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

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA [Before Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]

I.T.A No.1173/Kol/2016 Assessment Year: 2011-12

M/s. Umang Commercial Co. (P) Ltd. Vs. Deputy Commissioner of Income-tax, (PAN: AAACU3731B) Circle-2, Kolkata. (Appellant) (Respondent)

Date of hearing: 25.01.2017 Date of pronouncement: 08.03.2017

For the Appellant: Shri J.P.Khaitan, Sr. Advocate & Shri S. Jhajharia, FCA For the Respondent: Shri G. Mallikarjuna,CIT, DR

ORDER Per Shri M. Balaganesh, AM: This appeal by assessee is arising out of revision order of Pr. CIT-1, Kolkata vide Pr. CIT-1/15-16/U/s.263/Umang/2011-12/12574-76 dated 28.03.2016. Assessment was framed by DCIT, Circle-2, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2011-12 vide his order dated 06.03.2014.

2 ITA No.1173/K/2016 Umang Commercial Co. (P) Ltd., AY 2011-12 Demat Account charges (direct expenses) Rs. 552/- Interest expenses relatable to investment Rs. 9,91,24,091/- 25% of total administrative expenses Rs. 4,40,585/- ---------------------- Rs. 9,95,65,228/- ---------------------- The ld AO in the course of scrutiny proceedings u/s 143(3) of the Act discussed the issue of disallowance u/s 14A of the Act having regard to the accounts of the assessee by looking into the net worth of the assessee and investments in securities made by the assessee. Based on these examination of accounts, the ld AO accepted the disallowance made by the assessee in the sum of Rs. 9,95,65,228/- The ld AO discussed this issue of disallowance u/s 14A of the Act in detail in the assessment order. The ld CIT sought to invoke revisionary jurisdiction u/s 263 of the Act on the ground that the said order passed by the ld AO is erroneous in as much as it is prejudicial to the interests of the revenue . According to ld CIT, the disallowance made u/s 14A of the Act should be increased to Rs. 18,83,15,804/- under Rule 8D(2)(ii) as against Rs. 9,91,24,091/- made by the ld AO.

3 ITA No.1173/K/2016 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 ITA No.1173/K/2016 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 ITA No.1173/K/2016 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. 4. For that in view of the facts and in the circumstances, the Ld. PCIT having nowhere concluded that the order of the AO was erroneous and prejudicial to the interest of revenue, order of the Ld. PCIT is even otherwise also wholly bad, illegal, unjustified and uncalled for and it may kindly be quashed/cancelled. 5. For that the Ld. PClT having passed the order u/s 263 in respect of matter which was not the subject matter of notice u/s 263 and in view of the facts the order so passed by Ld. PCIT is wholly bad and illegal. 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. 8. For that in view of the facts and in the circumstances, the order so passed by the Ld. PCIT u/s 263 wherein he has set aside the order passed by the AO u/s 143(3) is without bringing any material on record as to the manner in which the AO's order is erroneous and prejudicial to the interest of revenue and in view of the facts and in the circumstances the order so passed by the Ld. PCIT is liable to be quashed / cancelled. 9. For that your petitioner craves the right to put additional grounds and / or to alter / amend / modify the present grounds at the time of hearing.”

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 ITA No.1173/K/2016 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 --------------------

7 ITA No.1173/K/2016 Umang Commercial Co. (P) Ltd., AY 2011-12 Book Profits u/s 115JB 20,88,02,973 --------------------

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 ITA No.1173/K/2016 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 ITA No.1173/K/2016 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." 86. Whether the assessment order dated 28th March, 2008 was passed without application of mind is basically a question of fact. The learned Tribunal has held that the assessment order was not passed without application of mind. The records of the assessment including the order sheets go to show that appropriate enquiry was made and the assessee was heard from time to time. In deciding the question Court has to bear in mind the presumption in law laid down in Section 114 Clause - e of the Evidence Act:— "that judicial and official acts have been regularly performed;" 87. Therefore, the Court has to start with the presumption that the assessment order dated 28th March 2008 was regularly passed. There is evidence to show that the assessing officer had required the assessee to answer 17 questions and to file documents in regard thereto. It is difficult to proceed on the basis that the 17 questions raised by him did not require application of mind. Without application of mind the questions raised by him in the annexure to notice under Section 142 (1) of the Act could not have been formulated. 88. The Assessing Officer was required to examine the return filed by the assessee in order to ascertain his income and to levy appropriate tax on that basis. When the Assessing Officer was satisfied that the return, filed by the assessee, was in accordance with law, he was under no obligation to justify as to why was he satisfied. On the top of that the Assessing Officer by his order dated 28th March, 2008 did not adversely affect any right of the assessee nor was any civil right of the assessee prejudiced. He was as such under no obligation in law to give reasons.

10 ITA No.1173/K/2016 Umang Commercial Co. (P) Ltd., AY 2011-12 applicable to a proceeding before a judicial or a quasi-judicial authority where there are two contesting parties cannot be made applicable to the proceedings before an Assessing Officer. 97. Mr. Nizamuddin contended the judgments cited by Mr. Poddar indicate that the Assessing Officer is not required to write an elaborate judgment. He contended that the assessing officer may not have any such obligation but it cannot be said, according to him, that the Assessing Officer is under no obligation to record anything in his assessment order. It is not in the first place a fact that he has not recorded anything. From the assessment order, the following facts and circumstances appear:— "Return was filed on 29/11/06 showing total income of Rs.3,80,66,940/-. In response to notices u/s. 143(2) and 142(1) of the I. T. Act, 1961, Sri P. R. Kothari, A/r appeared from time to time and explained the return. Necessary details and particulars were filed. The business of the assessee is manufacturing and trading of cosmetics and dental care products as in earlier years. In view of above total income is computed is under:" 98. Unless the aforesaid recital is factually incorrect or the computation is legally wrong, it is not possible to hold that the assessment order was passed without application of mind. On the top of that when the Assessing Officer accepted the contention of the assessee there was no occasion for him to make any discussion in his order. (b) Hon’ble Jurisdictional High Court in the case of CIT vs Mulchand Bagri reported in (1993) 68 Taxman 215 (Cal) wherein it was held that :-

11 ITA No.1173/K/2016 Umang Commercial Co. (P) Ltd., AY 2011-12 of fact stands, it has to be held that the Commissioner's decision to revise the order of the ITO under section 263 was erroneous.

(c) Hon’ble Supreme Court in the case of CIT (Central) vs Max India Ltd reported in (2007) 295 ITR 282 (SC) wherein it was held that :-

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 ITA No.1173/K/2016 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.

Order is pronounced in the open court on 08.03.2017 Sd/- Sd/- (N. V. Vasudevan) (M. Balaganesh) Judicial Member Accountant Member

Dated : 8th March, 2017

Jd.(Sr.P.S.) Copy of the order forwarded to:

APPELLANT – M/s. Umang Commercial Co. (P) Ltd., C/o Salarpuria 1. Jajodia & Co., 7, C. R. Avenue, Kolkata-700 072. Respondent –DCIT, Circle-2, Kolkata. 2 3. The CIT(A), Kolkata 4. CIT, Kolkata. 5. DR, Kolkata Benches, Kolkata

/True Copy, By order,

Asstt. Registrar.