Dhruvi Securities Private Limited , Bangalore V. Assistant Commissioner of Income TAx Circle-2(1)(2), Bangalore

ITA 1904/BANG/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 9469 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 22-09-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R PREMI J T ITA T BENGA LURU
• Assessee Lawyers: SUNIL JAIN
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND S HRI B.R. B ASKARAN , ACCOUNTANT MEMBE R ITA NO. 1904/ BANG / 20 17 ASSESSMENT YEAR : 2013 - 14 DHRUVI SECURITIES PVT. LTD., NO.25/1, SKIP HOUSE, MUSEUM ROAD, BANGALORE 560 025. P AN: AACCD 6532D VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(2), BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SHRI SUNIL JAIN, CA RESPONDENT BY : S MT. R. PREMI, J T.CIT(DR)(ITA T), BENGA LURU . DATE O F HEARING : 26 .09.2019 DATE OF PRONOUNCEMENT : 27 .09.2019 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORD ER DATED 28.07.2017 OF THE CIT(APPEALS), BENGALURU, RELATING TO ASSESSM ENT YEAR 2013-14. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL BY THE ASSESSEE IS WITH REGARD TO DISALLOWANCE OF EXPENSES INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER CHAPTER III OF THE INCOME-TAX ACT, 1961 [THE ACT] BY INVOKING THE PR OVISIONS OF SECTION 14A OF THE ACT. ITA NO. 1904/BANG/2017 PAGE 2 OF 6 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF FINANCING AS WELL AS INVESTMENT IN SHARES AND SECURITIES. FOR T HE AY 2013-14, THE ASSESSEE FILED A RETURN OF INCOME ON 21.9.2013 DECL ARING INCOME OF RS.3,75,18,920. 4. IN ARRIVING AT THE TOTAL INCOME, THE ASSESSEE HA D MADE A DISALLOWANCE OF RS.24,88,20,868 U/S. 14A OF THE ACT . THE AO AFTER MAKING A REFERENCE TO THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE INCOME-TAX RULES, WORKED OUT THE DISALLOWANCE U/S. 14A OF THE ACT AS FOLLOWS:- 4.6 THE DISALLOWANCE U/S. 14A R.W.R. 8D IS WORKED OUT AS BELOW: S.NO PARTICULARS AMOUNT AMOUNT 1 TOTAL AMOUNT OF INTEREST EXPENSES 62,30,95,648 LESS INTEREST EXPENSES INCURRED FOR EARNING INTEREST INCOME 36,38,53,740 LESS : INTEREST EXPENSES DISALLOWED U/S 36(1)(III) 1,04,21,040 37,42,74,780 BALANCE INTEREST 24,88,20,868 2 INVESTMENTS AS ON MARCH 31, 2012 10,27,34,88,684 LESS: INVESTMENTS EARNING TAXABLE INCOME 6,41,37,500 OPENING INVESTMENTS 10,20,93,51,184 3 INVESTMENTS AS ON MARCH 31, 2013 10,23,11,65,430 LES S : INVESTMENTS EA RNING TAXABLE INCOME 7,96,87,866 ITA NO. 1904/BANG/2017 PAGE 3 OF 6 S.NO PARTICULARS AMOUNT AMOUNT CLOSING INVEST MENTS 10,15,14,77,564 4 AVERAGE INVESTMENTS (2+3)2 10,18,04,14,374 5 OPENING TOTAL ASSETS 10,52,41,04,976 6 CLOSING TOTAL A S SETS 12,49,50,77,936 7 AVERAGE TOTAL ASSETS (5+6) / 2 11,50,95,91,456 A INTEREST DISALLOWANCE U/S 14A AS PER RULE 8D = 1X4/7 22,00,85,965 B ADMIN EXPENSES: 0.5% OF AVERAGE INVESTMENTS 5,09,02,072 TOTAL DISALLOWANCE U/S 14A 27,09,88,037 5. THE DIFFERENCE BETWEEN THE DISALLOWANCE MADE BY THE AO AND THE DISALLOWANCE MADE BY THE ASSESSEE IN THE COMPUTATIO N OF INCOME VIZ., A SUM OF RS.2,21,67,169 WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF DISALLOWANCE U/S.14A OF THE ACT. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) RESTRICTED THE ADDITION U/S. 14A OF TH E ACT OF RS.24,90,96,229 AS AGAINST THE DISALLOWANCE U/S. 14A MADE BY THE AO OF RS.27,09,88,037. STILL AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE A SSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THOUGH THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL BEFORE THE TRIBUNAL, AT T HE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE RESTRICTED HIS ARGUMENT F OR A LIMITED RELIEF OF RESTRICTING THE DISALLOWANCE U/S. 14A OF THE ACT TO THE EXTENT OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER CHAPTER III OF THE ACT. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE US A COPY OF THE ITA NO. 1904/BANG/2017 PAGE 4 OF 6 DECISION OF ITAT BANGALORE BENCH IN ASSESSEES OWN CASE IN ITA NO.317 & 318/BANG/2019 FOR THE AY 2014-15 AND 2015-16, ORDER DATED 15.7.2019 WHEREIN THE TRIBUNAL AFTER REFERRING TO SEVERAL DEC ISIONS DIRECTED THE AO TO RESTRICT THE DISALLOWANCE U/S. 14A OF THE ACT TO TH E EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE. FOLLOWING WERE THE RELEVAN T OBSERVATIONS OF THE TRIBUNAL:- 6. WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THE SOLE CRUX OF DISPUTED ISSUE IS IN RESPE CT OF DISALLOWANCE MADE BY THE AO BY APPLYING RULE 8D(2)( II) AND 8D(2)(III). THE CONTENTION OF THE LD. AR THAT THE C IT(A) HAS NOT CONSIDERED THE SUBMISSIONS ON THE GROUND OF APPEAL NO.2 AND 3 BEFORE HIM IN RESPECT OF DISALLOWANCE SUO MOTU MADE BY THE ASSESSEE. LD. AR FURTHER EMPHASIZED THAT THE ASSESS EE HAS MADE DISALLOWANCE AT THE TIME OF FILING OF RETURN OF INC OME AND REFERRED TO COMPUTATION OF INCOME. FURTHER IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS FILED REVISED STATEME NT OF INCOME IN DISALLOWING EXPENDITURE TO THE EXTENT OF DIVIDEND I NCOME RECEIVED. WHEREAS THE CIT(A) HAS PASSED THE ORDER A LLOWING THE ALTERNATIVE GROUND. WE FIND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF PRINCIPAL CIT VS. CARAF BUILDERS & CONS TRUCTIONS (P.) LTD. (101 TAXMAN.COM 167) HAS DEALT ON THIS ISSUE. THE HEADNOTE READS AS UNDER: SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH R ULE 8D OF THE INCOME-TAX RULES, 1962 EXPENDITURE INCU RRED IN RELATION TO INCOME NOT INCLUDED IN TOTAL INCOME (RULE 8D) ASSESSMENT YEAR 2009-10 WHETHER UPPER DISALLOWANCE CANNOT EXCEED EXEMPT INCOME OF RELEVAN T YEAR HELD, YES WHETHER WHERE FOR YEAR IN QUESTI ON, FINDING OF FACT WAS THAT ASSESSEE HAD NOT EARNED AN Y TAX FREE INCOME, CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE HELD, YES WHETHER F OR COMPUTING DISALLOWANCE UNDER CLAUSE (II) OF RULE 8D (2), NUMERAL B IN CLAUSE (II) REFERS ONLY TO AVERAGE VAL UE OF ENTIRE INVESTMENT THAT DOES NOT FORM PART OF TOTAL INCOME HELD, YES (PARAS 25 AND 26) (IN FAVOUR OF ASSESSE E). ITA NO. 1904/BANG/2017 PAGE 5 OF 6 FURTHER CO-ORDINATE BENCH DECISION IN THE CASE OF M /S. RENAISSANCE HOLDINGS & DEVELOPERS PVT.LTD. VS. ACIT IN ITA NO.848/BANG/2018 HELD AT PARA.6 AS UNDER: 6. WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD. THE ONLY ISSUE INVOLVED IS WHETHER THE AO IS JUSTIFIED IN MAKING DISALLOWANCE OF RS.24,87,246/- UNDER CLAUSE (III) OF RULE 8D OF THE IT RULES. THERE IS N O DISPUTE ABOUT THE APPLICABILITY OF THE PROVISIONS OF SEC.14 A OF THE ACT. THE CONTENTION OF THE ASSESSEE IS TWO-FOLD. THE FIRST LIMB OF ARGUMENT IS THAT DISALLOWANCE CANNOT EXCEED EXEMPT INCOME AND SECONDLY, FOR THE PURPOSE OF WORK ING OUT DISALLOWANCE UNDER CLAUSE (III) OF RULE 8D, THE ONLY INVESTMENTS WHICH YIELDED DIVIDEND INCOME OR EXEMPT INCOME ALONE SHOULD BE CONSIDERED. THIS ISSUE IS NO W COVERED BY THE DECISION OF THE SPECIAL BENCH OF TRI BUNAL (DELHI) IN THE CASE OF VIREET INVESTMENT (P) LTD. ( SUPRA). THE RELEVANT PARAGRAPH IS EXTRACTED HEREUNDER: 11.16. THEREFORE, IN OUR CONSIDERED OPINION, NO CONTRARY VIEW CAN BE TAKEN UNDER THESE CIRCUMSTANCES. WE, ACCORDINGLY, HOLD THAT ONLY THOS E INVESTMENTS ARE TO BE CONSIDERED FOR COMPUTING AVERAGE VALUE OF INVESTMENT WHICH YIELDED EXEMPT INCOME DURING THE YEAR. THUS THE PROPOSITION THAT THE AMOUNT OF DISALLOWA NCE CANNOT EXCEED EXEMPT INCOME IS SETTLED. ACCORDINGLY, WE HOLD THAT THE DISALLOWANCE CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. ON THE SECOND LIMB OF ARGUMENT THAT ONLY INVESTMENTS WHICH YIELDED EXEMPT INCOME SHOULD ALON E BE CONSIDERED, IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. VIREET INVESTMENT PVT. LTD. & ANR (165 ITD 27) (SB), THE CONTENTION OF THE ASSESSEE IS ACCEPTED. ACCORDINGLY, WE RESTORE THE ISSUE BACK TO THE FILE OF THE AO FOR DIS ALLOWANCE U/S 14A BY RESTRICTING THE AMOUNT OF DISALLOWANCE TO THE LOWER OF EXEMPT INCOME OR AMOUNT ARRIVED AT BY PRESCRIBED FORMULA UNDER RULE 8D CLAUSE (III) BY TA KING INTO ONLY THOSE INVESTMENTS WHICH YIELDED EXEMPT INCOME. BY APPLYING THE RATIO OF THE ABOVE DECISIONS, WE RE STORE THE DISPUTED ISSUE TO THE FILE OF THE AO FOR LIMITED PU RPOSE TO RESTRICT ITA NO. 1904/BANG/2017 PAGE 6 OF 6 THE DISALLOWANCE U/S 14A TO THE EXTENT OF EXEMPT IN COME AND ALLOW THE GROUNDS OF APPEAL ARE ALLOWED FOR STATIST ICAL PURPOSES. 6. WE HAVE PERUSED THE AFORESAID DECISION OF THE TR IBUNAL AND ARE OF THE VIEW THAT DISALLOWANCE U/S. 14A OF THE ACT IN T HE PRESENT ASSESSMENT YEAR SHOULD ALSO BE RESTRICTED TO THE INCOME EARNED BY THE ASSESSEE, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T, WHICH IS A SUM OF RS.4,11,628 BEING DIVIDEND INCOME EXEMPT U/S. 10(34 ) & (35) OF THE ACT AND LONG TERM CAPITAL GAIN OF RS.2,06,84,487 EARNED ON SALE OF KOTAK SHARES WHICH IS EXEMPT U/S. 10(38) OF THE ACT. WE HOLD AND DIRECT ACCORDINGLY. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF SEPTEMBER, 2019. SD/- SD/- ( B R BASKARAN ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 27 TH SEPTEMBER, 2019. / D ESAI S MURTHY / COPY TO: 1 . APPELLANT 2 . RE SPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.