TMI Blog2016 (6) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... same shall be included for computing disallowance u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act . The contentions of the assessee company that the investments are made in subsidiaries companies and hence no disallowance of indirect expenditure be made under Section 14A of the Act cannot be accepted. It is also a matter of fact as emerging from paper book/page 11 from Schedule F of audited financial statements that investments as at 31-3-2006 was ₹ 4.23 crores while investments as at 31-03-2007 was ₹ 7.53 crores, i.e. ₹ 3.30 crores net investments were made in the previous year relevant to the instant assessment year. We have observed that there are divergent view of the Tribunal on this issue and matter purely being factual is to be decided on the facts of the case keeping in view mandate of Section 14A of the Act whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act having regards to the accounts of the assessee as contemplated u/s 14A(2) of the Act and hence the matter is to be decided on the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 7273/Mum/2012 and ITA no. 7274/Mum/2012, are directed against two separate appellate orders both dated 26-09-2012 passed by learned Commissioner of Income Tax (Appeals)- 7, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2007-08 and 2009-10 respectively, the appellate proceedings before the learned CIT(A) arising from the assessment orders dated 26-10-2009 and 25-03-2011 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ) for the assessment years 2007-08 and 2009-10 respectively. 2. First we shall dispose of appeal for the assessment year 2007-08 in ITA no. 7273/Mum/2012. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) in ITA no. 7273/Mum/2012 for the assessment year 2007-08 reads as under:- 1. On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) has erred confirming the addition of ₹ 1,19,77,254/- being disallowance u/s 14A. Your appellant prays that the same be deleted. 2. On the facts and in the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A X B/C = X A = Interest = ₹ 22,97,73,171/- B = Average value of Investment = ₹ 24,93,62,667/- C = Average of Total Investment = ₹ 533,96,54,603/- = ₹ 1,07,30,441/- iii) % of average value of investments % of ₹ 24,93,62,667 = ₹ 12,46,813 Aggregate of (i),(ii) and(iii)= 0+10730441+1246813 = ₹ 1,19,77,254/- In view of the above , an amount of ₹ 1,19,77,254/- was treated by the AO as an expenditure incurred for earning exempt income and added the same to the income of the assessee company u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 and the same amount was also added to book profit u/s 115JB of the Act by the AO , vide assessment orders dated 26.10.2009 passed u/s 143(3) of the Act. PMS Management Fee The AO observed from the accounts of the assessee company that the assessee company has claimed an expenses of ₹ 11,55,354/- in its accounts as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Godrej and Boyce Manufacturing Company Limited v. DCIT (2010) 328 ITR 81(Bom.) whereby Hon ble Bombay High Court held that Rule 8D of Income Tax Rules,1962 was notified on 24-03-2008 and hence applicable with effect from assessment year 2008-09. Thus, it was submitted by the assessee company before the learned CIT(A) that the AO was not justified in invoking Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for the instant assessment year i.e.2007-08. As per the assessee company , the Hon ble Bombay High Court had laid down the proposition that all expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed u/s 14A of the Act. Thus, no deduction of the expenditure can be allowed incurred by the tax-payer in relation to the income which does not part form of the total income under the Act. It was held by Hon ble Bombay High Court that even for the assessment years prior to 2008-09, the AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the tax-payer to place all germane material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) CIT v. Winsome Textiles Industries Limited 319 ITR 204(P H HC) e) CIT v. Hero Cycles 323 ITR 518(P H) f) Voltas Limited v. JCIT 125 TTJ 601(Mum.) g) K.J.Arora v. DCIT 180 Taxman 131(Del.) h) Dishman Pharmaceuticals Chemicals Limited v. DCIT 45 SOT 37(Ahd.) i) ACIT v. Delite Enterprises Private Limited 135 TTJ 663(Mum.) j) Godrej and Boyce Manufacturing Company Limited 328 ITR 81 (Bom.) The assessee company further submitted that out of total expenditure of ₹ 314.76 crores, the direct expenditure on purchase of goods , material consumed and operational expenditure was ₹ 306.33 crores, which is evident from the financial statements. The administrative expenses are to the tune of ₹ 8.43 crores , which include selling and distribution expenses of ₹ 2.53 crores, ₹ 36 lacs for lease rent relating to manufacturing activity and balance ₹ 5.54 crores can be considered as indirect administrative expenses. It was submitted that none of these expenses can be considered to be incurred for earning dividend income . The total revenue of the assessee company is ₹ 314.32 crores which include dividend income of ₹ 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon decision of Pune Bench of the Tribunal in case of KRA Holdings and Trading Private Limited (2011) 54 SOT 493 (Pune Trib. ) to contend that the PMS expenses are allowable expenses while computing capital gains on sale of shares as these expenses are incurred for sale and purchase of securities. The assessee company submitted that provisions of Section 40(a)(ia) of the Act are invoked for the purposes of disallowance on the grounds that tax was not deducted at source on PMS charges paid by the assessee company while provisions of Section 40(a)(ia) of the Act are not applicable to cost of acquisition u/s. 48 of the Act and the said Section 40(a)(ia) of the Act can be invoked for computing disallowance under the head Income from business or profession and no disallowance can be made for computation of income under the head Capital Gains . The learned CIT(A) upheld the action of the AO and held that there are no provisions u/s 48 of the Act to allow PMS charges paid by the assessee company as the Section 48 of the Act contemplate only two deductions namely, i) Cost of acquisition and cost of improvements and ii) cost incurred wholly and exclusively related to transfer. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y hold 2,50,000 shares @ USD 1/- each. He further drew our attention to the same schedule to content that the assessee company holds shares of ₹ 1.98 crores in its Indian subsidiary Saurashtra Ferrous Private Limited whereby the objective is not to earn exempt income. Similarly , it was submitted with reference to Schedule F that investment of ₹ 4.00 crores is made in Preference Shares of its Indian subsidiary company Saurashtra Ferrous Private Limited . Thus, it was submitted that out of total investments of ₹ 7.53 crores as at 31-03-2007, the investments of ₹ 41.84 lacs has been made in Mutual Funds while investments of ₹ 1.69 lacs has been made in quoted shares, which are made for earning dividend income , while rest of the investments are in subsidiary companies which are strategic investments. The learned counsel stated before that in any case no borrowed funds are utilized for making any investments in shares and mutual funds and hence there is no question of disallowance of interest expenditure under provisions of Section 14A of the Act. The learned counsel relied upon the following decisions : 1. CIT v. Oriental Structures Engineers Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bombay High Court in the case of Reliance Utilities and Power Limited( supra) and two afore-stated decisions in the case of HDFC Bank Limited (supra), we are of considered view that no disallowance can be made by the Revenue on account of the interest expenditure as there is a presumption that the assessee company has utilized net owned funds for the purposes of making investments in shares and mutual fund , as the net owned funds are in far excess of the investments made by the assessee company in the shares and mutual funds. Thus, keeping in view the factual matrix of the instant case as emerging from the records before us , in our considered view , no disallowance u/s 14A of the Act is warranted towards interest expenditure incurred by the assessee company. Since, the instant assessment year is 2007-08 , Rule 8D of Income Tax Rules, 1962 is not applicable as the same is applicable from the assessment year 2008-09 as held by Hon ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra). However, there is a reasonable disallowance to be made u/s 14A of the Act for administrative and other indirect expenses incurred by the assessee company for ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: 12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the assessment year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. 234 CTR 1. The assessee company has made average investments of ₹ 14.44 crores computed as per rule 8D(2)(iii) of Income Tax Rules,1962 . The investments made by the assessee company includes the investment of ₹ 19.37 crores made in 100% subsidiary company. 13. Coming to the submission of assessee that these are strategic investments and no disallowance made towards the administrative expenses. We would like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are very complex in nature. They 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. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We, therefore, hold that the assessing officer has rightly invoked the provisions of section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 for disallowing the expenditure of ₹ 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. We order accordingly. The assessee company has relied upon following decisions to contend that no disallowance should be made u/s 14A of the Act with respect to strategic investment / controlling interest investments made by the assessee company: 1. CIT v. Oriental Structures Engineers Private Limited , 35 taxmann.com 210 (Del. HC) This case was decided by Hon ble Delhi High Court on facts.The Tribunal gave finding that only interest of ₹ 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further it was observed by the Tribunal, there was SPV created to obtain contracts from NHAI and the SPV so formed engaged the tax-payer as contract to execute the works awarded to them(SPV) by the NHAI . The tax-pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified by the Tribunal. However, in the instant case this facts that no expenditure has been incurred by the assessee company has not been brought on record having regards to the accounts of the assessee company and hence we are setting aside this appeal to the file of the AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. 4. Sh Jigar P. Shah v. ACIT in ITA no 4366/Mum/2014 dated 24-02-2016)-In this case also there is a finding of fact that the tax-payer has made investments which were old investments and that no new investments were made during the year. . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance u/s 14A of the Act ., we hold that the investment made by the assessee company in shares and units of mutual funds( excluding investment of ₹ 1,10,30,000/- in foreign subsidiary) shall attract disallowance u/s 14A of the Act .The Hon ble Bombay High Court in Godrej and Boyce Manufacturing Company Limited(supra) remanded the proceedings for assessment year 2007-08 to the AO to determine whether the tax-payer has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act for which the AO can adopt a reasonable basis for effecting the apportionment for disallowance u/s 14A of the Act. In the instant appeal , we are also inclined to remand the proceedings for assessment year 2007-08 to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services account of the assessee with ICICI Prudential Asset Management Company Limited and Otimix ING , which is managed by the Portfolio Managers for which portfolio management services fee of ₹ 22,64,272/- has been paid by the assessee to the portfolio managers , the income arising thereof from sale of shares is chargeable to tax under the head Capital Gains , for which the income is to be assessed under Chapter IV-E of the Act as per the provisions of Section 45 to 55A of the Act. The provisions of Section 48 of the Act stipulates as under : Section 48 [Mode of computation. 48. The income chargeable under the head Capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer (ii) the cost of acquisition of the asset and the cost of any improvement thereto: ********** ********** Thus, as could be observed from provisions of Section 48 of the Act , for computing capital gains, it is required to deduct from full value of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achieve the objects of SEBI Act,1992 , the Board may require registering and regulating the working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , the conditions of certificate of registration obtained from the SEBI in accordance with the regulations made under the SEBI Act,1992. The SEBI Act,1992 by virtue of provisions of Section 30 grants the power to SEBI to make regulations by notification consistent with the SEBI Act,1992 and the rules made there-under to carry out purposes of the Act which is primarily investor protection and to promote the development of, and to regulate the securities market. In exercise of powers u/s. 30 of SEBI Act,1992, SEBI came out with regulations to regulate the business of portfolio managers in India by promulgating Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 which were amended from time to time . Under clause 2(cb) of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , the portfolio manager is defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts to the clients as per the provisions of these regulations; (xv) other terms of portfolio investment subject to these regulations. The portfolio managers general responsibilities are defined in clause 15 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 as under :- 15. General responsibilities of a Portfolio Manager.─(1) The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client. [(1A) The portfolio manager shall not accept from the client, funds or securities worth less than five lacs rupees.] (2) The portfolio manager shall act in a fiduciary capacity with regard to the client's funds. [(2A) The portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank. Explanation.─For the purposes of this sub- regulation, the expression Scheduled Commercial Bank means any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be; The perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is a regulated and controlled business which requires mandatory registration with SEBI to carry on activities of portfolio management in India and is subject to continuous control, regulation and monitoring by SEBI with an objective of investor protection and promote and regulate securities market. The qualification and experience of the portfolio manager is also specified in the afore-stated regulations so that only professional, skilled, specialized and experienced persons are engaged in the activities of portfolio management . The roles and responsibilities of portfolio managers covers a vast spectrum of activities provided to clients for fee ranging from providing advises , or direct or undertake on behalf of client the management or administration of a portfolio of securities or fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified by the decision of jurisdictional Mumbai-tribunal in the case of Devendra Motilal Kothari v. DCIT in (2011) 13 taxman.com 15 (Mum.-trib.), Homi K Bhabha v. ITO (2011)14 taxmann.com 165(Mum-trib.) and Pradeep Kumar Harlalka v. ACIT (2011) 14 taxmann.com 42(Mum-trib.). The findings of the Mumbai-tribunal in the case of Devendra Motilal Kothari(supra) on identical issue are as under: 12. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profit arising to the assessee on sale of shares and securities chargeable to tax under the head capital gains and this position is not in dispute. The only dispute is whether the fees paid by the assessee for PMS can be allowed as deduction in computing such income or not. In this regard, it is observed that the charge of Income-tax is created by virtue of the provisions contained in section 4 according to which the Income-tax is charged for the relevant assessment year in accordance with and subject to the provisions of Income-tax Act in respect of the total income of the relevant previous year of every person. As per the scheme of the Act, income is broadly classified un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cited by the Ld. Counsel for the assessee in support of the assessee's case on the point under consideration, it is observed that the facts involved therein were altogether different in as much as the relevant amounts claimed by the assessee as deduction in computing capital gains were found to be in the nature of expenditure/cost covered by section 48. For instance, in the case of Mathuradas Mangaldas Parekh (supra), payment of betterment charges made under town planning scheme had resulted in increase in potential value of land and the same therefore were held to be cost of improvement of the said land. Similarly, in the case of Chemmancherry Estates Co. ( supra), funds borrowed by the assessee were utilized for acquisition of land and the interest paid thereon thus was held to the forming part of the cost of acquisition of the land. In other cases also, the brokerage expenses incurred by the assessee were in respect of particular sale of capital assets and the same therefore were held to be deductable while computing capital gain being expenditure incurred wholly and exclusively in connection with such transfer/sale. 15. At the time of hearing before us, the Ld, Couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is since applied. 17. In the present case, the profit arising from the sale of shares was received by the assessee directly which constituted its income at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. We, therefore, have not hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the contentions raised by the assessee in this regard cannot be accepted being devoid of any merit. 18. As regards the contention of the Ld. Counsel for the assessee in support of assessee's claim for deduction on account of fees paid for PMS based on real income theory, we agree with the ld. DR that the theory of real income cannot be applied to allow deduction to the assessee which is otherwise not permissible under the Income-tax Act. In the case of CIT v. Udayan Chinubhai [1996] 222 ITR 456 / 88 Taxman 114 (SC) it was held by the Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d law in the light of the subsequent decisions of the apex court referred to hereinabove. Thus, without going into further details we would only like to observe that the decision in the case of Smt. Shakuntala Kantilal (supra) is no more a good law in view of the latest decision and therefore that decision cannot be relied for the proposition that necessity of expenditure would make the same allowable. Thus, Respectfully following the afore-stated decision s of the co-ordinate jurisdictional Benches of the Mumbai Tribunal and our detailed discussions and reasoning in this order, we hold that these PMS expenses of ₹ 20,04,393/- paid to portfolio managers being management expenses incurred with respect to securities / funds of the assesse being managed by portfolio managers , being disallowed by the AO and confirmed by the CIT(A), are not allowable as deduction u/s 48 of the Act from the full value of consideration on sale of securities received or accruing to the assessee . Accordingly, we dismiss this appeal filed by the assessee. We order accordingly. 10. In the result, the appeal filed by the assessee in ITA N0. 7407/Mum/2011 for the assessment year 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the additions of ₹ 2,58,415/- to the income of the assessee company , vide assessment orders dated 25-03-2011 passed u/s 143(3) of the Act. The learned CIT(A) confirmed the assessment orders dated 25-03-2011 passed by the AO u/s 143(3) of the Act as the assessee company merely submitted that the assessee company has not received the said amounts from these parties while it failed to reconcile the AIR information as per ITS database with its books of accounts, vide appellate orders dated 26-09-2012 passed by learned CIT(A). On second appeal filed by the assessee company before the Tribunal , the learned counsel for the assessee company submitted that the AO may call these parties and verify the contentions of the assessee company that the assessee company has not received any income from these parties in excess of what is declared by the assessee company in its books of accounts , and the AIR details as per ITS database is incorrect. The learned DR submitted that he has no objection if the matter is remitted back to the file of AO for making necessaries enquiries and examination with these parties about the interest income reflected in AIR information and what is reported b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Utilities and Power Limited (supra) and two decisions in HDFC Bank Limited (supra), we are of considered view that no disallowance can be made by the Revenue on account of the interest expenditure as there will be presumption that the assessee company has utilized its net owned funds which are in far excess of the investments made by the assessee company in shares and mutual funds, for the purposes of making investments in shares and mutual fund. Thus, keeping in view the factual matrix of the instant case , in our considered view, no disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 is warranted towards interest expenditure incurred by the assessee company.Our decision in ITA no. 7273/Mum/2012 for assessment year 2007-08 shall apply mutatis mutandis with respect to disallowance of interest expenditure under Section 14A of the Act is concerned as no disallowance of interest expenditure of ₹ 86,72,298/- as made by the AO and confirmed by learned CIT(A) is warranted based on facts and circumstances of the case. The AO has not made any disallowance under Section 14A read Rule 8D(2)(i) of Income Tax Rules, 1962 in his impugned assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not form part of the total income under the Act having regards to the accounts of the assessee and hence the matter is to be decided on each case based on the facts of the case. We have duly considered the judicial decisions relied upon by the assessee company. Reference is drawn to the decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in ITA No 5366/Mum/2013 for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under: 12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the assessment year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. 234 CTR 1. The assessee company has made average investments of ₹ 14.44 crores computed as per rule 8D(2)(iii) of Income Tax Rules,1962. The investments made by the assessee company includes the investment of ₹ 19.37 crores made in 100% subsidiary company. 13. Coming to the submission of assessee that thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or earning high dividends as under: It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They 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. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mum.) 843, the Mumbai Bench of this Tribunal has held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A. 3. The ITAT, Chennai Bench has held in the case of Southern Petro Chemicals Industries v. DCIT(2005) 3 SOT 157 as under: We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962. Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure under section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962. The assessing officer has disallowed by computing the indirect expenditure being administrative and other in-direct expenses after invoking Rule 8D(2) (iii) of Income Tax Rules ,1962. We, therefore, hold that the assessing officer has rightly invoked the provisions of section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 for disallowing the expenditure of ₹ 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. We order accordingly. The assessee company has relied upon following decisions to contend that no disallowance should be made u/s 14A of the Act with respect of strategic investment / controlling interest investments made by the assessee company: 1. CIT v. Oriental S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company which shall not be disallowed as discussed above by us. 3. JM Financial Limited v. ACIT (ITA no. 4521/Mum/2012)-In this case, the tax-payer was made out a case to show that no expenditure has been incurred for maintaining the investment in subsidiary companies and therefore in the absence of finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO was held to be not justified by the Tribunal. However, in the instant case this facts has not been brought on record having regards to the accounts of the assessee company and hence we are setting aside this appeal to the file of the AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act read with Rule 8D(2)((iii) of Income Tax Rules, 1962having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act , excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. 4. Sh Jigar P. Shah v. ACIT in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and also of the decision of Kolkatta Tribunal Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced on 13th May 2015 whereby Kolkatta Tribunal has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962., we hold that the investment made by the assessee company in shares and units of mutual funds( excluding investment of ₹ 1,10,30,000/- in foreign subsidiary) shall attract disallowance u/s 14A of the Act having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act keeping in view Rule 8D(2)(iii) of the Income Tax Rules, 1962,.We are therefore inclined to set aside the matter to the file of the AO for de-novo determination and quantification of disallowance u/s 14A of the Act of the indirect expenses incurred by the assessee company in relation to such income which does not form part of the total income having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act and also keeping in view Rule 8D(2)(iii) of Income Tax Rules, 1962. We order ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
