Income Tax Appellate Tribunal - Ahmedabad
Gujarat State Financial Services Ltd., ... vs The Acit, Circle-4, Ahmedabad on 6 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "B" BENCH
(BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
& SHRI S.S. GODARA, JUDICIAL MEMBER)
ITA. Nos: 1478 & 1550/AHD/2013
(Assessment Year: 2009-10)
Gujarat State Financial V/S The ACIT, Circle-4
rd
Services Ltd. Wing "B", 3 Ahmedabad
Floor, Khanij Bhavan, 132
Ft Ring Road, Near
University Ground,
Vastrapur, Ahmedabad-
380052
Gujarat State Financial
The DCIT, Circle-4 V/S Services Ltd. Wing "B", 3rd
Ahmedabad Floor, Khanij Bhavan, 132
Ft Ring Road, Near
University Ground,
Vastrapur, Ahmedabad-
380052
(Appellant) (Respondent)
ITA. Nos: 2456 & 1023/AHD/2014
(Assessment Year: 2008-09)
Gujarat State Financial V/S The ACIT, Circle-4
rd
Services Ltd. Wing "B", 3 Ahmedabad
Floor, Khanij Bhavan, 132
Ft Ring Road, Near
University Ground,
Vastrapur, Ahmedabad-
380052
Gujarat State Financial
The DCIT, Circle-4 V/S Services Ltd. Wing "B", 3rd
2 ITA Nos. 1478 & 1550/Ahd/2013 and Ors.
. A.Ys. 2008-09, 2009-10 & 2010-11
Ahmedabad Floor, Khanij Bhavan, 132
Ft Ring Road, Near
University Ground,
Vastrapur, Ahmedabad-
380052
(Appellant) (Respondent)
ITA. No: 2360/AHD/2013
(Assessment Year: 2010-11)
Gujarat State Financial V/S The ACIT, Circle-4
rd
Services Ltd. Wing "B", 3 Ahmedabad
Floor, Khanij Bhavan, 132
Ft Ring Road, Near
University Ground,
Vastrapur, Ahmedabad-
380052
(Appellant) (Respondent)
PAN: AAACG5581B
Appellant by : Shri Sanjay R. Shah, AR
Respondent by : Shri Surendra Kumar, CIT/DR &
Shri Mudit Nagpal, Sr. D.R.
(आदे श)/ORDER
Date of hearing : 04 -04-2018
Date of Pronouncement : 06 -04-2018
PER N.K. BILLAIYA, ACCOUNTANT MEMBER
1. ITA Nos. 1478 & 1550/Ahd/2013 are cross appeals by the Assessee and the Revenue for A.Y. 2009-10, ITA Nos. 2456 & 1023/Ahd/2014 are cross appeals by the Assessee and the Revenue for A.Y. 2008-09 and ITA No. 2360/Ahd/2013 is the appeal by the Assessee for A.Y. 2010-11.
3 ITA Nos. 1478 & 1550/Ahd/2013 and Ors.. A.Ys. 2008-09, 2009-10 & 2010-11
2. Since the common issues are involved in all these appeals, they were heard together and are disposed of by this common order for the sake of convenience and brevity.
3. Representatives of both sides agreed that facts of A.Y. 2009-10 may be considered for the disposal of the impugned appeals. On such concession, we first take up ITA No. 1478/Ahd/2013 Assessee's appeal for A.Y. 2009-10.
4. The first grievance of the assessee relates to the disallowance made u/s. 14A of the Act read with Rule 8D amounting to Rs. 17.54 crores .
5. During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has earned interest on bonds and Debentures amounting to Rs. 3.99 crores and dividend of Rs. 60.72 lacs which were claimed as exempt u/s. 10(15)(iv)/10(23G) of the Act. The A.O. found that the assessee has made disallowance of Rs. 3,49,242/- u/s. 14A of the Act which was 1% of the total administrative expenses. The A.O. was of the firm belief that the disallowance made by the assessee is not in line with the provisions of Section 14A read with Rule 8D of the Act. Therefore, the Assessee was asked to explain why disallowance should not be made as per the provisions of Section 14A read with Rule 8D of the Act.
6. The assessee explained that the investment in tax free securities has been made from own funds and that no borrowed funds have been utilized for the purpose of making of such investment. It was further explained that the interest inflow was Rs. 672.98 crores and whereas interest outflow was Rs. 542.80 crores. It was strongly contended that since there is a net positive 4 ITA Nos. 1478 & 1550/Ahd/2013 and Ors. . A.Ys. 2008-09, 2009-10 & 2010-11 inflow, therefore, there is no reason why disallowance should be made u/s. 14A of the Act. It was further explained that the assessee has not incurred any interest expenditure for the purpose of earning tax exempt income. The entire borrowings were towards the business of financing and the net income from which has been offered to tax as business income.
7. The contentions of the assessee did not find any favour with the A.O. who proceeded by computing the disallowance u/s. 14a as per the formula given in Rule 8D and computed the disallowance at Rs. 17.54 crores.
8. Assessee carried the matter before the ld. CIT(A) but without any success.
9. Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. Per contra, the ld. D.R. strongly supported the findings of the revenue authorities and placed strong reliance on the judgment of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. 91 Taxmann.com 154.
10.We have given a thoughtful consideration to the orders of the authorities below and with the assistance of the ld. counsel, we have considered the relevant documentary evidences brought on record in the form of a paper book in the light of Rule 18(6) of the ITAT Rules. There is no dispute that the investments have been made in earlier years and not during the year under consideration as can be seen from the exhibits 20 & 21 of the paper book. It is also true that the assessee is having sufficient interest free funds to cover up the investments. It is equally true that the interest income of the assessee is more than the interest expenditure. The ratio laid down by the Hon'ble Bombay High Court in the 5 ITA Nos. 1478 & 1550/Ahd/2013 and Ors. . A.Ys. 2008-09, 2009-10 & 2010-11 case of Reliance Utilities and Power Ltd. 313 ITR 340 squarely apply on the facts of the case in hand. The A.O. has not demonstrated any nexus between the borrowed funds and the investments made by the assessee and as mentioned elsewhere, all the investments are brought forward balances from earlier years.
11. The assessee is a non banking financial company registered with Reserve Bank of India and is 100% a Government of Gujarat Company and is engaged in the business of providing financial assistance to Government of Gujarat Enterprises. Company's main source of funds are in the form of Inter Corporate Deposits from Government of Gujarat controlled enterprises. The Company also performs Treasury management of surplus funds of Government Board/Corporations and other institutions.
12.As per the directions of the Government of Gujarat, the assessee has parked its surplus funds in Government securities and bonds in earlier years. We find that the A.O. has mechanically computed the disallowance u/s. 14A as per Rule 8D without establishing any nexus between the borrowed funds and utilization thereof in making tax exempt investment. In our considered opinion, common expenses which are to the allocated in terms of the formula under rule 8D will be only such interest expenses which are directly attributable to borrowings specifically used for tax free incomes. Moreover, the interest income earned by the assessee is far more in excess of the interest expenditure and the interest free funds are sufficient to cover up investments and the investments are brought forward from earlier financial years. In our considered opinion, facts of the case do not warrant for any disallowance on account of interest expenditure.
6 ITA Nos. 1478 & 1550/Ahd/2013 and Ors.. A.Ys. 2008-09, 2009-10 & 2010-11
13.Insofar as the administrative expenses are concerned, there is no dispute that certain administrative expenses have to be apportioned towards earning of tax free income. The disallowance of Rs. 349242/- made by the assessee will not suffice. We find that the total administrative expenses claimed in the statement of total income are at Rs. 3.50 crores. In our considered opinion, at least 10% of such expenditure should be apportioned towards earning of exempt income. Therefore, a disallowance of Rs. 35 lacs should meet the ends of justice. We accordingly direct the A.O. to restrict the disallowance at Rs. 35 lacs. This ground alongwith all its sub ground and the additional ground are treated as partly allowed.
14.The next ground relates to the non granting of deduction of Rs. 30 crores contributed by the assessee to Gujarat Socio Economic Development Society (GSEDS) u/s. 37 r.w.s. 28 of the Act.
15.Briefly stated the underlying facts in this issue are that during the year under consideration, the assessee has given contribution of Rs. 30 crores to GSEDS. The assessee disallowed the amount in the computation of income but by way of a note, the assessee has claimed deduction of Rs. 30 crores u/s. 37 on the ground of commercial expediency. It was strongly contended that the contribution has been made in pursuance of the G.R. of the Government of Gujarat requesting each state Public Sector Enterprise to contribute 30% of its profit for such upliftment of weaker section of the society.
16.The claim of the assessee was denied by the A.O. on the ground that the assessee is a separate entity from the Finance Department of Government of 7 ITA Nos. 1478 & 1550/Ahd/2013 and Ors. . A.Ys. 2008-09, 2009-10 & 2010-11 Gujarat and the scope of business cannot be enlarged to an extent where the expenditure is incurred without commensurate benefit to its business.
17.The assessee strongly agitated the matter before the ld. CIT(A) but without any success.
18.Before us, the ld. counsel for the assessee vehemently stated that the assessee received its entire business from the state PSUs who are bound to follow their directive of the Finance Department while deputing surplus funds and are bound to deposit such funds with the assessee company.
19.It was brought to our notice that the assessee is bound to follow the directions of the Government of Gujarat and on such directions, the assessee had made the contribution of Rs. 30 crores and therefore the claim should be allowed on the grounds of commercial expediency. The ld. counsel drew our attention to the various instructions issued by the Government of Gujarat. Per contra, the ld. D.R. strongly supported the findings of the lower authorities.
20.We have carefully considered the orders of the authorities below. It is true that as per directions of the Government of Gujarat, the assessee had made the contribution of Rs. 30 crores. However, in our considered opinion, the directions of Gujarat cannot override the provisions of the Income Tax Act. We find that the assessee has contributed 30% of its profit which is akin to appropriation of profit and this 30% cannot be construed as charge against profit.
21.The contribution made by the assessee to GSEDS is eligible for deduction u/s. 80G of the Act and that has been allowed by the A.O. By making the 8 ITA Nos. 1478 & 1550/Ahd/2013 and Ors. . A.Ys. 2008-09, 2009-10 & 2010-11 contribution, the assessee has only followed the dictat of the Government of Gujarat but nowhere has demonstrated the nexus between the contribution and the commercial expediency vis-à-vis benefits to the assessee. The contribution so made is eligible for deduction u/s. 80G and therefore in our understanding of the facts, the claim of entire contribution as deduction u/s. 37 of the Act is not tenable.
22.The assessee has relied upon various judicial decisions. We have considered those judicial decisions carefully. In none of the decisions relied upon by the assessee, the payment was eligible for deduction u/s. 80G of the Act. Therefore, the reliance placed by the assessee is misplaced.
23.Considering the facts in totality, this ground is dismissed.
24.In the result, the appeal filed by the Assessee is partly allowed.
Coming to the appeal of the Revenue in ITA No. 1550/Ahd/2013 for A.Y. 2009-10
25.The first ground relates to the deletion of the disallowance of Rs. 82.74 lacs being expenses incurred towards renovation and modernization of Finance Department, Government of Gujarat.
26. During the course of the scrutiny assessment proceedings, the A.O. found that the assessee has claimed expenditure of Rs. 82,74,452/- towards Modernization on behalf of Government of Gujarat. It was explained that the assessee is 9 ITA Nos. 1478 & 1550/Ahd/2013 and Ors. . A.Ys. 2008-09, 2009-10 & 2010-11 100% Government of Gujarat Company and have to work under supervision and control of Finance Department of Govt. of Gujarat. It was explained that the Finance Department has directed all the State Govt. Corporations to part their surplus with the assessee. It was further explained that the Managing Director, Jt. Managing Director and Sr. Vice President of the assessee occupy and operate from the Finance Department of Govt. of Gujarat. The assessee has incurred the expenditure on the modernization of the office of the Finance Department of Government of Gujarat and therefore such expenditure should be allowed. The contentions of the assessee did not find any favour with the A.O. who disallowed the entire expenditure incurred on the modernization/renovation of Finance Department.
27.Assessee carried the matter before the ld. CIT(A) and reiterated its claim of expenditure on the ground of commercial expediency. The ld. CIT(A) was convinced with the claim of expenditure and directed the A.O. to delete the addition. The relevant findings of the ld. CIT(A) read as under:-
7.4 I have considered the facts of the case, the order of the Assessing officer and the submissions of the appellant. The claim of the appellant is that of allowability of deduction under section 37 of the IT Act being revenue expenditure incurred out of commercial expediency. The appellant has demonstrated that there is an element of commercial expediency in view of the fact that he entire business of the appellant, from which substantial taxable income is generated is due to the mandate issued by - the Finance Department of the Government of Gujarat requiring the Public Sector Enterprises (PSE) owned and controlled by it to deposit surplus moneys with the appellant. Accordingly, the expenditure incurred on renovation and modernization of Finance Department Building was for the benefit of the business since it ensured continued cordial relations with the Finance Department at whose instance appellant was able to get deposits from the state PSEs and at whose instance the expenditure was incurred by the appellant for renovation and modernization of Finance Department Building.
Further, the appellant has also demonstrated that renovation and modernization 10 ITA Nos. 1478 & 1550/Ahd/2013 and Ors. . A.Ys. 2008-09, 2009-10 & 2010-11 of Finance Department building would enhance image of Finance Department which would benefit the appellant's business which is positively benefited from the image of the Finance Department and its decisions. Further, the property in the furniture and fittings, etc. vests in the Finance Department as per correspondence from the Finance Department dated 25/01/2007 (page no. 65 of the paper book). Accordingly, no new asset owned by the appellant has come into existence nor has the appellant received any enduring advantage due to incurring of aforesaid expenditure. In view of the above, I am in agreement with the submissions of the appellant that the expenditure on account of renovation and modernization of Finance Department Building, which was not owned by the appellant, was incurred by the appellant on account of commercial expediency and was allowable under section 37 of the IT Act as revenue expenditure. Accordingly, the disallowance of Rs. 82,74,451 made by the Assessing officer in this regard is directed to be deleted.
28.Before us, the ld. D.R. strongly supported the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.
29. We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the entire business of the assessee comes from the Finance Department of the Government of Gujarat. It is also not in dispute that the M.D. Jt. M.D. and the Vice President of the assessee occupy office in the premises of the Finance Department of Govt. of Gujarat. In our considered opinion, the expenditure on account of renovation and modernization of Finance Department building was incurred by the assessee on account of commercial expediency and is therefore allowable u/s. 37 of the Act which has been rightly directed to be allowed by the First Appellate Authority. Therefore no interference is called for. Ground no. 1 is dismissed.
11 ITA Nos. 1478 & 1550/Ahd/2013 and Ors.. A.Ys. 2008-09, 2009-10 & 2010-11
30. Ground no. 2 relates to the deletion of the disallowance of depreciation on assets purchased and lease back.
31. An identical issue was considered by the Tribunal in assessee's own case in A.Y. 2005-06 wherein the Tribunal followed the decision of the Co-ordinate Bench in ITA No. 2763/Ahd/2007 for A.Y. 2004-05. We find that the First Appellate Authority while giving relief to the assessee on this issue has followed the decision of the Co-ordinate Bench in earlier assessment year. Therefore, no interference is called for. Ground no. 2 is also dismissed.
32. In the result, the appeal filed by the Revenue is dismissed.
ITA No. 2456/Ahd/2014 Assessee's appeal for A.Y. 2008-0933. The only grievance relates to the disallowance made u/s. 14A read with Rule 8D of the Act.
34. A similar issue has been considered by us in ITA No. 1478/Ahd/2013 qua ground no.2 with its sub ground and additional ground of that appeal. For our detailed discussion therein, we direct the A.O. to restrict the disallowance to 10% of the administrative expenses. The assessee will get part relief.
ITA No. 1023/Ahd/2014 Revenue's appeal for A.Y. 2008-0935. Ground no. 1 relates to the deletion of the disallowance made on expenses of Rs. 1.40 crores towards renovation and modernization.
12 ITA Nos. 1478 & 1550/Ahd/2013 and Ors.. A.Ys. 2008-09, 2009-10 & 2010-11
36. An identical issue has been considered by us in ITA No. 1550/Ahd/2013 qua ground no. 1 of that appeal. For our detailed discussion therein, this ground is dismissed.
37. Ground no. 2 relates to the deletion of the disallowance of depreciation on assets purchase and lease back.
38. An identical issue has been considered by us in ITA No. 1550/Ahd/2013 qua ground no. 2 of that appeal. For our detailed discussion therein, ground no. 2 is dismissed.
ITA No. 2360/Ahd/2013 Assessee's appeal for A.Y. 2010-1139. The only grievance of the assessee relates to the disallowance made u/s. 14A read with Rule 8D of the Act.
40. A similar issue has been considered by us in ITA No. 1478/Ahd/2013 vide ground no. 2 with its sub ground and additional ground. For our detailed discussion therein, we direct the A.O. to restrict the disallowance to 10% of the administrative expenses. The assessee will get part relief.
Order pronounced in Open Court on 06- 04- 2018
Sd/- Sd/-
(S. S. GODARA) (N. K. BILLAIYA)
JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER
Ahmedabad: Dated 06/04/2018
Rajesh
Copy of the Order forwarded to:-