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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI AMARJIT SINGH
आदेश / O R D E R
PER N.K. BILLAIYA, AM:
These are cross appeals by the assessee and the Revenue against the very same order of the Ld. CIT(A)-6, Mumbai dated 21.10.2013 pertaining to Assessment year 2010-11. Both these appeals were heard together and disposed of by this consolidated order for the sake of convenience.
ITA No. 820/M/2014 – Assessee’s appeal
The grievance of the assessee read as under:
“1. The appellant submits that on the facts and circumstances of the case, the Ld. CIT(A) erred in disallowing expenses of Rs. 10,35,789/- u/s. 14A of the I.T. Act, 1961 read with Rule 8D of the I.T. Rules, 1961.
2. The appellant submits that on the facts and circumstances of the case, the Ld. CIT(A) erred in disallowing Broken period Interest of Rs. 11,50,42,776/-.
Without prejudice to Ground No.2, if the Broken Period interest is not allowed as business expense, then broken period interest should be allowed as cost of acquisition of such securities. Any long term capital gain (LTCG) on sale of such securities should be taxed @ 20% after allowing indexed cost of acquisition (currently profit on sale of such securities are taxed @ 30% as business income.)
3. The first ground relates to the disallowance made u/s. 14A of the Act.
3.1. This issue has been considered by the AO at page-10 in para-5 of his order wherein the AO observed that the assessee has both exempt income yielding investment as well as business assets in the balance sheet. The AO further found that the assessee maintains a consolidated account. The assessee was asked to show cause as to why disallowance u/s. 14A of the Act r.w. Rule 8D should not be made. The assessee claimed that disallowance of Rs. 99,865/- should suffice the provisions of Sec. 14A. It was claimed that the Rule 8D is not applicable. It was further claimed that the assessee can earn both tax free as well as taxable income from the same investments cannot be considered to calculate disallowance under Rule 8D. The submissions of the assessee did not find favour with the AO who proceeded by computing the disallowance at Rs. 15,63,697/-.
Aggrieved by this, the assessee carried the matter before the Ld. CIT(A) but without any success.
5. Before us, the Ld. Counsel for the assessee reiterated what has been stated during the course of the assessment proceedings. It is the say of the Ld. Counsel that since the assessee is holding shares both as investment and as business assets, the computation of disallowance is not correct. Relying upon the decision of the Co- ordinate Bench in the case of M/s. Derive Trading Pvt. Ltd., in the Ld. Counsel stated that the disallowance if any should be made in accordance to the decision of the Co-ordinate Bench (supra).
Per contra, the Ld. Departmental Representative strongly supported the findings of the lower authorities.
We have given a thoughtful consideration to the orders of the authorities. We have given a thoughtful consideration to the orders of the authorities below. We are inclined to accept the contention of the Ld. Counsel. In our considered opinion, the facts in issue before us are similar to what has been considered by the Co-ordinate Bench in the case of Derive Trading Pvt. Ltd (supra) wherein the Co- ordinate Bench has considered the decision in the case of Rmkumar Venugopal Investments Pvt. Ltd Vs ACIT in decision of Hon’ble Karnataka High Court in the case of CCL Ltd. Vs JCIT 250 CTR 291 and also the Third Member decision in the case of D.H. Securities Ltd. Vs DCIT 41 Taxmann.com 352. The relevant part of the decision of the Tribunal reads as under:
We may observe that the issue relating to the disallowance under section 14A in relation to shares held in stock in trade was discussed by the co-ordinate bench of Mumbai Tribunal in the case of “D.H. Securities (P) Ltd. vs. DCIT” (2014) 41 taxmann.com 352 and the matter was referred to the Third Member. The decision of the Hon’ble Karnataka High Court in the case of “CCI Ltd. vs. JCIT” (2012) 250 CTR (Kar) 291 was referred to and discussed before the Tribunal and it has been held that in view of the decision of the Hon’ble jurisdictional High Court of Bombay in the case of “Godrej & Boyce Mfg. Co. Ltd. vs. DCIT” [2010] 328 ITR 81 (Bom) and the Hon’ble Kolkata High Court in the case of “Dhanuka & sons vs. CIT” [2011] 339 ITR 319, section 14A is attracted even in the case of dividend income from shares held as stock in trade. While holding so,it has been observed by the Tribunal that the investment component or element is in built in the expenditure incurred for purchase and sale of shares even held as stock in trade for business purposes. The expenditure attributable towards earning of exempt income, immaterial of the fact whether such exempt income was actually earned or not, is embedded in the expenditure incurred for share trading activity and is liable to be apportioned in the light of the provisions of section 14A of the Act. The decision of the Hon’ble Karnataka High Court relied upon by the assessee has been duly discussed and distinguished in the Third Member Case of “D.H. Securities (P) Ltd. vs. DCIT”(supra).
However, it has been further observed in the said Third Member decision of the Tribunal that the shares which yield tax exempt dividend income, interest qua which is to be disallowed, when held as stock in trade, yield taxable income also. In fact, the shares are bought and held primarily for the purpose of earning income from trading in shares. Hence, while calculating the interest disallowance under Rule 8D(2)(ii), the disallowance of the entire amount is not justified. The Tribunal therefore held that the amount calculated as per Rule 8D(2)(ii) would need to be scaled down as the income earned from share trading is offered for taxation. The tribunal observed that while scaling down the said amount no hard and fast rule can be applied and the same can be determined only on adhoc basis. The Tribunal also observed that where the share trading is the dominant object of purchase and sale of shares, the turnover of the year would be very high in comparison to the available share holding because of the continuous activity of sale and purchase of shares. Hence, mechanical application of Rule 8D(2)(ii) would be wrong. The Tribunal, accordingly, purposed to restrict the disallowance to 20% of the amount in relation to interest disallowance under Rule 8D(2)(ii), i.e., in relation to indirect expenses. The tribunal further held that so far the direct expenses are concerned, no such disallowance u/s.14A was attracted because of the fact that no direct expenditure is incurred by the assessee for earning of dividend income when the purpose of sale and purchase of shares is trading. The almost similar view had been made by the Co-ordinate Bench of the Tribunal in the case of Damani Estates & Finance Pvt. Ltd. (in dated 17.07.2013).
4. In our view, taking into consideration the fact that the primary object of holding the shares is trading and the dividend income is incidental and further that due to continuous activity of sale and purchase of the shares, the annual turnover would be much higher in case of share trading as compared to the investments made for the purpose of earning of exempt income, even the disallowance @ 20% of the amount calculated under Rule 8D(2)(ii) will be on higher side. We feel that it will be appropriate if the said disallowance is restricted to 5% of the amount so arrived.
So far the disallowance under Rule 8D(2)(iii) is concerned, since in the share trading activity, investment is not made for the purpose of earning exempt income, hence, the managerial/administrative expenses in relation to dividend income calculated under Rule 8D(2)(iii) are also required to be scaled down which we think that should be restricted to 10% of the amount so calculated under Rule 8D(2)(iii). In view of our
above observations, the disallowance u/s.14A read with Rule 8D is, accordingly, restricted to 5% of the amount arrived at under Rule 8D(2)(ii) and 10% of the amount calculated by the A.O. under Rule 8D(2)(iii).” 8. The Tribunal further observed as under:
“Therefore, the disallowance computed under Rule 8D of the Income Tax Rules cannot be more than the actual expenditure incurred by the assessee for the dividend income excluding the activity of share trading which is the business activity of the assessee. Even the computation of disallowance arrived as per the Rule 8D should be restricted only to the extent of actual expenditure or to the extent of the expenditure which can be attributable to the activity of the dividend income excluding the business activity of share trading. Accordingly, we direct the Assessing Officer to re-compute the disallowance u/s 14A with the rider to the actual expenditure which can be attributable to the receipt or earning of the dividend income excluding the expenditure related to business activity of share trading.”
Respectfully following the findings of the Co-ordinate Bench, we direct the AO to recompute the disallowance u/s. 14A with the rider to the actual expenditure which can be attributable to the receipt or earning of the dividend income excluding the expenditure related to business activity of share trading. Ground No. 1 is accordingly treated as allowed for statistical purpose.
Ground No. 2 relates to the disallowance of Broken Period interest amounting to Rs. 11,50,42,776/-.
9.1. This issue has been considered by the AO at para-3 of his order. While scrutinizing the return of income, the AO noticed that the assessee has claimed by debiting broken period interest amounting to Rs. 11,50,42,776/- to the P&L account. The assessee was asked to explain why broken period interest should not be disallowed as the amount needs to be considered as the part of cost price of the securities acquired by the assessee. The assessee explained its claim vide reply dated 28.12.2012 wherein strong reliance was placed in the decision of the Hon’ble Bombay High Court in the case of American Express International Banking Corpn. 258 ITR 601.
9.2. After considering the detailed submissions made by the assessee, the AO was of the opinion that on identical set of facts, the department has not accepted the claim in the case of HDFC Bank , therefore, the same is also not accepted in the case of the assessee. Broken period interest was added to the total income of the assessee.
The assessee carried the matter before the Ld. CIT(A) but without any success.
Before us, the Ld. Counsel for the assessee straightaway drew our attention to the decision of the Hon’ble High Court of Bombay in the case of HDFC Bank Ltd. 366 ITR 505 wherein question No. B read as under:
(B) Whether the Income-tax Appellate Tribunal was correct in law in holding that the broken period interest is allowable as a deduction, in spite of the hon'ble Supreme Court's decision in the case of Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541(SC) and the Rajasthan High Court's decision in the case of CIT v. Bank of Rajasthan Ltd. [2009] 316 ITR 391? 11.1. The Hon’ble High Court answered the question as under: Even as far as question (B) is concerned, we find no infirmity in the orders passed by the Commissioner of Income-tax (Appeals) or the Income-tax Appellate Tribunal. In deciding this issue, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal have merely followed the judgment of this court in the case of American Express International Banking Corporation v. CIT reported in [2002] 258 ITR 601 (Bom). On going through the said judgment, we find that question (B) reproduced above and projected as substantial by Mr. Suresh Kumar is squarely answered by the judgment of this court in the case of American Express International Banking Corporation (supra). In view thereof, we do not find that even question (B) gives rise to any substantial question of law that needs to be answered by this court.
12. As the issue has been decided in favour of the assessee and against the Revenue, we set aside the findings of the Ld. CIT(A) and direct the AO to delete the addition of Rs. 11,50,42,776/- in the light of the decision in the case of HDFC Bank (supra). Ground No. 2 is accordingly allowed.
13. Ground No. 3 is without prejudice claim relating to ground No.2. Since we have deleted the addition in ground No.2, ground No. 3 become otiose.
In the result, the appeal filed by the assessee is partly allowed.
15. Grievance of the Revenue read as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
1. 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred allowing the depreciation of Rs. 27,09,894/- on assets leased out, when the related transactions were purely financial transaction.
2. On the facts and in circumstances of the case and in law, the Ld.CIT(A) erred in not following the decision of Special Bench in the case of Indusind Bank, as reported in 135 ITD 165, and the ratio laid down by the Hon'ble Supreme Court of India in the case of Asian Brown Boveri Ltd, as reported in 54 Taxman 512 (SC).
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not adhering to judicial discipline in not following the decision of a higher bench, given in the case of Indusind Bank as reported in "135 ITD 165."
4. On the facts and in circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.10,64,19,514/- on account of amortization of premium on HTM securities and coming to a conclusion that the assessee is entitled for deduction with respect to the diminution in value of the investment held to maturity on the ground of mandate by RBI guideline without appreciating the ration of the decision of Hon'ble Supreme Court in the case of Southern Technologies vs. CIT 320 ITR 577.” 16. Ground No. 1,2 & 3 relate to the same issue in relation to the claim of depreciation on leased assets amounting to Rs. 27,09,894/-.
16.1. The AO at para-7.1 of his order has observed as under:
“The leased assets were purchased and leased during the previous year relevant to A.Y. 1996-97, 1997-98, 1998-99 and 1999-2000. No new assets were purchased for leasing purpose for the instant A.Y. For the detailed reasons given in the assessment orders for A.Ys 1996-97 to 2000-01 depreciation of Rs. 27,09,894/- is disallowed.
We find that the matter in the assessment years mentioned hereinabove travelled upto the Tribunal and the Tribunal by a consolidated order mainly in and 4892/M/03 and ITA No. 3620/M/01 alongwith other appeals order dated 20.3.2013 has held at para-34 as under:
After having examined all the transactions which have been impugned before us, we are of the opinion that the assessee is entitled for the claim of depreciation under all the three circumstance i.e. Sale lease back, genuineness of transaction and asset having being put to use. We, therefore, allow ground No.1 of the assessee’s appeal and dismiss both the grounds of the department’s appeals.
11. As the AO has followed the findings given in earlier assessment year and as the disallowance have been deleted by the Tribunal in earlier assessment years vide its order (supra), we do not find any reason to interfere with the findings of the Ld. CIT(A). Ground No. 1,2 & 3 are accordingly dismissed.
Ground No. 4 relates to the deletion of the addition of Rs. 10,64,19,514/- on account of amortization of premium on HTM Securities.
12.1. This issue has been considered by the AO at para-4 of his order wherein the AO observed that on the claim of Rs. 10,64, 19,514/- being amortisation of premium on HTM securities. The assessee was asked to explain why the same should not be disallowed as there is no provision in the Act for such deduction. The AO further at para- 4.4. on page-9 of his order observed that a similar claim has not been accepted by the Department in the case of HDFC bank and keeping in view the stand taken by the Department in the case of HDFC Bank expense of Rs. 10,64,19,514/- was added back to the total income of the assessee. We find that in the case of HDFC Bank, the Hon’ble High Court of Bombay in 366 ITR 505 has considered the question as under:
(C) Whether the Income-tax Appellate Tribunal is right in law in holding that the assessee is entitled for deduction with respect to the diminution in value of the investment and amortization of premium on investment held to maturity on the ground of mandate by the RBI guidelines thereby ignoring the decision of the Supreme Court in the case of Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577(SC) ?"”
The Hon’ble High Court answered the question as under: As far as question (C) is concerned, we find that an identical question of law was framed and answered in favour of the assessee by this court in its judgment dated July 4, 2014, in Income Tax Appeal No. 1079 of 2012, CIT v. Lord Krishna Bank Ltd. (now merged with HDFC Bank Ltd.) [2014] 366 ITR 416(Bom). Mr. Suresh Kumar fairly stated that question (C) reproduced above is covered by the said order. In view thereof, we are of the view that even question (C) does not raise any substantial question of law that requires an answer from us.”
14. As the AO has followed the findings given in the case of HDFC Bank Ltd., and as the said issue has been decided in favour of the assessee and against the Revenue by the decision of the Hon’ble High Court of Bombay in the case of HDFC (supra), we decline to interfere with the findings of the Ld. CIT(A). Ground No. 4 is accordingly dismissed.
In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is partly allowed.