KOTAK MAHINDRA PRIME LTD, MUMBAI V. DCIT RG 3(2), MUMBAI

ITA 2767/MUM/2013

• Counselvise Citation: 276719914 RSA 2013
• Duration Of Justice: 2 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 22-01-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 09-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PAVAN KUMAR BEER LA
• Assessee Lawyers: F V IRANI
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A , MUMBAI BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER ITA NO. 2767/M/2013 ASSESSMENT YEAR: 2007 - 08 M/S. KOTAK MAHINDRA PRI M E LTD., 27 BKC, C - 27 G BLOCK, BANDRA K URLA COMPLEX, BANDRA (EAST) MUMBAI 400 051 PAN: AAACK 5934A VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE 3(2), 6 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 400020 (APPELLANT) (RESPONDENT) ITA NO. 2681/M/2013 ASSESSMENT YEAR: 2007 - 08 DCIT 3(2), R. NO.674, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020 VS. M/S. KOTAK MAHINDRA PRINCE LTD., 36 - 38A NARIMAN BHAVAN, NARIMAN POINT, MUMBAI 400 021 PAN: AAACK 5934A (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI F.V. IRANI, A.R. REVENUE BY : SHRI PAVAN KUMAR BEERLA, D.R. DATE OF HEARING : 22.01 .201 5 DATE OF PRONOUNCEMENT : 15.04. 2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT ARE THE CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE PREFERRED AGAINST THE ORDER DATED 23.01.2013 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(HEREINAFTER REFERRED TO AS CIT(A)] RELEVANT TO ASSESSMENT YEAR 2007 - 08. THE SOLE ISSU E INVOLVED IN BOTH THE APPEALS IS RELATING TO DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. ITA NO.2767 & 2681 /M/2013 M/S. KOTAK MAHINDRA PRINCE LTD. 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD EARNED INCOME OF RS. 6,59,37,095/ - FROM MUTUAL FUND AND EQUITY SHARES WHICH WAS CLAIMED AS EXEMPT BUT N O DISALLOWANCE OF EXPENDITURE FOR EARNING OF SUCH EXEMPT INCOME WAS OFFERED BY THE ASSESSEE UNDER SECTION 14A. THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO) CALCULATED THE DISALLOWANCE UNDER SECTION 14A BY WAY OF APPLYING RULE 8D OF THE INCOME TAX RULES AND MADE THE DISALLOWANCE OF RS. 8,36,05,502/ - I.E. MORE THAN THE AMOUNT OF EXEMPT INCOME EARNED BY THE ASSESSEE. 3. IN APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE CONTENDED THAT A PART OF INVESTMENT WAS MADE OUT OF ITS OWN FUNDS ON WHICH NO IN TEREST WAS DISALLOWABLE AND THAT THE OWN FUNDS OF THE ASSESSEE WERE MORE THAN THE AMOUNT INVESTED. IT WAS ALSO CONTENDED THAT THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES WAS ALSO WRONG AS THE ASSESSEE HAD NOT INCURRED ANY SUCH EXPENSES. THE LD. CIT(A), H OWEVER, OBSERVED THAT THE AO HAS MADE THE DISALLOWANCE AS PER RULE 8D OF THE INCOME TAX RULES, WHEREAS THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT [(2010) 328 ITR 81 (BOM)] HAS HELD THAT RULE 8D IS APPLICAB LE FROM A.Y. 2008 - 09 AND FOR EARLIER YEARS A REASONABLE DISALLOWANCE HAS TO BE MADE. HE FURTHER OBSERVED THAT NEITHER THE ASSESSEE NOR THE AO HAD ESTABLISHED ANY NEXUS OF BORROWED FUNDS WITH THE INVESTMENTS MADE. DURING THE PROCEEDINGS BEFORE HIM, THE AS SESSEE COULD ESTABLISH THE LINKAGE OF HIS OWN FUNDS WITH THE INVESTMENTS IN RELATION TO TWO SECURITIES ONLY I.E. ( I) IN THE CASE OF KO TAK MAHINDRA OLD MUTUAL LIFE INSURANCE CO. LTD. (K - LIFE) , (II) IN THE CASE OF KOTAK REAL ESTATE FUND , HE THEREFORE DIR ECTED THE AO TO VERIFY THE CLAIM OF THE ASSESSEE WITH REGARD TO THESE TWO INVESTMENTS AND IF THE AO WOULD FIND THAT THE INVESTMENTS IN THESE TWO SECURITIES WERE MADE OUT OF THE ASSESSEES OWN FUNDS THEN THE PROPORTIONATE DISALLOWANCE WITH REGARD TO THESE T WO ITA NO.2767 & 2681 /M/2013 M/S. KOTAK MAHINDRA PRINCE LTD. 3 INVESTMENTS BE DELETED. HE, HOWEVER, CONFIRMED THE PROPORTIONATE DISALLOWANCE IN RELATION TO THE REMAINING INVESTMENTS AS PER RULE 8D2(II). HE ALSO OBSERVED THAT THE COMPUTATION OF DISALLOWANCE OF ADMINISTRATIVE EXPENSES BY THE AO UNDER RULE 8D2(III) WAS ALSO REASONABLE AND THEREFORE UPHELD THE SAME. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSESSEE HAS COME IN APPEAL BEFORE US. 4 . THE LD. AR OF THE ASSESSEE, BEFORE US, HAS REITERATED THE SUBMISSION WHICH WERE MADE BEFORE THE LD. CIT(A). HE HAS FURTHER CONTENDED THAT IN THIS CASE, NO DISALLOWANCE IS ATTRACTED IN RELATION TO INVESTMENTS MADE IN THE SISTER CONCERNS/GROUP COMPANIES WHERE THE ASSESSEE HOLDS SUBSTANTIAL STAKE BECAUSE OF THE FACT THAT IN CASE OF SUCH STRATEGIC INVESTMENTS, NO DAY TO D AY MONITORING IS REQUIRED AND NO EXPENDITURE ON DAY TO DAY BASIS IS INCURRED FOR MANAGING THOSE INVESTMENTS. THE REVENUE, ON THE OTHER HAND, IN ITS APPEAL HAS AGITATED THE ACTION OF THE LD. CIT(A) IN DIRECTING THE AO THAT THE INVESTMENTS , IN CASE OF ABOVE STATED TWO SECURITIES IF FOUND TO BE MADE FROM THE OWN FUNDS OF THE ASSESSEE , BE NOT CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A. IT IS THE CONTENTION OF THE REVENUE THAT THE AO WAS JUSTIFIED IN COMPUTING THE DISALLOWANCE AS PER THE PROVISIONS OF RULE 8 D OF THE INCOME TAX RULES. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF BOTH THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORDS. IT MAY BE OBSERVED THAT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) , THE HON'BLE BOM BAY HIGH COURT HAS HELD THAT RULE 8D R.W.S. 14A(2) IS NOT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED , ONLY , IF , THE ASSESSEE'S METHOD IS NOT SATISFACTORY. IT HAS BEEN FURTHER HELD THAT RULE 8D IS NOT RETROSPECTIVE AND APPLIES FROM A.Y. 2008 - 09. FOR THE Y EARS FOR WHICH RULE 8D IS NOT APPLICABLE AND IN THE EVENT OF THAT THE AO IS NOT SATISFIED WITH THE EXPLANATION/WORKING GIVEN BY THE ASSESSEE, DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE ON A ITA NO.2767 & 2681 /M/2013 M/S. KOTAK MAHINDRA PRINCE LTD. 4 REASONABLE BASIS. ALMOST SIMILAR VIEW HAS BEEN EXPRESSED BY HON 'BLE DELHI HIGH COURT IN THE CASE OF 'MAXOPP INVESTMENT LTD. & OTHERS' VS. CIT (247 ITR 162). FURTHER T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) , HAS OBSERVED THAT IF THERE ARE FUNDS A VAILABLE WITH THE ASSESSEE, BOTH INTEREST FREE AND OVERDRAFT/LOANS TAKEN, THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND S GENERATED OR AVAILABLE WITH THE ASSESSEE. 6 . SO FAR THE CONTENTION OF THE LD. AR THAT NO DISAL LOWANCE IS ATTRACTED IN RELATION TO STRATEGIC INVESTMENTS MADE IN THE SISTER CONCERNS/GROUP COMPANIES WHERE THE ASSESSEE HOLDS SUBSTANTIAL STAKE IS CONCERNED, W E FIND THAT THE IDENTICAL ISSUE HAS BEEN RAISED AND DECIDED BY THE CO - ORDINATE BENCH OF THE TRIB UNAL IN THE CASE OF GROUP COMPANIES OF THE ASSESSEE I.E. KOTAK MAHINDRA CAPITAL CO. LTD. VS. DCIT IN ITA NOS. 5748/M/2012 AND 248/M/2013 FOR A.YS. 2008 - 09 & 2009 - 10 RESPECTIVELY, DECIDED ON 21.01.2015 WHEREIN THE TRIBUNAL HAS MADE THE FOLLOWING OBSERVATIO NS: 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND PERUSED THE RECORDS. THE A.O. HAS MADE THE DISALLOWANCE U/S 14A R.W. RULE 8 - D AT 0.5% OF ADMINISTRATIVE EXPENSES. THERE WAS NO DISALLOWANCE ON ACCOUNT OF INTEREST WHILE WORKING OUT THE DISALLOWANCE U/S 14A OF T HE INCOME TAX ACT, 1961. IT WAS ARGUED BY THE LEARNED A.R. THAT THE ASSESSEE HAS INVESTMENTS IN COMPANIES WHICH ARE ITS GROUP COMPANIES WHERE THE ASSESSEE HOLDS SUBSTANTIAL STAKE. THE ID. A.R. SUBMITS THAT STRATEGIC INVESTMENTS, PER SE DO NOT REQUIRE ANY D AY TODAY MONITORING AS THEY ARE INHERENTLY LONG TERM IN NATURE. NO EXPENDITURE ON DAY - TO - DAY BASIS IS INCURRED FOR MANAGING THOSE INVESTMENTS. THEREFORE, STRATEGIC INVESTMENT SHOULD BE EXCLUDED FOR ATTRIBUTING ADMINISTRATIVE EXPENSES FOR MAKING DISALLOWAN CE U/S 14A OF THE ACT. THE LD. A.R. HAS PLACED RELIANCE ON THE FOLLOWING DECISIONS: - I) HSBC SECURITIES AND CAPITAL MARKETS (I) P. LTD. - ITA NO. 3186/M/08 II) ZENSTAR TECHNOLOGIES LTD. - ITA NO. 4538/M/05 III) SHRI BHALCHANDRA R. SULE - ITA NO. 3684/M/05 IV) EIH ASSOCIATED HOTELS VS. DCIT - ITA NO. 1503/MAD/12 V) INTERGLOBE ENTERPRISES LTD. VS. DCIT - ITA NO. 1362 & 1032/DE1/13 VI) JM FINANCIAL LIMITED VS. ACIT - ITA NO. 4521/M/12 VII) CIT VS. ORIENTAL STRUCTURAL ENGINEERS P. LTD. - ITA 605 OF 2012(HC) V III) ACIT VS. ORIENTAL STRUCTURAL ENGINEERS P. LTD. ITA NO. 4245/DE1/2011 ITA NO.2767 & 2681 /M/2013 M/S. KOTAK MAHINDRA PRINCE LTD. 5 IX) GARWARE WALL ROPES LTD. VS. ACIT - ITA NO. 5408/M/2012 IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS, THE LD. A.R. PRAYED THAT THE A.O. BE DIRECTED TO EXCLUDE THE INVESTMENTS MADE IN FOREIGN SUBSIDIARIES AND INVESTMENT MADE IN COMPANIES WHICH ARE STRATEGIC IN NATURE WHILE COMPUTING THE DISALLOWANCE U/S 14A OF THE ACT IN RESPECT OF ADMINISTRATIVE EXPENSES. 4. ON THE OTHER HAND, THE LD. D.R. RELIED ON THE ORDERS OF LOWER AUTHORITIE S. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO DELIBERATED UPON THE JUDICIAL PRONOUNCEMENTS CITED WITH REFERENCE TO THE EXCLUSION OF INVESTMENT MADE IN THE COMPANIES WHICH ARE STRATEGIC IN NATURE. AS PER THE JUDICIAL PRONOUNCEMENTS CITED ABOVE, SUCH INVESTMENTS SHOULD NOT BE TAKEN INTO ACCOUNT FOR WORKING OUT THE DISALLOWANCE U/S 14A OF THE ACT. 6. IN THE CASE OF INTERGIOBE ENTERPRISES LTD. VS. DCIT, ITAT DELHI BENCH IN ITA NO. 1362 & 1 032/DEL/2013 FOR A.Y. 2008 - 09 AND 2009 - 10, VIDE ORDER DATED 4 - 4 - 2014 CONCLUDED AS UNDER: - 'HOWEVER, WE FIND THAT THE CALCULATION OF DISALLOWANCE UNDER RULE 8D(III) MADE BY THE ASSESSING OFFICER AND UPHELD BY THE ID. CIT(A) IS NOT CORRECT IN VIEW OF THE FAC T THAT ASSESSING OFFICER HAD INCLUDED THE VALUE OF TOTAL INVESTMENTS FOR CALCULATION OF DISALLOWANCE WHEREAS IN OUR OPINION THE VALUE OF THOSE INVESTMENTS SHOULD HAVE BEEN INCLUDED WHICH WERE MADE FOR THE PURPOSE OF EARNING EXEMPT INCOME. THE ASSESSEE HAD MADE SIGNIFICANT INVESTMENTS IN THE SHARES OF SUBSIDIARY COMPANIES WHICH ARE DEFINITELY NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME.' 7. SINCE THIS ASPECT OF STRATEGIC INVESTMENT HAS NOT EXAMINED BY LOWER AUTHORITIES, WE RESTORE THE MATTER FOR BOTH THE A SSESSMENT YEARS BACK TO THE FILE OF THE A.O. FOR RECOMPUTING AFRESH THE DISALLOWANCES MADE U/S 14 A READ WITH RULE 8 - D. NEEDLESS TO SAY THAT THE A.O. SHOULD AFFORD SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THE ISSUE AFRESH. 7 . THE AO, IN THIS CASE, HAS STRAIGHTWAY APPLIED RULE 8D. THE RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT (SUPRA) A S DISCUSSED ABOVE. THE AO HAS ALSO NOT LOOKED INTO THE CONTENTIONS MADE BY THE ASSESSEE THAT THE INVESTMENTS WERE MADE OUT OF ITS OWN FUNDS AND THAT THE DISALLOWANCE IN THIS CASE WAS NOT ATTRACTED IN THE LIGHT OF THE DECISION OF THE THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA). FURTHER T HE C ONTENTION OF THE ITA NO.2767 & 2681 /M/2013 M/S. KOTAK MAHINDRA PRINCE LTD. 6 ASSESSEE RELATING TO STRATEGIC INVESTMENTS IN GROUP COMPANIES IS ALSO REQUIRED TO BE LOOKED INTO IN THE LIGHT OF THE DECISION OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF KOTAK MAHINDRA CAPITAL CO. LTD. VS. DCIT (SUPRA ). WE ACCORDINGLY RESTORE THE ISSUE UNDER CONSIDERATION TO THE FILE OF THE AO FOR DECISION AFRESH IN ACCORDANCE WITH LAW AND IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE . NEED LESS TO SAY THAT THE AO WILL GIVE PROPER OPPORTUNITY TO THE ASSESSEE TO PLACE ON RECORD ALL THE RELEVANT EVIDENCES INCLUDING ITS ACCOUNTS AND THEN TO EXAMINE THE CONTENTION OF THE ASSESSEE IN RELATION TO THE ISSUE UNDER CONSIDERATION AND PASS A SPEAKING OR DER ACCORDINGLY. ORDER PRONOUNCED IN THE OPEN COURT ON 15.04. 201 5 . SD/ - SD/ - ( R.C. SHARMA ) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 15 .04.2015 . * KISHORE , SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.