TMI Blog2019 (8) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with our aforesaid directions. The assessee is directed to file complete details and modus operandi for making and managing investments to that effect before the AO in denovo proceedings. AO shall grant proper and adequate opportunity of being heard to the assessee in denovo assessment proceedings and the evidences submitted by the assessee in its defence shall be admitted by the AO. We direct the AO make to disallowance of expenditure u/s. 14A in accordance with our aforesaid directions. - I.T.A. No.3092/Mum/2016, I.T.A. No.7061/Mum/2017 - - - Dated:- 19-8-2019 - Shri Sandeep Gosain, Judicial Member And Shri Ramit Kochar, Accountant Member For the Assessee : Shri. R.C Jain For the Revenue : Shri. Ajai Pratap Singh (Sr. AR) ORDER PER RAMIT KOCHAR, ACCOUNTANT MEMBER: These are two appeals. The first appeal is filed by Revenue being ITA No. 3092/Mum/2016 for assessment year 2012-13, which is directed against appellate order dated 28.01.2016 in Appeal No. CIT(A)-2/IT/306/2014-15, passed by learned Commissioner of Income Tax (Appeals)-2, Mumbai (hereinafter called the CIT(A) ), fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.s. 143(2) of the 1961 Act, it was observed by the AO that the assessee has earned dividend income from shares of ₹ 83,48,000/- which was claimed as an exempt income. The assessee has suo-motto voluntarily disallowed an expenditure of ₹ 4,59,998/- u/s. 14A of the 1961 Act purported to be incurred for earning an exempt income, wherein it disallowed 0.5% of Non-current investments by invoking Rule 8D(2)(iii) of the Income-tax Rules, 1962 r.w.s. 14A of the 1961 Act. The AO observed from Notes to accounts to Profit and Loss Account that the assessee has incurred bank charges to the tune of ₹ 2000/- and interest expenses to the tune of ₹ 601.46 lacs. The AO invoked provisions of Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules and made disallowance u/s. 14A r.w.r. 8D of the 1962 Rules, as detailed hereunder: Sr.No Particulars (Amt in Rs.) 1) The amount of expenditure directly relating to income which does not part of total income (Bank Charges) 2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing annual charges for maintaining folio of holding the debentures, shares and mutual funds. The assessee claimed that total investments held in depository are ₹ 5800.10 lacs out of which investments in shares are to the tune of ₹ 540.80 lacs which is 9.32% of the investments. The assessee claimed that these depository charges are paid for earning both taxable and non taxable income and thus, disallowance u/r 8D(2)(i) of the 1962 Rules be made proportionately. Thus, the assessee prayed that disallowance should be made proportionately of approx. 10% of ₹ 2000 which comes to ₹ 200/- under Section 14A read with Rule 8D(2)(i) of the 1962 Rules. 4.2 Disallowance of ₹ 1,43,56,170/- towards interest. The assessee submitted before learned CIT(A) that the assessee has following non-interest bearing funds, as detailed hereunder:- Schedule 1 Equity share capital ₹ 375.00 Lakhs Schedule 2 Reserve Surplus ₹ 968.42 Lakhs Tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has earned dividend income of ₹ 83,48,000/- which was claimed as an exempt income. The assessee claimed before learned CIT(A) that it has interest free funds to the tune of ₹ 1343.42 lacs whereas long term investments made in shares are to the tune of ₹ 1127.11 lacs. The assessee also submitted that it has both interest income(₹ 532.92 lacs) as well interest expenses ( ₹ 601.46 lacs) and the net interest expenses incurred by the assessee are to the tune of ₹ 68.54 lacs which should be considered for making disallowance u/s 14A of the 1961 Act. The assessee claimed that it has interest bearing borrowings as well as investments, as detailed hereunder:- S. No Particulars of Investments in Mutual Funds Note no As on 31/3/2012 (Rs. In lacs) As on 31/3/2011 (Rs. In lacs) 1. Short Term Borrowing 4 8,040.90 7,592.27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 705.08 1,954.48 Total 7,182,19 2,667.36 5.4 The assessee also claimed before learned CIT(A) that current investments made by the assessee are as under: s.No. Particulars of Investments in Mutual Funds As on 31/3/2012 Rs. In lacs As on 31/3/2011 Rs. In lacs 1. Birla Sun life cash plus -Growth 77.13 2,499.09 2. Birla Saving Fund Cash Plus-Growth 1101.00 Total 77.13 3,600.09 5.5 The assessee submitted that the AO has computed disallowances of expenses as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orked out the disallowance u/s 14A r.w. Rule 8D at ₹ 1,54,62,223/- as against the disallowance computed by Appellant ₹ 4,59,998/- and the same has been already offered for taxation by the appellant company. Considering the Hon'ble High Court of Mumbai in the case of CIT vs. Reliance Utilities and Power Ltd. that the Appellant possessed interest free funds of its own generated in the course of relevant financial year and therefore no part of interest on borrowing can be disallowed u/s 36(1)(iii) of the Income Tax Act. Further relying on the above judicial decision, I am of the considered opinion that the disallowance made by the AO. u/s 14A r.w. Rule 8D of the Income Tax Act of ₹ 1,50,00,225/- is not warranted. However, the additions towards Direct expenses of ₹ 2,000/- was not pressed and hence it is confirmed. 6. Aggrieved by appellate order dated 28.01.2016 passed by learned CIT(A), Revenue is in appeal before the tribunal and Ld. DR submitted before the tribunal that an ex-parte order was earlier passed by tribunal in the absence of the assessee, but later the assessee filed an MA and then appeared before the tribunal. Our attention w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d making investments. We have observed that assessee has received dividend income of ₹ 83,48,000/- which was claimed as an exempt income. The assessee while making voluntary disallowance made suo-motto disallowance of expenditure of an amount of ₹ 4,59,998/- u/s. 14A of the 1961 Act r.w.r. 8D 2 (iii) of the 1962 Rules by computing disallowance @0.5% of the average investments. The AO has computed disallowance u/s. 14A of the 1961 Act r.w.r. 8D of the 1961 Act, of ₹ 1,54,62,223/- as under:- Sr.No Particulars Amt in Rs.) 1) The amount of expenditure directly relating to income which does not part of total income (Bank Charges) 2000 2) Interest attributable to exempt income A*B/C A = amount of expenditure by way of interest other than the amount of interest included in clause (i) B = the average of value of investment (Non current investment in Equity Instruments and Current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest free funds as also interest bearing funds and in the absence of specific co-relation of interest bearing borrowed funds with investments made, the presumption will apply that the assessee made investments in securities capable of yielding tax-free income out of interest free funds available with it. The decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Limited(supra) and CIT v. HDFC Bank Limited (2014) 366 ITR 505(Bom.) are relevant and applicable. The assessee has claimed to be NBFC and to be engaged in investment business. The said position is not controverted by authorities below as well by learned DR before the Bench. The assessee being NBFC is borrowing funds at interest and investing these funds in Debentures, Bonds, Loans etc wherein taxable interest income is received. We are in agreement with the assessee that in such scenario, only net interest expenditure be considered for the purposes of disallowance of the interest expenditure u/s 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rule. The decision of Hon ble Gujarat High Court in the case of Nirma Credit and Capital Private Limited(supra) is relevant and applicable. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stage is not warranted. The AO on its part has duly recorded satisfaction albeit cryptic in para 5.1 and 5.2 of its assessment order. Thus, under these factual matrix, the AO is directed to make disallowance of expenditure u/s 14A of the 1961 Act in accordance with our aforesaid directions. The assessee is directed to file complete details and modus operandi for making and managing investments to that effect before the AO in denovo proceedings. Needless to say that the AO shall grant proper and adequate opportunity of being heard to the assessee in denovo assessment proceedings and the evidences submitted by the assessee in its defence shall be admitted by the AO. Thus, we direct the AO make to disallowance of expenditure u/s. 14A in accordance with our aforesaid directions. We order accordingly. 8. In the result, the appeal of the Revenue in ITA no.3092/Mum/2016 for ay: 2012-13 is allowed for statistical purposes. 9. Our aforesaid decision in ITA no. 3092/Mum/2016 for ay: 2012-13 shall apply mutatis mutandis to appeal of the assessee in ITA no. 7061/Mum/2017 for ay: 2013-14. The appeal of the assessee for ay: 2013-14 is allowed for statistical purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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