SPACO TECHNOLOGIES (I) P.LTD, MUMBAI V. ASST CIT 5(3)(2), MUMBAI

ITA 1811/MUM/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 0815 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-08-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2013-2014
• Appeal Filed On: 20-03-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: CHAUDHARY ARUN KUMAR SINGH
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G , MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, HONBLE ACCOUNTANT MEMBER ITA NO. 1 811 /MUM/201 8 (A.Y: 2013 - 14 ) M/S. SPACO TECHNOLOGIES (I) PRIVATE LTD., 901, PRASAD CHAMBERS, OPERA HOUSE MUMBAI 400 004 PAN: AABCS5307E V. A CIT 5 (3)( 2 ) AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020 (APPELLANT) (RESPONDENT) ITA NO. 4034 /MUM/201 8 (A.Y: 2014 - 15 ) DCIT 5(3)(2 ) ROOM NO. 573, 5 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020 V. M/S . SPACO TECHNOLOGIES (I) PRIVATE LTD., 901, PRASAD CHAMBERS, OPERA HOUSE MUMBAI 400 004 PAN: AABCS5307E (APPELLANT) (RESPONDENT) ASSESSEE BY : MILIN DATTANI DEPARTMENT BY : SHRI CHAUDHARY ARUNKUMAR SINGH DATE OF HEARING : 20 .08.2019 DATE OF PRONOUNCEMENT : 20 .08.2019 O R D E R PER C. N. PRASAD (JM) 1. THESE TWO APPEALS ARE FILED BY THE ASSESSEE AND REVENUE AGAINST DIFFERENT ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 2 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., 10, MUMBAI [HEREINAFTER IN SHORT LD.CIT(A)] DATED 24.10.2017 AND 22.03.2018 FOR THE A.Y. 2013 - 14 AND 2014 - 15 RESPECTIVELY. 2. FIRST WE TAKE UP THE APPEAL OF THE ASSES SEE FOR THE A.Y. 2013 - 14. THE ONLY ISSUE IN THE APPEAL OF THE ASSESSEE IS IN RESPECT OF DISALLOWANCE MADE U/S. 14A R.W. RULE 8D(2)(II) AND 8D(2)(III) OF I.T. RULES. 3. BRIEFLY STATED THE FACTS ARE THAT, THE ASSESSING OFFICER W HILE COMPLETING THE ASSESSMENT N OTICED THAT ASSESSEE RECEIVED DIVIDEND INCOME OF .4,69,80,067/ - AND CLAIMED AS EXEMPT U/S. 10(35) OF THE ACT. HE ALSO NOTICED THAT ASSESSEE RECEIVED INTEREST OF .27,84,20 4/ - ON TAX F R EE BONDS OF NHAI AND ASSESSEE DISALLOWED .5,36,000/ - TOWARDS EXPENDIT URE INCURRED AGAINST THE SAID EXEMPT INCOME RECEIVED BY THE ASSESSEE. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS ASSESSEE WAS REQUIRED TO EXPLAIN AS TO WHY THE PROVISIONS OF SECTION 14A R.W. RULE 8D SHOULD NOT BE APPLIED AND THE ASSESSEE VIDE LETTER DATED 12.02.2016 SUBMITTED THAT IT HAD SUFFICIENT RESERVES AND SURPLUS OF . 230.45 CRORES AS AGAINST INVESTMENT OF . 190.16 CRORES AND WHAT EVER LO A N WAS TAKEN WAS ONLY FOR THE PURPOSE OF BUSINESS. THEREFORE, IT WAS SUBMITTED THAT NO INTEREST COST COULD BE ATTRIBUTED TO THE EXEMPT INCOME. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT DIVIDEND WARRANTS RECEI VED AND DEPOSITED INTO BANK ACCOUNT WAS ONLY 26 IN NUMBER. ASSESSEE SUBMITTED THAT THE 3 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., TIME SPEN T FOR ACCOUNTING AND DOCU MENTATION OF THE INVESTMENT FOR PURCHASE, SALE, SWITCH AND PASSING RELEVANT ENTRIES TAKES THREE DAYS PER MONTH AND AS PER THIS CALCULATION THE APPROXIMATE SALARY OF ONE MR. S.N. URSAL WHO LOOK AFTER THIS PORTFOLIO WORK S OUT TO .1,95,000/ - AND SUPERVISION CHARGES OF ONE MR. KARKHANIS WORKS OUT TO .2 , 52 , 000/ - AND AFTER LOADING OVERHEAD AT THE RATE OF 20% , ALL PUT TOGETHER THE TOTAL EXPENDITURE FOR EARNING THE EXEMPT INCOME AFTER ROUNDING OFF TO NEAREST THOUSAND WORKS OUT TO .5,36,000/ - ONLY. THEREFORE , KEEPING IN VIEW THES E FACTS IT WAS REQUESTED THAT ONLY .5 , 36 , 000/ - SHALL BE TAKEN AS EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. NOT CONVINCED WITH THE SUBMISSIONS OF THE ASSESSEE , THE ASSESSING OFFICER INVOKING THE PROVISIONS OF RULE 8D R .W.S. 14A OF THE ACT COMPUTED THE DISALLOWANCE AT .1,00,38,428/ - COMPRISING OF DIRECT EXPENSES OF .5,36,000/ - WHICH THE ASSESSEE DISALLOWED ON HIS OWN, INTEREST OF .5,81,445/ - AND ONE AND HALF PERCENT OF AVERAGE VALUE OF INVESTMENTS I.E. BEING ADMINISTR ATIVE EXPENSES AT .89,20,983/ - . HOWEVER, HE REDUCED .5,36,000/ - FROM .1,00,38,428/ - AND ARRIVED AT N ET DISALLOWANCE OF .95,02,428/ - . ON APPEAL THE LD.CIT(A) SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4. LD. COUNSEL FOR THE ASSESSEE REFERR ING TO PAGE NO. 79 OF THE PAPER BOOK WHICH IS T HE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2011 - 12 IN ITA.NO. 2882/MUM/2016 DATED 22.01.2018 SUBMITS THAT 4 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., IDENTICAL ISSUE CAME UP BEFORE THE TRIBUNAL FOR THE A.Y. 2011 - 12 AND THE TRIBUNAL FOLLOWING THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWER LTD. [313 ITR 340] AND HDFC LTD V. DCIT [383 ITR 529] DELETED THE INTEREST EXPENSES AS T HE ASSESSEE HAD SUFFICIENT RESERVES AND SURPLUS MORE THAN THE INVESTMENTS MADE. LD. COUNSEL FOR THE ASSESSEE REFERRING TO PAGE NO. 6 OF THE PAPER BOOK WHICH IS THE BALANCE SHEET OF THE ASSESSEE COMPANY AS ON 31.03.2013 SUBMITS THAT FOR THE CURRENT ASSESSMENT YEAR THE ASSESSEE IS HAVING RESERVES AND SURPLUS TO THE E XTENT OF .230.45 CRORES AND THE INVESTMENTS STOOD AT . 190.15 CRORES . THEREFORE, IT IS SUBMITTED THAT SINCE THE RESERVES AND SURPLUS WERE MORE THAN THE INVESTMENTS AS ON THE DATE OF 31.03.2013 THE PRESUMPTION IS THAT T HE INVESTMENTS WERE MADE OUT OF THE INTEREST FREE SURPLUS FUNDS AND NO INTEREST DISALLOWANCE IS WARRANTED UNDER RULE 8D(2)(II) OF I.T. RULES. RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWER LTD. [313 ITR 340] AND HDFC LTD V. DCIT [383 ITR 529] AND THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA.NO . 2882/MUM/2016 DATED 22.01.2018. 5. IN SO FAR AS THE DISALLOWANCE MADE UNDER RULE 8D(2)(III) OF I.T. RULES IS CONCERNED THE ONLY SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT A DIRECTION MAY BE GIVEN TO ASSESSING OFFICER TO REDUCE THE SUOMOTO 5 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., DISALLOWANCE OF .5,36, 4 00/ - WHICH WAS MADE BY THE ASSESSEE FROM THE DISALLOWANCE COMP UTED U/S. 14A OF THE ACT . LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSING OFFICER HAS WRONGLY TAKEN AN AMOUNT OF .5,36,000/ - AS A DIRECT EXPENSE , HOWEVER , THIS AMOUNT REPRESENTS THE SUOMOTO DISALLOWANCE MADE BY THE ASSESSEE AS WAS STATED BEFORE THE ASSESSING OFFICER WHERE A DETAILED WORKING WAS GIVEN IN THE COURSE OF THE ASSESSMENT PROCEEDINGS WHILE OBJECTING FOR DISALLOWANCE U/S. 14A R.W. RULE 8D OF I.T. RULES. HE SUBMITS THAT THIS AMOUNT REPRESENTS SALARY OF THE PERSONS WHO LOOKED AFTER OF THE INVESTM ENTS AND 20% TOWARDS OTHER OVERHEADS. 6. LD. DR VEHEMENTLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE ORDERS OF THE AUTHORITIES BELOW. IN SO FAR AS THE DISALLOWANCE OF INTEREST UNDER RULE 8D(2)(II) OF I.T. RULES IS CONCERNED , WE OBSERVE THAT THE ASSESSEE HAS INVESTMENTS OF . 190.16 CRORES WHEREAS THE RESERVES AND SURPLUS STOOD AT .230.45 CRORES AS ON 31.03.2013 . ASSESSEE FILED AUDITED BALANCE SHEET TO SUBSTANTIATE HIS SUBMISSIONS. WE FIND THAT IDENTICAL ISSUE CAME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE AND THE TRIBUNAL DELETED THE INTEREST DISALLOWANCE IN VIEW OF THE RATIO OF THE DECISION IN THE CASE OF CIT V . RELIANCE UTILITIES AND POWER LTD. (SUPRA) AND HDFC LTD V . DCIT 6 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., (SUPRA). RESPECTFULLY FOLLOWING TH E SAID DECISIONS , WE HOLD THAT THERE SHALL NOT BE ANY DISALLOWANCE OF INTEREST UNDER RULE 8D(2)(II) R.W.S. 14A OF THE ACT AS THERE IS NOTHING ON RECORD TO SUGGEST THERE IS DIRECT NEXUS OF FUNDS BORROWED WITH INVESTMENTS MADE BY THE ASSESSEE WHICH ARE CAPAB LE OF YIELDING EXEMPT INCOME . 8. IN SO FAR AS THE DISALLOWANCE UNDER RULE 8D(2)(III) OF I.T. RULES IS CONCERNED , WE OBSERVE THAT ASSESSING OFFICER THOUGH ULTIMATELY REDUCED . 5,36,000/ - AND ARRIVED AT NET DISALLOWANCE OF . 95,02,428/ - U/S. 14A OF THE ACT , WE FIND THAT THE ASSESSING OFFICER CONSIDERED SUOMOTO DISALLOWANCE OF .5,36,000/ - AS DIRECT EXPENSES INCURRED UNDER RULE 8D(2)(I) OF I.T. RULES . IT IS THE SUBMISSION OF THE ASSESSEE THAT THERE ARE NO DIRECT EXPENSES INCURRED BY THE ASSESSEE AND THE AMOUNT O F . 5,36,000/ - WHICH THE ASSESSING OFFICER CONSIDERED AS DIRECT EXPENSE IS NOTHING BUT THE SUOMOTO DISALLOWANCE MADE BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE FURTHER REFERRING TO PAGE NO. 29 OF THE PAPER BOOK WHICH IS THE COMPUTATION OF INCOME , S UBMITS THAT THE ASSESSEE DISALLOWED . 5 ,36, 400/ - AS SUOMOTO DISALLOWANCE U/S. 14A OF THE ACT . IN VIEW OF THE ABOVE AND IN THE ABSENCE OF ANY DIRECT EXPENSES THE ASSESSING OFFICER IS NOT JUSTIFIED IN CONSIDERING THE SAID AMOUNT AS DIRECT EXPENSES . THUS, WE DIRECT THE ASSESSING OFFICER TO REDUCE THE SUOMOTO 7 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., DISALLOWANCE OF .5,36,400/ - WHILE COMPUTING THE DISALLOWANCE U/S. 14A OF THE ACT . APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 9. COMING TO THE APPEAL OF THE REVENUE FOR THE A.Y. 2014 - 15 , THE ONLY GR OUND RAISED BY THE REVENUE IS LD.CIT(A) IS NOT JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE INVE ST MENT S IN DEBT FUNDS/LIQUID FUNDS WITH GROWTH OPTIONS FROM AVERAGE VALUE OF INVESTMENTS FOR DISALLOWANCE UNDER RULE 8D(2)(III) HOLDING THE INCOME FROM THESE INVESTMENTS ARE NOT EXEMPT IN THE HANDS OF THE ASSESSEE . 10. LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT IDENTICAL ISSUE CAME UP FOR THE A.Y. 2012 - 13 IN ITA.NO. 246/MUM/201 7 DATED 04.10.2018 WHEREIN THE TRIBUNAL EXCLUDED THOSE INVE STMENTS WHILE COMPUTING T HE AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSE OF DISALLOWANCE UNDER RULE 8D(2)(III) OF I.T. RULES FOLLOWING THE DECISION OF THE DELHI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V . VIREET INVESTMENTS PRIVATE LIMITED [165 ITD 27] . COPY OF THE ORDER IS PLACED ON RECORD . 11. LD. DR VEHEMENTLY SUPPORTED THE ORDERS OF THE ASSESSING OFFICER. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE ORDER OF THE TRIBUNAL AND NOTICED THAT THE TRIBUNAL DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE INVESTMENT S MADE IN GROWTH FUNDS WHILE COMPUTING THE 8 ITA NO. 1 811 & 4034 /MUM/2018 M/S SPACO TECHNOLOGIES (I) PRIVATE LTD., AVERAGE VALUE OF INVESTMENT SINCE THE GROWTH FUNDS DO NOT YIELD ANY EXEMPT INCOME , SIMILAR IS THE RATIO OF THE DECISION OF THE DELHI SPECIAL BENCH IN THE CASE OF ACIT V. VIREET INVESTMENTS PRIVATE LIMITED (SUPRA) . IN VIEW OF THE DECISION OF THE SPECIAL BENCH , WE SUSTAIN THE ORDER OF THE LD.CIT(A) IN GIV ING DIRECTION TO EXCLUDE SUCH INVESTMENTS WHI LE COMPUTING THE DISALLOWANCE UNDER RULE 8D(2)(III) OF I.T. RULES . GROUND OF THE REVENUE IS DISMISSED . 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 20 TH AUGUST, 2019 SD/ - SD/ - ( MANOJ KUMAR AGGARWAL) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI / DATED 20 / 08/2019 GIRIDHAR, SR.PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// BY ORDER (ASSTT. REGISTRAR) ITAT, MUM