IL & FS FINANCIAL SREVICES LTD, MUMBAI V. ADDL CIT 10(1), MUMBAI

ITA 7676/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5013 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 12-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 14-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P K SHUKLA
• Assessee Lawyers: DILIP LAKHANI
• Keywords: Business income; Opportunity of being heard; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 7676/MUM./2011 ( &) * !+* / ASSESSMENT YEAR : 200809 ) M/S. IL & FS FINANCIAL SERVICES LTD. PLOT NO.C22, GBLOCK, BKC BANDRA (E), MUMBAI 400 051 .. ,- / APPELLANT ) V/S ADDL. COMMISSIONER OF INCOME TAX CIRCLE10(1), MUMBAI .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACI4805L &) *1# 2 3 / ASSESSEE BY : MR. DILIP . LAKHANI 4! 2 3 / REVENUE BY : MR. P.K. SHUKLA )! 2 # / DATE OF HEARING 12.08.2013 $ 5+ 2 # / DATE OF ORDER 13.09.2013 $ $ $ $ / ORDER '# $% '# $% '# $% '# $% , ,, , & & & & 6 6 6 6 / PER AMIT SHUKLA, J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE, CHALLENGING THE IMPUGNED ORDER DATED 2 ND AUGUST 2011, PASSED BY THE LEARNED COMMISSIONER (APPEALS)-XXI, MUMBAI, FOR THE QUANTUM OF ASSESSMENT M/S. IL & FS FINANCIAL SERVICES LTD. 2 PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT) FOR THE ASSESSMENT YEAR 200809, VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: 1. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE L EARNED COMMR. OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ADDITIONS MADE UNDER SECTION 14A READ WITH RULE 8D. THE APPELLANT PRAYS THAT THE DIS ALLOWANCES OF RS. 28,72,22,642/- IS NOT JUSTIFIED AS THE NETWORTH OF THE COMPANY FAR EXCEEDS ITS INVESTMENTS CAPABLE OF YIELDING EXEMPTED INCOME AND BE DELETED. 2. THE APPELLANT PRAYS THAT THE ACTIVITY OF PURCHA SE AND SALE OF SHARES IS TREATED AS BUSINESS ACTIVITY AND THE RESULT OF THE SAID ACTIVITY IS OFFERED FOR TAX UNDER THE HEAD BUSINESS INCOME. IN VIEW OF THIS N O DISALLOWANCE SHOULD BE MADE U/S 14A R.W.R 8D. 3. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE AP PELLANT PRAYS THAT THE ADDITION MADE U/S L4A R.W.R 8D AMOUNTING TO RS. 28, 72,22,642/- MAY BE DELETED. 2. FACTS IN BRIEF : THE ASSESSEE IS MAINLY ENGAGED IN THE BUSINESS O F LENDING, LEASING AND FINANCIAL SERVICES. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD SHOWN FUND BASED INCOME AT ` 792,97,74,893, FEE BASED INCOME AT ` 170,15,32,847 AND MISCELLANEOUS INCOME AT ` 22,45,342 AND THE NET PROFIT WAS COMPUTED AT ` 168,40,01,429. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS ALSO EARNED DIVIDEND INCOME O F ` 16,35,85,508, WHICH WAS CLAIMED AS EXEMPT. IN THE COMPUTATION OF TOTAL INCOME, THE ASSESSEE HAS WORKED OUT THE DISALLOWANCE UNDER SECTION 14A A T ` 55,21,289. 3. IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY THE DISALLOWANCE SHOULD NOT BE REWORKED ON THE BASIS OF RULE 8D, TH E ASSESSEE SUBMITTED THAT THE PROVISIONS OF RULE 8D WILL NOT BE APPLICAB LE AS THE INVESTMENTS WERE HELD AS STOCKINTRADE. THE ASSESSING OFFICER REJEC TED THE ASSESSEES M/S. IL & FS FINANCIAL SERVICES LTD. 3 CONTENTION AND HELD THAT THE DISALLOWANCE HAS TO BE WORKED OUT AS PER RULE 8D IN THE FOLLOWING MANNER: PARTICULARS MAR08 ( ` ) MAR07 ( ` ) AVERAGE ( ` ) BALANCE OF INVESTMENT CAPABLE OF YIELDING EXEMPTED INCOME 10,662,450,791 4,265,086,585 7,463,768,688 TOTAL ASSET 83,442,663,532 51,717,152,332 67,579,90,07,932 UNSPECIFIED INTEREST COST FOR THE YEAR (EXCLUDING OTHER FINANCE CHARGES) 2,262,727,643 WHILE CALCULATING THE DISALLOWANCE THE FOLLOWING HA VE BEEN CONSIDERED. I) INTEREST ON BANK LOAN IS REDUCED AS INCURRED TOW ARDS LENDING PORTFOLIO OF THE COMPANY II) AS PER RBI REGULATIONS BANK CANNOT LEND FOR INV ESTMENT PURPOSE TO BORROWER, HENCE ALL THE BANK LOAN OF IFIN ARE NOT U SED FOR INVESTMENT PURPOSE. III) 0.5% OF AVERAGE VALUE OF INVESTMENT CAPABLE OF YIELDING EXEMPTED INCOME IS DISALLOWED. DISALLOWANCE AS PER SEC. 14A OF I.T. ACT, 1961 AS P ER RULE SD. SR. NO. PARTICULARS AMOUNT A) EXPENSE DIRECTLY RELATED TO EXEMPT INCOME , B) ALLOCATED INTEREST COST 24,99,03,799 C) 0.5% OF AVERAGE VALUE OF INVESTMENT 3,73,18,843 TOTAL DISALLOWANCES 28,72,22,642 ACCORDINGLY, AN AMOUNT OF ` 28,72,22,642 IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE UNDER SECTION 14A R.W. RULE 8D OF T HE I.T. ACT, 1961. 4. BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSE SSEE SUBMITTED THAT IT WAS HAVING TOTAL NETWORTH OF ` 1261 CRORES AND THE TOTAL INVESTMENT IN SHARES WHICH WAS CAPABLE OF YIELDING EXEMPT INCOME WAS ` 1066 CRORES. SINCE THE ASSESSEES NETWORTH WAS FAR IN EXCESS OF AVERAGE INVESTMENT, M/S. IL & FS FINANCIAL SERVICES LTD. 4 THEREFORE, THERE SHOULD NOT BE ATTRIBUTION OF INTER EST WHILE WORKING THE DISALLOWANCE UNDER SECTION 14A. FURTHER, IT WAS ALS O SUBMITTED THAT THE ASSESSEE WAS HOLDING SHARES PARTLY AS INVESTMENT AN D PARTLY AS STOCKIN TRADE AND ANY DISALLOWANCE UNDER RULE 8D CANNOT BE MADE ON STOCKINTRADE BECAUSE THE ASSESSEE IS SHOWING BUSINESS INCOME FRO M SUCH STOCKINTRADE. THE LEARNED COMMISSIONER (APPEALS) REJECTED THE ASS ESSEES CONTENTION AND CONFIRMED THE ACTION OF THE ASSESSING OFFICER AND A LSO THE WORKING OF THE DISALLOWANCE UNDER SECTION 14A AS PER THE FORMULA P ROVIDED IN RULE 8D. 5. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT INSOF AR AS THE INVESTMENT IN SHARES ARE CONCERNED, THE SHARES HAVE BEEN MADE IN LISTED SECURITIES AS WELL AS UNLISTED SECURITIES. WHEN UNL ISTED SHARES ARE SOLD, THE ASSESSEE HAD OFFERED IT AS CAPITAL GAIN. FURTHER, M OST OF THE SHARES WERE HELD AS STOCKINTRADE AND, THEREFORE, TO THE EXTENT OF THESE SHARES, NO DISALLOWANCE SHOULD BE MADE UNDER SECTION 14A. HE F URTHER CONTENDED THAT THE ASSESSEES TOTAL NET WORTH IS APPROXIMATELY ` 1260 CRORES WHEREAS THE INVESTMENT IN SHARES WHICH WAS CAPABLE OF EARNING E XEMPT INCOME WERE FAR LESS. THEREFORE, NO INTEREST COST SHOULD BE DISALLO WED WHILE WORKING OUT THE DISALLOWANCE UNDER SECTION UNDER RULE 8D. FOR ALL T HE ABOVE PROPOSITIONS, HE RELIED UPON VARIOUS CASE LAWS INCLUDING THAT OF BOM BAY HIGH COURT IN CIT V/S RELIANCE UTILITIES AND POWER LTD., [2009] 313 ITR 3 40 (BOM.). 6. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED DIFFERENT WORKING OF DISALLOWANCE BASED ON HIS ABOV E PROPOSITION I.E., (I) WORKING OF DISALLOWANCE, IF NETWORTH IS MORE THAN I NVESTMENT CAPABLE OF YIELDING EXEMPT INCOME; (II) DISALLOWANCE, IF INVES TMENT IN EQUITY SHARES IS EXCLUDED AND (III) DISALLOWANCE, IF ONLY STOCKINT RADE IS EXCLUDED. 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE RELYING UPON THE FINDINGS GIVEN BY THE ASSESSING OFFICER AS WELL AS THE LEARNED COMMISSIONER (APPEALS), SUBMITTED THAT ONCE PROVISI ONS OF RULE 8D ARE M/S. IL & FS FINANCIAL SERVICES LTD. 5 APPLICABLE, THEN THE DISALLOWANCE HAS TO BE WORKED OUT AS PER FORMULA GIVEN THEREIN. MOREOVER, IT IS NOT A CASE THAT THE ASSESS EE HAS NOT PAID ANY INTEREST AND, THEREFORE, INTEREST ELEMENT CANNOT BE EXCLUDED IN THE WORKING. FOR THE OTHER PROPOSITION ALSO, HE RAISED STRONG OBJECTION. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE PERUSE D THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED C OMMISSIONER (APPEALS) AND THE MATERIAL AVAILABLE ON RECORD. THE ASSESSING OFFICER HAS WORKED OUT THE DISALLOWANCE UNDER SECTION 14A AS PER RULE 8D A T ` 28,72,22,642, AFTER TAKING INTEREST COST OF ` 24,99,03,799 AND ADMINISTRATIVE COST OF ` 3,73,18,843. THE LEARNED COUNSEL HAS GIVEN VARIOUS WORKING OF DISALLOWANCE UNDER SECTION 14A AND HAD SUBMITTED THAT IF ANY DIS ALLOWANCE IS CALLED FOR, THEN SAME SHOULD BE MADE ON THAT BASIS ONLY. HIS MA IN CONTENTION HAS BEEN THAT THE ASSESSEES NETWORTH AND AVAILABILITY OF FU NDS IS FAR MORE THAN INVESTMENT WHICH ARE CAPABLE OF YIELDING EXEMPT INC OME AND, THEREFORE, NO INTEREST COST SHOULD BE ATTRIBUTED FOR WORKING OUT THE DISALLOWANCE. IF THE ASSESSEE HAS HUGE FUNDS WHICH ALSO CONSIST OF INTER EST FREE FUNDS, THEN PRESUMPTION WOULD BE THAT INVESTMENTS HAVE BEEN MAD E OUT OF INTEREST FREE FUNDS, AVAILABLE WITH THE ASSESSEE AND, THEREFORE, INTEREST COST CANNOT BE MADE ATTRIBUTABLE. HOWEVER, AVAILABILITY OF INTERES T FREE FUNDS AND INVESTMENTS WHICH ARE CAPABLE OF YIELDING EXEMPT IN COME, HAS NOT BEEN EXAMINED PROPERLY EITHER BY THE ASSESSING OFFICER O R BY THE LEARNED COMMISSIONER (APPEALS). THEREFORE, RESPECTFULLY FOL LOWING THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN RELIANCE UTILI TIES AND POWER LTD. (SUPRA), WE DIRECT THE ASSESSING OFFICER TO REEXAMINE THE N EXUS OF INTEREST FREE FUNDS AND INVESTMENT MADE. IN CASE, THE INTEREST FR EE FUNDS ARE MORE THAN THE INVESTMENT, THEN INTEREST SHOULD BE COST EXCLUD ED FROM THE WORKING OF THE DISALLOWANCE AND IN THAT SITUATION ONLY ADMINIS TRATIVE COST CAN ONLY BE DISALLOWED. OTHER WORKINGS GIVEN BY THE ASSESSEE AR E NOT BEING CONSIDERED IN VIEW OF THE AFORESAID DIRECTION. WE, THUS, SET A SIDE THE IMPUGNED ORDER M/S. IL & FS FINANCIAL SERVICES LTD. 6 PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RE STORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH THE ABOVE DIRECTION. NEEDLESS TO SAY THAT THE ASSESSING OFFICER SHALL GIVE DUE AND EFFEC TIVE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND TO EXPLAIN ITS CASE. 9. 1 #7 &) *1# 2 82 9:; ' '$ !# < ) 4# => ? 9. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. $ 2 5+ @ A)7 13 TH SEPTEMBER 2013 2 B ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH SEPTEMBER 2013 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, A) A) A) A) DATED : 13 TH SEPTEMBER 2013 $ 2 .&#'C DC+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4! / THE REVENUE; (3) E () / THE CIT(A); (4) E / THE CIT, MUMBAI CITY CONCERNED; (5) C!HB .&#&) , , / THE DR, ITAT, MUMBAI; (6) BI* J / GUARD FILE. /C# .&# / TRUE COPY $) / BY ORDER . 4. KL / PRADEEP J. CHOWDHURY !1M &)4 K! / SR. PRIVATE SECRETARY 9 / = 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI