PIRAMAL CORPORATE SERVICES LTD,MUMBAI vs. DCIT CIR 7(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dt.30.12.2013 of CIT(A)-13,Mumbai the assessee has filed the present appeal. Assessee –company, engaged in the business of providing various consultancy services like management consultancy services, corporate strategy services to its group and is also making investment in other companies. It filed its return of income 13.10.2010, declaring total income at Rs.15.29crores .The assessment order u/s.143(3) of the Act, was passed on 31.12.2012, determining the total income of the assessee at Rs. 19.67 crores.

2.First Ground of appeal is about disallowance of interest expenditure of Rs.4.37 crores u/s.36(1)(iii)/ sec.14A of the Act.During the assessment proceedings the AO found that there was an inconsistency in the business results as compared to the earlier years. In order to verify the fluctuation of income he directed the assessee to file the details of various expenses. On perusal of the details he found that the assessee was carrying out investment activities, that it had borrowed a sum of Rs.52.07 crores as loan from Nozaki

1284/M/14-Piramal Finance and Investments Ltd. (NFIL), that the loan was borrowed at an average interest of Rs.12% , that the entire interest expenditure of Rs.4.37 crores was debited to P&L account, that the entire borrowed fund had been invested in Venture Capital Fund (VCF) of the Piramal Group by the name India Reit Fund (IRF). He asked the assessee to explain as to why the interest expenditure should not be disallowed u/s.14A of the Act. Vide its letter dt.19.12.12, the assessee argued that it had invested the borrowed fund in the Scheme-I and Scheme-III of IRF, that IRF had used those funds for making investment in VCU/share/mutual funds etc. on behalf of the various investors, that the assessee was one of the investor/beneficiary of IRF, IRF was a contributory and determinate Trust, the beneficiaries were identifiable and their shares were definite, that IRF enjoyed a pass through status (PTS) , that the taxes were paid at the beneficiary level, that the income would be taxable in the hands of the beneficiary in the same character and in the same manner as if it were the income of the beneficiary had it directly made the investments, during the year IRF had invested certain portion of its total assets in the shares and mutual funds whose income was exempt under Section 10(34) of the Act, that the assessee had on its own made a disallowance of Rs.2.23 crores u/s. 14A of the Act under the head interest expenditure, that IRF had also made certain investments in debentures and subscription money pending allotment and bank fixed deposits, that the income from the said investment was taxable, that proportionate investment in the same had not been taken into consideration while calculating the disallowance u/s. 14A, that the investment made by the IRF in debentures, subscription money pending allotment and bank FDR.s were taxable, that it paid by the assessee on the borrowed funds and invested in IRF who in turn use the above investment did not qualify for disallowance, that the assessee had invested Rs.5.00 crores, in Sept, 2009, in India Venture Fund (IVF-I), that out of the said amount a sum of Rs.4.16 crores was funded out of the sale proceeds of units of IRF , that disallowance u/s. 14A was calculated on 2

1284/M/14-Piramal the balance amount of Rs.84.40 lakhs utilized out of borrowed funds. The AO found that the assessee had submitted its own working of disallowance u/s. 14A.He held that contention of the assessee that India Reit had invested certain portion of its total assets in the shares and mutual fund whose income was exempt u/s.10(34) of the Act and therefore only proportionate interest should be disallowed was not acceptable, that once the assessee had made the investment in funds it would loose its control on the fund, that it had not disputed the applicability of section 14A of the Act.

2.1The AO referred to the cases of Daga Management (P) Ltd. (117ITD169); Chem Invest Ltd.(124TTJ577), Leena Ramchandran (ITA/1784 of 2009, 14.6.2010) and observed that the interest portion in question was not incurred for the business purposes , that same was to be disallowed as per the provisions of section 36(1)(iii) of the Act, that the fund borrowed, interest expenses incurred and investments made were directly related , that the entire expense had to be disallowed u/s.14A of the Act. Finally, the interest amount of Rs.4,37,29,913/- was disallowed as not being incurred for the purpose of business (u/s.36(1) and 14A) and was added to the retuned income of the assessee.

2.2Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that the assessee had borrowed funds from Nozaki Finance and Investment Ltd. and had paid interest of Rs.4.37 crores, that it had paid investment in a Scheme-I and III of IRF , that IRF had invested a certain portion of the total asset in shares and mutual funds, income from which was exempt from tax u/s.10(34), that as a beneficiary, the assessee was liable to tax for its share in its income from IRF in the same character and in the same manner as in the case of a trust, that it had calculated disallowance u/s. 14A in the same manner and the same extent by 3

1284/M/14-Piramal applying percentage of investment made by IRF to its total assets during the year and had suo moto disallowed interest of Rs.2.35 crores, that during the year under consideration there was both tax free and taxable income that was earned by the assessee from the investments made in IRF, that interest attributable to tax free investments was disallowed by itself, that no further disallowance (Rs.2.01 crores) was required for balance interest, that the borrowings were attributable to taxable income, that the interest portion was allowable as den u/s. 36(1)(iii) of the Act. Alternatively, it was argued that interest was allowable u/s.57(iii) of the Act. After considering the submissions of the assessee and the assessment order, the FAA held that the assessee had utilized borrowed funds of Rs.52.07 crores in Venture Capital Funds i.e. , IRF, that the AO had rightly disallowed expenditure u/s. 36(1)(iii) and 14A of the Act.The FAA also held that interest expenditure could not be allowed u/s. 57 of the Act.

2.3During the course of hearing before us the AR stated that assessee himself had made disallowance for the interest paid for earning exempt income, that there was no justification in allowing interest expenditure of Rs.2.01 crores. He referred to the order of the Tribunal delivered in assessee’s own case (ITA/4137 & 6645/Mum/2012 Ay.s 2008-09 and 2009-10 dt.9.12.15). The DR supported the order of the FAA.

2.4We have heard the rival submissions and perused the available material we find that the assessee had incurred business expenditure of Rs.4.36 crores during the year under appeal, that it had on its own disallowed a sum of Rs.2.35 crores for earning dividend income applying the mandatory section 14A of the Act, that it claimed that the balance interest expenditure (Rs.2.01 crores)incurred for taxable income should be allowed u/s. 36(1)(iii)/57(iii), that 1284/M/14-Piramal the AO and the FAA did not allow any expenditure invoking the provisions of section 14 of the Act.

2.5In our opinion,there was no justification in disallowing entire interest expenditure.As per the established principles of tax jurisprudence,no expenditure can be allowed for earning taxfree income.The assessee had on its own made a disallowance of Rs.2.37 crores as it was relatable to exempt income.There was no justification for disallowing it again. The assessee had offered taxable income and had claimed interest expenditure against it. The said fact is not denied by either of the revenue authorities. Therefore the assessee had to be allowed expenditure incurred for earning such taxable income. The genuineness of incurring of the expenditure is not in doubt. Therefore, in our opinion the FAA was not justified in disallowing interest expenditure of Rs.2.01 crores. Reversing his order we hold that disallowance of interest expenditure should be restricted to 2.35 croes only i.e. interest paid of earning exempt income. We find that while deciding the appeal for earlier year the Tribunal has dealt with the same issue. We would like to reproduce para No.3.3 to 3.9 of the said order and same reads as under “3.3. We have gone through the orders of lower authorities and submissions made by both the sides. The brief facts are that in the return filed by the assessee, the assessee has disallowed the interest amount to Rs.1,01,00,417/-, suo-moto. The background of the fact is that the assessee had made investments in scheme I and scheme III of India Reit Fund ("IRF"). IRF is a Venture Capital Fund registered with SEBI. IRF is also a contributory trust who receives contributions from various contributors/investors. IRF has in turn, used these funds for making investment in VCU's shares, mutual funds, debentures and 4 Piramal Enterprises Ltd. subscription money pending allotment etc on behalf of the various i n v e s to rs / b e n e f i c i a ri e s a n d th e a s s e s s e e c o m p a n y i s o n e o f th e investors/ beneficiaries. IRF is a contributory and determinate trust. IRF does not pay tax on the income earned as it enjoys a pass through status and taxes are paid at the beneficiary level. The income of IRF will be taxable in the hands of beneficiary in the same character and same manner as if it were the income of the beneficiary had it directly made the investments in VCUs. 3.4. The assessee, being beneficiary, is liable to tax for its share in the income earned by IRF in the same character and same manner as in the case of a trust and hence it had calculated disallowance u/s 14A in the same manner and the same extent by applying percentage of investments made by IRF in the shares/Mutual funds to its total assets as at the year end and has suo-moto disallowed interest of Rs.1,01,00,417/- while computing total income.

1284/M/14-Piramal

3.5. From the investments made in IRF, the assessee derives taxable as well non-taxable income and offers taxable income under the head "Income from Business and Profession". During the year under consideration, IRF had invested certain portion of its total assets in debenture and subscription money pending allotment mainly of debenture/securities and hank fixed deposit. Income from 5 Piramal Enterprises Ltd. these, portion of investments made by IRF will generate taxable interest income. Hence interest of Rs.1,27,70,4l7/- incurred on these portion of investment was claimed as allowable. 3.6. Apart from this, IRF had also invested certain portion of its total investments in shares and mutual funds, income from which is exempt u/s. 10(34) of the Act. Further, considering the provision of section 14A of the Act, suomoto disallowance of interest expenditure Rs.1,01,00,417/- was made by the assessee as it was relatable to earn exempt income and the balance interest of Rs.1,27,70,417 /- incurred for the purpose of business was claimed as allowable u/s 36(1)(iii) of the Act on the ground that interest paid was inextricably related to the earning of income. 3.7. During the course of hearing, it was argued on behalf of the assessee that no further disallowance u/s 14A was warranted as interest expenditure was claimed only for that portion of investment made by the assessee in IRF, which in turn invested the same in those items which generate taxable income. After considering detailed submission of the assessee, Ld. CIT(A) reworked the disallowance after recording detailed findings as under: “As regards suo-moto calculation of disallowance of interest of Rs 1.01 crores by the appellant u/s14A, 6 Piramal Enterprises Ltd. I find that the said disallowance was made on the basis of investments balance as on 31.03.2008 as appearing the audited balance sheet of the IRF scheme I and Scheme III. As the appellant has invested in IRF during the year and the IRF has in turn invested in shares, mutual fund, debentures, application money etc., I find that the disallowance of interest should be made based on the monthly balance in investments in shares, mutual funds, debentures, application money as appearing in the books of IRF scheme I and scheme III. The appellant was asked to recalculate the disallowance of interest based on the monthly balance in investment which generate tax free income and investments which generate taxable investments as per the books of IRF Scheme I and Scheme I. The appellant has submitted the interest calculation as per monthly balance in investments a per the books as certified by CFO of IRF scheme I and III which works out to Rs.1.07 crores. The disallowance u/s.14A is Rs. 1,07,16,861/- crores as against Rs.1,01,00,417/- crores offered by appellant. The AO shall therefore revise the interest disallowable u/s.14A at Rs.1,07,16,861/. Disallowance u/s.14A works out to Rs.1,07,16,861 cores. The balance interest in any case is allowable either u/s.36(1)(iii) or u/s. 57(iii) depending upon whether the investments are by way of stock-in-trade or investment (though for which no working/findings has been given by the AO.) Accordingly, there is no reason for disallowance of balance interest without any adverse material on record. 2.3 This ground of appeal is therefore, partly allowed as per aforesaid directions.” 3.8. We have gone through the detailed findings of Ld. CIT(A) and also gone through the judgment relied upon by the Ld. Counsel in the case of Rainy Investment Pvt. Ltd.,(supra), the relevant portion of the same is reproduced below: “We have heard the parties, and perused the material on record. Section 14A r/w r. 8D is mandatory in its application where the assessee earns income which is claimed tax-exempt, as dividend income in the instant case. In fact, there is no doubt with regard to this; the assesse itself conceding to the same before us and, besides, being engaged in the 1284/M/14-Piramal business of making investments and earning dividend income as an integral part thereof. The only option, therefore, if it considers the application of the provision as operating to its detriment, is to forfeit its right to exemption from tax in its respect. Qua merits, we find much force in the assessee’s argument that ‘share application money’, to the extent it is actually so, so that it only represents amount/s paid by way of application for allotment of shares, the same cannot be regarded as an investment in shares, or an asset (or asset 8 Piramal Enterprises Ltd. class) yielding tax-free income, and neither is it capable of yielding any tax-free income. The same would, therefore, in our clear view, have to be excluded in working out the disallowance u/r. 8D. Further, though the Revenue has not disputed the sums reflected as ‘share application money’ in the assessee’s balance-sheet, the AO, to whom the matter is to be in any case restored for working out the disallowance by excluding the same, shall, in the set aside proceedings, also examine the veracity of the assessee’s claim with regard to the same being ‘share application money’. This is in view of the pertinent questions raised by the Bench in its respect, to which no satisfactory answer was forthcoming during hearing, nor – to be fair to the ld. AR, could possibly be in the absence of any details on record. We state so as the ‘share application money’ would ordinarily only be ‘public money’ and, thus, except perhaps where toward shares of private limited companies, subject to stringent procedure, as is generally in place for such funds. We may further clarify that the exclusion of ‘share application money’, as opined by us, is not in the least for the reason that it did not yield any tax-free income for the relevant year, but for the reason that it is incapable of any such income. The same is only in the nature of application (offer) money, which would though, on allotment, get adjusted against the cost of the said shares, and only whereupon any rights in the investee company inure to the allottee. No rights, not even inchoate, in the share capital of the issuing company arise on the payment of the share application money, irrespective of the time period for which it may outstand. The same may at best yield interest income (for which a special procedure though has to be followed by the company concerned), which is in any case taxable, so that there is no scope for application of sec. 14A thereon. As such, upon verification of the assessee’s claim with regard to the share application money as on 31.03.2007 and 31.03.2008, as appearing in its balance-sheet/books of account, so that no shares had actually been allotted in its respect as at the relevant dates, the same shall be excluded by the AO from the qualifying amount in reckoning the average investment in working out the disallowance under rules 8D (ii) and 8D(iii). The A.O. will decide the matter per a speaking order, allowing the assessee a reasonable opportunity to present its case before him.” 3.9. In our considered opinion, the Ld. CIT(A) has followed correct approach, both on law and facts. The disallowance has been sustained to the extent it pertains to investment in securities enjoying tax-free income and the disallowance has been deleted vis-à-vis investment in the securities enjoying taxable income. Nothing wrong could be pointed in the findings of the Ld. CIT(A), and therefore order of Ld. CIT(A) is upheld. Thus, ground raised by the Revenue is dismissed”

Respectfully following the above order we decide Gr.No.1 in favour of the assessee in part.

1284/M/14-Piramal 3.Ground No.2 is about granting credit of advance tax . During the appellate proceedings the assessee contended before the FAA that credit for advance tax paid by IRF was not given .The FAA directed the AO to ascertain the facts and to give credit if adv tax was paid. In our opinion no interference is called for in that regard as the FAA had passed a suitable direction for verification.Ground No.2 is decided against the assessee.