SBI DFHI LTD, MUMBAI V. ACIT RG 2(1), MUMBAI

ITA 8827/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1699 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 16-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P MEENA
• Assessee Lawyers: SUNIL BHANDARI
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI .. , !'# $ $$ $ , %$ $ , & !'# BEFORE SHRI P.M. JAGTAP, AM AND SHRI VIJAY PAL RAO , JM !./ I.T.A. NOS. 8825TO 8828/MUM/2010 ( &( &(&( &( ) ) ) ) $ $$ $*) *)*) *) / / / / ASSESSMENT YEARS 2004-05, 2005-06, 2006-07 & 2007-0 8) SBI DFHI LTD., 3 RD FLOOR, 23 J.N. HEREDIA MARG, BALLARD ESTATE, MUMBAI 400 001. ( (( ( / VS. INCOME TAX OFFICER, RANGE 2(1)(1), MUMBAI. #+ !./ PAN : AAACD0532B ( +, / // / APPELLANT ) .. ( -.+, / RESPONDENT ) +, / 0 ! / APPELLANT BY : SHRI SUNIL BHANDARI -.+, / 0 ! / RESPONDENT BY : SHRI O.P. MEENA ! ($ / / // / DATE OF HEARING : 07-02-2013 12* / / DATE OF PRONOUNCEMENT : 08-03-2013 '3 / O R D E R PER P.M. JAGTAP, AM : THESE FOUR APPEALS FILED BY THE ASSESSEE AGAINST F OUR SEPARATE ORDERS PASSED BY THE LD. CIT(A)- 4, MUMBAI DTD. 11-10-2010 FOR ASSESSMENT YEARS 2004-05 & 2005-06 AND DTD. 12-10-2010 FOR ASSESSMEN T YEARS 2006-07 & 2007-08 INVOLVE SOME COMMON ISSUES AND THE SAME THE REFORE HAVE BEEN ITA NOS. 8825 TO 8828/MUM/2010 2 HEARD TOGETHER AND ARE BEING DISPOSED OF BY A SINGL E COMPOSITE ORDER FOR THE SAKE OF CONVENIENCE. 2. THE COMMON ISSUE INVOLVED IN THE SOLITARY GROUND RAISED IN THE APPEAL OF THE ASSESSEE FOR A.Y. 2004-05 AND IN GROUND NO. 1 O F ITS APPEAL FOR A.Y. 2005- 06 RELATES TO THE DISALLOWANCE OF RS. 53,13,059/- A ND RS. 19,05,827/- MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) RESPECTIVE LY IN A.Y. 2004-05 AND 2005-06 BY INVOKING THE PROVISIONS OF SECTION 14A O F THE INCOME TAX ACT, 1961 (THE ACT) ON ACCOUNT OF INTEREST EXPENDITURE. 3. THE ASSESSEE, IN THE PRESENT CASE, IS A COMPANY WHICH IS CARRYING ON THE BUSINESS AS PRIMARY DEALER IN GOVERNMENT SECURITIES AND MONEY MARKET OPERATIONS. THE RETURNS OF INCOME FOR ASSESSMENT Y EARS 2004-05 AND 2005-06 WERE FILED BY THE ASSESSEE ON 27-10-2004 AND 26-10- 2005 DECLARING TOTAL INCOME OF RS. 275,19,23,830/- AND LOSS OF RS. 93,33 ,97,220/- RESPECTIVELY. IN THE SAID RETURNS, INTEREST INCOME OF RS. 1,41,24,38 7/- AND RS. 79,87,320/- EARNED ON TAX FREE BONDS DURING ASSESSMENT YEARS 20 04-05 AND 2005-06 RESPECTIVELY WAS CLAIMED TO BE EXEMPT BY THE ASSESS EE U/S 10(15) OF THE ACT. NO DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE ATTRIBUTABLE TO THE EARNING OF THE SAID EXEMPT INCOME, HOWEVER, WAS MADE BY THE ASSESSEE. IN THIS REGARD, THE STAND OF THE ASSESSEE AS TAKEN BEFORE THE A.O. WAS THAT THE INVESTMENT IN TAX FREE BONDS WAS ENTIRELY MADE BY IT OUT OF OWN F UNDS AND THERE WAS NO UTILIZATION OF BORROWED FUNDS FOR MAKING THE SAID I NVESTMENT. THE STAND OF THE ITA NOS. 8825 TO 8828/MUM/2010 3 ASSESSEE WAS NOT ACCEPTED BY THE A.O. ACCORDING TO HIM, ALL ITS FUNDS WERE KEPT BY THE ASSESSEE IN ONE COMMON POOL AND IN THE ABSENCE OF ANY SEPARATE CASH FLOW STATEMENT MAINTAINED BY THE ASSESSEE, IT WAS NOT POSSIBLE FOR THE ASSESSEE TO ESTABLISH THAT THE INVESTMENT IN TAX FR EE BONDS WAS MADE ONLY OUT OF ITS OWN FUNDS. SINCE THE BORROWED FUNDS OF THE ASSESSEE WERE 52.50% AND 45.89% OF THE TOTAL FUNDS DURING ASSESSMENT YEARS 2 004-05 & 2005-06 RESPECTIVELY, THE A.O. APPLIED THE SAID RATIO TO ES TIMATE THE UTILIZATION OF BORROWED FUNDS FOR MAKING THE INVESTMENT IN TAX FRE E BONDS OF RS. 13.42 CRORES AND RS. 15.67 CRORES IN ASSESSMENT YEARS 200 4-05 & 2005-06 RESPECTIVELY AT RS. 7.05 CRORES AND RS. 7.19 CRORES AND INTEREST ATTRIBUTABLE TO THE SAID BORROWED FUNDS WAS WORKED OUT BY HIM AT RS . 53.13 LACS AND RS. 90.06 LACS BY APPLYING THE AVERAGE RATE OF INTEREST . THE AMOUNT OF INTEREST SO WORKED OUT WAS DISALLOWED BY THE A.O. U/S 14A OF TH E ACT IN THE ASSESSMENTS COMPLETED FOR THE ASSESSMENT YEARS 2004-05 & 2005-0 6. 4. AGAINST THE ORDERS PASSED BY THE A.O. U/S 143(3) OF THE ACT, APPEALS WERE PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A ) AND ALTHOUGH THE LD. CIT(A) AGREED WITH THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE BEING PROHIBITED FROM BORROWING FOR ANY PURPOSE OT HER THAN ITS CORE BUSINESS OF TRADING IN SECURITIES, INTEREST PAID ON BORROWED FUNDS COULD NOT BE SAID TO BE INCURRED FOR EARNING THE EXEMPT INCOME, HE HELD THAT SOME EXPENDITURE WAS ITA NOS. 8825 TO 8828/MUM/2010 4 REQUIRED TO BE DISALLOWED U/S 14A OF THE ACT. HE, ACCORDINGLY, CONFIRMED THE DISALLOWANCE MADE BY THE A.O. ON ACCOUNT OF INTERES T U/S 14A OF THE ACT. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH SIDES AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. AS SUBMITTED BY THE LD . COUNSEL FOR THE ASSESSEE, A SIMILAR ISSUE INVOLVED IN ASSESSEES OWN CASE FOR T HE IMMEDIATELY PRECEDING YEAR I.E. A.Y. 2003-04 HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE VIDE ITS ORDER DTD. 31-01-2013 PASSED IN ITA NO. 8645/MUM/2010. THE COPY OF THE SAID ORDER IS PLACED ON RECORD BEFORE US AND PERUSAL OF THE SAME SHOWS THAT A SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE FOR THE FOLLOWIN G REASONS GIVEN IN PARA NO. 4 OF ITS ORDER:- WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON T HIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THA T THE DISALLOWANCE U/S 14A ON ACCOUNT OF INTEREST WAS MADE BY THE ASSESSING OFFIC ER ON THE GROUND THAT THERE BEING COMMON POOL OF ALL THE FUNDS MAINTAINED BY TH E ASSESSEE, IT WAS NOT POSSIBLE FOR THE ASSESSEE TO SUBSTANTIATE ITS CASE THAT INVESTMENT IN TAX FREE BONDS WAS MADE OUT OF ITS OWN FUNDS. THE LEARNED CI T(APPEALS), HOWEVER, DELETED THE SAID DISALLOWANCE AFTER HAVING FOUND TH AT THE ASSESSEE AT THE RELEVANT TIME HAD ITS OWN FUNDS IN THE FORM OF SHAR E CAPITAL AND RESERVE AMOUNTING TO RS. 703 CRORES WHICH WERE FAR EXCEEDIN G THE INVESTMENT OF RS. 10.50 CRORES MADE BY THE ASSESSEE IN TAX FREE BONDS . HE THUS HELD THAT THE SAID INVESTMENT IN TAX FREE FUNDS WAS MADE BY THE A SSESSEE OUT OF ITS OWN FUNDS AND THERE BEING NO INTEREST EXPENDITURE INCUR RED IN RELATION TO THE EARNING OF TAX FREE INCOME, DISALLOWANCE ON ACCOUNT OF INTEREST U/S 14A WAS NOT JUSTIFIED. IN OUR OPINION, THE DECISION OF THE LEARNED CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE ON THIS ISSUE IS WELL FOUNDE D AND IS DULY SUPPORTED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F RELIANCE UTILITIES POWER LTD. 313 ITR 314 WHEREIN IT WAS HELD THAT WHEN THER E IS A COMMON POOL OF FUNDS, PRESUMPTION IS THAT THE INVESTMENT YIELDING TAX FREE RETURNS IS MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS. KEEPING IN VIEW THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE U TILITIES AND POWER LTD. (SUPRA) AND HAVING REGARD TO THE FINDING OF FACT RECORDED B Y THE LEARNED CIT(APPEALS) ITA NOS. 8825 TO 8828/MUM/2010 5 THAT THE INVESTMENT IN TAX FREE BONDS WAS MADE BY T HE ASSESSEE OUT OF ITS OWN FUNDS, WE FIND NO JUSTIFIABLE REASON TO INTERFERE W ITH THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) DELETING THE DISALLOWANCE MADE BY THE A0 ON ACCOUNT OF INTEREST U/S 14A AND UPHOLDING THE SAME, WE DISMISS THIS APPEAL FILED BY THE REVENUE. 6. AS NOTED BY THE TRIBUNAL, THE ASSESSEE IN A.Y. 2 003-04 HAD OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVE AMOUNTING TO RS. 703 CRORES WHICH WERE FAR EXCEEDING THE INVESTMENT OF RS. 10.50 CROR ES MADE BY THE ASSESSEE IN TAX FREE BONDS AND THERE WAS A PRESUMPTION AVAILABL E TO WITHDRAW IN FAVOUR OF THE ASSESSEE THAT THE INVESTMENT YIELDING TAX FREE RETURNS WAS MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS AS HELD BY THE HONBL E BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. ( 2009) 313 ITR 340 (BOM.). AS PER THE DETAILS PREPARED AND FURNISHED BEFORE US, T HE ASSESSEE HAD ITS OWN FUNDS OF RS. 1052.36 CRORES AND RS. 958.09 CRORES I N ASSESSMENT YEARS 2004- 05 & 2005-06 RESPECTIVELY WHICH WERE FAR EXCEEDING THE INVESTMENT OF RS. 13.42 CRORES AND RS. 15.67 CRORES MADE BY THE ASSES SEE IN TAX FREE BONDS DURING THE CORRESPONDING PERIOD. AS PER THE DECISI ON OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND PO WER LTD. (SUPRA), THE PRESUMPTION IS THAT THE INVESTMENT YIELDING TAX FRE E RETURNS WAS MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS AND THERE WAS NO JUST IFICATION IN MAKING THE DISALLOWANCE ON ACCOUNT OF INTEREST BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. CONSIDERING ALL THESE FACTS OF THE CAS E AND RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA) AS WELL AS THAT OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ITA NOS. 8825 TO 8828/MUM/2010 6 A.Y. 2003-04, WE DELETE THE DISALLOWANCE MADE BY TH E A.O. AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF INTEREST U/S 14A OF TH E ACT FOR BOTH THE YEARS UNDER CONSIDERATION. THE SOLITARY GROUND IN ASSESS EES APPEAL FOR A.Y. 2004- 05 AND GROUND NO. 1 OF ASSESSEES APPEAL FOR A.Y. 2 005-06 ARE ACCORDINGLY ALLOWED. 7. THE COMMON ISSUE RAISED IN GROUND NO. 2 OF ASSES SEES APPEAL FOR A.Y. 2005-06 AND IN THE SOLITARY GROUND RAISED IN THE AP PEALS FOR ASSESSMENT YEARS 2006-07 & 2007-08 RELATES TO THE DISALLOWANCE MADE BY THE A.O. AND SUSTAINED BY THE LD. CIT(A) ON ACCOUNT OF OTHER EXP ENSES U/S 14A OF THE ACT AS UNDER:- ASSESSMENT YEAR DISALLOWANCE MADE BY THE A.O. (RS.) DISALLOWANCE SUSTAINED BY THE LD CIT(A) (RS.) 2005-06 1,60,000/- 20,000/- 2006-07 1,13,000/- 1,13,000/- 2007-08 1,29,000/- 1,29,000/- 8. IN ITS COMPUTATION OF INCOME FOR A.Y. 2005-06, D ISALLOWANCE OF RS. 200/- WAS MADE BY THE ASSESSEE ON ACCOUNT OF OTHER EXPENS ES INCURRED IN RELATION TO THE EARNING OF TAX FREE INCOME OF RS. 79,87,330/-. HOWEVER, NO BASIS WHATSOEVER WAS GIVEN BY THE ASSESSEE IN SUPPORT OF THE SAME. ACCORDING TO THE A.O., OTHER EXPENSES ATTRIBUTABLE TO EARNING OF EXE MPT INCOME COULD REASONABLY BE ESTIMATED AT 2% OF SUCH INCOME AND HE NCE HE QUANTIFIED SUCH EXPENSE AT RS. 1,59,747/- AND MADE FURTHER DISALLOW ANCE OF RS. 1,59,547/- U/S 14A OF THE ACT ON ACCOUNT OF OTHER EXPENSES. O N APPEAL, THE LD. CIT(A) ITA NOS. 8825 TO 8828/MUM/2010 7 FOUND THAT THE ADHOC DISALLOWANCE OF 2% MADE BY THE A.O. OUT OF OTHER EXPENSES U/S 14 A WAS NOT REASONABLE KEEPING IN VIE W THAT THERE WERE ONLY THREE TRANSACTIONS INVOLVED IN RESPECT OF TAX FREE INCOME BY THE ASSESSEE AND SUCH INCOME WAS ACTUALLY ELECTRONICALLY TRANSFERRED TO THE BANK ACCOUNT OF THE ASSESSEE. HE ALSO FOUND THAT SIMILAR DISALLOWANCE MADE BY THE A.O. IN THE EARLIER YEAR WAS RESTRICTED BY HIS PREDECESSOR TO R S. 20,000/-. ACCORDINGLY, THE DISALLOWANCE MADE BY THE A.O. ON THIS ISSUE WAS RESTRICTED BY THE LD. CIT(A) TO RS. 20,000/- IN A.Y. 2005-06. IN ASSESSM ENT YEARS 2006-07 & 2007- 08, A SIMILAR DISALLOWANCE WAS MADE BY THE A.O. AT RS. 1.13 LACS AND RS. 1.29 LACS BEING 0.5% OF THE AVERAGE VALUE OF INVESTMENT MADE BY THE ASSESSEE IN THE TAX FREE SECURITIES RELYING ON RULE 8-D OF THE INC OME TAX RULES, 1962. ALTHOUGH THE LD. CIT(A) AGREED WITH THE STAND OF TH E ASSESSEE THAT RULE 8D HAVING PROSPECTIVE OPERATION WAS NOT APPLICABLE FOR ASSESSMENT YEARS 2006-07 & 2007-08 AS HELD BY THE HONBLE BOMBAY HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (2010) 328 ITR 81 (BOM.), HE HELD THAT THE METHOD GIVEN IN THE SAID RULE TO ESTIMATE/QUANTIFY THE EXPENSES INCURRED IN RELATION TO THE EARNING OF EXEMPT INCOME WAS QUITE FAIR AND REASONA BLE. ACCORDINGLY, THE DISALLOWANCE MADE BY THE A.O. IN ASSESSMENT YEARS 2 006-07 & 2007-08 BY FOLLOWING THE METHOD GIVEN IN RULE 8-D WAS CONFIRME D BY THE LD. CIT(A). 9. WE HAVE HEARD THE ARGUMENTS OF BOTH SIDES ON THI S ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS SUBMITT ED ON BEHALF OF THE ITA NOS. 8825 TO 8828/MUM/2010 8 ASSESSEE BEFORE THE AUTHORITIES BELOW AS WELL AS BE FORE US, THERE WERE ONLY FEW TRANSACTIONS INVOLVED IN RESPECT OF TAX FREE INCOME RECEIVED BY THE ASSESSEE AND THE SAID RECEIPTS WERE ALSO DIRECTLY CREDITED T O THE BANK ACCOUNT OF THE ASSESSEE. MOREOVER, THE QUANTUM OF INVESTMENT MADE BY THE ASSESSEE IN TAX FREE BONDS IN THE EARLIER YEAR HAD REMAINED MORE OR LESS STATIC IN THE YEARS UNDER CONSIDERATION AND FINALLY THE SAID INVESTMENT WAS SUBSTANTIALLY LIQUIDATED BY THE ASSESSEE IN A.Y. 2006-07. KEEPIN G IN VIEW ALL THESE RELEVANT FACTS OF THE MATTER, WE ARE OF THE VIEW THAT THE EX PENSES OF RS. 1,60,000/- ESTIMATED BY THE ASSESSEE AS ATTRIBUTABLE TO EARNIN G OF TAX FREE INCOME IN A.Y. 2005-06 ARE CERTAINLY ON THE HIGHER SIDE. AT THE S AME TIME, SUCH EXPENSES TAKEN BY THE ASSESSEE AT RS. 200/- ARE ALSO WITHOUT BASIS AND THE QUANTUM THEREOF IS VERY LOW. IN THESE CIRCUMSTANCES, THE L D. CIT(A), IN OUR OPINION, IS QUITE FAIR AND REASONABLE TO ESTIMATE SUCH EXPENSES AT RS. 20,000/- IN A.Y. 2005-06. AS REGARDS ASSESSMENT YEARS 2006-07 & 200 7-08, THE EXPENSES ATTRIBUTABLE TO EARNING OF INCOME HAVE BEEN ESTIMAT ED BY THE AUTHORITIES BELOW AT 0.5% OF THE INVESTMENT BY ADOPTING THE METHOD PR ESCRIBED IN RULE 8-D WHICH IS NOT APPLICABLE TO ASSESSMENT YEARS 2006-07 & 2007-08. MOREOVER THE FACTS INVOLVED IN ASSESSMENT YEARS 2006-07 & 20 07-08 ARE ALMOST SIMILAR TO A.Y. 2005-06. WE ARE, THEREFORE, OF THE VIEW TH AT IT WOULD BE FAIR AND REASONABLE TO ESTIMATE SUCH EXPENSES LIABLE TO BE D ISALLOWED U/S 14A OF THE ACT AT RS. 25,000/- AND RS. 30,000/- FOR ASSESSMENT YEARS 2006-07 & 2007- 08 RESPECTIVELY. ACCORDINGLY, THE IMPUGNED ORDER O F THE LD. CIT(A) ON THIS ISSUE ITA NOS. 8825 TO 8828/MUM/2010 9 FOR A.Y. 2005-06 IS UPHELD AND GROUND NO. 2 OF THE ASSESSEES APPEAL FOR THAT YEAR IS DISMISSED. THE DISALLOWANCE MADE BY THE A. O. AND CONFIRMED BY THE LD. CIT(A) AT RS. 1.13 LACS AND RS. 1.29 LACS FOR A SSESSMENT YEARS 2006-07 & 2007-08 HOWEVER, IS RESTRICTED TO RS. 25,000/- AND RS. 30,000/- RESPECTIVELY AND ACCORDINGLY THE SOLITARY GROUND RAISED IN THE A PPEALS OF THE ASSESSEE FOR ASSESSMENT YEARS 2006-07 & 2007-08 IS PARTLY ALLOWE D. 10. IN THE RESULT, APPEAL OF THE ASSESSEE FOR A.Y. 2004-05 IS ALLOWED AND THAT FOR ASSESSMENT YEARS 2005-06, 2006-07 & 2007-08 ARE PARTLY ALLOWED. ORDER PRONOUNCED ON 08-03-3013. SD/- SD/- ( VIJAY PAL RAO ) ( P.M. JAGTAP ) & !'# / JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; @'( DATED 08-03-2013. $.&(.!./ R.K. , SR. PS ' '' '3 33 3 / // / - -- -& && &A AA A% %% % B BB B%* %*%* %* / COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. C() / THE CIT(A)- 4. C / CIT 5. %$F -&&( , , / DR, ITAT, MUMBAI 6. G) H / GUARD FILE. ' '' '3 33 3( (( ( ! !! ! / BY ORDER, !.% -& //TRUE COPY// I II I / // /! !! !J JJ J ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI