TD TOLL ROAD PRIVATE LIMITED, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX 15(3)(1), MUMBAI

ITA 1646/MUM/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2521 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2014-2015
• Appeal Filed On: 14-03-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D G
• Keywords: Business income; Earning of tax free income; Proportionate interest; Revised return; Rule 8D
• Section: 143(3); 14A; 115JB

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.1646/ MUM/2018 ( / ASSESSMENT YEAR: 2014 - 15) TD TOLL ROAD PRIVATE LTD., 361, 3 RD FLOOR, NORTH WING, RELIANCE CENTRE, SANTACRUZ (E), MUMBAI - 400055 / V. DCIT - 15(3)(1) ROOM NO. 451, AAYAKAR BHAVAN, M.K ROAD, MUMBAI - 400020 ./ PAN : AACCT6395C ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY: SHRI. JITENDRA SANGHAVI REVENUE BY: SHRI. D.G. PANSARI (DR) / DATE OF HEARING : 25.03.2019 / DATE OF PRONOUNCEMENT : 21 .0 6 .2019 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER: THIS APPEAL, FILED BY ASSESSEE , BEING ITA NO. 1646/MUM/2018 , IS DIRECTED AGAINST APPELLATE ORDER DATED 31.01.2018, PASSED BY LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) - 2 4, MUMBAI (HEREINAFTER CALLED THE CIT(A)) IN APPEAL NO. CIT(A) - 24/DCIT - 15(3)(1)/IT - 244/2016 - 17 , FOR ASSESSMENT YEAR 2014 - 15 , THE APPELLATE PROCEEDINGS HAD ARISEN BEFORE LEARNED CIT(A) FROM THE ASSESSMENT ORDER DATED 30.12.2016 PASSED BY LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) FOR AY 2014 - 15 . 2. T HE GROUNDS OF APPEAL RAISED BY A SSESSEE IN MEMO OF APPEAL FILED WITH THE INCOME - TAX APPELLATE TRIBUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER: - I.T.A. NO.1646/MUM/2018 PAGE | 2 COMPUTATION OF INCOME UNDER THE NORMAL P ROVISIONS OF THE INCOME - TAX ACT, 1961 ('THE ACT'): A. DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I NCOME - TAX RULES, 1962 ('THE RULES'): 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 24, MUMBAI [HEREINAFTER REFERRED TO AS CIT(A)] ERRED IN CONFIRMING THE ACTION OF THE DEPUTY COM MISSIONER OF INCOME - TAX - 15(3)( 1), MUMBAI [HEREINAFTER REFERRED TO AS ASSESSING OFFICER] IN DISALLOWING EXPENSES UNDER SECTION 14A OF THE ACT R.W.R. 8 D OF TH E RULES TO THE EXTENT OF RS. 17,50, 083/ - . THE APPELLANT SUBMITS THAT THE AFORESAID DISALLOWANCE I S ERRONEOUS AND THE SAME OUGHT TO BE DELETED. WITHOUT PREJUDICE TO THE ABOVE GROUND : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN COMPUTING THE DISALLOWAN CE TAKING AVERAGE OF OPENING AND CLOSING VALUE OF INVESTMENTS CONSIDERING THE TENURE OF INVESTMENT IN FUNDS YIELDING TAX FREE INCOME INSTEAD OF CONSIDERING THE BALANCE ON THE FIRST DAY AND THE LAST DAY OF THE FINANCIAL YEAR 2013 - 14 IN FUNDS YIELDING TAX FR EE INCOME AS SPECIFIED IN RULE 8D OF THE RULES. THE APPELLANT SUBMITS THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS TO BE COMPUTED BY APPLYING RULE 8D OF THE RULES AS PRESCRIBED UNDER THE RULES AND NOT BY ADOPTING A DIFFERENT METHODOLOGY THAT IS NOT PRESCRIBED UNDER THE RULES OR FRAMED UNDER THE ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING INTEREST OF RS. 15,17,548/ - U NDER RULE 8D (2)(II) OF THE RULES. THE APPELLANT SUBMITS THAT AS THE APPELLANT HAS OWN FUNDS THAT ARE IN EXCESS OF THE TOTAL VALUE OF INVESTMENTS AND THEREFORE THE INTEREST DISALLOWANCE IS INCORRECT AND THE SAME OUGHT TO BE DELETED. WITHOUT PREJUDICE TO THE ABOVE GRO UNDS: I.T.A. NO.1646/MUM/2018 PAGE | 3 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT ADJUDICATING THE SPECIFIC GROUND OF APPEAL IN RESPECT OF DISALLOWANCE UNDER SECTION 14A OF THE ACT IS RESTRICTED TO THE EXEMPT INCOME EARNED BY THE APP ELLANT. THE APPELLANT SUBMITS THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT OUGHT TO HAVE BEEN RESTRICTED TO THE QUANTUM OF THE EXEMPT INCOME OF RS. 10,67,974/ - EARNED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERATION. 5. WITHOUT PREJUDICE TO THE ABOVE , THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WORKED OUT BY THE ASSESSING OFFICER IS EXCESSIVE AND UNREASONABLE AND OUGHT TO BE REDUCED SUBSTANTIALLY. COMPUTATION OF BOOK PROFIT U/S. 115JB OF THE ACT: B. ADDITION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT: 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER AS EXPENSES INCURRED IN RELATIO N TO EXEMPT INCOME WHILE COMPUTING BOOK PROFIT UNDER SECTION.115JB OF THE ACT TO THE EXTENT OF RS. 17,50,083/ - . THE APPELLANT SUBMITS THAT THE AFORESAID ADDITION TO BOOK PROFITS IS ERRONEOUS AND THE SAME OUGHT TO BE DELETED. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT AS PER SECTION 14A OF THE ACT R.W.R. 8D OF THE RULES. THE APPELLANT SUBMITS THAT THE EXTENSION OF THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D OF THE RULES FOR COMPUTATION OF BOOK PROFIT U/S. 115JB OF THE ACT IS NOT IN ACCORDANCE WITH LAW AND THE SAME OUGHT TO BE DELETED. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN NOT FOLLOWING THE DECISIONS OF HON'BLE SUPREME COURT IN CASES OF RAJASTHAN STATE WAREHOUSING (242 ITR 450) AND INDIAN BANK LTD. (56 ITR 77) IN WHICH THE HON'BLE SUPREME COURT HAD HELD I.T.A. NO.1646/MUM/2018 PAGE | 4 THAT APPORTIONMENT OF EXPENDITURE BETWEEN EXEMPT INCOME AND TAXABLE INCOME ARISING OUT OF INDIVISIBLE BUSINESS CANNOT BE MADE. THE APPELLANT SUBMITS THAT THE EXPENSES ALLOCATED BY THE ASSESSING OFFICER TOWARDS THE EXEMPT INCOME IS CONTRARY TO THE ABOVE DECISIONS OF HON'BLE SUPREME COURT AND THE SAID ADDITION IN THE COMPUTATION OF BOOK PROFIT OUGHT TO BE DELETED. 9. WITHOUT PREJUDICE TO THE ABOVE , THE APPELLANT SUBMITS THAT ADDITION OF DISALLOWANCE MADE UNDER SECTION 14A OF THE AC T WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT IS EXCESSIVE AND THE SAME OUGHT TO BE REDUCED SUBSTANTIALLY. C. G ENERAL : 10. THE APPELLANT CRAVES LEAVE TO ADD TO AMEND, VARY OR ALTER, INCLUDING BY SUBSTITUTION, ANY OF THE ABOVE GROUNDS OF APP EAL. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF ROADS ON BOT BASIS , STRENGTHENING OF THE EXISTING CARRIAGEWAY FROM TRICHY DINDIGUL SECTION OF NATIONAL HIGHWAY NO. 45 IN THE S TATE OF TAMILNADU. THE AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND NATIONAL HIGHWAY AUTHORITY OF INDIA ON 19.07.2007 AND THE ASSESSEE COMMENCED COMMERCIAL OPERATIONS FROM 11.01.2012 IN THE FORM OF TOLL COLLECTION. THE ASSESSEE SHOWED INCOME FROM OPERATIONS DURING TH E YEAR UNDER CONSIDERATION OF RS. 45.22 CRORES AND OTHER INCOME AT RS. 15.68 LACS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) READ WITH SECTION 143(2) OF THE 1961 ACT, THE AO OBSERVED FROM COMPUTATION OF INCOME THAT THE ASSESSEE HAS EARNED DIV IDEND INCOME OF RS. 10,67,974/ - WHICH WAS CLAIMED AS AN EXEMPT INCOME. THE AO OBSERVED THAT THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE U/S. 14A R.W.R. 8D OF THE INCOME - TAX RULES,1962 . THE AO ALSO OBSERVED THAT THE ASSESSEE IS NO T HAVING ANY INVESTMENT S IN EQUITY SHARE AND MUTUAL FUND AS ON 01.04.2013 AND 31.03.2014. THE AO ASK ED THE ASSESSEE TO FURNISH THE DETAIL S OF DISALLOWANCE IN RESPECT OF INTEREST AND OTHER EXPENSES INCURRED TOWARDS INVESTMENTS IN SHARES AND I.T.A. NO.1646/MUM/2018 PAGE | 5 MUTUAL FUNDS, INCOME FROM WHICH IS EXEMPT F ROM INCOME TAX. THE ASSESSEE SUBMITTED THAT IT HAS EARNED DIVIDEND INCOME OF RS. 10,67,974/ - ON ITS INVESTMENTS IN MUTUAL FUND WHICH WAS CLAIMED AS AN EXEMPT INCOME U/S. 10(34) OF THE 1961 ACT. IT WAS SUBMITTED THAT ASSESSEE DOES NOT HAVE ANY INVESTMENTS C APABLE OF EARNING TAX FREE INCOME AS ON FIRST DAY AND LAST DAY OF THE FINANCIAL YEAR. THUS IT WAS SUBMITTED BY THE ASSESSEE THAT DISALLOWANCE U/S. 14A R.W.R. 8D WORK ED OUT T O BE N IL AND HENCE NO DISALLOWANCE U/S. 14A WAS MADE IN THE COMPUTATION OF INCOME W HILE FILING RETURN OF INCOME. W ITHOUT PREJUDICE , IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAS EARNED DIVIDEND INCOME OF RS. 10,67,974/ - FROM MUTUAL FUNDS WHICH WAS CLAIMED AS AN EXEMPT INCOME . IT WAS SUBMITTED THAT ASSESSEE HAS OWNED INTEREST FREE FUNDS C OMPRISING OF SHARE C APITAL AND R ESERVE & SURPLUS , AGGREGATING TO RS. 106.11 CRORES AS AT 31.03.2014 WHILE THE SAME WAS RS. 105.63 CRORES AS AT 31.03.2013 WHICH WERE MORE THAN INVESTMENT S MADE BY THE ASSESSEE WHICH WERE CAPABLE OF EARNING TAX FREE INC OME. IT WAS EXPLAINED THAT PEAK INVESTMENTS WERE TO THE TUNE OF RS. 5.36 CRORES. THE DETAILS OF S HAREHOLDER S FUND S DURING THE FINANCIAL YEAR ENDED 31.03.2014 AND 31.03.2013 ARE REPRODUCED HEREUNDER : - SHAREHOLDERS FUND PARTICULARS FY 2013 - 14 FY 2012 - 13 SHARE CAPITAL 10,74,49,202 10,74,49,202 RESERVES AND SURPLUS SECURITIES PREMIUM RESERVE 96,71,50,800 96,71,50,800 SURPLUS/(DEFICIT) IN THE STATEMENT OF PROFIT AND LOSS - 1,34,06,753 - 1,82,11,525 95,37,44,047 94,89,39,275 TOTAL 1,06,11,93,2 4 9 1,05,63,88,477 I.T.A. NO.1646/MUM/2018 PAGE | 6 3.2 IT WAS SUBMITTED THAT ASSESSEES PEAK INVESTMENTS DURING THE YEAR STOOD AT RS. 5.36 CRORE . THE ASSESSEE CLAIMED THAT ITS SHAREHOLDER FUNDS ARE MORE THAN VALUE OF INVESTMENTS AND HENCE D ISALLOWANCE U/S. 14A SHOULD BE N IL. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITI ES AND POWER LTD., (2009) 178 TAXMAN 135 (BOM.) AND DECISION OF HONBLE BOMBAY HIGH COURT DATED 23.07.2014 IN THE CASE OF CIT V . HDFC BANK LTD. (2014) 366 ITR 505(BOM.) . T HE ASSESSEE ALSO RELIED UPO N THE OTHER CASE LAWS TO CONTEND ITS VIEW POINT THAT NO DISALLOWANCE U/S. 14A R.W.R. 8D(2)(II) IS WARRANTED AS ITS OWNED INTEREST FREE FUNDS AVAILABLE ARE MORE THAN VALUE OF INVESTMENTS . 3.3 SO FAR AS DISALLOWANCE BY INVOKING RULE 8D (2)(III) READ WITH SECTION 14A OF THE 1961 ACT , IT WAS SUBMITTED THAT DISALLOWANCE CAN BE MADE U/R 8D(2)(III) OF THE 1962 RULES BY TAKING AVERAGE VALUE OF INVESTMENTS AS ON THE FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR AS APPEARING IN THE BALANCE SHEET. THE ASSESSEE SUBMITTED THAT IT HELD NIL INVESTMENTS IN SECURITIES CAPABLE OF YIELDING TAX - FREE INCOME AS AT THE FIRST DAY AND LAST DAY OF FINANCIAL YEAR AS PER ITS BALANCE SHEET AND HENCE NO DISALLOWANCE OF EXPENDITURE INCU RRED IN RELATION TO EARNING OF AN EXEMPT INCOME IS WARRANTED U/S 14A READ WITH RULE 8D(2)(III) OF THE 1962 RULES. THUS IT WAS SUBMITTED THAT RULE 8D 2(III) OF THE 1962 RULES CANNOT BE APPLIED AND HENCE DISALLOWANCE U/S. 14A R.W.R. 8D2( I II) STAND S AT N IL. WI THOUT PREJUDICE, I T WAS ALSO SUBMITTED BY ASSESSEE THAT DISALLOWANCE U/S. 14A CANNOT EXCEED EXEMPT INCOME OF RS. 10,67,947/ - RECEIVED BY THE ASSESSEE. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT S P. LTD . V . CIT (2015) 372 ITR 6 94 (DELHI) . 3.4 . THE AO REJECTED THE CONTENTION S OF THE ASSESSEE AND WORKED OUT DISALLOWANCE U/S 14A OF THE 1961 ACT READ WITH RULE 8D OF THE 1962 RULES . THE AO OBSERVED THAT THE INVESTMENT S IN SHARE S AND MUTUAL FUND S AS ON 31.03.20 14 AND 31.03.2013 ARE AS UNDER: - I.T.A. NO.1646/MUM/2018 PAGE | 7 SR, NO. PARTICULARS AS AT 31/03/2014 AMT. IN RS. HAS AT 31/03/2013 AMT. IN RS. 1 NON - CURRENT INVESTMENTS I) EQUITY SHARES - UNQUOTED NIL NIL 2 CURRENT INVESTMENTS RELIANCE LIQUID FUND - DIRECT GROWTH PLAN - GROWTH OPTION NIL NIL NIL NIL 3.5 THE AO ALSO OBSERVED THAT BORROWED FUNDS AND INTEREST EXPENSES CLAIMED DURING THE YEAR UNDER CONSIDERATION FOR BOTH THE YEARS ARE AS UNDER: - SR. NO. PARTICULARS AS AT 31/03/2014 AMT. IN RS. AS AT 31/03/2013 AMT. IN RS. 'I LONG TERM BORROWINGS 1 SECURED - TERM LOAN FROM BANK 2,30,08,20,000 2,35,03,00,000 2 SECURED - FROM FINANCIAL INSTITUTIONS 69,75,00,000 7,12,500,000 3 SUB ORDINATE DEBTS 11,05,00,000 NIL TOTAL: 3,10,88,20,000 3,06,28,00,000 II SHORT TERM BORROWINGS UNSECURED ICD NIL 8,00,00,000 TOTAL BORRO WING S : 3,10,88,20,000 3,14,28,00,000 I.T.A. NO.1646/MUM/2018 PAGE | 8 3.6 THE AO ALSO OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF HIGHWAYS ON BOT (BUILT, OPERATE AND TRANSFER) BASIS AND THE ASSESSEE HAS EARNED INCOME BY WAY OF TOLL COLLECTION AND SHOWN INCOME TO THE TUNE OF RS. 45,22,54,365/ - . THE AO OBSERVED THAT THE ASSESSEE HAS EARNED EXEMPT DIVIDEND INCOME TO THE TUNE OF RS. 10,67,974/ - AND THE AS SESSEE HAS FAILED TO APPORTION INTEREST AND OTHER EXPENSES INCURRED TOWARDS INVESTMENT S IN SHARES AND MUTUAL FUNDS , INCOME FROM WHICH IS EXEMPT FROM TAX. 3.7 IT WAS ALSO OBSERVED BY THE AO THAT WHILE AT THE BEGINNING OF THE YEAR , THE ASSESSEE HAD NIL INVESTMENT IN MUTUAL F UND AND ON 22.07.201 3 , THE ASSESSEE HAS INVESTED IN RELIANCE LIQUIDITY FUND - DIRECT DAILY DIVIDEND REINVESTMENT OPTION AN AMOUNT OF RS. 2,10,00,000/ - . IT WAS ALSO OBSERVED BY THE AO THAT INVESTMENTS IN M UTUA L F UND S GRADUALLY INCREASED DURING THE YEAR AND THE PEAK INVESTMENT DURING THE YEAR STOOD AT RS. 5.36 CRORE S. IT WA S ALSO OBSERVED THAT AT THE EN D OF THE YEAR , THE ASSESSEE DID NOT HOLD ANY INVESTMENT IN MUTUAL F UND UNITS WHICH CAN FETCH DIVIDEND INCOME. THE AO OBSERVED THAT THE ASSESSEE I S FOLLOWING PECULIAR PATTERN OF HOLDING INVESTMENT S SO THAT THE INVESTMENTS IN SECURITIES CAPABLE OF YIELDING AN EXEMPT INCOME IS AT N IL VALUE AT THE BEGINNING OF THE YEAR AND ALSO AT THE END OF THE YEAR , SO AS TO AVOID ANY DISALLOWANCE U/S. 14A OF THE 1961 ACT. 3. 8. THE AO REJECTED THE CONTENTION S OF THE ASSESSEE AND HELD THAT S ECTION 14A OF THE 1961 ACT IS APPLICABLE . T HE AO WORK ED OUT DISALLOWANCE U/S 14A BY OBSERVING THAT THE ASSESSEE HAS INCURRED TOTAL INTEREST EXPENSES TO THE TUNE OF RS. 35.14 CRORE S AND THE BORROWINGS STOOD AT RS. 3 10 . 88 CRORE S . THE AO MADE DISALLOWANCE S OF INTEREST EXPENSE S TO THE TUNE OF RS. 15,17,548/ - , WHILE DISALLOWANCE UNDER RULE 8D2(III) OF THE 1962 RULES WAS WORK ED OUT BY THE AO TO THE I.T.A. NO.1646/MUM/2018 PAGE | 9 TUNE OF RS. 1,16,120/ - , BY TAKING AVERAGE VALUE OF INVESTMENTS OF 2,32,24,145/ - , DETAILED AS HERE UNDER: - 6 .6 HENCE, DISALLOWANCE U/S.14 A IS COMPUTED AS DISCUSSED ABOVE: IN RESPECT IN INVESTMENTS IN MUTUAL FUNDS WITH DIVIDEND OPTION PARTICULARS A MOUNT (IN RS.) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME 0 TOTAL INTEREST PAID (OTHER THAN INTEREST DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME) 35,14,31,503 DISALLOWANCE IN RESPECT OF INTEREST PAID (AS CALCULATED IN ANNEXURC A} 15,17,548 0.5% OF AVERAGE V ALUE OF INVESTMENT I.E. 2,32,24, 145 (AS CALCULATED IN ANNEXURE A) 1,16,120 TOTAL DISALLOWANCE U/S . 14A R.W.R. 8D 17,50,083 6.7 ACCORDINGLY, DISALLOWANCE OF RS. 17, 50,083/ - IS WORKED OUT U/S. 14A, OUT OF THE TOTAL EXPENDITURE CLAIMED AT RS. 35,14,31,503/ - IN RESPECT OF INTEREST EXPENSES. 3.9 THE AO BASED UPON THE ABOVE DISALLOWANCE S MADE U/S 14A READ WITH RULE 8D OF THE 1962 RULES ALSO MADE ADDITIONS TO THE TUNE OF RS. 17,50,083/ - U/S. 115JB OF THE 1961 ACT WHILE COMPUTING BOOK PROFITS. THUS, THE AO MADE ADDITIONS OF RS.17,50,083/ - TO BOOK PROFI TS AS PER CLAUSE (II) OF THE EXPLANATION 1 TO SECTION 115JB , WITH RESPECT TO EXPENDITURE OF RS. 17,50,083/ - INCURRED IN RELATION TO EARNING OF DIVIDEND INCOME BEING EXEMPT INCOME , VIDE ASSESSMENT ORDER DATED 30.12.2016 PASSED BY THE AO U/S 143(3) OF THE 1961 ACT , BY HOLDING AS UND ER: - 7 UPON HEARING, CONSIDERING THE SUBMISSIONS MADE, DOCUMENTS/EVIDENCES PRODUCED, AND INFORMATION AVAILABLE ON RECORD, AS DISCUSSED HEREINABOVE, THE TOTAL INCOME OF THE ASSESSEE IS COMPUTED AS UNDER: COMPUTATION OF TOTAL INCOME TOTAL BUSINESS INCOME ( AS PER REVISED RETURN) (12,26,25,952) ADD: DISALLOWANCE U/S 14A R.W.R 8D OF THE ACT 17,50,083 I.T.A. NO.1646/MUM/2018 PAGE | 10 SHORT TERM CAPITAL GAIN: 53,797 TOTAL ASSESSED INCOME: (12,08,22,072) TAX @ 30%; NIL COMPUTATION OF TOTAL INCOME AS PER SECTION 115JB BOOK PROFIT U/S. 115JB AS PER REVISED RETURN 46,36,798/ - ADD: DISALLOWANCE U/S 14A R.W.R 8D OF THE ACT 17,50,083 / - NET BOOK PROFIT U/S. 115JB 63,86,881/ - TAX @ 18.5% 11,81,573/ - SINCE THE TAX ON BOOK PROFITS U/S. 115JB IS MOR E THAN THE TAX ON TOTAL INCOME, THE ASSESSEE IS LIA BLE TO PAY TAX ON THE SECTION 1 15JB PROVISION OF THE ACT, OTHER THAN TOTAL INCOME OF THE ASSESSEE. 3.10 . WHILE WORKING THE AFORESAID DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A OF THE 1961 ACT READ WITH RULE 8D OF THE 1962 RULES, T HE AVERAGE VALUE OF INVESTMENT WAS WORK ED OUT BY AO OF RS. 2,32,24,145/ - , WHICH WAS ANNEXED BY THE AO TO ASSESSMENT ORDER VIDE ANNEXURE - A, WHICH IS REPRODUCED AS HERE UNDER: - I.T.A. NO.1646/MUM/2018 PAGE | 11 4 . AGGRIEVED BY AN ASSESSMENT FRAMED BY THE AO VIDE ASSESSMENT ORDER DATED 30.12.2016 PASSED U/S. 143(3) OF THE 1961 ACT, THE ASSESSEE FILED FIRST APPEAL WITH LD. CIT(A). DETAILED CONTENTIONS WERE RAISED BY THE ASSESSEE BEFORE LD. CIT(A) WHO WAS PLEASED TO DISMISS THE APPEAL O F THE ASSESSEE IN PART BY FOLLOWING APPELLATE ORDER PASSED BY LEARNED CIT(A) FOR AY 2013 - 14 , VIDE APPELLATE ORDER DATED 31.01.2018 PASSED BY LEARNED CIT(A), BY HOLDING AS UNDER: - 4.2 I HAVE EXAMINED THE ARGUMENTS TAKEN BY THE ASSESSEE AND THE SUBMISSIONS FILED BY THE ASSESSEE. THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.10,67,974 I.T.A. NO.1646/MUM/2018 PAGE | 12 DURING THE YEAR AND CLAIMED THE SAME AS EXEMPT FROM TAX. AS PER SECTION 14A R.W. RULE 8D, THE AMOUNT OF DISALLOWANCE IS TO BE WORKED BASIS THE ACTUAL AMOUNT OF EXPENDITURE INCURRED TO EARN THE EXEMPT INCOME, PROPORTIONATE INTEREST PAID BASIS THE AVERAGE VALUE OF INVESTMENT TO THE TO TAL ASSET AND 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. 4.2.1 IN THIS CASE, THE ASSESSEE HAS CONTENDED THAT IT HAS NOT INCURRED ANY DIRECT EXPENSES TO EARN THE EXEMPT DIVIDEND INCOME W HICH WAS NOT ACCEPTED BY THE LD. AO. 4.2.2 IT IS NOTED THAT TH E ASSESSEE DOES NOT HAVE HAD CHANGED FROM RELIANCE L IQUID FUND - CASH PLAN GROWTH OPTIONS TO CASH PLAN DAILY DIVIDEND O PTION ON 03.04.2012. THE PEAK INVESTMENT DURING THE YEAR STOOD AT RS.7.87 CRORES. THE ASSESSEE HAS CLEARLY INVESTED THESE MONIES NOT ME RELY FOR INVESTMENT PURPOSES BUT ALSO WITH A VIEW TO EARN DIVIDEND INCOME. 4.2.3 THE ASSESSEE HAS CONTENDED THAT IT HAS UTILIZED ITS OWN FUNDS FOR INVESTMENT PURPOSES AND ACCORDINGLY, NOT BORROWED ANY LOANS AND PROPORTIONATE INTEREST DISALLOWANCE SHOU LD NOT BE MADE. I HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSES AND THE AO'S FINDINGS IN THE ORDER. THE ASSESSEE HAS INVESTED HUGE AMOUNTS IN THE DIVIDEND OPTION MUTUAL FUNDS. THE ASSESSEE HAS ALSO BORROWED HUGE AMOUNTS ON WHICH INTEREST IS PAID DURING THE YEAR, WHICH THE ASSESSEE CLAIMS TO HAVE BORROWED FOR BUSINESS PURPOSES. EVEN FOR A WHILE IT IS ASSUMED THAT THE INVESTMENT IS MADE OUT OF ITS OWN SURPLUS FUNDS, IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAS BORROWED MONIES ON WHICH INTEREST IS PAID. HAD THE ASSESSEE NOT INVESTED THESE MONIES, IT MIGHT HAVE NOT BORROWED SUCH HUGE LOANS, WHICH ARE CLAIMED FOR BUSINESS AND IMPACTED THE BUSINESS ACTIVITIES. THUS, THE ARGUMENT OF THE ASSESSEE THAT IT HA S INVESTED MONIES OUT OF ITS OW N FUNDS IS NOT T ENABLE AS ON THE OTHER HAND THE ASSESSEE IS BORROWING MONIES FOR CONDUCTING ITS BUSINESS ACTIVITIES. HENCE, IN MY VIEW, THE AO HAS CORRECTLY COMPUTED THE DISALLOWANCE OF THE PROPORTIONATE INTEREST EXPENDITURE. NEW, CORNING TO THE THIRD LIMB OF THE RULE 8D COMPUTATION RELATING TO 0.5% OF THE AVERAGE VALUE OF INVESTMENT. IN THIS CASE, THE ASSESSEE DOES NOT HAVE OPENING AND CLOSING BALANCE OF THE INVESTMENT IN THE BOOKS OF ACCOUNTS. THE AO RELYING ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. [2010] 323 ITR 81, HAS ADOPTED TWO ALTERNATE METHODS OF COMPUTING THE AVERAGE VALUE OF INVESTMENTS. THE AO HAD ADOPTED THE AVERAGE INVESTMENT VALUE BY CONSIDERING THE FIRST INVESTMENT MADE AND THE I.T.A. NO.1646/MUM/2018 PAGE | 13 LAST INVESTMENT MADE / NO. OF DAYS FOR WHICH THE ASSESSEE STAYED INVESTED. IN THIS CASE, THE SAID AVERAGE INVESTMENT IS COMPUTED AT RS.2,32,24,145. 4,2.4 IDENTICAL ISSUE HAS BEEN DECIDED BY ME IN THE APPELLANT'S OWN CASE FOR AY 2013 - 14 VIDE ORDER DATED 02.06.2017. THERE BEING NO CHAN GE IN THE FACTS AND CIRCUMSTANCES, FOLLOWING THE DECISION FOR THE SAID YEAR, I HEREBY HOLD THAT THE DISALLOWANCE U/S. 14A R. W, RULE 8D SHOULD BE RS.16,33,66 9 (RS 15,17,548 + RS. 1,16,121) AS AGAINST AO'S COMPUTATION OF RS.17.50,083/ - . THE ADDITION MADE BY THE AO IS ACCORDINGLY RESTRICTED TO RS.16,33,669/ - . THESE GROUNDS OF APPEAL ARE PARTLY ALLOWED. 4.2 . SO FAR AS DISALLOWANCE S OF EXPENSES U/S 14A AND ADDITIONS THERETO TO COMPUTE BOOK PROFITS U/S 115 JB , THE PLEA OF THE ASSESSEE WAS REJECTED BY LD. CIT(A) BY FOLLOWING THE DECISION OF LEARNED CIT(A) FOR AY 2013 - 14 , VIDE APPELLATE ORDER DATED 31.01.2018 PASSED BY LEARNED CIT(A), BY HOLDING AS UNDER: - 5.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND THE AOS ORDER. IT IS HELD IN GROUND NO. 1 TO 6 ABOVE THAT DISALLOWANCE OF RS. 16,33,669 IS TO BE MADE U/S. 14A R.W. RULE 8D. NOW, THE QUESTION ARISES IS WHETHER THIS AMOUNT IS TO BE ADDED BACK WHILE COMPUTING THE BOOK PROFITS U/S. 115JB OF THE ACT. 5.2.1 THE ASSESSEE HAS CONTENDED THAT SECTION 14A IS SPECIFIED UNDER CHAPTER IV OF THE ACT - COMPUTATION OF TOTAL INCOME AND COMPUTATION OF BOOK PROFIT U/S. 115JB OF THE ACT IS SPECIFIED UNDER CHAPTER XII - B OF THE ACT. THUS DISALLOWANCE U/S. 14A OF THE ACT IS TO BE COMPUTED AND ONLY COMPUTED WHEN COMPUTI NG THE TOTAL INCOME UNDER CHAPTER IV. 5.2.2 THE PROVISIONS OF SECTION 115JB OF THE ACT IS A NOTWITHSTANDING CLAUSE, I.E. THE AFORESAID PROVISIONS OVERRIDE ALL THE OTHER PROVISIONS OF THE ACT AND ARE TO BE READ AND APPLIED SETTING ASIDE ALL OTHER PROVISI ONS OF THE ACT. THUS PROVISIONS UNDER SECTION 115JB OF THE ACT ARE SPECIFIC PROVISIONS TO COMPUTE THE TAXABLE BOOK PROFITS CONSIDERING THE ADDITIONS AND REDUCTIONS AS SPECIFIED IN THE AFORESAID SECTION AND HENCE THE PROVISIONS UNDER SECTION 14A, SPECIFIED UNDER A SEPARATE CHAPTER OF THE ACT, CANNOT BE INVOKED WHEN COMPUTING THE BOCK PROFITS UNDER SECTION 115JB OF THE ACT. I.T.A. NO.1646/MUM/2018 PAGE | 14 5.2.3 HOWEVER, IT IS TO BE NOTED THAT SECTION 14A OF THE ACT PROVIDES THAT IT MANDATES DISALLOWA NCE OF EXPENDITURE 'IN RELATION TO TH E INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WHILE CLAUSE (F) I N EXPLANATION 1 TO SECTION 115JB (2) OF THE ACT MANDATES DISALLOWANCE OF EXPENDITURE RELATABLE' TO THE INCOME TO WHICH SECT ION 10 (OTHER THAN SECTION 10(38 ) OF THE ACT) OR SECTION 11 OR SECTION 12 OF THE ACT APPLIES. THE CLOSE PERUSAL OF THE BOTH THE ABOVE PROVISIONS REVEALS THAT MORE OR LESS SIMILAR LANGUAGE IS USED IN BOTH THE AFORE - STATED PROVISIONS. THE DIVIDEND INCOME IS DECLARED ON THE MUTUAL FUNDS WHICH IS EXEMPT U /S 10(34) (NOT SECTION 10(3 8 )). AS PER CLAUSE (F) T O EXPLANATION 1 TO SECTION 115JB (2) REQUIRES EXPENDITURE RELATABLE TO THE EXEMPT INCOME TO BE DISALLOWED PROVIDED THE SAME IS DEBITED TO PROFIT AND LOSS ACCOUNT WHILE SECTION 14A(2) MANDATES THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , THEN DISALLOWANCE SHALL BE COMPUTED IN ACCORDANCE WITH THE PRESCRIBED METHOD VIZ. RULE 8D OF INCOME TAX RULES, 1962. 5.2.4 THE ASSESSES COMPANY HAS RELIED UPON ON THE DECISION OF MUMBAI TRIBUNAL IN RELIANCE INDUSTRIAL INFRASTRUCTURE LTD. V. ADDL. CIT IN ITA NO 69 & 70/ MUM/2009 WHEREBY THE MUMBAI TRIBUNAL HEL D THAT DISALLOWANCE U/S. 14A OF THE ACT R.W. RULE 8D CANNOT BE IMPORTED INTO CLAUSE (F) OF THE EXPLANATION 1 TO SECTION 115JB OF THE ACT, IT IS TO BE NOTED THAT THIS APPEAL PERTAINED TO AY 2005 - 06 AND 2006 - 07 WHICH ARE PRIOR TO ASSESSMENT YEAR 200 8 - 09 FROM WHERE THE PROVISIONS OF SECTION 14A R.W. RULE 8D APPLY. 5.2.5 THE ASSESSEE COMPANY HAS RELIED UPON THE DECISION OF APOLLO TYRES LIMITED 255 ITR 273{SC). THE HON'BLE SUPREME COURT IN ABOVE DECISION HAS HELD THAT THE AO CANNOT TINKER WITH THE PROFIT AND LOSS PREPARED BY THE ASSESSEE COMPANY IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT.1956 AND WHICH ARE CERTIFIED BY THE STATUTORY AUDITORS AND APPROVED BY THE COMPANY IN ANNUAL GENERAL MEETING AND SCRUTINIZED BY THE REGISTRAR OF COMPANIES TO BE SO MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF THE CO MPANIES ACT, 1956. SECTION 115JB OF THE ACT REVEALS THAT TINKERING WITH THE PROFIT AND LOSS ACCOUNT AS PREPARED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT IS PERMITTED TO THE EXTENT PROVIDE D IN EXPLANAT ION 1 TO SECTION 115JB (2) OF THE ACT. CLAUSE (F) TO EXPLANATION 1 TO SECTION 115JB(2) OF THE ACT PERMIT THE BOOK PROFIT TO BE INCREASED WITH THE EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 (OTHER THAN SECTION I.T.A. NO.1646/MUM/2018 PAGE | 15 10(38) OF THE ACT), SE CTION 11 OR SECTION 12 OF THE ACT APPLIES AND HENCE THE ABOVE DECISION IN APOLLO TYRES LIMITED IN 255 ITR 273(SC) IS NOT APPLICABLE TO THE FACTS OF THE CASE. 5.2.6 IDENTICAL ISSUE HAS BEEN DECIDED BY ME IN THE APPELLANT'S OWN CASE FOR AY 2013 - 14 VIDE O RDER DATED 02.06.2017. THERE BEING NO CHANGE IN THE FACTS AND CIRCUMSTANCES, FOLLOWING THE DECISION FOR THE SAID YEAR, I HEREBY HOLD THAT THE AO IS RIGHTLY ADDED THE AMOUNT DISALLOWABLE U/S. 14A R.W. RULE 8D WHILE COMPUTING THE BOOK PROFITS U/S. 115JB OF T HE ACT, HOWEVER, THE SAID AMOUNT OF DISALLOWANCE SHOULD BE LIMITED AND RESTRICTED TO RS. 16,33,669. THESE GROUNDS OF APPEAL ARE DISMISSED. 5 . AGGRIEVED BY AN APPELLATE ORDER DATED 31.01.2018 PASSED BY LEARNED CIT(A), THE ASSESSEE HAS FILED AN APPEAL WITH TRIBUNAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY ASSESSEE S OWN CASE IN ITA NO. 5981/MUM/201 7 VIDE ORDER DATED 31. 01.2019 PASSED BY MUMBAI - TRIBUNAL . I T WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT THE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME WAS MADE BY THE AUTHORITIES BELOW U/S. 14A OF THE 1961 AC T READ WITH RULE 8D OF THE 1961 ACT . FURTHER IT WAS SUBMITTED THAT ADDITIONS WERE MADE WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE 1961 ACT WHEREIN DISALLOWANCE S OF EXPENSES AS WERE MADE U/S. 14A OF THE ACT READ WITH RULE 8D WERE ADDED TO INCOME TO COMPU TE BOOK PROFITS U/S 115JB OF THE 1961 ACT . I T WAS CLAIMED THAT OPENING AND CLOSING INVESTMENTS AS AT THE BEGINNING OF THE YEAR AND AS AT THE END OF THE YEAR WERE RS. N IL. IT WAS SUBMITTED THAT AVERAGE INVESTMENT S WERE TAKEN BY AO BY TAKING MONTHLY AVERAGE S OF THE INVESTMENTS WHICH COME S TO RS. 2,32,24,145/ - WHICH WAS ANNEXED BY THE AO VIDE A NNEXURE A TO ASSESSMENT ORDER. IT WAS SUBMITTED THAT COMPUTING MONTHLY AVERAGES OF INVESTMENTS FOR MAKING DISALLOWANCE U/S 14A IS NOT PERMISSIBLE FOR THE IMPUGNED ASS ESSMENT YEAR I.E. 2014 - 15 AS NEW RULE 8D WHEREIN MONTHLY AVERAGE INVESTMENTS IS TO BE COMPUTED FOR MAKING DISALLOWANCES U/S 14A HAS COME INTO FORCE FROM AY 2017 - 18 ONWARDS . I.T.A. NO.1646/MUM/2018 PAGE | 16 IT WAS SUBMITTED THAT INTEREST FREE OWN ED FUNDS AVAILABLE WITH THE ASSESSEE ARE RS. 106.11 CRORES AS AT 31.03.2014(APART FROM NHAI GRANT OF RS. 10 7.46 CRORES AS AT 31.03.2013 AS WELL AT 31.03.2014 , WHICH IS FOUND CREDITED TO RESERVES AND SURPLUS ) WHILE THE INTEREST FREE OW N ED FUNDS WERE RS. 105.63 CRORES AS AT 31.03.2013 (EXCLUDIN G NHAI GRANT) . OUR ATTENTION WAS DRAWN TO AUDITED FINANCIAL STATEMENTS OF THE ASSESSEE FOR THE YEAR ENDED 31.03.2014 WHICH IS PLACED IN FILE IN THE PAPER BOOK AT PAGE 6 - 14. IT WAS EXPLAINED THAT WHILE THE INVESTMENTS IN MUTUAL FUND AT PEAK WAS RS. 7.87 CRO RES. I T WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT SINCE OWN INTEREST FREE FUNDS AVAILABLE ARE MORE THAN INVESTMENT S MADE, NO DISALLOWANCE S U/S 14A READ WITH RULE 8D IS WARRANTED . IT WAS ALSO CLAIMED THAT DISALLOWANCE S U/S 14A READ WITH RULE 8D OF THE 1962 RULES CANNOT EXCEED AN EXEMPT INCOME FOR THE TUNE OF RS. 10,67,974/ - WHICH WAS DIVIDEND INCOME FROM MUTUAL FUND CLAIMED TO BE EXEMPT U/S 10(34) OF THE 1961 ACT . IT WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT SUO MOTU DISALLOWANCE O F EXPENSES INCURRED BY THE ASSESSEE FOR EARNING OF AN EXEMPT INCOME WAS MADE U/S 14A OF THE 1961 ACT OF RS. N IL. THUS IT WAS CLAIMED THAT NO DISALLOWANCE S OF EXPENSES ARE WARRANTED U/S. 14A OF THE 1961 ACT . 5.2 THE LD. DR ON THE OTHER HAND SUBMITTED THAT ASSESSEE HAD MADE INVESTMENT S IN MUTUAL FUND DURING THE YEAR ON WHICH EXEMPT INCOME WAS RECEIVED AND DISALLOWANCE WAS MADE TOWARDS INTEREST EXPENSES U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES AND ALSO DISALLOWANCE OF EXPENSES WERE M ADE OF 0.5% OF THE AVERAGE VALUE OF INVESTMENT S IN THE SECURITIES CAPABLE OF YIELDING EXEMPT INCOME BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 ACT READ WITH RULE 8D(2)(III) OF THE 1962 RULES . 6 . WE HAVE CONSIDERED RIVAL CONTENTION S AND PERUSED THE MATERIAL ON RECORD INCLUDING CITED CASE LAWS. WE HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF ROADS ON BOT BASIS , STRENGTHENING OF THE EXISTING CARRIAGEWAY FROM TRICHY DINDIGUL I.T.A. NO.1646/MUM/2018 PAGE | 17 SECTION OF NATIONAL HIGHWAY NO. 45 IN THE STA TE OF TAMILNADU. THE AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND NATIONAL HIGHWAY AUTHORITY OF INDIA ON 19.07.2007 AND THE ASSESSEE COMMENCED COMMERCIAL OPERATIONS FROM 11.01.2012 IN THE FORM OF TOLL COLLECTION. THE ASSESSEE SHOWED INCOME FROM OPE RATIONS DURING THE YEAR UNDER CONSIDERATION OF RS. 45.22 CRORES AND OTHER INCOME AT RS. 15.68 LACS. THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 10,67,974/ - WHICH WAS CLAIMED AS AN EXEMPT INCOME U/S 10(34) OF THE 1961 ACT. THE ASSESSEE DID NOT SUO MOTU OFFERED ANY DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A OF THE 1961 ACT. T HE AO OBSERVED THAT THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE U/S. 14A R.W.R. 8D OF THE INCOME - TAX RULES,1962 . THE AO HAD MADE DISALLOWAN CE OF EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) AND 8D(2)(III) OF THE 1961 ACT.. THE DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 15,17,548/ - INCURRED IN RELAT ION TO EARNING OF AN EXEMPT INCOME WAS MADE BY THE AO U/S 14A READ WITH RULE 8D(2)(II) OF THE 1961 ACT WHILE THE AO MADE DISALLOWANCE OF RS.1,16,120/ - TOWARDS EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME BY INVOKING PROVISION OF SECTION 14A READ WITH RULE 8D(2)(III) OF THE 1961 ACT. THE LEARNED CIT(A) RETAINED THE DISALLOWANCE BUT SINCE THERE WAS TOTALLING ERROR COMMITTED BY THE AO , THE LEARNED CIT(A) SUSTAINED ADDITIONS TO THE TUNE OF RS. 16,33,669/ - AS AGAINST ADDITION OF RS. 17,50,083/ - MADE BY THE AO. THE AUTHORITIES BELOW HAVE MADE DISALLOWANCE OF INTEREST EXPENDITURE BASED ON THEORY OF MIXED USE FUND BEING USED FOR ACQUIRING MUTUAL FUNDS/SECURITIES WHICH ARE CAPABLE OF EARNING AN EXEMPT INCOME. THERE COULD NOT BE BROUGHT ON RECORD ANY EVIDENCE BY REVENUE THAT THE ASSESSEE UTILISED SPECIFIC BORROWED FUNDS FOR ACQUIRING SECURITIES/MF WHICH ARE CAPABLE OF YIELDING AN EXEMPT INCOME. WE HAVE OBSERVED THAT INTEREST FREE OWNED FUNDS AVAILABLE WITH THE ASSESSEE ARE TO THE TUNE OF RS. 106.11C RORES AS AT 31.03.2014(APART FROM NHAI GRANT OF RS. 107.46 CRORES AS AT 31.03.2013 AND I.T.A. NO.1646/MUM/2018 PAGE | 18 31.03.2014, WHICH IS FOUND CREDITED TO RESERVES AND SURPLUS, ) WHILE THE INTEREST FREE OWED FUNDS WERE RS. 105.63 CRORES AS AT 31.03.2013(EXCLUDING NHAI GRANT). THE ASS ESSEES AUDITED FINANCIAL STATEMENTS ARE PLACED IN FILE. THE INVESTMENTS WERE MADE IN MUTUAL FUNDS DURING THE YEAR UNDER CONSIDERATION AND PEAK INVESTMENTS DURING THE YEAR WAS RS. 7.87 CRORES IN MF/SECURITIES CAPABLE OF YIELDING EXEMPT INCOME . THE AO COULD NOT BRING ON RECORD THAT SPECIFIC INTEREST BEARING FUNDS WERE USED TO PURCHASE SECURITIES/MF CAPABLE OF YIELDING EXEMPT INCOME. THE FUNDS USED FOR ACQUIRING THESE SECURITIES/MF ARE THEREFORE MIXED USE FUNDS. THE PEAK INVESTMENTS IN SUCH SECURITIES/MF CAPA BLE OF YIELDING EXEMPT INCOME WAS RS. 7.87 CRORES WHILE AVERAGE INVESTMENTS BASED ON MONTHLY AVERAGES WAS RS. 2.32 CRO R ES , WHICH WAS WORKED OUT BY THE AO ON MONTHLY AVERAGE BASIS . IT IS A MATTER OF FACT THAT OPENING INVESTMENT AS AT THE FIRST DAY OF PREVIO US YEAR AS WELL ON THE LAST DATE OF PREVIOUS YEAR WAS RS. NIL. THUS, AS PER FACTUAL MATRIX OF THE CASE, THE AVAILABILITY OF INTEREST FREE OWN ED FUNDS ARE MUCH HIGHER THAN THE PEAK INVESTMENTS MADE BY THE ASSESSEE DURING THE YEAR IN MF/SECURITIES WHICH ARE CAPABLE OF YIELDING AN EXEMPT INCOME AND PRESUMPTION WILL APPLY THAT THE ASSESSEE HAS INVESTED IN THESE SECURITIES/MF OUT OF ITS INTEREST FREE OWNED FUNDS AVAILABLE WITH IT. THE RELIANCE IS PLACED ON DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF REL IANCE UTILITIES AND POWER LIMITED (SUPRA) AND ALSO DECISION IN THE CASE OF HDFC BANK LIMITED(SUPRA). THE RELIANCE IS ALSO PLACED ON RECENT DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF PCIT V. ASHOK APPARELS PRIVATE LIMITED REPORTED IN (2019) 106 TA XMANN.COM 63(BOMBAY). THUS, IN OUR CONSIDERED VIEW, NO DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME BY INVOKING PROVISIONS OF SECTION 14A READ WITH RULE 8D(2)(II) OF THE 1962 RULES TOWARDS INTEREST EXPENDITURE CAN BE MADE KEEPING IN VIEW FACTUAL MATRIX OF THE CASE . 6.2 SO FAR AS DISALLOWANCE FOR INDIRECT EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A READ WITH RULE 8D(2)(III) OF THE I.T.A. NO.1646/MUM/2018 PAGE | 19 1962 RULES IS CONCERNED , A CLAIM IS MADE THAT SINCE OPENING AND CLO SING INVESTMENTS AS THE BEGINNING OF THE YEAR AS ON 01.03.2013 WAS NIL AND SIMILARLY, INVESTMENTS AS AT 31.03.2014 WAS NIL , NO DISALLOWANCE U/S 14A READ WITH RULE 8D(2)(III) OF THE 1961 ACT CAN BE MADE. SECTION 14A IS A SUBSTANTIVE PROVISION WHICH CREATES A CHARGE AS TO DISALLOWING OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE. THUS, THE EXPENSE WHICH ARE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME WOULD WARRANT DISALLOWANCE U/S 14 A OF THE 1961 ACT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THUS, THE INITIAL ONUS IS ON THE ASSESSEE TO EXPLAIN DISALLOWANCE OF THE EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. TOWARDS DI SCHARGING T HE SAID PRIMARY ONUS, THE ASSESSEE IS REQUIRED TO EXPLAIN THE ENTIRE MODUS OPERANDI AND THE MANNER IN WHICH INVESTMENT DECISIONS ARE TAKEN BY IT . THE ASSESSEE HAS TO EXPLAIN DETAILS AND COMPOSITION OF COMMITTEES /PERSONNEL WHO ARE RESPONSIBLE FOR LOOK ING AFTER INVESTMENT DECISIONS. THE DETAILS OF THE EXPENSES ACCORDINGLY IS TO BE BROUGHT ON RECORD WHICH ARE INCURRED BY THE ASSESSEE INCLUDING SALARIES AND OTHER EXPENSES IN RELATION TO EARNING OF AN EXEMPT INCOME. THE AO IS UNDER AN OBLIGATION TO SC RUTINISE THE MODUS OPERANDI AND THE MANNER IN WHICH INVESTMENTS DECISIONS ARE MADE, RECORD S ARE KEPT BY THE ASSESSEE ETC AND ALSO TO SCRUT I NISE THE ACCOUNTS OF THE ASSESSEE TO DETERMINE THE EXPENSES WHICH WERE INCURRED BY THE ASSESSEE IN RELATION TO THE EA RNING OF AN EXEMPT INCOME AND THEREAFTER DISALLOWANCE OF THESE EXPENSES ARE TO BE MADE IN ACCORDANCE WITH MANDATE OF SECTION 14A. WHERE THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE INCLUDING WHEREIN THE ASSESSEE CLAIMED THAT NO SUCH EXPENDITURE W ERE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME , THEN RULE 8D OF THE 1962 RULES WILL BE PRESSED INTO SERVICE TO COMPUTE EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME. NO SUCH DETAILS AS WERE REQUIRED TO BE SUBMITTED BY THE ASSESSEE WAS INFACT SUBMITTED BY THE ASSESSEE NOR THE AO DID THE EXERCISE TO FIND OUT AN EXPENDITURE INCURRED IN RELATION TO EARNING I.T.A. NO.1646/MUM/2018 PAGE | 20 OF AN EXEMPT INCOME AND STRAIGHTWAY RU LE 8D OF THE 1962 RULES WAS PRESSED INTO SERVICE . THE ASSESSEE HAD CLAIMED THAT NO E XPENDITURE WAS INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME. THE AO IS REQUIRED TO DWELL INTO ACCOUNTS TO SEE THE BONAFIDE AND GENUINENESS OF THE SAID CLAIM MADE BY THE ASSESSEE. THE RULES ARE MADE TO SUB - SERVE THE SUBSTANTIVE PROVISIONS AND NOT TO SCUTTLE THE SAME. THUS, EXERCISE HAS TO BE DONE TO IDENTIFY EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME HAVING REGARDS TO ACCOUNTS OF THE ASSESSEE KEEPING IN VIEW MANDATE OF SECTION 14A OF THE 1961 ACT . UNDER THESE CIRCUMSTANCES, I T IS CO NSIDERED FIT AND APPROPRIATE TO RESTORE THIS MATTER BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION ON MERITS IN ACCORDANCE WITH LAW . 6.3 S IMILARLY , WITH RESPECT TO DISALLOWANCE S OF EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A T O BE ADDED TO THE INCOME OF THE ASSESSEE FOR COMPUTING BOOK PROFIT U/S. 115JB , THE MATTER NEED TO BE RESTORED TO THE FILE OF AO TO DETERMINE DISALLOWANCE OF EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A OF THE 1961 ACT, KEEPING IN V IEW DECISION OF DELHI SPECIAL BENCH OF TRIBUNAL IN THE CASE OF ACIT V. VIREET INVESTMENT PRIVATE LIMITED (2017) 165 ITD 27(DELHI SB). WE ORDER ACCORDINGLY. 7 . IN THE RESULT , T HE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONO UNCED IN THE OPEN COURT ON 2 1 .06 .2019. 2 1 .06 .2019 S D / - S D / - ( SANDEEP GOSAIN ) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 2 1 .0 6 .2019 I.T.A. NO.1646/MUM/2018 PAGE | 21 NISHANT VERMA SR. PRIVATE SECRETARY COPY TO 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) CONCERNED, MUMBAI 4 . THE CIT - CONCERNED, MUMBAI 5 . THE DR BENCH, 6 . MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI