DCIT 7(1), MUMBAI vs. PIRAMAL ENTERPRISES LTD, MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member):

2 Piramal Enterprises Ltd. Mumbai {(in short Ld. CIT(A)} dated 27.02.2012 for the assessment years 2008-09 & 2009-10, against the assessment order passed by the Assessing Officer (in short ‘AO’) u/s 143(3) of the Act.

“On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in partly allowing the disallowance u/s.36(1)(iii) of Rs.1,27,70,417/- made by the Assessing officer without appreciating the fact observed by the Assessing Officer in the assessment order, that the assessee has not been able to show the exact amount of investment in debentures, the interest earned on these debentures, and also the amount of subscription money pending allotment.”

3.1. During the course of hearing it has been argued by the Ld. DR that interest is to be allowed only on the amount of loan or capital which has been used for the purpose of business, amount invested in share application money pending for allotment is not for the purpose of the business and therefore, Ld. CIT(A) has wrongly allowed the claim of the assessee.

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3.2. On the other hand, Ld. Counsel of the assessee has supported the order of Ld. CIT(A) and has submitted that the assessee has made investment in India Reit Fund. During the course of appellate proceedings, the assessee was asked to explain the amount which pertained to the amount invested for taxable units and amount invested for tax-free units. After taking into account all the facts and figures the appropriate amount has been allowed by the Ld. CIT(A) and balance amount of disallowance has been sustained by him, therefore, the order of Ld. CIT(A) is factually correct. He has further placed reliance on the judgment of Mumbai Bench of Tribunal in the case of Rainy Investment Pvt. Ltd. dated 16.01.2013, and M/s. MSA Securities Services (P.) Ltd. 33 taxmann.com 508 (Chennai – Trib).

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 t o r s / b e n e f i c i a r i e s a n d t h e a s s e s s e e c o m p a n y i s o n e o f t h 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.

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, suo- moto disallo wance of inte re st expe nditure 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

7 Piramal Enterprises Ltd. 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 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

9 Piramal Enterprises Ltd. 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.

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Order pronounced in the open court on 9th December, 2015.