Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
PER BENCH
These cross appeals are directed against separate orders of the learned Commissioner (Appeals)–2, Mumbai, pertaining to assessment years 2008–09 and 2009–10.
./2013 – Assessee’s Appeal
Grounds raised by the assessee are as under:–
1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in not allowing deduction of indemnity payment to the tune of ` 5,10,00,000 incurred in connection with transfer of shares in UTI Securities Ltd. for the purpose of computation of capital gains, without appreciating that the said expenditure was incurred wholly and exclusively in connection with transfer of the said shares.
2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming disallowance of expenditure under section 14A to the tune of ` 1,53,10,783.”
As far as ground no.1 is concerned, facts in brief are, assessee a Non–Banking Financial company is engaged in trading of Government securities, PSU bonds, commercial derivatives, equity and equity derivatives, mutual funds apart from lending against shares. As stated, in the financial year 2006–07, assessee acquired 100% stake in UTI Securities Ltd. (UTISL) for a consideration of ` 265 crore, as a result
4 M/s. STCI Limited M/s. STCI Finance UTISL became wholly owned subsidiary of the assessee. At this stage, it may be stated UTISL was engaged in business of securities, investment banking and distribution of financial products. In the financial year 2007–08, relevant to the assessment year under dispute, assessee on 23rd August 2007, entered into a share purchase agreement (SPA), with Standard Chartered Bank (Mauritius) Ltd. (SCB), for a consideration of ` 147 crore. For the sake of clarity, it may be mentioned UTISL was also a party to this share purchase agreement. In the return of income filed for the year under consideration, in the computation of income, assessee while offering the amount of ` 147 crore form sale of 49% stake in UTISL to SCB claimed deduction for indexed cost of acquisition and expenditure incurred in relation to the transfer of asset and ultimately declared long term capital loss of ` 4,44,08,759. In the course of assessment proceeding, the Assessing Officer on verifying the details furnished found that out of the total consideration of ` 147 crore received by the assessee from sale of 49% of stake in UTISL to SCB assessee has reduced indexed cost of acquisition of ` 137,85,61,657 and expenditure related to transfer of asset amounting to ` 13,58,47,102. On further verification, he found that the expenditure claimed are under the following head:–
5 M/s. STCI Limited M/s. STCI Finance i) Indemnity payment to UTI securities ` 10 crore ii) Payment to Kanga & Co. ` 28,13,262 iii) Payment to Ernst and Young ` 3,30,33,840
To verify the genuineness of expenditure claimed, Assessing Officer called for further details in respect of indemnity payment to UTI Securities. In response to the query raised, it was submitted by the assessee that such payment was made in terms of SPA to compensate UTISL in full and final settlement of losses suffered by them on account of employees’ irregularities at the Pune Branch of UTISL. It was stated by the assessee that entire amount was written–off during the current financial year and shown separately as an exceptional item in the statement of Profit & Loss account. To further justify the claim of expenditure, assessee furnished copy of agreement and relevant board resolution. The Assessing Officer, after perusing the SPA was of the view that there is no specific condition in the agreement regarding payment of ` 10 crore as indemnity. He also observed, the board resolution was passed only on 18th March 2008 stating that the managing director negotiated with SCB for one time settlement on account of irregularity of employees’ action of Pune Branch at ` 10 crore which was remitted to SCB on the closing date i.e., 11th January 2008. The Assessing Officer opined, while computing capital gain only the expenditure incurred wholly and exclusively in connection with 6 M/s. STCI Limited M/s. STCI Finance transfer of capital asset is deductible from full value of consideration. He observed, even if the expenditure has some nexus with transfer, it will not qualify for deduction unless it is wholly and exclusively incurred in connection with the transfer. He observed, there is nothing in the agreement to show that transfer will be effected only if the amount of ` 10 crore is paid to UTISL. Accordingly, the Assessing Officer disallowed the claim of indemnity payment of ` 10 crore while computing capital gain from sale of shares. Of–course, the Assessing Officer also disallowed payment made to Ernst and Young amounting to ` 3,30,33,840. However, since such disallowance is not a subject matter for consideration in the present appeal, there is no necessity to deal with the same.
Challenging the disallowance of indemnity payment of ` 10 crore, the assessee preferred appeal before the learned Commissioner (Appeals). Before the first appellate authority, assessee reiterating the stand taken before the Assessing Officer submitted, indemnity payment of ` 10 crore made to UTISL is to compensate the loss suffered by Pune Branch of UTISL. It was submitted, as there were operational irregularities of Pune Branch of UTISL resulting in loss to its customer / sub–broker on account of unauthorised purchase and sale of securities, F&O transactions withholding of brokerage price
7 M/s. STCI Limited M/s. STCI Finance differential etc., UTISL had appointed independent firm to investigate operation of Pune Branch and to quantify losses and the independent agency had quantified losses at ` 10.14 crore, which was reimbursed by UTISL to aggrieved customers. It was submitted, though, UTISL paid for the losses, in turn claimed it from the assessee in terms of SPA. It was submitted, assessee after negotiation agreed to settle the payment at ` 10 crore and which was accordingly paid. The assessee taking shelter under the share purchase agreement submitted, it was under a legal obligation to indemnify SCB for losses suffered before conclusion of sale as per clause 8 of SPA. Further, relying upon different clauses of SPA, it was submitted by the assessee that if it would not have paid the amount of ` 10 crore to UTISL, the sale of shares to SCB would not have fructified as the assessee was duty bound to honour indemnity payment as per obligation under SPA.
Learned Commissioner (Appeals), after considering the submissions of the assessee in the light of share purchase agreement between parties and other relevant materials such as correspondence between the assessee and representative of SCB found that if the appellant would not have agreed to pay the indemnity amount of ` 10 crore, the transaction could not have taken place. Therefore, for enabling the transaction to go through the assessee had to pay ` 10
8 M/s. STCI Limited M/s. STCI Finance crore to UTISL. The learned Commissioner (Appeals), therefore, concluded that the indemnity payment made is wholly and exclusively related to transfer of asset. However, while quantifying the amount of expenditure which could be allowed, learned Commissioner (Appeals) observed, ` 10 crore paid by the assessee is on account of erosion in valuing of 100% shares of UTISL or in other words, it is the amount spent to enhance the value of 100% share held by the assessee in UTISL. Learned Commissioner (Appeals) held, as the assessee sold 49% of the shares to SCB and held 51% shares with him, correspondingly 49% of the amount of ` 10 crore can be allowed as deduction as the balance amount will go to enhance the value of balance 51% of the shares held by the assessee. Accordingly, allowing deduction for an amount of ` 4.90 crore, he disallowed the balance amount of ` 5.10 crore.
More or less, repeating the submissions made before the Departmental Authorities, learned Authorised Representative submitted, there is no dispute that the expenditure incurred by the assessee towards indemnity payment to UTISL is related to transfer of capital asset, hence, is an allowable deduction. Referring to the share purchase agreement, learned Authorised Representative submitted, the terms and conditions of the share purchase agreement would
9 M/s. STCI Limited M/s. STCI Finance make it abundantly clear that indemnity payment of ` 10 crore to UTISL is a condition imposed for sale of shares to SCB. He submitted, unless the assessee would have paid the amount of ` 10 crore to UTISL, the share transaction could not have gone through and SPA would have failed. He submitted, only for the purpose of fulfilling the condition of SPA, the assessee had to pay ` 10 crore to UTISL. It was submitted, even the learned Commissioner (Appeals) has also accepted the aforesaid factual position while holding that the indemnity payment was wholly and exclusively related to transfer of shares, though, he ultimately allowed part of it. Learned Authorised Representative submitted, once it is proved on record that unless the payment was made the agreement would have failed and the share transaction would not have taken place, the expenditure incurred being wholly and exclusively for the purpose of transfer of capital asset should have been allowed in full instead of restricting to the 49% of the amount claimed on the reasoning that assessee sold 49% of the shares. He submitted, the balance 51% of the shares were sold by the assessee in the immediately succeeding assessment year and the Assessing Officer has also allowed the entire expenditure claimed by the assessee while computing capital gain. It was submitted, in any case of the matter, amount of ` 5.10 crore otherwise would have been allowed in the next year when the balance 51% share was sold.
10 M/s. STCI Limited M/s. STCI Finance Learned Authorised Representative submitted, since the assessee had claimed the amount of ` 10 crore in the impugned assessment year in the subsequent assessment year, the assessee did not claim it. Thus, the learned Authorised Representative submitted, there being no dispute that indemnity payment of ` 10 crore was wholly and exclusively for the purpose of transfer of shares there should not have been part allowance rather it should have been fully allowed.
Learned Departmental Representative relied upon the reasoning of the learned Commissioner (Appeals).
We have patiently and carefully considered the submissions of the parties and perused the material on record. At the outset, it needs to be observed, as far as the allowability of expenditure claimed, there cannot be any dispute with the same as the learned Commissioner (Appeals), after taking into consideration the entire gamut of facts and materials brought on record including SPA and correspondences between the parties has concluded that indemnity payment of ` 10 crore to UTISL is wholly and exclusively related to transfer of capital asset (shares), though, of–course he disallowed a part of it for a completely different reason. As against the aforesaid decision of the learned Commissioner (Appeals), department has not preferred any appeal. Therefore, we have to proceed on the basis that Department
11 M/s. STCI Limited M/s. STCI Finance has accepted the fact that indemnity payment made to UTISL is wholly and exclusively related to transfer of shares. Having held so, it is necessary now to deal with the issue relating to quantum of expenditure allowable to the assessee. Undisputedly, assessee has paid an amount of ` 10 crore towards indemnity to UTISL. However, learned Commissioner (Appeals) has allowed an amount of ` 4.9 crore towards deduction for the reason that assessee has sold 49% of the shares in the relevant financial year while holding with him 51% of the shares. According to the learned Commissioner (Appeals), 51% out of the expenditure is not allowable as such amount has gone to enhance the value of shares held by the assessee. In our view, such conclusion of the learned Commissioner (Appeals) is unsustainable for the following reasons:–
On a perusal of the share purchase agreement, a copy of which is at Page–2 of assessee’s paper book, it is evident that as per clause 8 of the SPA, assessee and UTISL were jointly and severely liable to indemnify SCB from and against any loss, claim s, demands, actions, damages, costs, expenses, etc. Further, it is not disputed that due to some irregularities in the Pune Branch of UTISL, there were losses to the customers sub–brokers, etc., which was quantified at ` 10.14 crore by an independent agency. As per settlement reached with UTISL,
12 M/s. STCI Limited M/s. STCI Finance assessee agreed to pay an amount of ` 10 crore to UTISL for enabling that company to bear the losses suffered by it towards payment of ` 10.14 crore to subscribers / sub–brokers. Thus, it is clear that unless the assessee would have paid the indemnity amount, the SCB would not have agreed for purchase of shares of UTISL and the SPA would have failed. Therefore, for successful completion of SPA, indemnity payment of ` 10 crore was necessary. In fact, the learned Commissioner (Appeals) has accepted the aforesaid fact, while allowing a part of the expenditure. Therefore, when the entire amount of ` 10 crore was linked to successful implementation of SPA ultimately resulting in sale of shares to SCB, we fail to understand how only 49% of the expenditure claimed can be allowed as deduction. It is illogical to conclude that the share transactions would have fructified even if the assessee would have paid 49% of the amount of ` 10 crore corresponding to 49% of shares sold. In our view, when the indemnity payment of ` 10 crore as a whole is related to successful completion of share transaction with SCB it cannot be segregated to 49% and 51%. In any case of the matter, as is evident from record, even the balance 51% of the shares were sold to SCB in the assessment year 2009–10. Therefore, amount of ` 5.90 crore in any case would have been allowed to the assessee in the next assessment year as the expenditure is wholly and exclusively related to transfer of shares. In 13 M/s. STCI Limited M/s. STCI Finance fact, it was brought to our notice and not controverted by the learned Departmental Representative, in the assessment year 2009–10, the entire expenditure claimed by the assessee while computing capital gain from transfer of balance 51% of share was allowed by the Assessing Officer. Thus, once the learned Commissioner (Appeals) has come to a conclusion that indemnity payment is wholly and exclusively for the purpose of transfer of shares he cannot restrict the assessee’s claim of deduction to ` 4.90 crore. In the aforesaid view of the matter, upholding the claim of the assessee, we direct the Assessing Officer to reduce the amount of ` 10 crore from the sale consideration of shares and compute the capital gain accordingly. Ground no.1, raised by the assessee is allowed.
In ground no.2, assessee has challenged disallowance made under section 14A of the act.
Briefly stated the facts are, in course of assessment proceedings, the Assessing Officer on verification of relevant details found that during the relevant previous year, assessee had received dividend income of ` 8,02,01,283, which was claimed as exempt. He also noticed, assessee on its own has disallowed an amount of ` 1,53,10,783 under section 14A. The Assessing Officer, however, was of the view that the disallowance made by the assessee is not in terms
14 M/s. STCI Limited M/s. STCI Finance of rule 8D. Accordingly, by applying the provisions of rule 8D, the Assessing Officer worked out the total disallowance at ` 2,01,19,000. As the assessee itself has disallowed the amount of ` 1,53,10,783, the Assessing Officer made addition of differential amount of ` 48,08,217. Being aggrieved of such disallowance, assessee preferred appeal before the learned Commissioner (Appeals).
Before the first appellate authority, it was submitted by the assessee that it is basically engaged in purchase and sale of government securities and other money market instruments which are treated as stock–in–trade to earn dividend. It was submitted, even otherwise also, whatever investment made in shares was out of interest free funds available with it and the investments made are also for strategic purpose. The learned Commissioner (Appeals), after considering the submissions of the assessee, found that the assessee has not proved that investments are out of interest free funds. He opined that as the provisions of rule 8D are applicable for the impugned assessment year, the Assessing Officer was justified in working out disallowance by applying the said provisions. Accordingly, he confirmed the disallowance of ` 1,53,10,783, under section 14A r/w rule 8D.
15 M/s. STCI Limited M/s. STCI Finance
Learned Authorised Representative submitted, the assessee in relevant previous year, had sufficient surplus interest free fund available with it to make the investment which resulted in tax free dividend income. To prove such fact, the learned Authorised Representative drew our attention to the Balance Sheet of the company as at 31st March 2008. Further, he submitted all the investments are in subsidiaries. He submitted, in these circumstances, no disallowance should have been made by the Assessing Officer under section 14A r/w rule 8D. In support of his contentions, learned Authorised Representative relied upon the following decisions:–
i) CIT v/s Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom.); ii) CIT v/s HDFC Bank Ltd., W.P. no.1753/2016, judgment dated 25th February 2016; and iii) CIT v/s HDFC Bank Ltd., [2014] 366 ITR 505 (Bom.).
Learned Departmental Representative, however, pointed out that the assessee itself has made the disallowance of ` 1,53,10,783, in the computation of income filed along with the return of income, hence, he cannot ask for deletion of the said amount.
We have considered the submissions of the parties and perused the material available on record. No doubt, assessee in the return of income has itself disallowed ` 1,53,10,782 under section 14A of the 16 M/s. STCI Limited M/s. STCI Finance Act. However, in our view, that cannot debar the assessee from chiming either during the assessment proceedings or in appellate forum that no disallowance under section 14A is called for, as there is no estoppel against law. If a particular deduction is not permissible in law, it cannot be allowed even if the assessee claims it in the return of income. Likewise, if a receipt is not taxable but wrongly offered in the return or a particular deduction otherwise allowable per mistake was not claimed in the return, cannot be brought to tax as the intent and purpose of the Act is to tax the real income of the assessee. Thus, considered in the aforesaid perspective assessee is well within its right to challenge the disallowance made under section 14A. It is seen, before the Departmental Authorities, assessee had objected such disallowance for following reasons. Firstly, Govt. securities are held as stock in trade, hence, section 14A, is not applicable; secondly; assessee had enough interest free surplus fund available with it to make the investments, hence, no disallowance under section 14A r/w rule 8D, at least, of interest expenditure can be made. In our view, aforesaid contentions of the assessee are valid contentions, hence, worthy of being taken note of. In case of CIT v/s India Advantages Securities Ltd., of 2013, decided on 30th April 2014, the Hon'ble Jurisdictional High Court held that no disallowance under section 14A, can be made where tax free securities are held as stock in 17 M/s. STCI Limited M/s. STCI Finance trade. The Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities & Power Ltd. held where assessee has mixed funds, both interest bearing and interest free, no disallowance out of interest expenditure can be made as the presumption would be investment in subsidiary / sister concern is out of surplus interest free fund available with the assessee. Though, the aforesaid decision of the Hon'ble Jurisdictional High Court was in the context of section 36(1)(iii), however, applying the principle laid down therein the Hon'ble Jurisdictional High Court in case of CIT v/s HDFC Bank Ltd., 368 ITR 377 (Bom.) held that no disallowance of interest expenditure under section 14A, can be made if the assessee had sufficient interest free funds available with him to make the investments. The same view was reiterated again by the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. v/s DCIT, while deciding Writ Petition no.1753 of 2016, in judgment dated 25th December 2016. Thus, the legal principle emerging from the aforesaid judicial pronouncements are; (i) no disallowance under section 14A can be made if securities are held as stock in trade; (ii) no disallowance can be made if the assessee had sufficient interest free fund available with him to make the tax free investments. Though, assessee raised these contentions before the Departmental Authorities, as is evident, the Departmental Authorities failed to consider the contention of the assessee both factually and legally. Of–course, it
18 M/s. STCI Limited M/s. STCI Finance needs to be mentioned the decisions of the Hon'ble Jurisdictional High Court in case of HDFC Bank Ltd. (supra), and India Advantages Securities Ltd., were not available when the orders were passed by learned Commissioner (Appeals) and Assessing Officer. Keeping in view the aforesaid facts, we are of the considered opinion, assessee’s contentions against disallowance under section 14A, r/w rule 8D, requires to be re–examined after verifying the relevant facts and in the light of the principles laid down in the judicial pronouncements referred to above. The Assessing Officer must afford reasonable opportunity of being heard to the assessee and pass a well reasoned order dealing with the contentions of the assessee and keeping in view the ratio of the dictions relied upon by the assessee.
In the result, assessee’s appeal is partly allowed. ./2013 – Assessee’s Appeal
The only issue in the aforesaid appeal relates to disallowance of ` 1,56,98,750 under section 14A.
Facts relating to this issue are more or less common to similar issue raised in ground no.2, of ITA no.2306/Mum./2013, except, the fact that in the impugned assessment year assessee did not make any suo–motu disallowance under section 14A. However, Departmental
19 M/s. STCI Limited M/s. STCI Finance Authorities rejecting assessee’s contention that no disallowance under section 14A is called for, made disallowance under section 14A r/w rule 8D.
We have heard the parties. This issue is similar to the issue raised in ground no.2, of ITA no.2306/Mum./2013. Following our decision in Para–15, we restore the matter back to the Assessing Officer for deciding afresh keeping in view our directions therein.
In the result, assessee’s appeal is allowed for statistical purposes ./2013 Revenue’s Appeals ITA no.2580/Mum./2013
The only ground raised which is common in both the appeals of the Department is as under:–
“Whether on the facts and in the circumstances of the case and in law, learned CIT(A) erred in holding that section 14A(2) and 14A(3) of the Act and Rule 8D of the I.T. Rules, cannot be imported into section 115JB and the book profit cannot be increased accordingly.”
Briefly stated the facts are, the Assessing Officer, in the course of assessment proceedings, finding that assessee had earned dividend income which was claimed as exempt made disallowance under section 14A r/w rule 8D, for an amount of ` 2,01,19,000, under the normal provisions. The Assessing Officer also added the said amount to the 20 M/s. STCI Limited M/s. STCI Finance book profit under section 115JB of the Act. Assessee challenged the addition before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), though sustained the disallowance of ` 1,53,10,783, under section 14A r/w rule 8D under the normal provisions but as far as addition to book profit under section 115JB, learned Commissioner (Appeals) held that as the assessee has not debited any actual expenditure relating to earning of exempt income under section 14A, cannot be imported into provisions of section 115JB to disallow expenditure while computing book profit. While coming to such conclusion, the learned Commissioner (Appeals) relied upon certain decisions of the Tribunal.
Learned Departmental Representative submitted before us that the conclusion arrived by the learned Commissioner (Appeals) is untenable in view of the co–ordinate bench decision of the Tribunal in ITA no.4439/Mum./2013, dated 21st October 2015.
Learned Authorised Representative, however, supporting the reasoning of the learned Commissioner (Appeals), submitted, no addition under section 115JB, can be made in respect of disallowance made under section 14A.
21 M/s. STCI Limited M/s. STCI Finance
We have considered the submissions of the parties and perused the material available on record. In our view, the issue raised by the Department cannot be decided at this stage as it depends upon the ultimate outcome of the issue whether any disallowance under section 14A can at all be made in case of the assessee. As the issues relating to disallowance under section 14A, have been restored back to the Assessing Officer for deciding afresh while considering assessee’s appeals in and 2307/Mum./2013, the issue raised by the Department in these appeals are also restored back to the Assessing Officer for deciding afresh in consonance with the decision to be taken in respect of assessee’s claim that no disallowance under section 14A, can be made.
In the result, Department’s appeals are allowed for statistical purposes. Order pronounced in the open Court on 30.03.2016