IDFC CAPITAL LATD, MUMBAI V. DCIT CIR 10(1), MUMBAI

ITA 6446/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0731 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 29-12-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 20-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUSUM BANSALDR
• Assessee Lawyers: HIRO RAIAR
• Keywords: Principle of natural justice; Earning of tax free income; Retrospective amendment
• Section: 143(3); 14A

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL, MUMBAI I BENCH , BEFORE S/SH. MAHAVIR SINGH,JM & RAMIT KOCHAR ,AM ./ ITA NO./6446/MUM/2014 , / ASSESSMENT YEARS: 2010-11 IDFC CAPITAL LIMITED (NOW MERGED WITH IDFC SECURITIES LTD.) (FORMERLY KNOWN AS IDFC SSKI LIMITED) 501, NAMAN CHAMBERS, C-32, G-BLOCK, BANDRA KURLA COMPLEX, BANDRA (E) MUMBAI-400 051. PAN:AACS 8752 N V. THE D CI T - 1 0 (1) AAYAKAR BHAVAN MUMBAI-400 020. ( / APPELLANT ) ( / RESPONDENT ) REVENUE BY: MS. KUSUM BANSAL-DR ASSESSEE BY: SHRI HIRO RAI-AR / DATE OF HEARING: 20/04/2017 / DATE OF PRONOUNCEMENT: 17/05/2017 , 1961 254(1) ORDER U/S 254(1) OF THE INCOME-TAX ACT, 1961(THE AC T) O R D E R , / PER RAMIT KOCHAR,AM : THIS APPEAL, FILED BY THE ASSESSEE , BEING ITA NO. 6446/MUM/2014, IS DIRECTED AGAINST THE APPELLATE OR DER DATED 03 RD JULY 2014 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 21, MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR T HE ASSESSMENT YEAR 2010-11, THE APPELLATE PROCEEDINGS BEFORE THE LEARN ED CIT(A) ARISING FROM THE ASSESSMENT ORDER DATED 25 TH MARCH, 2013 PASSED BY THE LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INCOME-TAX ACT,1961 (HEREINAFTER CALLED THE AC T). 6446/M/14 IDFC CAPITAL LIMITED 2 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN TH E MEMO OF APPEAL FILED WITH THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI (HER EINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- 1. UNDER THE FACTS & IN LAW, THE LEARNED CIT(A) , HAS ERRED IN CONFIRMING DISALLOWANCE OF RS. 5,58,104/- U/S 14A O F INCOME TAX 1961 R.W.RULE 8D(2)(III) OF THE I.T.RULES, 1962. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF FINANCIAL SERVICES, THE ASSESSEE BEING A CATEGORY I MERCHANT BANKER ENG AGED IN THE BUSINESS OF PROVIDING A FULL RANGE OF SERVICES FROM PRIVATE PLA CEMENTS AND PUBLIC OFFERINGS TO ADVISORY SERVICES AND MERGERS, ACQUISI TIONS AND DEBT SYNDICATION. 4. IT WAS OBSERVED BY THE ASSESSING A.O. DURING THE C OURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 143(2) OF THE 1961 AC T THAT DIVIDEND INCOME OF RS.54,83,240/- WAS EARNED BY THE ASSESSEE WHICH WAS CLAIMED EXEMPT BY THE ASSESSEE. THE ASSESSEE WAS ASKED BY THE AO TO FURNISH DETAILS OF EXPENSES INCURRED IN RELATION TO THE SAID INCOME. F URTHER, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY DISALLOWANCE U/S. 14A R. W.RULE 8D SHOULD NOT BE MADE CONSIDERING THE CLAIM OF EXEMPT INCOME. THE AS SESSEE IN REPLY SUBMITTED THAT CAPITAL AND RESERVES AS WELL AS INCO ME EARNED DURING THE YEAR HAD NO OTHER APPLICATION EXCEPT INVESTMENT IN SUBSIDIARIES COMPANIES AND MUTUAL FUNDS. IT WAS ALSO SUBMITTED THAT THERE WERE NO BORROWINGS MADE AND ALSO THE ASSESSEE HAD NOT INCURRED ANY INT EREST EXPENDITURE. IT WAS SUBMITTED THAT ALL THE EXPENSES INCURRED BY THE ASSESSEE WERE MAINLY ADMINISTRATIVE IN NATURE WHICH WERE REQUIRED FOR OP ERATION OF BUSINESS AND NONE OF THESE EXPENSES WERE INCURRED FOR MAKING INV ESTMENT WHICH ARE EARNING EXEMPT INCOME. THE ASSESSEE MADE VOLUNTARY DISALLOWANCE OF RS.1,09,665/- BEING EXPENSES TO EARN EXEMPT INCOME, WHICH THE ASSESSEE CLAIMED TO BE MADE BASED ON MANPOWER EMPLOYED AND R EASONABLE OVERHEAD EXPENSES WHICH ARE ATTRIBUTED FOR THE INVESTMENT IN MUTUAL FUNDS. THE ASSESSEE ALSO SUBMITTED THAT THE ONUS IS UPON THE A O TO PROVE THAT ASSESSEE HAS INCURRED EXPENSES TO EARN TAX FREE INCOME. THE ASSESSEE ALSO FURTHER SUBMITTED THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM 6446/M/14 IDFC CAPITAL LIMITED 3 MADE BY THE ASSESSEE IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE, THEN ONLY, PROVISION OF RULE 8D OF THE 1962 RULES CAN BE INVOKED BY THE ASSESSING OFFICER. THE AO CONSIDERED THE SUBMISSION OF THE ASSESSEE A ND HELD THAT SECTION 14A OF THE 1961 ACT WAS INTRODUCED BY FINANCE ACT , 2001 WAS APPLICABLE FROM RETROSPECTIVE EFFECT AND IT MANDATES THAT EXPE NDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME S HALL NOT BE ALLOWED. THE AO INVOKED RULE 8D OF INCOME-TAX RULES, 1962 TO MAK E DISALLOWANCE U/S 14A OF THE 1961 ACT. THE AO HELD THAT THE ASSESSEE HAD EARNED EXEMPT INCOME OF RS.54,80,240/- FROM INVESTMENTS WHICH ARE EXEMPT FROM TAX. THE AO REJECTED THE WORKING OF DISALLOWANCE SUBMITTED BY THE ASSESSEE U/S. 14A R.W. RULE 8D OF THE 1962 RULES KEEPING IN VIEW THE RATIO OF DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG.LTD.(328 ITR 81) . THE AO MADE DISALLOWANCE @0.5% OF AVERAGE VALUE OF INVESTMENT U/R 8D(2)(III) OF THE 1962 RULES READ WITH SECTION 14A OF THE 1961 ACT WHEREIN DISALLOWANCE OF RS.6,67,769/- WAS CONFIRMED . THE ASSESSEE WAS ALLOWED CREDIT BY THE AO OF SUO-MOTU DISALLOWANCE O F RS.1,09,665/- MADE U/S 14A OF THE 1961 ACT AND DIFFERENCE OF RS.5,58,1 04/- WAS ADDED TO INCOME AND BROUGHT TO TAX UNDER RULE 8D(2)(III) OF THE 1962 RULES R.W.S. 14A OF THE 1961 ACT., VIDE ASSESSMENT ORDER DATED 25-03 -2013 PASSED BY THE AO U/S 143(3) OF THE 1961 ACT. 5. BEING AGGRIEVED BY THE ASSESSMENT ORDER DATED 25-0 3-2013 PASSED BY THE AO U/S 143(3) OF THE 1961 ACT, THE ASSESSEE FILED A N APPEAL BEFORE THE LEARNED CIT(A). THE ASSESSEE SUBMITTED BEFORE LEARN ED CIT(A) THAT THE ASSESSEE IS MERCHANT BANKER REGISTERED WITH SEBI CA RRYING ON PROFESSIONAL BUSINESS OF MERCHANT BANKING. IT WAS SUBMITTED BEF ORE LEARNED CIT(A) THAT THE ASSESSEE IS NOT A TRADER AND THAT IT DOES NOT R EQUIRE HUGE CAPITAL AND IT HAS NO BANK BORROWINGS. THE ASSESSEE SUBMITTED THAT AS PER SEBI REQUIREMENT, THE ASSESSEE IS REQUIRED TO HAVE MINIM UM NET WORTH AND HENCE THE ASSESSEE HAS MINIMUM CAPITAL WHICH IS NOT REQUIRED FOR BUSINESS PURPOSES AS THERE IS NO ALTERNATIVE INVESTMENT OPPO RTUNITIES AND HENCE WAS PARKED IN INVESTMENTS. THE ASSESSEE SUBMITTED BEFOR E LEARNED CIT(A) THAT IT DID NOT REQUIRED MUCH CAPITAL AND INCOME MAINLY ARO SE FROM PROFESSIONAL 6446/M/14 IDFC CAPITAL LIMITED 4 SERVICES RENDERED FOR WHICH PROFESSIONAL FEES WERE RECEIVED FROM CLIENTS. THE ASSESSEE FURTHER SUBMITTED COPIES OF FINANCIAL ACCO UNTS AND SUBMITTED THAT IT HAS MADE INVESTMENT IN MUTUAL FUNDS AND MAINLY A DMINISTRATIVE EXPENSES WERE INCURRED. IT WAS SUBMITTED THAT THE A SSESSEE HAS NOT INCURRED ANY INTEREST EXPENDITURE AS THERE WERE NO BANK BORR OWINGS OR OTHER INTEREST BEARING BORROWINGS. IT WAS SUBMITTED BEFORE THE LEA RNED CIT(A) THAT THE AO HAD MECHANICALLY APPLIED RULE 8D OF THE 1962 RULES READ WITH SECTION 14A OF THE 1961 ACT . IT WAS SUBMITTED THAT THE ONUS WA S ON THE AO TO PROVE THAT THE ASSESSEE HAS INCURRED ANY EXPENSES TO EARN TAX- FREE INCOME. THE CONTENTIONS OF THE ASSESSEE WERE REJECTED BY TH E LEARNED CIT(A) AND THE ADDITIONS MADE BY THE AO IN THE ASSESSMENT ORDER DA TED 25-03-2013 BY INVOKING RULE 8D(2)(III) OF THE 1962 RULES READ WIT H SECTION 14A OF THE 1961 ACT WAS CONFIRMED BY LEARNED CIT(A), VIDE APPELLATE ORDER DATED 03-07-2014 PASSED BY THE LEARNED CIT(A) . 6. AGGRIEVED BY THE APPELLATE ORDER DATED 03-07-2014 P ASSED BY LEARNED CIT(A), THE ASSESSEE FILED AN APPEAL BEFORE THE T RIBUNAL . 7. AT THE OUTSET IT WAS SUBMITTED BY THE LEARNED AUTH ORISED REPRESENTATIVE (AR) OF THE ASSESSEE THAT THIS MATTER NEEDS TO BE R ESTORED BACK TO THE FILE OF THE AO AS THE AO HAS NOT PROPERLY APPRECIATED THE SUO MOTO DISALLOWANCE OF RS.1,09,665/- MADE BY THE ASSESSEE U/S.14A OF TH E ACT. IT WAS SUBMITTED IF THE MATTER IS RESTORED TO THE FILE OF THE AO , T HEN THE ASSESSEE WILL DULY EXPLAIN THE DISALLOWANCE TO BE WORKED OUT KEEPING I N VIEW THE MANDATE OF SECTION 14A(2) OF THE 1961 ACT. THE LEARNED DEPARTM ENTAL REPRESENTATIVE (DR) RELIED UPON THE ORDER OF THE LEARNED CIT(A) AN D CONTENDED THAT PROPER SATISFACTION WAS RECORDED. IT WAS SUBMITTED BY LEAR NED DR THAT ASSESSEE HAD NOT GIVEN COMPLETE DETAILS BEFORE THE AO AS TO THE WORKING OF RS.109665/- HENCE, AO REJECTED THE DISALLOWANCE MADE BY THE ASS ESSEE U/S.14A AND INVOKED RULE 8D(2)(III) OF THE 1962 RULES. 8. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL ON RECORD. WE HAVE OBSERVED THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF FINANCIAL SERVICES, THE ASSESSEE BEING A CATEGORY I MERCHANT BANKER ENGAGED IN THE BUSINESS OF PROVIDING A FULL RANGE OF SERVICES FROM PRIVATE PLACEMENTS AND PUBLIC OFFERINGS TO ADVISORY SERVICES AND MERGERS, 6446/M/14 IDFC CAPITAL LIMITED 5 ACQUISITIONS AND DEBT SYNDICATION. THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.54,83,240/- WHICH WAS CLAIMED AS EXEMP T BY THE ASSESSEE. THE ASSESSEE HAS SUBMITTED THAT IT HAS NO INTEREST BEARING BORROWINGS AND HENCE NO INTEREST EXPENDITURE WAS INCURRED .THE ASS ESSEE HAS SUBMITTED THAT IT HAS INCURRED ADMINISTRATIVE EXPENSES OF RS. 1,09,665/- TOWARDS EARNING OF EXEMPT INCOME WHICH IS TO BE DISALLOWED U/S 14A OF THE 1961 ACT BUT NO DETAILS WERE GIVEN BY THE ASSESSEE OF THE SA ID PROPOSED DISALLOWANCE WITH REFERENCE TO THE ACCOUNTS OF THE ASSESSEE AS I S CONTEMPLATED U/S. 14A(2) OF THE 1961 ACT. IN THE ABSENCE THEREOF OF T HE RELEVANT DETAILS ,THE AO INVOKED RULE 8D(2)(III) OF THE 1962 RULES READ WITH SECTION 14A OF THE 1961 ACT. SECTION 14A OF THE ACT WHICH WAS INTRODUCED BY FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01.04.1962 CLEARLY STIPU LATES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME , NO DEDUCTION WILL BE AL LOWED OF THE EXPENDITURE INCURRED IN RELATION TO EARNING OF INCOME WHICH DOE S NOT FORM PART OF TOTAL INCOME AND WHICH IS CLAIMED AS EXEMPT BY THE TAX-PA YER. THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 54,83,240/- WHICH IS CLAIMED AS AN EXEMPT BY THE ASSESSEE. AS PER SECTION 14A OF THE ACT WHER E ANY EXPENDITURE IS INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH IS NOT INCLUDIBLE IN TOTAL INCOME OF THE ASSESSEE , SUCH EXPENSES SHALL NOT BE ALLOWED AS EXPENDITURE. THUS, DISALLOWANCE OF SUCH EXPENDITURE INCURRED IN RELATION TO EARNING OF INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER PROVISIONS OF THIS ACT SHALL BE COMPUTED HAVING REGARD TO ACCO UNTS OF THE ASSESSEE AS PROVIDED IN SECTION 14A(2) OF THE ACT. HON'BLE SUPR EME COURT IN A VERY RECENT DECISION PRONOUNCED ON 8 TH MAY, 2017 IN THE CASE OF GODREJ & BOYCE V. DCIT (CIVIL APPEAL NO.7020 OF 2011) WHEREIN THE HONBLE SUPREME COURT HAS UPHELD THE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME AS IS CONTEMPLATED U/S 14A OF THE 1961 ACT. THE PRIMARY ONUS IS ON THE ASS ESSEE TO WORK OUT THE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF THE INCOME WHICH IS NOT FORMING PART OF TOTAL INCOME OF THE AS SESSEE HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE. THESE ARE FACTS WHICH ARE ESPECIALLY IN THE KNOWLEDGE OF THE ASSESSEE AND PRIMARY ONUS/BURDEN I S ON THE ASSESSEE TO BRING THOSE FACTS BEFORE THE AO OF HAVING INCURRED EXPENDITURE IN RELATION TO 6446/M/14 IDFC CAPITAL LIMITED 6 EARNING OF INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE. THEREAFTER , THE ONUS SHIFTS TO THE ASSESSING OFFICER TO WORK OUT THE DISALLOWANCE OF E XPENDITURE INCURRED IN RELATION TO EARNING OF INCOME WHICH DOES NOT FORM P ART OF TOTAL INCOME, KEEPING IN VIEW THE ACCOUNTS OF THE ASSESSEE AS IS CONTEMPLATED U/S 14A(2) OF THE 1961 ACT . IF THE ASSESSING OFFICER IS NOT S ATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE OF EXPENDITURE SUO MOTU OFFERED BY THE ASSESSEE BEING INCURRED IN RELATION TO EARNING OF INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE IF THE SAME COULD NOT BE WORKED OUT FROM THE MANNER IN WHICH AC COUNTS ARE MADE BY THE ASSESSEE, THE ASSESSING OFFICER CAN INVOKE RULE 8D OF THE 1962 RULES R.W.S. 14A OF THE 1961 ACT AND APPLY METHOD PRESCRI BED U/R 8D OF THE 1962 RULES FOR MAKING DISALLOWANCE OF EXPENDITURE INCURR ED IN RELATION TO EARNING OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME. WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE DID OFFER THE SUO MOTU DISALLOWANCE BUT DID NOT RELATE THE SAME TO THE ACC OUNTS OF THE ASSESSEE AS IS CONTEMPLATED U/S 14A(2) OF THE 1961 ACT AND IN T HE ABSENCE THEREOF THE AO APPLIED RULE 8D OF THE 1962 RULES R.W.S. 14A OF THE 1961 ACT TO MAKE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . THE LEARNED COUNSEL FOR THE ASSESSEE HAS CONCEDED THAT IF ONE MORE OPPORTUNITY IS GRANTED TH E ASSESSEE WILL EXPLAIN DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE BEFORE THE AO AND INJUSTICE CAUSED TO THE ASSESSEE BY INVOCATION OF RULE 8D OF THE 1962 RULES R.W.S. 14A OF THE 1961 ACT CAN BE REMOVED . KEEPING IN VIEW FACTS AND CIRCUMSTANCES OF THE CASE , IN OUR C ONSIDERED VIEW THE MATTER NEEDS TO BE SET ASIDE AND RESTORED TO THE FI LE OF AO FOR RE-COMPUTING THE DISALLOWANCE U/S. 14A OF THE 1961 ACT OF THE EX PENDITURE INCURRED IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESS EE . THE ASSESSEE IS DIRECTED TO PRODUCE WORKING OF DISALLOWANCE OF EXPE NDITURE INCURRED IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF ASSESSEE A S IS CONTEMPLATED U/S 6446/M/14 IDFC CAPITAL LIMITED 7 14A OF THE 1961 ACT. THE PRIMARY ONUS/BURDEN IS ON THE ASSESSEE TO PRODUCE SUCH WORKING AS THE SAID FACTS ARE ESPECIAL LY IN THE KNOWLEDGE OF THE ASSESSEE. IF THE AO IS NOT SATISFIED WITH THE W ORKING AS IS SUBMITTED BY THE ASSESSEE AS SUCH DISALLOWANCE CANNOT BE WORKED OUT KEEPING IN VIEW ACCOUNTS OF THE ASSESSEE, THE AO WILL BE JUSTIFIED IN INVOKING RULE 8D OF THE 1962 RULES. NEEDLESS TO SAY, PROPER AND ADEQUATE OP PORTUNITY OF HEARING SHOULD BE GRANTED BY THE AO TO THE ASSESSEE IN ACCO RDANCE WITH PRINCIPLES OF NATURAL JUSTICE. THE ASSESSING OFFICER IS DIRECTED TO ADMIT NECESSARY EVIDENCES AND EXPLANATION FILED BY THE ASSESSEE IN ITS DEFENSE WHICH SHALL BE ADMITTED AND ADJUDICATED ON MERITS.WE ORDER ACCORDI NGLY. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH MAY, 2017. 17 , 2017 SD/- SD/- ( / MAHAVIR SINGH ) (RAMIT KOC HAR) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 17/05/2017 . . . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / ; 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, DY./ASST. REGISTRAR , /ITAT, MUMBAI .