M/S UMANG COMMERCIAL CO. PVT. LTD.,KOLKATA vs. DCIT, CIR-2, KOLKATA, KOLKATA

4. In response to show cause notice, the assessee replied that the net worth of assessee stood at Rs 90.27 crores as against which investment in securities yielding tax free income stood at Rs. 211.12 crores. Thus, as on 1.4.2010, investment in securities was excess by Rs. 120.85 crores. Similarly as on 31.3.2011, the net worth of the company stood at Rs. 105.62 crores as against which investment in securities yielding tax free income stood at Rs. 183.02 crores. Thus as on 31.3.2011, investment in securities yielding tax free income was excess by Rs. 77.40 crores when compared to the net worth. Thus, average investment in securities yielding tax free income in excess of net worth during the financial year 2010-11 stood at Rs. 99.12 crores and the excess has been financed out of borrowings on which interest has been paid which interest needs to be disallowed. The assessee had adopted the weighted average interest rate of borrowings made by the company during the financial year 2010-11 at 10% and applied the said interest rate on Rs 99.12 crores and arrived at the disallowance of interest figure at Rs. 9,91,24,091/- which was disallowed suo moto while filing the return of income, in addition to other direct expenses of Rs 552/- and indirect expenses of Rs. 4,40,585/-. The workings for disallowance made by the assessee u/s 14A of the Act was also furnished before the ld

3 Umang Commercial Co. (P) Ltd., AY 2011-12 CIT during revision proceedings u/s 263 of the Act. With regard to disallowance made towards administrative expenses, it was submitted that the assessee had disallowed Rs. 4,40,585/- being 25% of total administrative expenses. It was submitted that the assessee being a Non-Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI) and engaged in the activity of investment in shares and also granting of loans. Thus the assessee company is having tax free income in the form of dividend on shares and also taxable income in the form of interest income on loans granted. During the financial year 2010-11, the total revenue of the assessee company was Rs. 58,48,69,384/- out of which dividend income was Rs. 9,45,55,748/- and thus dividend income as a percentage of total revenue stood at 16.17%. Out of the total administrative and other expenses of Rs. 17,62,890/- , the assessee company has already added back Rs. 26,538/- on account of incremental provision for gratuity / leave salary and Rs. 552/- on account of demat charges leaving a balance of Rs. 17,35,800/-. 16.17% of Rs. 17,35,800/- works out to Rs. 2,80,679/- being the indirect expenses attributable to dividend income. As against this, the assessee has itself added back Rs. 4,40,585/- which was much more than Rs. 2,80,679/- and hence the ld AO had rightly accepted the said disallowance towards indirect expenses.

4.1. It was further submitted that the assessee during the Asst Years 2008-09 , 2009-10 and 2010-11 had offered disallowance of interest on a net basis at (i.e interest paid less interest income on loans granted) . The interest paid on loans taken was Rs. 37,76,73,248/- and interest income received on loans granted was Rs. 18,93,57,444/- and accordingly the net interest paid worked out to Rs. 18,83,15,804/-.

4.2. It was further submitted that the assessee had utilized borrowings of Rs 150 crores specifically towards purchase of bonds in March 2010. The said bonds were held during the financial year 2010-11 and were sold only in December 2010 and Feb 2011. As such, the interest of Rs. 11,63,01,170/- pertaining to the loan of Rs 150 crores taken for purchase of bonds needs to be first reduced from gross interest expense of Rs 37,76,73,248/- leaving behind the balance of Rs. 26,13,72,078/- (i.e Rs. 37,76,73,248 minus Rs. 11,63,01,170) . From this Rs. 26,13,72,078/- , the interest income of Rs. 18,93,57,444/-

4 Umang Commercial Co. (P) Ltd., AY 2011-12 needs to be reduced and the net interest amount works out to Rs. 7,20,14,634/- which alone could be considered for the purpose of disallwoance under Rule 8D(2)(ii) of the Rules. Acordingly it was submitted that the disallwoance of interest made by the assessee at Rs. 9,91,24,091/- being more than Rs. 7,20,14,634/- having regard to the accounts of the assessee, cannot be held as erroneous and prejudicial to the interests of the revenue.

4.3. In other words, it was pleaded that in respect of disallowance of interest as per Rule 8D(2)(ii) of the Rules, the figure worked out above comes to Rs. 7,20,14,634/- but whereas the assessee company itself had voluntarily disallowed Rs. 9,91,24,091/-. In respect of disallowance of indirect expenses as per Rule 8D(2)(iii) of the Rules, the figure worked out above comes to Rs. 2,80,679/- but whereas the assessee company itself had voluntarily disallowed Rs. 4,40,585/-. Based on these submissions, it was pleaded that there was no error in the order of the ld AO accepting the disallowance u/s 14A of the Act made by the assessee and hence the order of the ld AO cannot be termed as erroneous and prejudicial to the interests of the revenue.

5. The ld CIT however proceeded to ignore the aforesaid submissions and did not agree to the elimination of interest attributable on loans borrowed in the sum of Rs. 150 crores utilized for purchase of bonds while calculating disallowance under Rule 8D(2)(ii) of the Rules and proceeded to arrive at the disallowance figure thereon at Rs. 18,83,15,804/- . He further adopted 0.5% of average value of total investments of the assessee company and arrived at the disallowance figure of Rs. 98,53,465/- under Rule 8D(2)(iii) of the Rules. Accordingly, he proposed to make additional disallowance of Rs. 9,86,04,041/- ( 18,83,15,804 + 98,53,465 – 9,95,65,228) and non-consideration of the said additional disallowance resulted in the order of the ld AO as erroneous and prejudicial to the interest of the revenue. Aggrieved, the assessee is in appeal before us on the following grounds :- “

1. For that in view of the facts and in the circumstances, the Ld. PCIT is wholly wrong and unjustified in initiating proceedings u/s. 263 and passing an arbitrary order u/s.263 of the Act directing revision of original assessment order u/s 143(3) without considering the facts and the law explained before the AO as well as before Ld. PCIT as well.

2. For that in view of the facts and in the circumstances, the order u/s. 263 is wholly bad, illegal and void ab initio and such order u/s 263 has been made by the Ld. PCIT without properly taking into consideration the submission made by your petitioner by letter dated 5 Umang Commercial Co. (P) Ltd., AY 2011-12 26.02.2016 and in view of the facts and in the Circumstances such order u/s 263 may kindly be quashed/cancelled.

3. For that in view of the facts and in the circumstances, the AO having taken a possible view in the matter, provisions of section 263 even otherwise also did not lie in the case.

6. Without prejudice to ground No. 5 above, the disallowance made u/s 14A cannot be in excess of exempt income and in view of the facts the Ld. PCIT failed to appreciate the law settled in such respect and in view of the facts and in the circumstances it may kindly be held accordingly.

7. For that in view of the facts and in the circumstances and without prejudice to grounds No. 5 & 6 above, the Ld. PCIT is wholly unjustified in directing AO to disallow Rs.18,83,15,804/- u/s 14A read with Rule 80(2)(i) and in view of the facts and in the circumstances AO already having taken/considered the matter in its assessment order and AO's view being neither erroneous nor prejudicial to the interest of revenue, the Ld. PCIT's action and direction in passing order u/s 263 is wholly bad & illegal and it may kindly be held accordingly.

In response to the same, the assessee filed reply to the said questionnaire on 4.3.14 which is enclosed in Pages 100 -103 of Paper Book. The assessee also filed complete details of capital gains wherein in respect of sale of unlisted bonds of Aditya Birla Retail Limited (ABRL) on which gain of Rs. 41,09,589/- was earned by the assessee. It was stated that these bonds were purchased in Financial Year 2009-10 in physical mode but were sold in 6 Umang Commercial Co. (P) Ltd., AY 2011-12 demat mode in the Financial Year 2010-11. We find that the assessee had replied before the ld AO that on 31.3.2010, it had subscribed to 1,50,00,000 1% optionally fully convertible bonds of Rs. 100 each of Aditya Birla Retail Limited at a total cost of Rs. 150,00,00,000/-. These bonds were originally in physical form but were then subsequently held in demat mode. On 20.12.2010, the assessee sold 1,00,00,000 bonds and on 18.2.2011, it sold remaining 50,00,000 bonds and total sale consideration amounted to Rs. 150,41,09,589/- thereby resulting in short term capital gain of Rs. 41,09,589/- on sale of these bonds of ABRL. The relevant papers in this regard are part of pages 98 to 99 of the Paper Book. We find that the assessee had also earned interest income of Rs. 21,91,781/- for the period from 1.10.2010 to 19.12.2010 for Rs. 100,00,00,000 @ 1% for 80 days and Rs. 19,17,808/- for the period from 1.10.2010 to 17.2.2011 for Rs. 50,00,00,000 @ 1% for 140 days. This interest income from bonds is offered to tax by the assessee. Hence it could be safely concluded that the investment in bonds had yielded only taxable income and not any exempt income to the assessee. Hence the argument of the ld AR that the said investment should be excluded while calculating the total value of investments and total value of assets is logical and since it is not in dispute that the said bonds were purchased out of borrowed funds, the proportionate interest element attributable to Rs 150 crores loan deserves to be eliminated from the gross interest paid by the assessee. This is to be done in view of the fact that only interest paid on loans relatable to investments yielding tax free income alone would be the subject matter of disallowance under Rule 8D(2)(ii) of the Rules.

6.1. We find that the assessee had voluntarily disallowed total sum of Rs. 9,95,65,228/- u/s 14A of the Act both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act. We find that the comment made by the ld CIT as to how the figure of Rs. 20,88,02,973/- was arrived at is unwarranted in view of the fact that the assessee had made the computation of book profits u/s 115JB of the Act as below:- Net profit before tax as per profit and loss account 20,37,93,493 Add: Disallowance under section 14A 9,95,65,228 -------------------- 30,33,58,721 Less: Dividend income exempt u/s 10 9,45,55,748 -------------------- We do not find any infirmity in the said computation of book profits u/s 115JB of the Act.

6.2. With regard to the other comment made by the ld CIT in his order u/s 263 of the Act that the ld AO had not bothered to probe into the details of interest paid in the huge sum of Rs. 37.76 crores by not calling for the details of the same, we find that the assessee had duly replied before the ld AO in the course of assessment proceedings vide letter dated 7.2.2014 wherein it had clearly given the party wise details of loans given and loans granted by the assessee together with its interest, TDS details, repayments , if any, made thereon etc which are enclosed in pages 69 to 97 of the Paper Book. Hence from the perusal of the said documents, we are convinced that the ld AO had duly examined the aspect of interest paid on loans and interest received on loans in the assessment proceedings. The ld AR even informed the bench that the ld AO had also sent notices u/s 133(6) of the Act to those parties and cross verified the loan statements with their records and no adverse inferences were drawn by the ld AO in the assessment proceedings. Accordingly, the ld AR argued that the ld AO after having elaborate enquiries on the issue of disallowance u/s 14A of the Act thought it fit that the disallowance made thereon by the assessee itself is much more though the same is not in accordance with Rule 8D of the Rules. This view has been taken by him taking into consideration the accounts of the assessee in terms of section 14A(2) of the Act and accordingly it could be safely concluded that he had taken a possible view thereon which cannot be subject matter of revision u/s 263 of the Act. In support of his contentions, he placed reliance on the following decisions:-

(a) Hon’ble Jurisdictional High Court in the case of CIT vs J.L.Morrison (India) Ltd reported in (2014) 366 ITR 593 (Cal) ; (b) Hon’ble Jurisdictional High Court in the case of CIT vs Mulchand Bagri reported in (1993) 68 Taxman 215 (Cal) ; (c) Hon’ble Supreme Court in the case of CIT (Central) vs Max India Ltd reported in (2007) 295 ITR 282 (SC)

8 Umang Commercial Co. (P) Ltd., AY 2011-12 6.3. The ld DR argued that the ld AO simply reproduced the version and explanation of the assessee in the assessment order and that does not tantamount to making any enquiries with regard to the issue of disallowance u/s 14A of the Act and hence it cannot be construed as having taken any one possible view in the matter so as to stay outside the ambit of revision u/s 263 of the Act and hence the case laws cited by the ld AR are not applicable to the facts of the instant case.

6.4. We hold in the facts and circumstances of the case and from perusal of the various pages of the paper book as detailed above, we are convinced of the fact that the ld AO had sought to make disallowance u/s 14A of the Act having regard to the accounts of the assessee in terms of section 14A(2) of the Act and we hold that he need not resort to Rule 8D always for the purpose of making disallowance. Admittedly, the Rules cannot prevail over the Act as it is only a subordinate piece of legislation. When the Act clearly stipulates the point that the ld AO is entitled to make disallowance u/s 14A(2) of the Act having regard to the accounts of the assessee , then no error could be attributed on that aspect in the order of the ld AO. Moreover, we also find that if Rule 8D is adopted , then it would only result in lesser disallowance figure u/s 14A of the Act as enumerated above in the detailed factual workings given by the assessee before the ld CIT. Hence it could be safely concluded that the assessee had erred on the revenue side and offered more amount of disallowance u/s 14A of the Act which has been accepted by the ld AO. Hence it could be safely concluded that the ld AO had taken a possible view and this action had not caused any prejudice to the interest of the revenue but on the contrary as stated above, it had only caused prejudice to the interest of the assessee. Hence, the dual conditions stipulated in section 263 of the Act are not satisfied cumulatively.

6.5. We find that the ld AR had placed reliance on the following decisions :- (a) Hon’ble Jurisdictional High Court in the case of CIT vs J.L.Morrison (India) Ltd reported in (2014) 366 ITR 593 (Cal), wherein it was held :-

“85. He also drew our attention to a judgment of the Punjab & Haryana High Court in the case of Hari Iron Trading Co. v. CIT [2003] 263 ITR 437/131 Taxman 535, wherein the following views were expressed:— 9 Umang Commercial Co. (P) Ltd., AY 2011-12 "The expression "record" has also been defined in clause (b) of the Explanation so as to include all records relating to any proceedings available at the time of examination by the Commissioner. Thus, it is not only the assessment order but the entire record which has to be examined before arriving at a conclusion as to whether the Assessing Officer had examined any issue or not. The assessee has no control over the way an assessment order is drafted. The assessee on its part had produced enough material on record to show that the matter had been discussed in detail by the Assessing Officer. The least that the Tribunal could have done was to refer to the assessment record to verify the contentions of the assessee. Instead of doing that, the Tribunal has merely been swayed by the fact that the Assessing Officer has not mentioned anything in the assessment order. During the course of assessment proceedings, the Assessing Officer examines numerous issues. Generally, the issues which are accepted do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/disallowances are made. As already observed, we have examined the records of the case and find that the Assessing Officer had made full inquiries before accepting the claim of the assessee qua the amount of Rs.10 lakhs on account of discrepancy in stock. Not only this, he has even gone a step further and appended an office note with the assessment order to explain why the addition for alleged discrepancy in stock was not being made. In the absence of any suggestion by the Commissioner as to how the inquiry was not proper, we are unable to uphold the action taken by him under section 263 of the Act."

We find that even the most celebrated judgement on the impugned subject was rendered by the Hon’ble Delhi High Court in the case of Gee Vee Enterprises vs Addl CIT reported in (1975) 99 ITR 375 (Del) would not come to the rescue of the revenue in the instant case as the facts of the instant case did not provoke any further enquiry in the mind of the ld AO and hence there cannot be any error that could be attributed in his order. Hence the ld CIT could not invoke revision jurisdiction u/s 263 of the Act in the instant case.

12 Umang Commercial Co. (P) Ltd., AY 2011-12 6.6. In view of our aforesaid findings in the facts and circumstances of the case and respectfully following the judicial precedents relied upon hereinabove, we hold that the revision order passed by the ld CIT u/s 263 of the Act has no legs to stand in the eyes of law and deserves to be quashed in the instant case . Accordingly, the grounds raised by the assessee in this regard are allowed.