Income Tax Appellate Tribunal - Ahmedabad
Gujarat State Financial Services ... vs The Dy.Cit.,Circle-2(1)(1),, ... on 3 October, 2018
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'ch' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" B " BENCH, AHMEDABAD
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BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER
And SMT MADHUMITA ROY, JUDICIAL MEMBER
आयकर अपील सं./I.T.A.
No.708/Ahd/2016
( नधा रण वष / Assessment Year : 2012-13)
Gujarat State Financial बनाम/ DCIT,
Services Ltd., Vs. Circle-2(1)(1)
rd
Wing ''B", 3 Floor, Khanji Navjivan Building,
Bhavan, 132 Ft Ring Road, Ahmedabad-380 014.
Near University Ground,
Vastrapur,
Ahmedabad-380 052.
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAACG 5581 B
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ ओर से/ Appellant by : Shri Sanjay R. Shah, A.R.
यथ क ओर से/Respondent by: Shri Mudit Nagpal, Sr. D.R.
ु वाई क तार ख/
सन Date of Heari ng 18/07/2018
घोषणा क तार ख /Date of Pronounce ment 03/10/2018
आदे श / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)-7, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-7/299/15-16 dated 09.12.2015 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 04.12.2014 relevant to Assessment Year (AY) 2012-13.
ITA No.708/Ahd/2016Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -2-
2. The grounds of appeal raised by the assessee are as under:-
"Your appellant being aggrieved by the order passed by the Learned Commissioner of Income-tax (Appeals)-7, Ahmedabad, (hereinafter referred to "learned CIT(A)"), presents this appeal against the same on the following grounds of appeal, which are without prejudice to each other:
1. The order passed by the learned CIT(A) is erroneous and contrary to the provisions of law & facts of the case and therefore needs to be suitably modified. It is submitted that it be so held now.
2. The learned C1T(A) erred in law and on facts in upholding the action of the A.O. in applying Rule 8D of the Income Tax Rules, 1962 and thereby confirming additional disallowance of Rs.
65,26,522/- under section 14A of the Act. In the facts & circumstances of the case it is submitted that no disallowance u/s 14A is required to be made. It is submitted that it be so held now. 2.1 The learned CIT(A) erred in law in confirming the computation of disallowance of interest of Rs. 61,50,642/- and indirect administrative expenditure of Rs.3,75,880/-" by the A.O. as per the method prescribed in Rule 8D r.w.s. 14A(2) of the Act despite the fact that the A.O. had not recorded any satisfaction as required by Section 14A of the Act, regarding correctness of disallowance worked by the appellant in the return of income. It is submitted that it be so held now.
2.2 The learned CIT(A) erred on facts and in law in holding that the A.O. has recorded satisfaction by discussing the statutory and legal position in respect of the disallowance under Section 14A of the Act. It is submitted that mere discussing the statutory and legal position and stating that the disallowance computed by the appellant does not give correct picture of the claim of expenses incurred does not amount to recording of satisfaction by the A.O. It is submitted that it be so held now.
2.3 The learned CIT(A) erred in law in upholding the action of the A.O. by applying Rule 8D of Rules read with section 14A of the Act for computing disallowance of proportionate interest of Rs.61,50,642/- even when:
i. There is no net interest out go and on the contrary' there is net receipt of interest income.
ii. Without establishing nexus between the borrowed funds and investment in exempt income earning securities coupled with the ITA No.708/Ahd/2016 Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -3- fact that appellant had sufficient own funds for making such investment.
iii. Without appreciating the fact that the interest expenditure was incurred by the appellant for the business of financing carried on by the appellant in accordance with the mandate provided by the Government of Gujarat, income from which was taxable.
It is submitted that it be so held now.
2.4 Without prejudice to the above, the learned CIT(A) erred in confirming the action of the A.O. disallowing expenditure under Section 14A of the Act without considering the fact that the investment made by the appellant company in its subsidiary company should be excluded while computing the amount of disallowance under section 14A read with rule 8D owing to the fact that such investment has been made on account of strategic considerations and business expediency and not for purpose of earning exempt income. It is submitted that it be so held now.
2.5 The A.O. erred in making separate disallowance of Rs.2,19,585/-
(being amount suo-moto disallowed by the appellant) in his computation of disallowance under Section 14A of the Act read with Rule 8D of the Rules and not-granting set-off of the same against the disallowance of Rs.3,75,880/- worked out by him towards other expenses under Rule 8D of the Rules. The learned CIT(A) erred in confirming the same. It is submitted that it be so held now.
2.6 Without prejudice to the above, the learned CIT(A) erred in not restricting the amount of disallowance under Section 14A of the Act read with Rule 8D of the Rules to the extent of the exempt income amounting to Rs.42,23,519/- as claimed in the return ofincome.lt is submitted that it be so held now.
Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal."
ITA No.708/Ahd/2016Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -4-
3. The grievance of the assessee in ground no. 2 is that Ld CIT(A) erred in confirming the disallowance made by the AO u/s 14A r.w.r. 8D for Rs. 65,26,522/- only.
4. Briefly stated facts are that the assessee is a limited company and engaged in the business of providing financial assistance to the enterprises of Gujarat Government. The assessee is also registered as NBFC with RBI. The assessee during the year has earned dividend income of Rs. 42,23,519/- which was claimed as exempted u/s 10(34)/10(35) of the Act. The assessee in respect of such income has made disallowance of Rs. 2,19,585/- only. However, the AO was of the view that the disallowance needs to be made as per the provisions of Section 14A r.w.r. 8D of Income Tax Rule 1963. Accordingly, a show- cause notice was issued to the assessee for making the disallowance as per the provision under section 14A r.w.r. 8D of the Income Tax Rule. The assessee in compliance thereto inter alia submitted that its own fund exceeds the amount of investment. Therefore no disallowance on account of interest expenses can be made in view of the judgment of Hon'ble Gujarat High Court in the case of Anjani Synthetics Ltd. in Tax Appeal No.2096 of 2010. The assessee also relied on the judgment of Hon'ble Gujarat High Court in the case of Lubi Submersibles Ltd. in Tax Appeal No.868 of 2010. Similarly, the assessee also relied on the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. reported in 313 ITR 340.
ITA No.708/Ahd/2016Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -5- 4.1 The assessee in support of his contention also furnished the detail of its own capital vis-à-vis investment made in tax free securities. The necessary details of the own fund and the investment stands as under:
Particulars Rs. (in crores)
Share Capital and Free Reserves 418.35
Provision against standard assets 16.50
Total Funds available for making 434.85
investment in tax free securities
3. Further the details of investment in tax free income yielding securities as on 31/03/2012 are summarized hereunder:
Particulars Rs (In crores)
In fully paid equity shares 1.63
In subsidiary company 5.00
Units of UTI balanced fund 0.83
Total investment 7.46
4.2 The assessee about the administration expenses submitted that it has not incurred any expenses for the earning of such dividend income. However, the assessee suo moto disallowed 1% of the total operating expenses which works out at Rs. 2,19,585/- only (1% of 2,19,58,496/-).
4.3 In view of above, the assessee submitted that no other disallowance can be made u/s 14A r.w.r. 8D of Income Tax Rule. However, the AO disregarded the contention of the assessee and invoked the provision of Section 14A r.w.r. 8D of the Income Tax Rule for the purpose of disallowance which works out as under:
Sr. Particulars Amount
No.
ITA No.708/Ahd/2016
Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -6-
1. Direct expenses 2,19,585
2. Interest expenses 61,50,642
3. Administrative expenses 3,75,880 Total 67,46,107 Amount already disallowed -2,19,585 Net amount to be disallowed 65,26,522 In view of above, the AO made the disallowance of Rs.65,26,522/- under the provisions of Section 14A r.w.r. 8D and added back to the total income of the assessee.
5. Aggrieved, assessee preferred an appeal to Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that its own fund exceeds the amount of investment therefore no disallowance of interest can be made.
5.1 Similarly, the assessee submitted about the administration expenses that it has already disallowed 1% of total operating expenses in view of the order of ITAT pertaining to the A.Y. 2001-02 in its own case. However, Ld. CIT(A) disregarded the contentions of the assessee and confirmed the order of AO by observing as under:
"5.2 I have considered the assessment order and the submissions made by the appellant. The A.O has held that the appellant was not able to explain the nexus of interest free funds with the investment made by it. On the other hand, it was submitted by the appellant that it had sufficient funds of its own which far exceeded the investment in tax free income and hence it could not be said that borrowed funds had been used for purpose of making these investments It is seen that the appellant's contention that the AO had not recorded his satisfaction about why he was not accepting the disallowance and calculation made by the appellant, is misplaced. A perusal of the assessment order shows ITA No.708/Ahd/2016 Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -7- that the AO has discussed the statutory and legal position in this respect in detail and has then stated that the appellant's argument on this issue is not acceptable, since the same does not give a correct picture of the claim of expenditure in respect of expenses related to earning exempt income. Moreover, it is not possible that no administrative and other expenses would have been incurred to manage the investment portfolio. Besides, it is also not possible to keep funds segregated and show with certainty that only own funds were used for investment.
In addition, it is seen that the addition u/s 14A r w Rule 8D has under
identical circumstances been made in the appellant's case in earlier years as well, and my learned predecessors for AY's 2008-09, 2009-10, 10-11 and 11-12, have, after detailed analysis and discussion, Confirmed the addition made by the A.O on this account. In view of the same, the dlsallowance u/s.14A is upheld. This ground of appeal is dismissed."
5.2 Being aggrieved by the order of Ld. CIT(A) assessee is in second appeal before us.
6. The Ld. AR before us filed a paper book which is running from pages 1-103 and reiterated the submission as made before the Ld. CIT(A).
6.1 The Ld AR for the assessee in respect of administrative expenses further submitted that the AO in his assessment order has disallowed administrative expenses for Rs. 3,75,880/- only. Thus, the disallowances cannot exceed more than the said sum. The ld. AR for the assessee further submitted that the Hon'ble ITAT cannot improve the case of the AO.
ITA No.708/Ahd/2016Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -8- 6.2 Without prejudice to the above, the Ld. AR for the assessee also submitted that at the most the disallowance can be made up to Rs.3,75,880/- as made by the AO in his assessment order.
7. On the other hand, Ld DR about the interest expenses relied on the order of lower authorities.
7.1 The Ld DR in respect of administrative expenses submitted that the Hon'ble ITAT in own case of the assessee in ITA No.1478/Ahd/2013 pertaining to the A.Y. 2009-10 has made the disallowance @10% of administrative expenses incurred in relation to such income. The relevant extract of the order is reproduced below:
"13. In so far 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."
8. We have heard the rival contentions and perused the materials available on record. As regards the disallowance of interest expenses, we find that the own fund of the assessee exceeds the amount of investment. Therefore no disallowance on account of interest expenses can be made. In this regard, we find support and guidance from the order of this Tribunal in the own case of the assessee in ITA No.1478/Ahd/2013 ITA No.708/Ahd/2016 Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13 -9- where the addition on account of interest expenses was deleted by holding as under:
"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 1TAT 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 die 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 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 arc 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 ITA No.708/Ahd/2016 Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13
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considered opinion, facts of the case do not warrant for any disallowance on account of interest expenditure."
In view of above, we hold that the disallowance of interest expenses in the given facts and circumstances are not warranted.
9. Coming to administrative expenses, we note that the AO in his assessment order has made the disallowances of Rs. 3,75,880/- only. Therefore, in our considered view the disallowance on account of administrative expenses cannot exceed the said amount. It is because, the ITAT has no power to enhance the income computed by the AO or improve the case of the AO. In this regard, we find support and guidance from the judgment of Hon'ble Madras High Court in the case of Sanmar Speciality Chemicals Ltd. Vs. ITO reported in 93 taxmann.com 330 wherein it was held as under:
"The operative portion of the judgment reads as follows:
"6.In the case of Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232 (SC) this Court has held that under s.33(4) of the IT Act, 1922 [equivalent to s.254(1) of the 1961 Act]. The Tribunal was not authorized to take back the benefit granted to the assessee by the AO.
The Tribunal has no power to enhance the assessment. Applying the ratio of the said judgment to the present case, we are of the view that in this case, the AO had granted depreciation in respect of 42,000 bottles out of the total number of bottles (5,46,000), by reason of the impugned judgment. That benefit is sought to be taken away by the Department, which is not permissible in law. This is the infirmity in the impugned judgment of the High Court and the Tribunal."
5. The decision in the case of MCORP Global (P) Ltd., was followed by the Division Bench of the High Court of Gujarat in Fidelity Shares & Securities Ltd. v. Dy. CIT [2017] 82 taxmann.com 108/390 ITR 267, wherein it was held that the Tribunal has no power under the Income Tax Act to enhance the assessment in appeal in view of the statutory ITA No.708/Ahd/2016 Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13
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provisions. Further it was held that the benefit, which was sought to be taken away by the Department, was not permissible in law and this is the infirmity in the judgment of the Tribunal as the Tribunal has no power to enhance the assessment in appeal.
6. Considering the facts and circumstances of the case, we find that there is no error in the order passed by the Tribunal in remanding the matter for fresh consideration to the Assessing Officer. But, however, the learned counsel for the appellant pointed out that the observations and directions issued by the Tribunal are incorrect. In any event, we have indicated in the preceding paragraphs that the Tribunal has no power under the Income Tax Act to enhance the assessment in an appeal. Equally, it cannot be done on an order of remand being passed by the Tribunal to the Assessing Officer. Therefore, we opine that it is sufficient to clarify the legal position as held by the Hon'ble Supreme Court in Hukumchand Mills Ltd. case (supra) and in MCORP Global (P) Ltd. case (supra) followed by the High Court of Gujarat in Fidelity Shares & Security Ltd.'s case (supra). The Assessing Officer, while reconsidering the matter on remand, should bear the above legal principle in mind and the assessee cannot be denied whatever benefit he has granted in the Assessment Order dated 28.02.2003."
9.1 In addition to the above, we also note that Hon'ble ITAT in the own case of the assessee as discussed above has made the disallowance @10% of the total administrative expenditure. Accordingly, it was argued by the ld. DR that the disallowances should be made in the year under consideration @10% of total administrative expenditure. However, in our view, the same basis cannot be adopted in the year under consideration. If we do so, it will result in the enhancement of the disallowance as made by the AO for which the Tribunal has no power. In the case relied upon by the Ld DR, we note that the total disallowance was made by the AO as per Rule 8D for Rs. 17.54 crores. Thus, the disallowance confirmed by the Hon'ble ITAT @10% of the total ITA No.708/Ahd/2016 Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13
- 12 -
administrative expenditure was within the limit of the disallowance as made by the AO in his assessment order. Therefore, we are reluctant to take any guidance in the given facts and circumstances from the order of Tribunal in the own case of the assessee in ITA No.1478/Ahd/2013 pertaining to the assessment year 2009-10.
In view of above, we confirmed the disallowance on account of administrative expenses as per Rule 8D as worked out by the AO i.e. Rs. 3,75,880/-.
9.2 We also note that the AO has treated the sum disallowed by the assessee for Rs. 2,19,585.00 in the income tax return as direct expenses incurred in relation to dividend income under rule 8D(2)(i) of Income Tax Rule. However the action of the AO is not based on any material suggesting that the amount of Rs. 2,19,585.00 is the direct expenditure incurred by the assessee in relation exempted income as specified under rule 8D(2)(i) of Income Tax Rules. Thus we direct to delete the same. Thus, the ground of appal of the assessee is partly allowed.
10. In the result the appeal of the assessee is partly allowed.
This Order pronounced in Open Court on 03/10/2018
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(MADHUMITA ROY) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
ITA No.708/Ahd/2016
Gujarat State Financial Services Ltd. vs DCIT A.Y. 2012-13
- 13 -
Ahmedabad; Dated 03/10/2018 Priti Yadav, Sr.PS आदे श क त"ल#प अ$े#षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं'धत आयकर आयु)त / Concerned CIT
4. आयकर आयु)त(अपील) / The CIT(A)-7, Ahmedabad.
5. ,वभागीय /त/न'ध, आयकर अपील य अ'धकरण, अहमदाबाद / DR, ITAT, Ahmedabad.
6. गाड4 फाईल / Guard file.
आदे शानुसार/BY ORDER, स या,पत /त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad