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Order u/s.254(1)of the Income-tax Act,1961(Act) 1 CITIGROUP(04-05&05-06)
खंडपीठ खंडपीठ केकेकेके अनुसार खंडपीठ खंडपीठ अनुसार अनुसार PER BENCH- अनुसार Challenging the orders of the Cs.IT(A)-Mumbai the assessee and the Assessing Officers (AO.s)have filed Cross-appeals for the above mentioned Assessment Years(AY.s.). Besides, the assessee has also filed Cross-objection(CO.s) for the AYs.2004-05 and 2005- 06.Considering the fact that issues involved in all the appeals are common,we are adjudicating these matters by a single order for sake of convenience.Details of filing of returns of incomes,returned incomes,dates of assessments etc.for the above AY.s. can be summarised as under: A.Y. ROI filed on Returned Income Assessment dt. Assessed Income Dt. CIT(A) order 2004-05 29.10.2004 67,39,03,580/- 27.12.2006 100,04,76,050/- 02.05.2012 2005-06 18.08.2006 35,97,68,850/- 24.12.2008 46,33,26,226/- 04.02.2011 2006-07 16.11.2006 71,70,30,046/- 30.12.2009 64,08,83,600/- 28.02.2011 ITA/ 5731/Mum/2012,AY.2004-05 (Assessee’s Appeal) : 2.Assessee-company is engaged in the business of financial services.First ground of appeal is about expenditure incurred towards venture capital advisory services of Rs.64.02 lakhs. During the assessment proceedings, the AO found that in terms of an agreement, dated18.8.1997,the assessee had paid Rs.64,02,401/- for the services rendered, that the payment was called Venture Capital Advisory Fee. The AO held that the expenditure was towards the investment in shares, that the input from such advice was being used to enter or to exist or to hold on to investments,that the fee paid by it was not related to cost of acquisi - tion or sale consideration in respect of investment, that for the purpose of computation of income such expenses can only be considered against earning of dividends from investments. The assessee claimed that fee paid by it should not be deducted from gross dividend to compute net dividend income. However, the AO held that if the matching principle were applied the fee would be clubbed with growth of dividend.Finally,he made a disallowance of Rs.64.02 lakhs under section 14A of the Act.
3.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him, it was argued that Citi Bank would provide advisory services to the assessee, that the fee was not paid for earning the dividend, that it would not be attributable to exempt income. After considering the submission of the assessee and the assessment order the FAA held that the expenditure in question was incurred wholly and exclusively for investment activity that it was relatable to investment activity only.Referring to his order for the AY 2003-04 he held CITIGROUP(04-05&05-06) that Venture Advisory Fee was relatable to investment activity.Thus, he upheld the order of the AO.
4.Before us, the Authorised Representative(AR) submitted that proportionate advisory fee on investment,made during the year on which exempt dividend had been received,was not attributable to earning of exempt income.He referred to the order of the Tribunal dt.12.8.2008 for AY 2003-04(ITA/2433/Mum/2007).He also made a reference to the order of the FAA, dt.24.08.2011 that was passed in pursuance of the decision of the Tribunal i.e. order dtd.12. 08.2009.The DR supported the order of the FAA.
5.We have heard the rival submissions and material before us. We find that while deciding the issue of Venture Capital Advisory Fee for the AY.2003-04(supra),the Tribunal had dealt the issue as under : “Ground 3 relates to the decision of the CIT(A) that the Venture Capital advisory fee of Rs.2,11,26,134/- paid to Citibank was entirely towards the investment activity and it therefore, attributable to the earning of dividend income. Paragraphs 2.3 of the impugned order does not provide any discussion in this regard despite specific ground 1(c) raised by the assessee before him. The passing such as order is against the provisions of section 250(6) of the Act, where it is provided that the order of the CIT(A) shall state the ‘points for determination, the decision thereon and the reason for the decision’. On finding that the CIT(A) has failed to consider the point for determination we are of the opinion, that the matter must be referred to his files for a decision the reasons thereon. CIT(A) shall note that it is an admitted position that the advisory fee payment to CITIBANK is for rendering of services in matters of the assessee’s investments and such rendering of advisory services is continuous process. In that sense, the rendering of the services by the Bank to the earning of the dividend cannot be ruled out.CIT(A) needs to pass a speaking order if the dividend earned from the franchisees Sriram Group, and the dividend earned from Citicorp Maruti Finance Ltd. (CMFL) where the investment are supplied by way of foreign equity participation by the Citibank Overseas Investment Corporation (COIC), were due to the advisory services rendered by CITIBANK. CIT(A) shall also take into account the binding jurisdictional High Court’s judgment in the case of GIC(supra), while deciding the issue afresh and proceed to adjudicate the issue only after considering the requirement of establishing the nexus between the advisory services rendered and the earning of the dividend. It goes without saying that the assessee is under legal obligation to demonstrate the nexus as it is the assessee , who made the claim of deduction u/s. 80M of the Act. CIT(A) shall accord reasonable opportunity of being heard to the assessee .Accordingly, the ground 3 is set aside.” We find that the FAA had passed the order, in pursuance of the decision of the Tribunal as Under “The Hon'ble ITAT in para-15 of the order dated 12.08.2009 had directed to the CIT(A) that - "CIT(A) needs to pass a speaking order if the dividend earned from the franchisees i.e. Shriram Group and the dividend earned from the Citicorp Maruti Finance Ltd. where the investments CITIGROUP(04-05&05-06) are supplied by way of foreign equity participation by the Citibank Overseas Investment Corporation (COIC), were due to the advisory services rendered by the Citibank. In this connection, it was the appellant's claim that the investments in these three companies had not been made on account of advisory services from the Citibank " In the facts and circumstances, the onus was on the appellant to prove the same. Since it was appellant's claim, it was appellant's books accounts and it was the appellant's affairs, therefore, the documentary evidence/information/details were in possession of appellant itself to prove that the investment in these three companies were not made on account advice received from the said bank. In view of above facts, the AO or CIT( A) could not be in a position to examine the appellant's claim. In respect of investment in shares of Shriram Group, the investment was made at Rs.7.69 crore and Rs.7.54 crore during the year only. In respect of investments made in shares of subsidiary companies, M/ s. Citicorp Maruti Finance Ltd. the investments were as under:- As on31.03.1998 Rs. 22,20,000/- As on 31.03.1999 Rs.44,40,74,000/- As on 31.03.2000 Rs.55,50,74,000/- As on 31.03.2001 Rs.74,00,00,000/- As on 31.03.2002 Rs.74,00,00,000/- As on 31.03.2003 Rs.74,00,00,000/- From the above details, it is apparent that the investment in shares of subsidiary companies, Citicorp Maruti Finance Ltd., has not increased after A.Y. 2001-02. There was no sales of these investments after A.Y. 2001-02. Since there is no fresh investment in the shares of Citicorp Maruti Finance Ltd. during the A.Y. 2002-03 or 2003-04, therefore, it cannot be said that the appellant utilized advice of Citibank during the year for the purpose of acquisition of new investment in shares of Citicorp Maruti Finance. Thus, it appears that-venture capital advisory fee paid to Citibank was not related to the earning of dividend on -the investments held in the shares of Citicorp Maruti Finance Ltd. Shares of this company were acquired in earlier years and therefore, such advice of the bank could not have been utilized at least during the year in respect of investment in shares of this company. Similarly, the investments in shares of Polaris Software Lab and RelQ Software were also made in earlier years as explained above. During the year, or in immediately preceding assessment years, there was no fresh investment in shares of these two companies and therefore, it could not be said that the appellant utilized advice of Citibank during the year for making fresh investments in shares of these two companies. However, the shares of RelQ Software at Rs.8.60 crore and shares of Polaris Software Lab Ltd. at Rs.3.22 crore were sold by the appellant during the year. However, the advisory fee paid for the sale of shares, if any, is required to be considered against capital gains and not against dividend earned. In the facts and circumstances, the expenditure of venture capital advisory fee was also not relating to the dividend earned on shares of these two companies. Without prejudice to the above finding it is held that the appellant has failed to explain and prove that the advisory fee paid to bank was not having direct nexus with the dividends earned on shares of Shriram Investments Ltd. During the year, the appellant made fresh investment in following:- Shares of Citicorp Capital Market Rs.53.04 crore Shares of Shriram Investment Rs. 7.69 crore Shares of Shriram Transport Rs. 7. 54 crore Govt. of India Loans Debentures The appellant was also having investment in other companies. The investment in most of the companies were old (opening and closing balance same) or reduced during the year. The appellant was paying advisory fee to Citibank for [i] Proposal for making investments (ii) Monitoring the assisted Companies and recommending mode, timing, pricing for sale / disposal of investments.
CITIGROUP(04-05&05-06)
The advisory fee paid relating to sale of shares was to considered against capital gains only. The advisory fee paid for acquisition of shares of companies was only required to be considered for the purpose deduction u/s.80M of the Act. The fresh acquisition of shares of Citicorp Capital market at Rs.53.04 crore did not yield the dividend during the year. Hence, advisory fee paid relating to fresh investments made in shares Citicorp Capital market was not required to be considered here. However advisory fee paid in respect of fresh acquisition of shares of Shriram Investments-and Shriram Transport was ,required to be considered against the dividend income earned during the year. The appellant's fresh investments during the year were at Rs.68.27 crore (i.e. 53.04 + 7.69 + 7.54). The ratio of investment in shares of Citicorp Capital Market and Shriram Group companies was 77.70 : 22.30. The total advisory fee paid to bank was at Rs.2,11,26,134/-. The proportion of advisory fee paid relating to fresh investments made in Shriram Group companies works out at 22.30% of Rs.2,11,26,134/- i.e. at Rs.47,11,127/-. In view of above, it is held that out of total venture capital advisory fee paid to Citibank at Rs.2, 11,26,134/-, the advisory fee of Rs. 47,11,127/- was having nexus with the earning of dividend income on shares of Shriram Group of companies. The disallowance of venture capital advisory fee of Rs.4 7,11,127/- is therefore, upheld and disallowance of balance is deleted. In the result, it is held that interest expenditure of Rs.14,59, 120/- and advisory fee of Rs.47, 11,127/- totaling to Rs.61,70,247/- was the expenditure relatable to earning of dividend income. Thus, the net dividend earned by appellant was at Rs.1,90,96,983/-(2,52,67,230- 61,70,247) which was eligible for deduction u/s.80M of the Act. The A.O. is directed to allow deduction u/s. 80M at Rs.1,90,96,983/-.”
We find that the order of the FAA was not challenged before the Tribunal by either of the parties.Thus,his order has become final.Considering the above facts,we direct the AO to recalculate the disallowance on similar lines after considering the ratio of investment as considered by the FAA in his order dt.24.8.2011.Ground, No.1 is allowed in favour of the assessee,in part.
6.Ground No.2-4 are about ad-hoc disallowance of expenditure u/s.14A of the Act.We would like to discuss the facts with regard to the disallowance in brief.
6.1.During the original assessment proceedings the AO scrutinised the balance sheet of the earlier year and the year under consideration and held that the assessee had heavily used borrowed funds for its business. After considering the networth and borrowings of the assessee,he held that the investment were much more than its own funds, that a part of borrowing costs had to be apportioned towards earning dividend, that it had not proved that investment was out of its own funds.On a query by the AO in this regard,it was argued that investment in its subsidiaries should be excluded from the interest cost.However,the AO did not agree that investment was entirely out of assessee’s own fund,that assessee was not correct in claiming that all of the gross dividends was income.He tabulated the investment in equities and average interest cost of the fund as under :-
CITIGROUP(04-05&05-06)
6.1.3 Investment in equities (unquoted & quoted) is as under :- 31.03.2002 31.03.2004 (Rs.Crs.) (Rs.Crs.) 140.5123 219.6978> subsidiary companies 72.4612 46.2259> unquoted other companies 24.6250 21.7844> current investments(quoted) ________ _________ 237.5985 287.7081 ________ __________ Average investment : Rs.262.65 crores Average in subsidiaries : Rs.180.10505 crores Average investment (other than subsidiaries) : Rs.82,54495 crores Average interest cost of the fund = 131.45 crores /[(2896.24 + 2478.80)/2] = 131.45/2687.52 = 4.89% Interest cost of the fund utilized For investment (tax exempt) = 82.54495 x 4.89% = Rs.4,03,64,480/- He further held that a part of the personnel/administrative cost had to be apportioned towards dividend yielding investment for section 14A, that the allocation was to be made on the basis of ratio of amount invested in equities in income to total capital employed in the business.He worked out disallowance under the head administrative and establishment expenses at Rs. 94.13 lakhs.The FAA,in the appellate proceedings,worked out the 14A disallowance at Rs.11.40 Crores.The Tribunal vide its order dtd.28.09.2011 set aside the issue to the file of the FAA for fresh adjudication.
6.2.During the set-aside proceedings,in respect of interest cost,the assessee argued and explained that the AO and the assessment order had accepted its claim that investment in downstream subsidiaries was not made out of borrowed funds and accordingly no interest cost was required to be apportioned towards investment in the subsidiary companies, that the Tribunal in its order for the AY. 2003-04 had also accepted the assessee’s said claim.In respect of investment in companies other than subsidiaries, it was argued that no fresh investment had been made during the year under appeal, that investment to the extent of Rs. 31 Crores approximately had been sold during the period, that no interest cost was attributable to earning of dividend income, that the contention of the assessee had been accepted by the Tribunal in the orders for the earlier years that no interest expenditure had been incurred towards tax-free income. It referred to the order of the FAA for the AY. 2003- 04 wherein he had disallowed a portion of interest cost only towards investment made in one of the group companies and stated that the FAA had given the finding that out of total CITIGROUP(04-05&05-06) investment of Rs. 15.23 Crores in that group investment to the extent of Rs. 4.90 Crores had nexus with interest expenditure, that interest cost had been attributed only on such investment to the extent of Rs. 4.90 Crores. Without prejudice to its claim,the assessee contended that Rs.0.93 Crores,towards investment in Shriram group,should be attributed towards investment amount of Rs. 4.90 Crores.
6.3.In respect of the administrative expenses,the assessee argued that no expensive attributable to the investment activity,that the Tribunal had deleted the addition under the head stated expenses,while adjudicating the appeal for the AY.2003-04. 6.4.After considering the submission of the assessee,the FAA held that in the assessment order,the AO had accepted the argument of the assessee that the investment in subsidiaries were out of its own funds and therefore had no interest cost attributable.Referring to the order passed by him, in pursuance of the order of the Tribunal,for the AY.2003-04,the F AA held that interest cost of Rs. 93.60 lakhs was attributable to investment in shares of the Shriram group companies which had yielded exempt income and therefore same was to be disallowed u/s.14A of the Act.The FAA further observed that assessee was having investment in companies(other than subsidiaries) at Rs. 46.22 Crores and investment of Rs. 6.50 Crores in equity shares of Swojas Energy foods Ltd. Adapting the formula of finance charges x investment in other companies/total investment, the F AA worked out the interest cost at Rs.10.07 Crores.However,he held that the above figure was giving a distorted picture. Referring to the figures of share capital and reserves and surplus was and the investments,he held that interest expenditure attributable to shares of other companies had to be estimated at Rs. 2 Crores.Thus,he disallowed a sum of Rs.2.93 Crores (Rs. 2 Crores+ Rs. 93.60 lakhs) u/s. 14A of the Act.
6.5.With regard to administrative and managerial cost attributable to the investment activities, the FAA held that the exempt dividend income could not be earned without incurring of such expenses,that the argument of the assessee about not incurring any administrative/managerial expenses was not acceptable,that it had sold various old investments,that the selling of investment at an appropriate time required decision at managerial level and also support of skilled personnel in the field of capital/financial management, that it could not be said that no expenses were incurred for management of investments, that there were various methods for working out search administrative cost attributable to investment, that the AO had applied 7 CITIGROUP(04-05&05-06) one of such methods and had worked out the admin and managing cost at Rs. 94.13 lakhs, that the disallowance made by the AO was reasonable.
6.6.During the course of hearing before us, the Authorised Representative (AR) argued that the assessee had sufficient own funds to make investments, that the available results and surplus was far more than the total investments for the year under consideration,that the FAA was not justified in working out the disallowance at Rs. 2.93 Crores,that the assessee had not incurred any administrative or managerial expenditure to earn the exempt income. Alternatively,it was argued that the disallowance should be restricted to 1% of the exempt income.He referred to the cases of HDFC Bank Ltd. (Writ Petition 1753 of 2016), HDFC Bank Ltd.(ITA/374/Mum/2012),HDFC Bank Limited(366 ITR 505),Reliance Utilities and Power Ltd.(313 ITR 340), Suzlon Energy Ltd. (354 ITR 630),Hero Cycles Ltd.(323 ITR 518),Catholic Syrian Bank Ltd. & Ors.(237CTR 164),Videocon Industries Ltd.(ITA/ 6145/ Mum/2012,1728/Mum/2014 & 1729/Mum/2014 order dt.06.02.2015),Shoppers Stop (ITA /1448 & 4475/Mum/2010 order dated 30.08.2011) in support of his argument that if the assessee had sufficient own funds from which investment had been made no disallowance u/s.14A was to be made. He also relied upon the cases of HDFC Bank Ltd(ITA/4529/ Mum/ 2015),The Ashoka Trading Company Private Ltd. (ITA/ 2270-71/Kol/ 2010).
6.7.The Departmental Representative (DR) supported the order of the FAA and argued that reasonable disallowance had to be made with regard to administrative expenses for the year under consideration.He referred to the case of M/s.India Infoline Ltd.(ITA/2490-2620/Mum/ 2013-AY.2008-09,dtd.01/12/2015).
6.8.We have heard the rival submissions and perused the material before us. We find that the FAA had made a disallowance of Rs.2.93 Crores under the head interest expenditure. We find that non-interest-bearing fund available to assessee for the year under consideration was at Rs. 6,35,95,80,000/--(share capital 509.02 Crores + Reserves and Surpluses-126.93Crores) and the investment made by the assessee for the year under appeal was Rs.287.70 Crores (without considering the provision for permanent diminution in value of Rs.29.26 Crores). Thus,the assessee had sufficient own fund to make investments.Therefore, in our opinion the FAA was not justified in making the disallowance of Rs. 2.93 Crores under the head interest expenditure.
CITIGROUP(04-05&05-06)
6.9.As far as managerial and administrative expenditure is concerned we are of the opinion that provisions of Rule 8D of the Rules cannot be applied, as the AY. involved is AY. 2004- 05.As per the judgement of the Honorable Bombay High Court, delivered in the case of Godrej and Boyce,only reasonable disallowance could be made under the head managerial/ administrative expenses for the year under appeal.We are of the opinion,that to meet the ends of justice, disallowance should be restricted to 1% of the exempt income under the head managerial and administrative expenses.Ground number two decided in favour of the assessee.
7.Third ground stands allowed in favour of the assessee,in part.Ground no.4 is allowed for statistical purposes.
ITA/5149/Mum/2012-AY. 2004-05(Revenue’s Appeal): 8.The solitary ground of appeal
, raised by the AO is partly deleting the addition u/s. 14. A and restricting the addition from Rs. 5.61 Crores two Rs. 4.51 Crores. While deciding the appeal, filed by the assessee, we have held that the F AA was not justified in making disallowance under the head interest expenditure,that the disallowance under the head managerial/ administrative expenses should be restricted to 1% of the exempt income.The issue of Venture Capital Advisory Fees has been restored back to the file of the AO for fresh adjudica -tion.Thus,we have decided all the issues that have been raised by the AO in his appeal. Effective ground of appeal of the AO is,partly allowed.
CO/219/MUM/2013-AY. 2004-05 (By Assessee ) 9.In its CO,the assessee has argued that 14A disallowance should be restricted to amount of exempt income.While deciding appeal filed by the assessee,we have already held that the disallowance should not be more than 1% of the exempt income.Therefore,the ground raised by the assessee in its CO,stands allowed for statistical purposes.
ITA/3973/Mum/2011,AY.2005-06 (Assessee’s Appeal) : 10. As per the chart,submitted by the assessee, during the course of hearing before us, there are two effective ground of appeal-the first deals with venture capital expenditure disallowed under section 14A of the Act and the second ground is about ad hoc disallowance confirmed by the FAA under the heads ‘interest expenditure’ and ‘administrative expenditure’.
CITIGROUP(04-05&05-06)
10.1. During the course of hearing before us, the AR and the DR made the same submissions that were advanced for earlier assessment year. Following our order for the AY.2004-05,we restore back the issue of venture capital expenditure to the file of the AO for fresh adjudica - tion with similar directions.First effective ground is allowed in favour of the assessee, in part.
10.2.With regard to disallowance under the head interest expenditure, we would like to state that funds available to the assessee for the year under consideration was far more than the investment made by it.Funds available to the assessee for the year were at Rs. 6,73, 05, 75, 000/-(share capital 509.02 Crores + Reserves and Surpluses-164.03Crores) and the investment made by it was 283.72 Crores (without considering the provision for permanent diminution in value of Rs.21. 76 Crores).Therefore, the FAA was not justified in making disallowance of Rs. 4 crores under the head interest expenditure.We further find that the FAA had made the disallowance of Rs.15 lakhs on account of administrative expenditure . Following our order for the earlier year,we restrict the disallowance to 1% of the exempt income.Second effective ground is allowed partly.
ITA/3164/Mum/2011,AY.2005-06 (Revenue’s Appeal) : 11.The only ground raised by the AO is restricting the disallowance of administrative and managerial expenses to Rs.15.00 lakhs as against the disallowance of Rs.2.50 crores as computed by the AO.
11.1While deciding the appeal filed by the assessee we have held that the disallowance should be restricted to 1% of the exempt income. To that extent, we confirm the order of the FAA.Effective Ground raised by AO is decided in his favour, in part.
CO/149/Mum/2011 AY.2005-06: 12.In its C.O. the assessee has argued that, in the event, the contention of the Department regarding computation of disallowance of administrative expenses apportioning 0.5% of the average value of investment is upheld, then only those investment should be considered for disallowance from which tax free income was received during the year. 12.1.In the earlier paras of our order,we have already held that disallowance under the head administrative/managerial expenditure should be restricted to 1% of the exempt income. Therefore,the C.O. filed by the assessee stands allowed for statistical purposes.
CITIGROUP(04-05&05-06)
ITA/4898/Mum/2011,AY.2006-07 (Assessee’s Appeal): 13.Ground no.1 deals with interest disallowance of Rs.2 Crores,made u/s.14A of the Act.Following our orders of earlier years,we decide the issue in favour of the assessee ,as it had sufficient own fund to make investments.
14.Second ground pertains to disallowance of administrative expenses of Rs.10 lakhs.Following the orders for earlier years, disallowance is restricted to 1% of the exempt income.Second ground is partly allowed.
ITA/3615/Mum/2011,AY.2006-07 (Revenue’s Appeal): 15.First ground of appeal is pertains to applicability of Rule 8D of the Rules.The FAA had held that that the provisions of the said Rule were not applicable for the year under appeal.In our opinion, the FAA was fully justified in following the judgment of Hon’ble Bombay High Court of Godrej & Boyce Manufacturing Co.Ltd.and hold that the Rule 8D was applicable for the AY.2006-07.First ground of appeal is decided against the AO.
16.Second ground is about restricting the 14A disallowance.The FAA had restricted the interest and administrative disallowances to Rs.2 Crores and 10 lakhs as against the disallowance of Rs. 2.40 Crores and Rs.26.43 lakhs respectively, made by the AO. Following our order for earlier years we hold that no disallowance should have been made under the head interest expenditure. We have restricted the administrative-expenditure disallowance to 1% of the exempt income in the earlier years Following the same, second ground is decided in favour of the A.O. , in part.