TANTIA FINANCIAL SERVICES LTD,KOLKATA vs. ITO, WARD-4(1), KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH: KOLKATA [Before Shri S. S. Viswanethra Ravi, JM & Dr. A. L. Saini, AM] I.T.A No.1624/Kol/2016 Assessment Year: 2012-13

Tantia Financial Services Ltd. Vs. Income-tax Officer, Wd-4(1), Kolkata (PAN: AABCT0007E) (Appellant) (Respondent)

Date of hearing: 06.01.2017 Date of pronouncement: 13.01.2017 For the Appellant: Shri Manish Tiwari, FCA For the Respondent: Shri SallongYaden, Addl.CIT ORDER Per Dr. A. L. Saini, AM The captioned appeal filed by the assessee pertaining to Assessment Year 2012-13, is directed against the order passed by the Ld. CIT(A)-6, Kolkata in appeal no. 407/CIT(A)- 6/Kol/2015-16 dated 26.05.2016, which in turn arises out of assessment order passed by the ITO, Wd-4(1), Kolkata u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 27.02.2015.

For issue u/s. 14A read with Rule 8D of the Rules (ground no. 1 and 2) “3.2. I have considered the facts of the case and the appellant's submission. The dispute is regarding computation of disallowance under section 14A read with Rule 8D(2)(ii) by the AO on the basis of gross interest incurred by the appellant whereas according to the appellant, only net interest should be considered. On this issue, the Hon'ble ITAT, Kolkata has held in its order dated 30.03.2012 in ITA No. 1277/Kol/2011 in the case of DCIT v Trade Apartment Ltd. that where net interest after setting of interest income is nil, there can be no disallowance. The same view has been taken by the jurisdictional tribunal also in its order dated 06.03.2013 in ITA No. 1682/Kol/2011 in BiswanathPasari v ACIT, Circle-34, Kolkata after referring to the above decision and the judgement of Hon'ble Calcutta High Court in the case of ISG Traders Ltd. v CIT(2011-TIOL-621-HC-Kol). Considering the same, the disallowance under Rule

2 ITA No.1624/Kol/2016 Tantia Financial Services Ltd. AY. 2012-13

8D(2)(ii) has to be done on the basis of net interest. The appellant has claimed that the net interestis Rs. 39,42,331/ - after deducting interest receivable of Rs. 29,15,450/- from gross interest of Rs. 68,57,787/-. However, it is seen that while interest receivable debited under "other current assets" in the balance sheet stands at Rs. 29,15,456/-, there is no corresponding interest credited in the profit and loss account, meaning thereby that the amount of Rs.68,57,787/- debited in the P& L Account reflects the net interest and not the gross interest as claimed by the appellant. The AR was given an opportunity during the hearing held on 12.05.2016 to furnish specific details showing interest receipts credited in the P & L Account on 13.05.2016 so as to verify that the net interest paid was as claimed by the appellant. However, no details have been furnished till date to establish that interest receipts of Rs.29,15,450/- have been credited to the P & L Account. Hence, it is concluded that net interest amounted to Rs.68,57,787/- only. This amount of Rs. 68,57,787/- has been rightly considered by the AO in computing disallowance under Rule 8D(ii) and no reduction of this figure is warranted on the basis of the material on record. As regards the contention that disallowance under Rule 8D cannot exceed exempt income, the Hon'ble Delhi Court in the case of Joint Investments Pvt. Ltd.(Supra) relied upon by the appellant had held that the disallowance u/s. 14A can be only of expenditure "incurred by the assessee in relation to the tax exempt income" and set aside the matter to the AO for fresh consideration in accordance with its direction. Thus, the judgement does not lay down any precedent that disallowance under rule 8D cannot exceed exempt income. Hence, the disallowance of Rs.53,08,614/- u/s. 14A is confirmed.” For issue u/s. 115JB of the Act (ground no.3) “4.2. I have considered the facts of the case and the appellant's submission. As regards the appellant's contention that the dividend income of Rs. 18,29,640/- exempt u/s. 10 should have been reduced while computing the book profit, it is in accordance with the plain language of clause (ii) of Explanation 1 to section 115JB which lays down, inter-alia, that amount of income to which any of the provisions of section 10 [other than the provisions contained in clause (38) thereof] apply, if any amount is credited to the profit and loss account, shall be reduced while computing the "book profit". Hence, the AO is directed to reduce the dividend income from the book profit computed in the assessment order. The appellant has also contended that the disallowance made u/s.14A cannot be added to the net profit for computing book profit u/s. 115JB. For this purpose, the appellant relied upon the two decisions of ITAT. It is seen that the Hon'ble ITAT in its decision in the case of Spark Finwiz Ltd.(Supra) had decided that such an addition could not be made u/s.115JB having regard to the fact that the assessment year concerned(A.Y. 2006-07) in that case was before the "curative" amendment was brought about. It also stated that as disallowance u/s. 14A had been deleted, the question whether the same disallowance could be made u/s.115JB was only academic in nature. On the other hand, the Hon'ble ITAT, Mumbai has held in ITO v RBK Share Broking (P)Ltd.(2013) 60 SOT 61, Godrej consumer Products Ltd. v Addl. CIT(2014) 159 TTJ 21 and Time Technoplast Ltd. v Addl. CIT(ITA No. 8126, 7576/M/2011 dated 02/01/2014) that amount of expenditure disallowable u/s. 14A is to be added back while computing book profit under clause (f) of explanation (l) to section 115JB.Respectfully following these decisions, it is held that the AO was right in addingthe amount disallowed u/s.14A of the Act while computing book profit u/s. 115JB.” 4. Not being satisfied with the order of the Ld. CIT(A), the assesseepreferred appeal before us and has taken the following grounds of appeal:

3 ITA No.1624/Kol/2016 Tantia Financial Services Ltd. AY. 2012-13 “1. That on the facts and in the circumstances of the case, Ld. CIT (Appeals) is wrong and unjustified in confirming the action of Assessing Officer who considered interest payment of Rs.68,57,787/- for the purpose of working disallowance under Rule 8D(ii) of IT Rules 1962. 2. That on the facts and in the circumstances of the case, Ld. CIT (Appeals) has erred in holding the judgement of Delhi High Court in the case of Joint Investments Pvt. Ltd. (Supra) does not lay any precedent as the matter was restored to lower authorities for fresh adjudication and thereby rejecting the assessee's contention that disallowance U/s 14A read with Rule 8D should be confined to exempt income only. 3. That on the facts and in the circumstances of the case, Ld. CIT (Appeals) is wrong and unjustified in upholding the action of Assessing Officer who added amount of disallowance U/s. 14A while computing book profit u/s. 115JB of Income Tax Act,1961. 4. That the appellant craves leave to add, alter, adduce or amend any ground or grounds on or before the date of hearing.”

I.T.Rules at Rs.68,57,787/-.

5.1. The Ld. AR for the assessee has submitted that the assessee company under consideration is a non-banking financial company (NBFC) recognized by the RBI norms. The company’s main business is taking loan and giving loan, the AO has worked out the disallowance under Rule 8D (2) (ii) by computing proportionate interest paid in relation to exempted income, (dividend received). The Ld. AR for the assessee has stated before us clearly, that the assessee has credited the interest of Rs.29,15,456/- in his P&L account and debited the interest of Rs.68,57,787/- in his profit and loss account. Therefore, the net difference of Rs.39,42,331/- can be used for the purpose of disallowance u/s. 14A read with Rule 8D(2)(ii) of the Act but the AO has considered the entire interest debited to the P&L Account for the purpose of disallowance u/s. 14A,read with Rule 8D(2)(ii) of the I.T. Rules. In addition to this, the Ld. AR also submitted that the disallowance should not exceed the exempted income. The Ld. AR relied on the decision of Coordinate bench of this Tribunal in assessee’s own case (Tantia Financial Services Ltd. Vs. DCIT, IT(SS)A No.46/Kol/2014, AY 2009-10) dated 05.12.2016, wherein it has been held as under:

“5.3. Having heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of the assessee, as the propositions canvassed

4 ITA No.1624/Kol/2016 Tantia Financial Services Ltd. AY. 2012-13 by the Ld. AR for the assessee are supported by the order of the ITAT Mumbai Bench in the case of M/s. Daga Chemicals Pvt. Ltd., (supra) and the facts relied on by him. Ld. AR has submitted that disallowance u/s.14A r.w.rule 8D cannot exceed the exempt income. Considering the factual position and the case law relied on by the Id. AR of the assessee, we are of the view that the addition made by the AO and confirmed by the Id CIT(A) should be deleted. Accordingly, we delete the addition.” 5.2. 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 again for the sake of brevity.

5.3. Having heard the rival submissions and perused the material available on record, we are of the view that there is merit in the submission of the assessee, as the proposition canvassed by the Ld. AR for the assessee are supported by the judgment of Hon’ble ITAT, Kolkata, in assessee’s own case (supra) and the facts narrated by him above. As the Ld. AR for the assessee has pointed out that net interest is to be taken into account for disallowance purpose, as the assessee company under consideration is a NBFC company which received interest and paid interest during the assessment year under consideration. Therefore, the differential amount of Rs.39,42,331/- should be considered for the purpose of computation of disallowance u/s. 14A read with Rule 8D(2)(ii) of the Rules. In addition to this, the Ld. AR for the assessee also argued that the disallowance u/s. 14A of the Act should not exceed the exempt income. Therefore, considering the factual position and the precedence cited by the Ld. AR for the Assessee, we direct the AO to consider the net interest amount for the purpose of disallowance u/s. 14A read with Rule 8D(2)(ii) of the I.T. Rules and also should not disallow the amount beyond the exempt income.

5.4 In the result, the appeal filed by the assessee on ground nos. 1 and 2 are allowed for statistical purposes.

5 ITA No.1624/Kol/2016 Tantia Financial Services Ltd. AY. 2012-13 6.1. The Ld. AR for the assessee has submitted that the dividend income of Rs.18,29,640/- which is exempted u/s. 10 should have been reduced while computing the book profit, it is in accordance with the plain language of clause (ii) of Explanation (1) to section 115JB of the Act which lays down, inter alia, the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof was applied, if any amount is credited to the P&L Account, shall be reduced while computing the book profit. The Ld. AR for the assessee also stated that the disallowance made u/s. 14A of the Act cannot be added to the net profit for computing book profit u/s. 115JB of the Act. For this purpose, the assessee relied on following two decisions:

(i) ACIT Vs. Spray Engineering Devices Ltd. 53 SOT 70 (Chd.) and (ii) ITA No. 1741/Kol/2011 & 12/Kol/2012 in the case of Spark Finwiz Ltd. dated 19.10.2012. 6.2. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the AO, which we have already noted in earlier para and is not being repeated again for the sake of brevity.

6.3. Having heard rival submissions and perused the material available on record, we are of the view that there is merit in the submission of the assessee as the proposition canvassed by the Ld. AR for the assessee are supported by the judgment of Hon’ble ITAT, Kolkata, supra and the facts narrated by him above. The Ld. AR for the assessee has clearly stated before us that the disallowance made u/s. 14A of the Act cannot be added to the net profit for computing book profit u/s. 115JB of the Act. Therefore, considering the factual position and the precedence cited by the Ld. AR for the assessee, we are of the view that the addition made by the AO and confirmed by the Ld. CIT(A) needs to be deleted. Accordingly, we delete the addition.

6.4 In the result, the appeal filed by the assessee on this ground , is allowed.

6 ITA No.1624/Kol/2016 Tantia Financial Services Ltd. AY. 2012-13 Order pronounced in the open court on 13.01.2017 Sd/- Sd/- (S.S. Vishwanethra Ravi) (Dr. A. L. Saini) Judicial Member Accountant Member 13th January, 2017 Dated :

Jd. Sr. P.S

Copy of the order forwarded to: 1. Appellant – Tantia Financial Services Ltd., 25-27, NetajiSubhas Road, 1st Floor, Kolkata-700 001. 2. Respondent – ITO, Wd-4(1), Kolkata. 3. CIT(A), Kolkata 4. CIT, Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.