, that the assessee had incurred expenditure of Rs.1.42 lakhs on audit fees, Rs. 55, 150 on trusteeship fees and Rs.1,323/- on other expenses, that out of the said expenditure it had already considered for disallowance of the payment of trusteeship fees,that the administrative expenditure incurred on audit fees had nothing to do with earning of exempt income,that the disallowance under rule 8D(2) (iii) had to be restricted to Rs. 1,323/-.Finally, he deleted the balance disallowance.
4.During the course of hearing before us,the Authorised Representative (AR) argued that the assessee was dealing in shares and securities,that it was a trader and not an investor, that no disallowance u/s.14A could be made in case of a trader under the head interest expenditure, that except for the year under consideration the AO had allowed the interest expenditure for every year u/s.36(1) of the Act,that the profit for the year under consideration was more than Rs.18 crores.He relied upon the case of India Advantage Securities Ltd.(380ITR471) and HDFC Bank Ltd.(383ITR529) The Departmental Representative supported the order of the FAA.
5.We have heard the rival submissions and perused the material available on record.We would like to mention that the basic facts of the case can be summarised as under: i.Dividend income earned by the assessee-Rs.1,12,67, 825/- ii.Suo-motu disallowance made by the assessee -Rs. 1,17,49,359/-(Rs.55,150/-direct expenses and Rs.1,16, 94,209/-u/s.14 A read with Rule 8D (2)(ii) of the Rules. iii.Disallowance made by the AO- Rs. 35.57 Crores (Rs. 32.48 Crores under the head interest disallowance + Rs. 2.08 Crores under rule 8D (2) (iii) of the Rules. iv.Disallowance upheld by the FAA u/s.14 A r.w.R.8D-35.57 Crores v.Disallowance deleted by the FAA 14 A r.w.R.8D -2.08 crores(Except Rs.1317/-only) We find that the FAA had held that for making disallowance u/s.14A r.w.r.8D of the Rules the purpose for which investment is made is immaterial.In our opinion,it is a settled position that if an assessee incurs interest expenditure for carrying out its business,same has to be allowed.Disallownace can be made if it incurs interest expenditure for earning exempt 3
4948&5590/M/16-Maytas Investment income.Shares and securities have been held by the assessee as stock in trade,so,there wa no justification in disallowing the interest expenditure.We find that in the case of India Advantage Securities Ltd.(supra),the Hon’ble jurisdictional High Court has held that disallowance of expenses can be made which are incurred for earning dividend. For that purpose,the figures under the head Investment could be taken and some charges apportioned for the purpose of computing the expenses.The AO,except for the year under appeal,has allowed the interest expenditure for earlier and subsequent years.He has not given any reasons for deviating from the stand taken in earlier years.Considering the above,we hold that there was no justification in disallowing the interest expenses by the AO/FAA as the assessee was dealing in shares-it was not an investor.Reversing the order of the FAA,we decide first effective ground of appeal(GOA1-5)in favour of the assessee. 6.Second effective ground of appeal (GOA-6) is about levy of interest u/s.234A of the Act. Before us, the AR stated that due date of filing the return of income was 30/9/2011,that the assessee had filed the return on that date,that it was not liable to pay interest u/s. 234A of the Act, that it had raised a specific Ground before the FAA during the appellate proceeding, that the FAA did not adjudicate the issue and treated it of consequential nature .The DR left the matter to the discretion of the Bench. 6.1.We find that the assessee had raised a specific Ground of appeal in the appellate proceed - ings about levy of penalty u/s.234A,that it was also part of statement of facts filed before the FAA,that he did not decide the issue.Therefore, we are of the opinion,that in the interest of justice the matter should be restored back to the file of FAA for fresh adjudication and he is directed to afford a reasonable opportunity of hearing to the assessee and pass a speaking order.Ground No.6 is decided in favour of the assessee,in part. 5590/Mum/2016: 7.The solitary Ground of appeal,filed by the AO,is about deleting the disallowance made by him under the head administrative expenses,While narrating the facts of the case in the earlier paragraphs,we have found that the FAA had deleted the alleged administrative expenses related to earning of exempt income-except Rs.1,317/- . 7.1.We find that the FAA held that if no expenditure was incurred by the assessee for earning dividend income no disallowance should be made.In our opinion,the order of the FAA does not suffer from any legal or factual infirmity.It has been held by the various courts that in absence of incurring of expenses by an assessee to earn exempt income no disallow ance can be made.Thus,incurring of expenses is a pre-condition for 14A disallowance.In the 4
4948&5590/M/16-Maytas Investment case under appeal,the FAA had rightly excluded two items of expenditure out of the three items related to exempt income and confirmed one of the expenses. Therefore, in our opinion his order does not suffer from any legal infirmityConfirming his order,we decide the effective ground of appeal against the AO.