E-CITY INVESTMENT & HOLDINGS COMPANY P.LTD,MUMBAI vs. DCIT RG 8(1)(OSD), MUMBAI

PER SHAILENDRA KUMAR YADAV, J.M:

“1. The Ld. CIT(A) erred in law and facts in upholding disallowance of interest of Rs.9,81,55,591/- u/s.36(1)(iii) of the Act on account of finance provided by way of share application/loan to its subsidiaries/sister concerns out of prudence commercial expediency. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law.”

2.1 In for A.Y.2009-10, Revenue has filed the appeal on the following grounds: , 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 3

“1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.3,79,01,645/- under section 14A read with Rule 8D, placing reliance on the appellate order for A.Y. 2008-09 without appreciating that the assessee has not shown any income other than interest income of Rs.8,03,509/- which constitutes income assessable under the head 'income from other sources' and does not form part of business and the interest expenditure of Rs.9,81,55,591/- has arisen to the assessee on account of investments in equity shares and therefore, section 14A read with Rule 8D was squarely applicable to the assessee's case."

2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 3,79,01,645/- under section 14A read with Rule 8D without appreciating that the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd v/s. DCIT -10(2) has held that Rule 8D is constitutionally valid and effective from A.Y. 2008-09 onwards."

3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.3,79,01,645/- under section 14A read with Rule 8D without appreciating that once Rule 8D is invoked, the disallowance has to be computed within the provisions of the said Rule and no deviation can be made therefrom."

4. "Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.3,74,76,097/- (out of Rs 3,79,01,645/- disallowed under section 14A read with Rule 8D) without appreciating that in para 4.6. of the assessment order the Assessing Officer had held that the entire expenditure on interest amounting to Rs.9,81,55,591/- as disallowable under section 36(1)(iii) read with Section 14A of the Act which has been upheld by the Ld. CIT(A)in Ground No. 3 of the impugned order and , 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 4

therefore, the disallowance of the entire amount of Rs.9,81,55,591/-, which included the telescoped disallowance of Rs 3,74,76,097/- under section14A, ought to have been upheld by the Ld. CIT(A)."

5. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) in deleting the increase of Rs 3,79,01,645/- as per Explanation 1(f) of Section 115JB of the Act in the book profit computed under the said section."

3. Assessee e-filed its original return of income declaring net loss at Rs.6,14,200/-. Thereafter, assessee e-filed its revised return of income declaring net loss at Rs.9,77,77,630/-. First issue raised in Revenue’s appeal is with regards to disallowance of interest u/s.14A of the Act. Assessing Officer on perusal of comparative balance sheet noticed that assessee was holding investments worth Rs.64,96,53,500/- as at the end of year. However, assessee has not attributed any expenses which have been incurred to carry out the activity of investments, though it was observed that for carrying out any such activity, some kind of expenditure necessary has to be incurred. Assessee was asked to furnish complete details of investments and to show cause and explain as to why disallowance of expenditure should not be made u/s.14A of the Act in accordance with the formula prescribed under Rule 8D of the Income Tax Rules. In response to same, assessee company furnished written submissions inter alia submitting that investments were strategic investments not made with the intention to earn tax free income by way of dividend or capital gain, that total investments were made out of internal 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 5 accruals/interest free funds, and no expenses were incurred or effort made to earn dividend or any income from this investment. Assessing Officer did not accept the contentions of assessee and made addition by observing that investment decisions are very complex and require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time etc., and it is difficult to accept that assessee can carry out any such activity without incurring any expenses whatsoever including management or administrative expenses as investment decisions are generally, taken in a planned manner, that 14A disallowance encompasses also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. According to Assessing Officer, there were no free reserves and surplus lying with assessee company and that it had also applied its borrowed funds towards making investments in the form of equity shares. Assessing Officer computed disallowance u/s.14A of the Act in accordance with the provisions of Rule 8D of the Act, taking i. direct expenditure at Nil, ii. proportionate of interest expenditure computed in accordance with the formula given in Rule 8D(2)(ii) at Rs.3,74,76,097/-, and iii. amount equal to one-half percent of the average of the value of investment at Rs.32,47,895/-, total disallowance was worked out at Rs.4,07,23,992/-. , 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 6 3.1 In appeal, various contentions were raised on behalf of assessee and having considered the same, CIT(A) allowed the claim of assessee by following order for A.Y.2008-09. It was brought to our notice that similar facts arose in A.Y. 2008-09 wherein the similar issue allowed in favour of assessee at CIT(A)’s level by observing as under:

“In the present assessment year in appeal the facts are similar, and in fact it has been shown by the appellant that the investments were made in earlier years and this itself had been accepted by the AO in AY 2008-09 in his assessment order. In AY 2008-09, the AO held that no borrowed fund has been utilized for investment purposes. Hence, interest was not disallowed for the purpose of computing disallowance u/s 14A, and disallowance was computed at one half percent of the average value of investments. Thus the disallowance on account of the interest component cannot be sustained in appeal for AY 2009-10. The disallowance computed at one half percent of the average value of investments in AY 2009-10 is Rs.32,47,895/- as against expenditure claimed of Rs.4,25,428/- and no exempt income has been declared by the appellant. As against the total expenditure claimed by appellant of Rs.4,25,428/-, the AO has also not indicated whether or not there is any expenditure which has been wrongly claimed by the appellant, in view of foregoing, no disallowance can be made u/s. 14A. Accordingly, the disallowance made by the AO is accordingly deleted. This ground of appeal is thus allowed.”

3.2 There is nothing contrary was brought to our knowledge on behalf of Revenue. In view of this, the disallowance on account of interest component could not sustained in the year under consideration i.e. A.Y. 2009-10. Moreover, Assessing Officer has not indicated whether or not there is any expenditure which has been wrongly claimed by assessee. In 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 7 view of this, CIT(A) was justified in holding that no disallowance has been made u/s.14A of the Act. Same has been uphold.

5. The next issue as raised in assessee’s appeal with regard to disallowance of interest of Rs.9,81,55,591/- u/s.36(1)(iii) of the Act on account of finance provided by way of share application/loan to its subsidiaries/sister concerns. Assessee provided finance by way of interest free loan and share application money to its subsidiaries/sister concerns during the year and in earlier year as well as out of commercial expediency. The subsidiary had used these funds for its business, hence interest thereon was claimed as allowable u/s.36(1)(iii) of the Act. However, Assessing Officer disallowed Rs.9,81,55,591/- u/s.36(1)(iii) of the Act on the ground that assessee could not substantiate its claim its claim in respect of interest expenditure. However, Assessing Officer restricted the disallowance of Rs.6,06,79,494/- as interest of Rs. 3,74,76,097/- was already disallowed by him u/s.14A of the Act. , 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 8 5.1 CIT(A) upheld the disallowance relying upon the order of predecessor’s for A.Y. 2008-09 and confirmed the disallowance of Rs.9,81,55,591/-.

5.2 Ld. Authorized Representative pointed that in assessee’s own case for A.Y. 2008-09 in wherein Tribunal has decided the similar issue in favour of assessee by observing as under: “2.12 To sum up the matter, in the light of the aforesaid judicial pronouncement and the factual matrix available on record, we find that the money was advanced by the assessee holding company to its subsidiaries for "business expediency", which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed above and facts of this case, it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee.”

5.3 Nothing contrary was brought to our knowledge. Facts being similar, so following same reasoning, we are inclined to censure with the order of CIT(A) who has disallowed the interest in question. Assessing Officer is directed accordingly to allow the interest of Rs.9,81,55,591/- u/s.36(1)(iii) of the Act 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 9 on account of finance provided by way of share application/loan to its subsidiaries/sister concerns.

“1. The Ld. CIT(A) erred in law and facts in upholding disallowance of interest of Rs.4,07,41,028/- u/s.36(1)(iii) of the Act on account of finance provided by way of share application/loan to its subsidiaries/sister concerns out of prudence commercial expediency. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law.”

6.1 In for A.Y.2010-11, Revenue has filed the appeal on the following grounds:

“1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.1,72,95,931/- under section 14A read with Rule 8D, placing reliance on the appellate order for A.Y. 2009-10 without appreciating that the assessee has not shown any income other than interest income of Rs.3,02,49,717/- which constitutes income assessable under the head 'income from other sources' and does not form part of business and the interest expenditure of Rs.4,07,41,028/- has arisen to the assessee on account of investments in equity shares and therefore, section 14A read with Rule 8D was squarely applicable to the assessee's case."

2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.1,72,95,931/- under section 14A read with Rule 8D without appreciating that the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd v/s. DCIT -10(2) has held that Rule 8D is , 2930, 5690 & 5697/Mum/13 A.Ys. 09-10 & 10-11 [M/s. E-City Investments & Holdings Co. Pvt. Ltd. Vs. DCIT] Page 10

constitutionally valid and effective from A.Y. 2008-09 onwards."

4. "Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 1,72,95,931/- without appreciating that in para 6.6. of the assessment order the Assessing Officer had held that the entire expenditure on interest amounting to Rs. 4,07,41,028/- as disallowable under section 36(1)(iii) read with Section 14A of the Act which has been upheld by the Ld. CIT(A)in Ground No. 3 of the impugned order and therefore, the disallowance of the entire amount of Rs. 4,07,41,028/-, which included the telescoped disallowance of Rs.1,72,95,931/- under section14A, ought to have been upheld by the Ld. CIT(A)."

Pronounced in the open Court on this the 24th day of June, 2016.