BRICS GILT FINANCE P.LTD,MUMBAI vs. DCIT 1(2), MUMBAI

The assessee has filed the present appeal against the order dated 23.10.2013 passed by the Commissioner of Income Tax (Appeals)2, A.Y. 2010-11 Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2010-11.

The assessee has raised the following grounds:-

The brief facts of the case are that the assessee filed its return of income declaring total income to the tune of Rs.2,78,03,440/- on 23.09.2010. The return was processed u/s.143(1)of the Income Tax Act, 1961( in short “the Act”) on 23.04.2011. The case was selected for scrutiny by issuing notice u/s.143(2) of the Act on 09.09.2011 A.Y. 2010-11 which was duly served upon the assessee. A fresh notice u/s.143(2) of the Act along with a detailed questionnaire was also issued on 18.10.2012 which was duly served upon the assessee on 19.10.2012. The assessee company is a non-banking finance company engaged in the business activities of providing loan facilities to its clients against shares and securities, trading of fixed income bearing securities like Government securities, commercial papers, etc. The assessee company has shown the dividend income to the tune of Rs.28,074/- which was claimed as exempt u/s.10(34) of the Act. Thereafter, the Assessing Officer disallowed the expenditure incurred to earn the exempt income u/s.14A of the Act to the tune of Rs.16,49,950/- and assessed the total income to the tune of Rs.2,94,23,720/-. Feeling aggrieved the assessee filed the appeal before the CIT(A) who dismissed the appeal of the assessee, therefore, the assessee has filed the present appeal before us. ISSUE NO.I:- 4. The learned representative of the assessee has argued that the assessee earned the dividend income of Rs.28,074/- which was claimed exempt u/s.10(34) of the Act and the assessee did not incur any expenditure to earn the said exempt income and the assessee disallowed the suo moto expenditure to the tune of Rs.29,669/- on the basis of the detailed report of independent Chartered Accountant and the said report was also submitted before the Assessing Officer. It is A.Y. 2010-11 also argued that the Assessing Officer did not record his satisfaction with regard to the claim of the assessee and directly applied the rule 8D of the Act wrongly and illegally, therefore, in the said circumstances the expenditure which has been assessed under Rule 8D of the Act to the tune of Rs.16,49,950/- is wrong against law and facts and is liable to be set aside. The learned representative of the assessee has also argued that the assessee made strategic investment in its subsidiary company, therefore, the said investment is not liable to be calculated to assess the expenditure u/s.14A r.w. Rule 8D of the Act. In support of these contentions the learned representative of the assessee has placed reliance on the law settled mentioned below:- Rule 8D of the Rules is not automatic: 1. Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (328 ITR 81)(Bom) 2. CIT Vs. I.P. Support Services India (P.) Ltd.(378 ITR 240)(Del. HC) 3. Maxopp Investment Ltd. Vs. CIT (203 Taxmann 364)(Del HC) 4. CIT Vs. REI Agro Ltd. (ITAT No.161 of 2013)(Cal. HC) 5. Graviss Hospitality Ltd. Vs. DCIT (67 SOT 184)(Mum.Trib) 6. Auchtel Products Ltd. Vs. ACIT (52 SOT 39) (Mum. Trib) 7. DCIT Vs. Jindal Photo Limited and vice versa (ITA No.814 (Del) 2011 and CO 91 (Del) 2011) 8. Allahabad Bank Vs. ACIT (ITA No.1199/Kol/2012)(Kol.Trib). A.Y. 2010-11 The AO must record his dissatisfaction as regards the correctness of the working of suo moto disallowance u/s.14A of the Act before applying Rule 8D of the Rules:- 1. Graviss Hospitality Ltd. Vs. DCIT (67 SOT 184) (Mum. Trib) 2. Shri Rohit A. Kapadia Vs. ACIT (ITA No.1022/Mum/2014)(Mum.Trib) 3. JM Financial Consultants Pvt. Ltd. Vs. DCIT (ITA No.1863/M/2013)(Mum.Trib) 4. ACIT Vs. Raymond Apparel Ltd. (ITA 255 & 720 of 2012) 5. Allahabad Bank Vs. ACIT (ITA 1199 of 2012) 6. Dr. Ashwin V. Mehta Vs. JCIT (ITA No.5329/Mum/2012) 7. Kalyani Steels Ltd. Vs. ACIT (1733/PN/2012)(Pun) While calculating average investments for Rule 8D Strategic Investments should be excluded:- 1. JM Financial Limited Vs. ACIT (I.T.A. No.4521/Mum/2012)(Mum) 2. Garware Wall Ropes Limited Vs. Add. CIT (I.T.A No.5408/Mum/2012)(Mum) 3. ACIT Vs. Raymond Apparel Ltd (ITA No. 720/Mum/2012)(Mum) 4. ACIT Vs. Crompton Greaves Ltd. (ITA No.6277/Mum/2012) (Mum) A.Y. 2010-11

MCX Stock Exchange Ltd. Vs. DCIT (ITA No.6574/Mum/2013)(Mum) 6. Provogue (India) Limited Vs. DCIT (ITA No.225/Mum/2013)(Mum) 7. Tops Security Ltd. Vs. DCIT (ITA No.7151/Mum/2011)(Mum) 8. CIT Vs. Oriental Structural Engineers Pvt. Ltd. (35 taxmann.com 210)(Del HC) 9. Interglobe Enterprises Ltd. Vs. DCIT (ITA No.1362/Del/2013)(Del.Trib) 10. EIH Associated Hotels Ltd. Vs. DCIT (ITA No.1503/Mum/2012) (Chen.) 11. M/s.Fiduciary Euromax Global Vs. DCIT (ITA No.1349/Mum/2013)(Mum). 5. On the other hand the learned representative of the department has strongly relied upon the order passed by the CIT(A) in question. It is not in dispute that the assessee earned the dividend income to the tune of Rs.28,074/- which has been claimed as exempt u/s.10(35) of the Act. The assessee has disallowed the expenditure to earn the exempt income to the tune of Rs.29,669/- on the basis of the report of the independent Chartered Accountant. The said report was also presented before the Assessing Officer. The report is also on the file at page 40 to 66 of the paper book. Under the year of consideration, there was no movement of investment for the period w.e.f 31.03.2009 A.Y. 2010-11 to 31.03.2010 which has been shown at page 4 to 39 of the paper book. The provisions of section 14A(2) and 14A(3) of the Act are as under:- “(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.”

On appraisal of the assessment order, it is quite clear that no satisfaction has been recorded by the Assessing Officer to dishonor the claim of the assessee. No doubt in view of the law settled in Manilal Kher Ambalal & Co. Vs. ITO (176 ITR 253)(Bom) and Trivedi Bros (JA) Vs. CIT (158 ITR 705)(MP) and CIT Vs. A.Y. 2010-11 Margadarshi Chit Funds Pvt. Ltd. (155 ITR 442)(MP) and DCIT Vs. Mewar Textiles Mills Ltd. (64 TTJ 502) (JP-Trib) the finding of the CIT(A) is not liable to be sustainable in the eyes of law. It is also not in dispute that while calculating the average investment for the purpose of Rule 8D of the Act, the strategic investment should be excluded. In this regard there are plethora of judgments on record such as JM Financial Limited Vs. ACIT (I.T.A. No.4521/Mum/2012)(Mum) and Garware Wall Ropes Limited Vs. Add. CIT (I.T.A No.5408/Mum/2012)(Mum) and ACIT Vs. Raymond Apparel Ltd (ITA No. 720/Mum/2012)(Mum). Further, more the dividend income is to the tune of Rs.28,074/- whereas the disallowance is to the tune of Rs.16,49,950/- which is more than the earned income which is not justifiable in accordance with law. Reliance placed upon Joint Investments Pvt. Ltd. Vs. CIT (ITA No.117 of 2015)(Del.HC) and Pinnacle Brocom Pvt. Ltd. Vs. ACIT (ITA No.6247 of 2012) (Mum) and Daga Global Chemicals Pvt. Ltd, Vs. ACIT (ITA No.5595 of 2012)(Mum). The assessee has also took the plea that at the time of assessing the expenditure incurred to earn the exempt income the Assessing Officer should consider the investment which has actually generated tax free income for the disallowance u/s.14A of the Act and in this regard the assessee has also placed reliance on the ACB India Ltd. Vs. Assistant Commissioner of Income Tax (62 taxmann.com 71)(Del. HC) and REI Agro Ltd, Vs. DCIT (144 ITD 141) (Kol) and All Bank Finance A.Y. 2010-11 Ltd. Vs. JCIT (ITA No.465/Kol/2013)(Kol). The said law has legally interpreted the consideration of disallowance with regard to the investment which actually generated the tax free income. Anyhow in view of the above said facts and circumstances of the case, we are of the view that the finding of the CIT(A) on this issue is wrong against law and facts therefore the same is not sustainable in the eyes of law, therefore we set aside the finding of the CIT(A) on this issue and remand the case to the Assessing Officer to reassess the expenditure to earn the exempt income in view of the above said observation and in accordance with law. Accordingly, this issue is decided in favour of the assessee against the revenue. ISSUE NO.II:- 7. Since the matter of controversy has already been adjudicated in deciding the above said issue therefore there is no need to decide this issue because it would be an academic in nature.

In the result appeal filed by the assessee is hereby Allowed for statistical purpose. Order pronounced in the open court on 29th December, 2016 (G.S.PANNU) (AMARJIT SINGH) लेखासद" / ACCOUNTANT MEMBER "ाियकसद"/JUDICIAL MEMBER मुंबई Mumbai; िदनांकDated : 29th December, 2016 MP A.Y. 2010-11