M/s. Indiabulls Capital Services Ltd., New Delhi V. ACIT, New Delhi

ITA 1546/DEL/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4668 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 08-06-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 14-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RAKESH GUPTA; SOMIL AGARWAL S; MRS PANKAJ JAIN
• Keywords: Opportunity of being heard; Earning of tax free income; Source of fund
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : C : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI JOGINDER SINGH, JUDICIAL MEMBER ITA NO.1546/DEL/2014 ASSESSMENT YEAR : 2008-09 INDIABULLS CAPITAL SERVICES LTD., F-60, MALHOTRA BUILDING, IIND FLOOR, CONNAUGHT PLACE, NEW DELHI. PAN: AABCI3613B VS. ACIT, RANGE-11, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAKESH GUPTA & SHRI SOMIL AGARWAL, ADVOCATES & MRS. PANKAJ JAIN, CA DEPARTMENT BY : SHRI ARUN KUMAR YADAV, SR. DR DATE OF HEARING : 01.08.2018 DATE OF PRONOUNCEMENT : 02.08.2018 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF TH E ORDER PASSED BY THE CIT (A) ON 31.01.2014 IN RELATION TO THE ASSESSMENT YEAR 2008-09. ITA NO.1546/DEL/2014 2 2. THE SOLITARY GRIEVANCE PROJECTED THROUGH VARIOUS GROUNDS IS AGAINST THE CONFIRMATION OF DISALLOWANCE AMOUNTING TO RS.9, 12,39,472/- MADE BY THE ASSESSING OFFICER U/S 14A OF THE INCOME-TAX ACT , 1961 (HEREINAFTER ALSO CALLED `THE ACT) READ WITH RULE 8D OF THE INCOME-T AX RULES. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS ENGAGED IN THE BUSINESS OF FINANCING, BORROWING, LENDING, ADVA NCING MONEY, DEALING IN DEBT INSTRUMENTS, INVESTING, DEPOSITORY SERVICES AN D PORTFOLIO MANAGEMENT SERVICES. THE ASSESSEE RECEIVED EXEMPT DIVIDEND INC OME OF RS.3,38,62,672/-. IN THE ABSENCE OF ANY DISALLOWAN CE OFFERED U/S 14A OF THE ACT, THE ASSESSING OFFICER REQUIRED THE ASSESSE E TO SHOW CAUSE AS TO WHY DISALLOWANCE BE NOT MADE. THE ASSESSEE TENDERE D SOME EXPLANATION. NOT SATISFIED WITH THE ASSESSEES POINT OF VIEW, T HE ASSESSING OFFICER INVOKED THE PROVISIONS OF RULE 8D AND COMPUTED DISA LLOWANCE AT RS.9,12,39,472/- COMPRISING OF TWO PARTS, NAMELY, D ISALLOWANCE OF INTEREST EXPENDITURE AMOUNTING TO RS.8,53,28,239/- UNDER RUL E 8D(2)(II) AND DISALLOWANCE OF OTHER EXPENSES UNDER RULE 8D(2)(III ) @ % OF THE AVERAGE VALUE OF INVESTMENTS. THE LD. CIT(A) ECHOED THE DI SALLOWANCE, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. ITA NO.1546/DEL/2014 3 4. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELE VANT MATERIAL ON RECORD, IT IS FOUND THAT THE ASSESSING OFFICER INVO KED THE PROVISIONS OF RULE 8D FOR THE PURPOSES OF COMPUTING DISALLOWANCE U/S 1 4A OF THE ACT. THE HON'BLE SUPREME COURT IN CIT VS. ESSAR TELEHOLDINGS LTD. (2018) 401 ITR 455 (SC) , HAS HELD THAT RULE 8D IS PROSPECTIVE AND, HENCE, APPLICABLE FROM THE ASSESSMENT YEAR 2008-09. SINCE THE ASSESSMENT YEAR UNDER CONSIDERATION IS THE FIRST YEAR OF THE APPLICABILIT Y OF RULE 8D, IT IS HELD, IN PRINCIPLE, THAT THE PROVISIONS OF RULE 8D WERE RIGH TLY INVOKED. 5. COMING TO THE CALCULATION OF DISALLOWANCE, WE FI RST TAKE UP RULE 8D(2)(III) AS PER WHICH THE ASSESSING OFFICER COMPU TED DISALLOWANCE OF RS.59,11,233/- AT 0.5% OF THE AVERAGE VALUE OF INVE STMENTS. THE ASSESSING OFFICER ADOPTED THE FIGURE OF RS.1,18,22,566/- AS T HE AVERAGE VALUE OF INVESTMENTS. THE LD. AR CONTENDED THAT THE ASSESSI NG OFFICER RIGHTLY NOTICED THAT THE EXEMPT DIVIDEND INCOME OF RS.3.38 CRORE AND ODD WAS EARNED IN RESPECT OF SIX SECURITIES ENUMERATED ON P AGE 2 OF THE ASSESSMENT ORDER. HE SUBMITTED THAT FOR CALCULATING THE AVERA GE VALUE OF INVESTMENTS, THE ASSESSING OFFICER WRONGLY CONSIDERED THE VALUE OF ALL THE INVESTMENTS APPEARING IN THE BALANCE SHEET, INCLUDING THOSE IN RESPECT OF WHICH NO ITA NO.1546/DEL/2014 4 DIVIDEND INCOME WAS EARNED DURING THE YEAR. THIS C ONTENTION COULD NOT BE FACTUALLY CONTROVERTED ON BEHALF OF THE REVENUE. 6. THE HON'BLE DELHI HIGH COURT IN ACB INDIA LTD. VS. CIT (2015) 374 ITR 108 (DEL) , HAS HELD THAT THE AVERAGE VALUE OF INVESTMENTS, F OR THE PURPOSES OF RULE 8D(2)(III), SHOULD BE CONFINED TO THOSE SECURITIES IN RESPECT OF WHICH EXEMPT INCOME IS EARNED AND NOT TH E TOTAL INVESTMENTS. SIMILAR VIEW HAS BEEN TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. VIREET INVESTMENTS (P) LTD. (2017) 165 ITD 27 (DEL) (SB) HOLDING THAT ONLY THOSE INVESTMENTS SHOULD BE CONSI DERED FOR COMPUTING AVERAGE VALUE OF INVESTMENTS WHICH YIELD EXEMPT INC OME DURING THE YEAR. IN VIEW OF THE AFORE REFERRED BINDING PRECEDENTS, W E SET ASIDE THE IMPUGNED ORDER TO THIS EXTENT AND REMIT THE MATTER TO THE FI LE OF ASSESSING OFFICER FOR RE-COMPUTING THE DISALLOWANCE UNDER RULE 8D(2)(III) BY CONSIDERING ONLY SUCH INVESTMENTS IN CALCULATING THE AVERAGE VALUE O F INVESTMENTS, WHICH HAVE YIELDED EXEMPT INCOME DURING THE YEAR. 7. NOW, WE ESPOUSE THE FIRST COMPONENT OF DISALLOWA NCE, BEING, INTEREST EXPENDITURE AMOUNTING TO RS.8,53,28,239/- UNDER RUL E 8D(2)(II). IN THIS ITA NO.1546/DEL/2014 5 REGARD, IT IS SEEN THAT THE ASSESSING OFFICER TOOK THE AMOUNT OF INTEREST EXPENDITURE AT RS.9,51,01,095 FOR CALCULATING DISAL LOWANCE, WHICH IS THE SAME FIGURE AS WAS CLAIMED BY THE ASSESSEE IN ITS PROFIT & LOSS ACCOUNT AND, THEREAFTER, CALCULATED PROPORTIONATE AMOUNT OF DISALLOWANCE AT RS.8.53 CRORE AND ODD. THE LD. CIT(A) NOTICED THAT THE ASS ESSEE DURING THE YEAR PURCHASED 4,22,684/- SHARES OF BAJAJ HOLDING AND IN VESTMENT LTD.; 33 LAC SHARES OF AMBUJA CEMENT LTD.; 255000 SHARES OF ICRA LTD.; 1168891 SHARES OF NITCO TILES LTD.; AND 936900 SHARES OF RE LIANCE LIQUIDITY FUNDS. IT WAS, THUS, OBSERVED THAT THE ASSESSEE MA DE INVESTMENT DURING THE YEAR IN SHARES/MUTUAL FUNDS TO THE TUNE OF RS.291.1 2 CRORE AS AGAINST THE SHARE CAPITAL OF ONLY RS.5 CRORE WITH OPENING BALAN CE OF SECURED LOANS AT RS.124.49 CRORE. THIS WAS SEEN IN CONTRAST TO THE INVESTMENTS OF RS.111,30,09,245/- IN THE SHARES AS ON 31.03.2007 W ITH CORRESPONDING FIGURE OF LOANS AND ADVANCES AT RS.5,26,64,161/-. IT WAS, THUS, OPINED THAT THE OPENING STOCK OF SHARES WAS ACQUIRED THROUGH TH E BORROWED FUNDS AND FURTHER INVESTMENTS IN NEW SHARES OF RS.291.12 CRO RE MADE DURING THE YEAR WERE ALSO OUT OF BORROWED INTEREST BEARING FUNDS. THIS WAS COUNTERED BY THE LD. AR CONTENDING THAT INTEREST OF RS.9.51 CROR E WAS PAID IN RESPECT OF ITA NO.1546/DEL/2014 6 BORROWED FUNDS WHICH WERE NOT UTILIZED FOR THE PURP OSES OF INVESTMENTS IN THE CURRENT AS WELL AS THE PRECEDING YEAR. IT WAS FURTHER SUBMITTED THAT THOUGH THE ASSESSEE MADE FRESH INVESTMENT OF RS.291 .12 CRORE DURING THE YEAR, AT THE SAME TIME, IT ALSO SOLD INVESTMENTS OF RS.344.87 CRORE DURING THE RELEVANT PERIOD. THE LD. DR STRONGLY SUPPORTED THE IMPUGNED ORDER ON THIS SCORE BY PUTTING FORTH THAT INTEREST PAID BY T HE ASSESSEE DURING THE YEAR WAS IN RESPECT OF INTEREST BEARING FUNDS UTILIZED F OR THE PURPOSES OF INVESTMENT IN SUCH SECURITIES AND HENCE THE DISALLO WANCE OF INTEREST AS PER RULE 8D(2)(II) WAS RIGHTLY MADE AND CONFIRMED. 8. WE FIND THAT THOUGH THE LD. CIT(A) HAS DISCUSSED THE FRESH INVESTMENTS MADE DURING THE YEAR AT RS.291.12 CRORE , BUT, HE DID NOT CONSIDER THE AMOUNT OF REALIZATIONS FROM SALE OF IN VESTMENTS AT RS.344.87 CRORE DURING THE YEAR. THE ASSESSING OFFICER SIMPL Y WENT BY THE FIGURE OF INTEREST GIVEN IN THE PROFIT & LOSS ACCOUNT AND APP ORTIONED IT TO THE AMOUNT OF INVESTMENTS FOR THE PURPOSE OF MAKING DIS ALLOWANCE. IN OUR CONSIDERED OPINION, THE APPROACH ADOPTED BY THE AUT HORITIES BELOW CANNOT BE COUNTENANCED. THE ONUS IS ON THE ASSESSING OFFI CER TO DEMONSTRATE THAT THE FUNDS DEPLOYED FOR MAKING INVESTMENTS IN SHARES ETC. WERE FROM INTEREST ITA NO.1546/DEL/2014 7 BEARING FUNDS. IN VIEW OF THE FACT THAT ALL THE MAT ERIAL FACTS WERE NOT CONSIDERED BY THE AUTHORITIES BELOW IN MAKING THE D ISALLOWANCE OF INTEREST, WE DEEM IT APPROPRIATE TO SEND THE MATTER BACK TO T HE AO FOR CONSIDERING ALL SUCH ASPECTS BEFORE MAKING DISALLOWANCE OF INTE REST UNDER RULE 8D(2)(II). AS SUCH, WE SET ASIDE THE IMPUGNED ORDER TO THIS EXTENT AND RESTORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER FOR A DE NOVO ADJUDICATION AFTER PROPERLY FINDING OUT THE SOURCE OF FUNDS UTIL IZED FOR MAKING INVESTMENTS IN THE SECURITIES. 9. THE LD. AR SUBMITTED THAT IN THE ORDER OF ASSESS MENT FOR THE A.Y. 2007-08, THE ASSESSING OFFICER ADDED A SUM OF RS.5 LAC U/S 14A TOWARDS SALARY COSTS AND ADMINISTRATION EXPENSES U/S 14A ON AGREED BASIS. IT WAS, THEREFORE, SUBMITTED THAT NO DISALLOWANCE OF INTERE ST SHOULD BE MADE IN RESPECT OF THE SECURITIES PURCHASED DURING THE PREC EDING YEARS. HE RELIED ON THE JUDGMENT OF THE HON'BLE KARNATAKA HIGH COURT IN CIT VS. SRIDEV ENTERPRISES (1991) 192 ITR 165 (KAR.) AND CERTAIN OTHER DECISIONS CANVASSING THE PROPOSITION THAT IF THE ASSESSEES C LAIM IN THE PREVIOUS ASSESSMENT YEARS REGARDING INTEREST ON BORROWED CAP ITAL HAS BEEN ACCEPTED, THE REVENUE CANNOT MAKE DISALLOWANCE OF INTEREST IN THE SUCCEEDING YEARS ITA NO.1546/DEL/2014 8 ON THE OPENING BALANCE OF SUCH INVESTMENTS. HE FUR THER RELIED ON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF HDFC BANK LTD. VS. DCIT (2016) 383 ITR 529 (BOM) FOR THE PROPOSITION THAT THE PARAMETERS FOR ALLOWING INTEREST U/S 36(1)(III) APP LY IN RESPECT OF DISALLOWANCE TO BE MADE U/S 14A AS WELL. 10. WE ARE NOT CONVINCED WITH THE PROPOSITION TENDE RED BY THE LD. AR TO THE EFFECT THAT NO DISALLOWANCE OF INTEREST CAN BE MADE U/S 14A IN RESPECT OF THE OPENING BALANCE OF INVESTMENTS EVEN IF THOSE AR E FOUND TO HAVE BEEN FINANCED OUT OF INTEREST BEARING BORROWED FUNDS. SRIDEV ENTERPRISES (SUPRA) AND OTHER DECISIONS HOLD THAT ONCE THE CLAIM OF THE ASSESSEE FOR ALLOWING INTEREST IN THE PREVIOUS ASSESSMENT YEAR HAS BEEN A CCEPTED, THEN, NO DISALLOWANCE CAN BE MADE IN THE SUCCEEDING YEAR. A DVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008-09. IT IS FROM THIS YEAR ONWARDS THAT THE MAN DATE OF RULE 8D HAS COME INTO FORCE. ALL THE HONBLE HIGH COURTS ARE U NANIMOUS THAT THE DISALLOWANCE U/S 14A IS TO BE MADE ONLY ON REASONA BLE BASIS UP TO ASSESSMENT YEAR 2007-08. SUCH A DISALLOWANCE HAS T O BE MADE IN A HOLISTIC MANNER DE HORS ANY REFERENCE TO INDIVIDUAL ITEMS OF EXPENSES, INC LUDING ITA NO.1546/DEL/2014 9 INTEREST, AS IS THE POSITION UNDER RULE RULE 8D APP LICABLE FROM THE YEAR UNDER CONSIDERATION. THUS, IT IS GRAPHICALLY CLEAR THAT THE QUESTION OF SPECIFIC DISALLOWANCE OF INTEREST U/S 14A READ WITH RULE 8D IS AND COULD HAVE OCCURRED FOR THE FIRST TIME IN THE YEAR IN QUESTION AND THERE CAN BE NO PRESUMPTION THAT THE AO ACCEPTED IN THE PRECEDING Y EAR THAT NO INTEREST BEARING FUNDS WERE UTILIZED BY THE ASSESSEE IN MAKI NG THE INVESTMENTS IN RESPECT OF OPENING BALANCE OF INVESTMENTS, SO AS TO DISABLE HIM FROM MAKING DISALLOWANCE OF INTEREST UNDER RULE 8D, EVEN IF IT IS PROVED THAT INTEREST BEARING FUNDS WERE UTILIZED FOR THE PURPOS E. ERGO, THIS CONTENTION OF THE LD. AR IS JETTISONED. IT IS, THEREFORE, DIRECT ED THAT THE ASSESSING OFFICER WILL EXAMINE THE QUESTION OF DISALLOWANCE OF INTERE ST UNDER RULE 8D(2)(II) IN THE ABOVE HUE AND COMPUTE THE SAME AFTER ALLOWIN G OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 11. IT IS NOTICED THAT THE ASSESSEE EARNED EXEMPT D IVIDEND INCOME OF RS.3,38,62,672/-. THE HON'BLE JURISDICTIONAL HIGH C OURT IN CHEMINVEST LTD. VS. CIT (2015) 378 ITR 33 (DEL) AND CIT VS. HOLCIM INDIA P. LTD. (2014) 90CCH 081-DEL-HC HAS HELD THAT IF THERE IS NO EXEMPT INCOME, THER E CAN BE NO QUESTION OF MAKING ANY DISALLOWANCE U/S 14A. A FORTIORI, THE ITA NO.1546/DEL/2014 10 DISALLOWANCE U/S 14A OF THE ACT HAS TO BE RESTRICTE D TO THE AMOUNT OF EXEMPT INCOME. AS SUCH, WE DIRECT THAT THE DISALLO WANCE COMPUTED BY THE ASSESSING OFFICER IN THE FRESH PROCEEDINGS SHOULD N OT CROSS THE AMOUNT OF EXEMPT DIVIDEND INCOME OF RS.3,38,62,672/-. 12. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 02.08.201 8. SD/- SD/- [JOGINDER SINGH] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 02 ND AUGUST, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.