HDFC BANK TD,MUMBAI vs. ASST CIT 2(3), MUMBAI

Common grievance of the assessee in both the years pertains to disallowance of Rs.34,67,201/- and Rs.81,28,000/- in the assessment year 2006-07 & 2007-08, respectively u/s.14A of the I.T.Act.

Rival contentions have been heard and record perused. Facts in brief are that in the assessment year 2006-07 the assessee had claimed exemption of Rs.1,11,25,000/- being tax-free interest on bonds, in its Return of Income. The assessee out of abundant caution had offered 2 Rs.81,28,000/- being interest allocated in respect of the disallowance u/s 14A of the Act. During the course of original assessment proceedings, the assessee submitted that that the suo-moto disallowance amounting to Rs.81,28,000/- was made on a conservative basis and that there should be no disallowance u/s.14A of the Act. The assessee further submitted that its net worth i.e. capital and reserves and surplus and current account deposits is higher than the investment made in tax free securities and hence no disallowance u/s. 14A should be made. The assessee also stated that investments generating tax-free income were made in the course of its banking business. However, the AO worked out the disallowance u/s. 14A r.w. Rule 8D of the Act amounting to Rs.56,00,000/-. The AO adopted the disallowance made by the assessee in the return of income (i.e. Rs.81,28,000/-) while passing the order u/s.143(3) of the Act, since it was higher.

The CIT(A) confirmed the order of AO, against which assessee approached to the ITAT. Before the Tribunal, both the parties agreed that the issue requires reconsideration. The ITAT held that in light of the decision of Godrej and Boyce Mfg. Co. Ltd. v. DCIT (328 ITR 81) (Bom. HC), Rule 8D cannot be applied in the year under consideration and accordingly restored back the matter on the issue of 14A disallowance to the AO. While passing the order u/s.143(3) r.w.s.254, the AO once again made the disallowance of Rs.81,28,000/- on the alleged ground that no disallowance u/s.14A was made by him and therefore the same cannot be reduced by the assessee. By the impugned order, the CIT(A) confirmed 3 the action of AO on the plea that assessee has not filed a revised return of income to make such claim and, hence, in view of decision of Hon’ble Supreme Court in the case of Goetze India Ltd., 283 ITR 323, such claim cannot be entertained. Now, the assessee is again in appeal before us.

We have considered rival contentions and deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. AR and DR during the course of hearing before us. From the record we found that at the time of filing the return of income for A.Y.2006-07, the decision of Tribunal in assessee’s own case for A.Y.2001-02 to 2005-06, ITA No.4529/Mum/2005, was not available and hence on a conservative basis, suo moto disallowance of proportionate interest was made u/s.14A by the assessee in the computation of income. The ITAT vide order dated 29-6-2011, deleted the disallowance of interest u/s.14A on the ground that where interest free funds are more than the investment made in tax-free securities, it shall be presumed that such investments is made from interest free funds. This ITAT decision has been subsequently affirmed by the Hon’ble Bombay High Curt in assessee’s own case reported in 366 ITR 505. However, the department has not filed an appeal before the Hon’ble Supreme Court against the said High Court’s order.

It is clear from the order of ITAT & High Court that if the non-interest bearing funds (i.e. Capital, Reserves, and Current Account Deposits) are more than the investment in tax free securities, no disallowance of interest 4 is justifiable u/s. 14A of the Act. The position of non-interest bearing funds and tax free securities for the year under consideration is as under: (Rs.in lacs) Details of owned Funds and other non- As on interest bearing funds 31/3/2006 Share Capital (a) 14,083 Reserves and Surplus (b) 77,693 Current Account Deposits - From banks (c) 4,658 -From others (d) 1,38,332 e=c+d 1,42,990 Total f=a+b+e 2,34,766 Tax Free Investments 1,000 In the light of the above factual position, the issue on merits stands squarely covered by the assessee's own case, viz: • DCIT v. HDFC Bank Ltd. (ITA o. 45291M12005) (Mum Tribunal) • CIT v. HDFC Bank Ltd. (366 ITR 505) (Born HC) • HDFC Bank Ltd. V. DCIT (383 ITR 529) (Born HC) 7. In support of the contention as to whether disallowance offered by the assessee in the return of income can be deleted/reduced by the ITAT, ld. AR relied on the decision of the Mumbai ITAT in the case of TATA Industries Ltd. V. ITA (ITA No. 4894/Mum/2008].

We had carefully gone through the order of tribunal in the case of TATA Industries Ltd. V. ITO (ITA No. 4894/Mum/2008), wherein Tribunal has allowed similar claim by following the decision of Hon'ble Bombay High Court in the case of Pruthvi (supra). In the said case, the assessee had suo moto disallowed an amount of Rs. 39 crores u/s. 14A of the Act. The assessee had received exempt income of Rs. 6.16 crores. The AO 5 ITA No.5480&5481/14 made further disallowance in the assessment order which was upheld by CIT(A). However, during the course of proceedings before the Tribunal, the assessee contended that disallowance u/s. 14A of the Act should be restricted to exempt income. The Id. DR argued that, since the assessee has suo moto made disallowance u/s. 14A of the Act in the Return of Income, which was more than the exempt income, the plea of the assessee should not be accepted. The Tribunal directed the AO to restrict the disallowance u/s. 14A of the Act, to the exempt income earned by the assessee. In the process, the ITAT has considered all the relevant case law viz:- National Thermal Power Co. Ltd. V. CIT (229 ITR 383) (SC) CIT v. Pruthvi Brokers and Shareholders Pvt. Ltd. (349 ITR 336) Gujarat Gas Ltd. V. JCIT (245 ITR 84) (Guj. HC) Goetze (India) Ltd. V. CIT (157 Taxman 1) (SC) 9. In view of the above, we direct the AO not to make any disallowance of interest u/s.14A read with rule 8D.

Facts and circumstances during the assessment year 2007-08 are pari material, therefore, following the above reasoning, we direct the AO to delete the disallowance of interest while computing disallowance u/s.14A r.w.rule 8D. We direct accordingly.

In the result, both the appeals are allowed in part, in terms indicated hereinabove. Order pronounced in the open court on this 24/08/ 2016. Sd/- Sd/- SANDEEP GOSAIN R.C.SHARMA न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated 24/08/2016 प्र.कु.मभ/pkm, नन.स/ PS