Income Tax Appellate Tribunal - Mumbai
Saurashtra Fuels P.Ltd, Mumbai vs Assessee on 6 June, 2016
आयकर अपील
य अ धकरण "E" यायपीठ मंब
ु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI
BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND
SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A. No. 727 3-74/Mum/2012
( नधा रण वष / Assessment Year : 2007-08 & 2009-10)
Saurashtra Fue ls Private बनाम/ Deputy Commissioner of
Limited, C/o M/s Kucheria & Income Tax, circle 3(3) ,
v.
Associates, 59, Jolly Maker 6 t h Floor, Aayakar
No.-2 Nariman Point, Bhawan, Mumbai-400 020
Mumbai-400021
थायी ले खा सं . /PAN : AAACS7271G
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Assessee by Shri B.V.Jhaveri
Revenue by : Shri Ritesh Mishra(D.R.)
ु वाई क तार ख / Date of Hearing
सन : 08-03-2016
घोषणा क तार ख /Date of Pronouncement : 06-06-2016
आदे श / O R D E R
PER RAMIT KOCHAR, Accountant Member
These two appeals, filed by the assessee company, being ITA No. 7273/Mum/2012 and ITA no. 7274/Mum/2012, are directed against two separate appellate orders both dated 26-09-2012 passed by learned Commissioner of Income Tax (Appeals)- 7, Mumbai (hereinafter called "the CIT(A)"), for the assessment year 2007-08 and 2009-10 respectively, the appellate proceedings before the learned CIT(A) arising from the assessment orders dated 26-10-2009 and 25-03-2011 passed by the learned Assessing Officer (hereinafter called "the AO") u/s 143(3) of the Income Tax Act,1961 (Hereinafter called "the Act") for the assessment years 2007-08 and 2009-10 respectively.
2 ITA 7273-74/Mum/2012
2. First we shall dispose of appeal for the assessment year 2007-08 in ITA no. 7273/Mum/2012. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called "the Tribunal") in ITA no. 7273/Mum/2012 for the assessment year 2007-08 reads as under:-
"1. On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) has erred confirming the addition of Rs.1,19,77,254/- being disallowance u/s 14A.
Your appellant prays that the same be deleted.
2. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in confirming the addition of Rs.11,55,354/- being PMS Management Fee.
Your appellant prays that the same be deleted.."
3. The brief facts of the case are that the assessee company is engaged in business of manufacturing of low ash metallurgical coke.
4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the assessee company was asked by the AO to give details of expenses incurred for earning exempt income and also asked by the AO that why expenses incurred and claimed in respect of exempt income should not be disallowed as per provisions of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962. The assessee company submitted that Rule 8D of Income Tax Rules,1962 cannot be applied retrospectively.
The AO rejected the contentions of the assessee company and held that Finance Act,2001 introduced Section 14A of the Act with retrospective effect from 01-04-1962 which clarifies that no deduction shall be allowed to the tax- payer in respect of the expenditure incurred by the taxpayer in relation to the 3 ITA 7273-74/Mum/2012 income which does not form part of the total income. The AO relied upon the decision of the ITAT, Mumbai in the case of Gherzi Eastern Limited in ITA no 6562/Bom/94 dated 23-09-2002 wherein the ITAT held that it cannot be denied that some administrative expenditure was definitely attributable towards earning of this dividend income and that had to be deducted while allowing deduction u/s 80M of the Act. The reliance was also placed by the AO on the decision of Hon'ble Supreme Court in the case of Distributors(Baroda) Private Limited v. UOI ((1985) 155 ITR 120(SC)) and Bombay High Court in the case of Magganlal Chagganlal Private Limited ((1999) 236 ITR 456 (Bom.)) whereby it has been held that expenditure may be attributable to dividend income. The AO also relied upon the decision of Special Bench , ITAT , Mumbai in the case of Daga Capital Management Private Limited (2008) 312 ITR (AT)1(Mum) to hold that the provisions of Rule 8D of Income Tax Rules, 1962 are retrospective in nature. The AO worked out disallowance under Rule 8D of Income Tax Rules, 1962 as under:
i) Expenditure directly related to exempt income = NIL
ii) Interest Paid A X B/C = X A = Interest = Rs.22,97,73,171/-
B = Average value of Investment = Rs.24,93,62,667/- C = Average of Total Investment = Rs.533,96,54,603/-
= Rs.1,07,30,441/-
iii) ½% of average value of investments
½% of Rs.24,93,62,667 = Rs.12,46,813
Aggregate of (i),(ii) and(iii)
= 0+10730441+1246813
= Rs.1,19,77,254/-
4 ITA 7273-74/Mum/2012
In view of the above , an amount of Rs.1,19,77,254/- was treated by the AO as an expenditure incurred for earning exempt income and added the same to the income of the assessee company u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 and the same amount was also added to book profit u/s 115JB of the Act by the AO , vide assessment orders dated 26.10.2009 passed u/s 143(3) of the Act.
PMS Management Fee The AO observed from the accounts of the assessee company that the assessee company has claimed an expenses of Rs.11,55,354/- in its accounts as portfolio management services fee and income arising from portfolio management is offered as capital gains. The assessee company has paid money to the service provider to invest money on behalf of the assessee company in the stock market for which portfolio management fee has been charged by the service provider. It was further observed by the AO that the tax has not been deducted at source on these payments of professional fee. The assessee company was asked to explain by the AO that why these PMS management fees be not disallowed as it was incurred for earning capital gains. The assessee company submitted that payments were retained by the service provider without deduction of tax at source and also submitted that the same should be allowed against capital gains.
The AO held that the expenses are not the business expenses of the assessee company as the gains on shares is taxable under the head capital gains. The expenditure is incurred in respect of service charges collected by the portfolio management service provider for doing transaction on behalf of the assessee company and maintaining the portfolio of the assessee company . The AO held that there is no provision in the Act to allow the deductions for PMS management fee under the head 'capital gains' . The AO disallowed the 5 ITA 7273-74/Mum/2012 expenses on this ground as well on the ground that tax was not deducted at source on these payment, vide assessment order dated 26-10-2009 passed by the AO u/s 143(3) of the Act.
5. Aggrieved by the assessment orders dated 26-10-2009 passed by the AO u/s 143(3) of the Act, the assessee company filed first appeal before the learned CIT(A).
6. Before the learned CIT(A), the assessee company submitted that dividend income received by the assessee company in respect of investment in Shares and Mutual funds was Rs.8,92,887/- in respect of which the assessee company has claimed exemption u/s 10(34) and 10(35) of the Act. The AO has erred in invoking Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962. The AO erred in relying on the decision of Special Bench of the ITAT, Mumbai in the case of Daga Capital Management Private Limited (supra) whereby the Special Bench of the ITAT has held that Rule 8D of Income Tax Rules, 1962 is retrospective, while Hon'ble Bombay High Court has disapproved the afore-said decision of the Special Bench of ITAT, Mumbai, in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT (2010) 328 ITR 81(Bom.) whereby Hon'ble Bombay High Court held that Rule 8D of Income Tax Rules,1962 was notified on 24-03-2008 and hence applicable with effect from assessment year 2008-09. Thus, it was submitted by the assessee company before the learned CIT(A) that the AO was not justified in invoking Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for the instant assessment year i.e.2007-08. As per the assessee company , the Hon'ble Bombay High Court had laid down the proposition that all expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed u/s 14A of the Act. Thus, no deduction of the expenditure can be allowed incurred by the tax-payer in relation to the income which does not part form of the total 6 ITA 7273-74/Mum/2012 income under the Act. It was held by Hon'ble Bombay High Court that even for the assessment years prior to 2008-09, the AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the tax-payer to place all germane material on record. The Hon'ble Bombay High Court in Godrej and Boyce Manufacturing Company Limited(supra) remanded the proceedings for assessment year 2007-08 to the AO to determine whether the tax-payer has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act for which the AO can adopt a reasonable basis for effecting the apportionment. The assessee company submitted that AO erred in making disallowance of Rs.1,19,77,254/- u/s 14A of the Act. The AO erred in assuming that part of the interest of Rs.22.98 crores has been paid to Banks on term loans, CC limit was relating to the acquisition of the investment in shares and mutual funds. The assessee company submitted that no borrowed funds have been utilized for the purposes of making investments in shares/mutual funds and no part of interest can be disallowed. The assessee company submitted that paid up capital and reserves of the assessee company as at 31-03-2006 was Rs. 77.16 crores and the paid up capital and reserves as on 31-03-2007 was Rs.58.36 crores. As against the own funds as detailed above, the investment in shares/mutual funds is Rs. 7.52 crores as at 31-03-2007. Out of the above investments , Rs.1.10 crores is in shares of foreign company, dividend from which is liable to tax under the provisions of the Act and hence the dividend income from these foreign shareholding is not exempt income under the provisions of the Act. Further, Rs. 6 crores is invested in shares of subsidiary companies which is an investment made not for earning dividend , but to enable the assessee company to carry on business in a more efficient manner. Thus, the investment in shares of other companies and mutual fund is to the tune of Rs.43.52 lacs in respect of which dividend income has been received. The 7 ITA 7273-74/Mum/2012 assessee company submitted that no portion of the interest can be disallowed as the entire investment in shares and mutual funds have been made out of own funds and not out of borrowed funds. The assessee company relied upon following judgments in support of its contentions:
a) DCIT v. Maharashtra Seamless Limited 138 TTJ 244(Del)
b) Yatish Trading Company Private Limited v. ACIT 129 ITD 237(Mum.)
c) G.D.Metsteel Private Limited v. ACIT 47 SOT 62(Mum.)
d) CIT v. Winsome Textiles Industries Limited 319 ITR 204(P&H HC)
e) CIT v. Hero Cycles 323 ITR 518(P&H)
f) Voltas Limited v. JCIT 125 TTJ 601(Mum.)
g) K.J.Arora v. DCIT 180 Taxman 131(Del.)
h) Dishman Pharmaceuticals & Chemicals Limited v. DCIT 45 SOT 37(Ahd.)
i) ACIT v. Delite Enterprises Private Limited 135 TTJ 663(Mum.)
j) Godrej and Boyce Manufacturing Company Limited 328 ITR 81 (Bom.) The assessee company further submitted that out of total expenditure of Rs 314.76 crores, the direct expenditure on purchase of goods , material consumed and operational expenditure was Rs.306.33 crores, which is evident from the financial statements. The administrative expenses are to the tune of Rs.8.43 crores , which include selling and distribution expenses of Rs.2.53 crores, Rs 36 lacs for lease rent relating to manufacturing activity and balance Rs 5.54 crores can be considered as indirect administrative expenses. It was submitted that none of these expenses can be considered to be incurred for earning dividend income . The total revenue of the assessee company is Rs.314.32 crores which include dividend income of Rs.8.93 lacs which form 0.03% of total revenue. Thus, the assessee company submitted that disallowance of 0.03% of the indirect expenditure which comes to Rs.
8 ITA 7273-74/Mum/2012 16,621/- should be made. It was submitted that Rs.17,000/- be considered for disallowance as expenses relatable to the earning of dividend income.
The learned CIT(A) held that Rule 8D of Income Tax Rules, 1962 is applicable from the assessment year 2008-09 onwards and is not applicable for the instant assessment year 2007-08 under appeal, as held by Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra). Thus, the directions were given to the AO by the learned CIT(A) to work out disallowance u/s 14A of the Act of the expenses incurred for earning exempt income in accordance with the decision of Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra). The AO was directed by learned CIT(A) to verify the sources of investment in all such assets, which generate exempt income vis-à-vis the borrowed funds of the assessee company. The learned CIT(A) directed the AO to verify the cash flow statement of the assessee company to ascertain the expenditure in relation to the exempt income in accordance with the decision of Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra), vide appellate orders dated 26-09-2012 passed by learned CIT(A).
PMS Management Fee The assessee company submitted that it has earned short term capital gains of Rs.37,21,305/- and it entrusted the work relating to the investments in shares/mutual funds for the purposes of purchasing and selling of shares and units of mutual funds to M/s Kotak Securities Limited who were rendering portfolio management services. The assessee company paid Rs.11,55,354/- for the above PMS services. The assessee company submitted that portfolio managers used to purchase shares/units and sell the same and 9 ITA 7273-74/Mum/2012 render the account for the same to the assessee company. The portfolio managers used to deduct their fees out of service on sale of shares/units of mutual funds and balance was remitted to the assessee company. The assessee company submitted that above expenditure of Rs.11,55,354/- is an allowable expenditure while computing short term capital gains and the AO erred in disallowing the same. The assessee company relied upon decision of Pune Bench of the Tribunal in case of KRA Holdings and Trading Private Limited (2011) 54 SOT 493 (Pune Trib. ) to contend that the PMS expenses are allowable expenses while computing capital gains on sale of shares as these expenses are incurred for sale and purchase of securities. The assessee company submitted that provisions of Section 40(a)(ia) of the Act are invoked for the purposes of disallowance on the grounds that tax was not deducted at source on PMS charges paid by the assessee company while provisions of Section 40(a)(ia) of the Act are not applicable to cost of acquisition u/s. 48 of the Act and the said Section 40(a)(ia) of the Act can be invoked for computing disallowance under the head 'Income from business or profession' and no disallowance can be made for computation of income under the head 'Capital Gains'.
The learned CIT(A) upheld the action of the AO and held that there are no provisions u/s 48 of the Act to allow PMS charges paid by the assessee company as the Section 48 of the Act contemplate only two deductions namely, i) Cost of acquisition and cost of improvements and ii) cost incurred wholly and exclusively related to transfer. Thus, the learned CIT(A) affirmed the orders of the AO and held that no deduction is permitted under the Act of PMS fee paid by the assessee company, vide learned CIT(A) appellate orders dated 26-09-2012.
7. Aggrieved by the appellate orders dated 26-09-2012 passed by the learned CIT(A) , the assessee company filed second appeal with the Tribunal.
10 ITA 7273-74/Mum/2012
8. The learned counsel for the assessee company reiterated its submissions before the Tribunal as were made before the authorities below, which are not repeated for sake of brevity. The learned counsel for the assessee company submitted that the assessee company has paid up capital and reserves of Rs. 58,35,86,981/- as at 31-03-2007 , while the share capital and reserves as at 31-03-2006 was Rs. 77,16,10,984/- . The learned counsel drew our attention to page 6 of paper book filed before the Tribunal which is an audited Balance Sheet of the assessee company . The learned counsel submitted that the investments were only Rs.7,52,57,643/- as per audited Balance Sheet as at 31-03-2007(paper book/page 6) . The learned counsel submitted that net owned funds of the assessee company of Rs. 58.36 crores as at 31-03-2007 are more than sufficient to cover the investments of Rs.7.53 crores made by the assessee company as at 31-03-2007 and hence there is a presumption that the investments are made by the assessee company out of the net owned funds of the assessee company and no borrowed funds were utilized by the assessee company for making investment of Rs.7.53 crores, relying on the decision of Hon'ble Bombay High Court in the case of CIT v .Reliance Utilities and Power Limited , (2009) 313 ITR 340(Bom. HC) , CIT v. HDFC Bank Limited in ITA no 330 of 2012 (366 ITR 505(Bom. HC) ) and CIT v. HDFC Bank Limited(WP no. 1753 of 2016)((2016) 67 taxmann.com 42(Bom.HC). The learned counsel also contended that the investments of Rs1.10 crores has been made in foreign subsidiary company whereby dividend income is taxable under the provisions of the Act. He drew our attention to page 11 /paper book filed with the Tribunal which is schedule 'F : Investments' to audited financial statements for the financial year 2006-07 to contend that Rs.1,10,30,000/- is investment of the assessee company in its foreign subsidiary company namely 'Saurashtra World Holdings Private Limited' whereby the assessee company hold 2,50,000 shares @ USD 1/- each. He further drew our attention to the same schedule to content that the assessee company holds shares of Rs.1.98 11 ITA 7273-74/Mum/2012 crores in its Indian subsidiary Saurashtra Ferrous Private Limited whereby the objective is not to earn exempt income. Similarly , it was submitted with reference to Schedule 'F' that investment of Rs 4.00 crores is made in Preference Shares of its Indian subsidiary company Saurashtra Ferrous Private Limited . Thus, it was submitted that out of total investments of Rs.7.53 crores as at 31-03-2007, the investments of Rs.41.84 lacs has been made in Mutual Funds while investments of Rs.1.69 lacs has been made in quoted shares, which are made for earning dividend income , while rest of the investments are in subsidiary companies which are strategic investments. The learned counsel stated before that in any case no borrowed funds are utilized for making any investments in shares and mutual funds and hence there is no question of disallowance of interest expenditure under provisions of Section 14A of the Act. The learned counsel relied upon the following decisions :
1. CIT v. Oriental Structures Engineers Private Limited , 35 taxmann.com 210 (Del. HC)
2. Garware Wall Ropes Limited v. ACIT 65 SOT 86, Mum-Trib.
3.JM Financial Limited v. ACIT (ITA no. 4521/Mum/2012)
4. Sh Jigar P. Shah v. ACIT in ITA no 4366/Mum/2014 dated 24-02-2016) The learned counsel has submitted written submissions before the Tribunal which we have gone through and taken note of while deciding instant appeal.
PMS Management Fee The learned counsel reiterated its submissions as were made before the authorities below which are not repeated for sake of brevity. The learned counsel for the assessee company relied upon the written submissions filed before the Tribunal which we have gone through and taken note of while 12 ITA 7273-74/Mum/2012 deciding this appeal. The learned counsel for the assessee company relied upon decision of Pune Tribunal KRA Holdings and Trading Private Limited (2012) 54 SOT 493-(Pune Trib.) to contend that the PMS management fee expenses are allowable while computing capital gains chargeable to tax. It was also submitted that Section 40 of the Act is not applicable for computing income chargeable to tax under the head capital gains.
9. Learned DR relied upon the orders of the learned CIT(A) and submitted that the learned CIT(A) has given directions to AO to compute disallowance u/s 14A of the Act in accordance with the decision of Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra) . The learned DR submitted that the PMS Management fee expenses are not an allowable expenses while computing capital gains under the provisions of the Act. The learned DR relied upon the orders of learned CIT(A).
10. We have heard the rival contentions and perused the material on record including case laws relied upon by both the parties. We have observed that the assessee company has made investments of Rs.7.53 crores in shares of companies and units of Mutual Fund as at 31-03-2007, while the assessee company has net owned funds of Rs.58.36 crores as at 31-03-2007 and Rs. 77.16 crores as at 31-03-2006 which is appearing in the audited Balance Sheet of the assessee company as at 31-03-2007 filed in paper book with the Tribunal . Thus, it is demonstrated vide audited financial statements that the assessee company's net owned funds are much higher than the investments in securities made by the assessee company. Thus, as held by Hon'ble Bombay High Court in the case of Reliance Utilities and Power Limited( supra) and two afore-stated decisions in the case of HDFC Bank Limited (supra), we are of considered view that no disallowance can be made by the Revenue on account of the interest expenditure as there is a presumption that the 13 ITA 7273-74/Mum/2012 assessee company has utilized net owned funds for the purposes of making investments in shares and mutual fund , as the net owned funds are in far excess of the investments made by the assessee company in the shares and mutual funds. Thus, keeping in view the factual matrix of the instant case as emerging from the records before us , in our considered view , no disallowance u/s 14A of the Act is warranted towards interest expenditure incurred by the assessee company. Since, the instant assessment year is 2007-08 , Rule 8D of Income Tax Rules, 1962 is not applicable as the same is applicable from the assessment year 2008-09 as held by Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra). However, there is a reasonable disallowance to be made u/s 14A of the Act for administrative and other indirect expenses incurred by the assessee company for earning exempt income having regards to the accounts of the assessee company as laid down u/s 14A(2) of the Act. So, far as the contentions of the assessee company are concerned with respect to the investment of Rs.1,10,30,000/- made in foreign subsidiary company, we are in agreement with the assessee company that such investments in foreign subsidiaries shall not be included for computing disallowance u/s 14A of the Act, as the income by way of dividend is chargeable to tax and is not an exempt income under the provisions of the Act. Thus , the said investments of Rs.1,10,30,000/- in foreign subsidiary shall not be included for computing disallowance of indirect expenditure under Section 14A of the Act. However, with respect to the contentions of the assessee company regarding other investments in shares and mutual funds, in our considered view, the same shall be included for computing disallowance u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act . The contentions of the assessee company that the investments are made in subsidiaries companies and hence no disallowance of indirect expenditure be made under Section 14A of the Act cannot be accepted. It is also a matter of fact as emerging from paper book/page 11 from Schedule F of 14 ITA 7273-74/Mum/2012 audited financial statements that investments as at 31-3-2006 was Rs.4.23 crores while investments as at 31-03-2007 was Rs. 7.53 crores, i.e. Rs. 3.30 crores net investments were made in the previous year relevant to the instant assessment year. We have observed that there are divergent view of the Tribunal on this issue and matter purely being factual is to be decided on the facts of the case keeping in view mandate of Section 14A of the Act whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act having regards to the accounts of the assessee as contemplated u/s 14A(2) of the Act and hence the matter is to be decided on the facts of each case. We have duly considered the judicial decisions relied upon by the assessee company. Reference is drawn to the decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in ITA No 5366/Mum/2013 for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under:
"12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the assessment year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 234 CTR 1. The assessee company has made average investments of Rs. 14.44 crores computed as per rule 8D(2)(iii) of Income Tax Rules,1962 . The investments made by the assessee company includes the investment of Rs.19.37 crores made in 100% subsidiary company.
13. Coming to the submission of assessee that these are strategic investments and no disallowance made towards the administrative
15 ITA 7273-74/Mum/2012 expenses. We would like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands of shareholders shall be exempt from tax. No doubt , the returns can also come by way of divestments of these investments but normally strategic investments are made with long term horizon where objective is to set up business and growth of these business over a long period of time. In these type of strategic investments, the investor has to normally devote significant time to plan, execute and monitor these investments regularly and periodically to ensure that these strategic investments are turned viable and profitable. These Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an 16 ITA 7273-74/Mum/2012 expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments . Our view is fortified by the following decisions :
1. The observation made by Hon'ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively wef 1st April 1962. The relevant observations are reproduced as under:
"The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in
17 ITA 7273-74/Mum/2012 relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. Insection 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further,section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59quantify the total 18 ITA 7273-74/Mum/2012 income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A.
Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37).
2. The ITAT,Mumbai in the case of ACIT v. Citicorp Finance (India ) Limited (2007)108 ITD 457 has negated the contention of the assessee that it had incurred no expenditure for earning high dividends as under:
"It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A 19 ITA 7273-74/Mum/2012 company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer (2004) 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments &Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view 20 ITA 7273-74/Mum/2012 of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. (1993) 200 ITR 488 (SC), the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Del), the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In Asstt.CIT v. Premier Consolidated Capital Trust (I). Ltd. (2004) 83 TTJ (Mum.) 843, the Mumbai Bench of this Tribunal has held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A."
21 ITA 7273-74/Mum/2012
3. The ITAT, Chennai Bench has held in the case of Southern Petro Chemicals Industries v. DCIT(2005) 3 SOT 157 as under:
" We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of Rs. 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra), wherein the question was as under:
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the 22 ITA 7273-74/Mum/2012 decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. (1973) 90 ITR 348 (Bom) to the assessment year in question without considering the effect of the amendment operative from Ist April, 1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gross dividend before deduction of the proportionate management expenses ?"
Thus, when the decision of the Honble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can be made towards expenses. In view of the aforementioned discussion and keeping in view the submissions of the learned Departmental Representative, we restore this matter to the assessing officer to verify the quantum of deduction claimed by the assessee in earlier years under section 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes
4. The ITAT, Kolkatta Bench in recent reported judgment in Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced recently on 13th May 2015 has categorically held that even strategic investment in group concerns for the purpose of control and not 23 ITA 7273-74/Mum/2012 for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962.
Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure under section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962.
The assessing officer has disallowed by computing the indirect expenditure being administrative and other in-direct expenses after invoking Rule 8D(2) (iii) of Income Tax Rules ,1962.
We, therefore, hold that the assessing officer has rightly invoked the provisions of section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 for disallowing the expenditure of Rs. 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. We order accordingly."
The assessee company has relied upon following decisions to contend that no disallowance should be made u/s 14A of the Act with respect to strategic investment / controlling interest investments made by the assessee company:
1. CIT v. Oriental Structures Engineers Private Limited , 35 taxmann.com 210 (Del. HC) - This case was decided by Hon'ble Delhi High Court on facts.The Tribunal gave finding that only interest of Rs. 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further it was observed by the Tribunal, there was SPV created to obtain contracts from NHAI and the SPV so formed engaged the
24 ITA 7273-74/Mum/2012 tax-payer as contract to execute the works awarded to them(SPV) by the NHAI . The tax-payer has shown turnover from these contracts awarded by SPV in its Profit and Loss Account and hence it was held by the Tribunal on the facts of the case that no interest can be disallowed u/s 14A read with rule 8D of Income Tax Rules, 1962 because it can not be held that expenses/interest were incurred for earning exempted income. The Hon'ble Delhi High Court held that it is a question of fact and no question of law much less substantial question of law arises and the appeal was dismissed . In the instant case, it is not the case of the assessee company that it has got any business contracts from its strategic investments/subsidiary companies in which controlling interest were acquired and hence the case are distinguishable on facts.
2. Garware Wall Ropes Limited v. ACIT 65 SOT 86, Mum-Trib.- In this case, the tax-payer was holding old investments made long back and no new investments were made during the previous year and on facts of the case the Tribunal held that it could be concluded that the tax-payer did not incur any expenditure for earning income which does not form part of the total income and hence disallowance was deleted. In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the 25 ITA 7273-74/Mum/2012 interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
3.JM Financial Limited v. ACIT (ITA no. 4521/Mum/2012)-In this case, the tax-payer made out a case to show that no expenditure has been incurred for maintaining the investment in subsidiary companies and therefore in the absence of finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO was held to be not justified by the Tribunal. However, in the instant case this facts that no expenditure has been incurred by the assessee company has not been brought on record having regards to the accounts of the assessee company and hence we are setting aside this appeal to the file of the AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
4. Sh Jigar P. Shah v. ACIT in ITA no 4366/Mum/2014 dated 24-02-2016)-In this case also there is a finding of fact that the tax-payer has made investments which were old investments and that no new investments were made during the year. . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assessee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income 26 ITA 7273-74/Mum/2012 from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
5. Daga Global Chemicals Private Limited v. ACIT in ITA No. 5592/Mum/2012 - The Tribunal has decided this appeal based on the facts of the case whereby it was established by the tax-payer that all the investments were made in the earlier years out of own funds and no expenditure was incurred and claimed by the tax-payer . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
Respectfully following the above decision of the Co-ordinate Benches of Mumbai ITAT in the case of Uma Polymers Limited in ITA no.5366/Mum/2012 dated 30-09-2015, and also of the decision of Kolkatta Tribunal Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 27 ITA 7273-74/Mum/2012 1032/Kol/2012 pronounced on 13th May 2015 whereby Kolkatta Tribunal has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act ., we hold that the investment made by the assessee company in shares and units of mutual funds( excluding investment of Rs.1,10,30,000/- in foreign subsidiary) shall attract disallowance u/s 14A of the Act .The Hon'ble Bombay High Court in Godrej and Boyce Manufacturing Company Limited(supra) remanded the proceedings for assessment year 2007-08 to the AO to determine whether the tax-payer has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act for which the AO can adopt a reasonable basis for effecting the apportionment for disallowance u/s 14A of the Act. In the instant appeal , we are also inclined to remand the proceedings for assessment year 2007-08 to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. We order accordingly.
PMS Management fee We have observed that the assessee company has incurred PMS management fee of Rs.11,55,354/- being paid to portfolio managers who were managing 28 ITA 7273-74/Mum/2012 the portfolio of shares and mutual funds of the assessee company. The assessee company has claimed deductions of the afore-stated expenses from capital gains computed under the Act from sale of shares. The assessee company relied upon the decision of Pune Tribunal in the case of DCIT v. K.R.A. Holdings and Trading Private Limited (supra). We have observed that ITAT Mumbai has recently passed detailed orders in the case of Captain Avinash Chander Batra v. DCIT in ITA no 7407/Mum2011 vide orders dated 30-03-2016 ( (2016) 68 taxmann.com 366(Mum.Trib.)) ,which is authored by one of us (the Accountant Member) in which the decision of the Pune Bench of the ITAT in K.R.A. Holdings and Trading Private Limited(supra) was duly discussed. The order of the Mumbai Tribunal in the case of Captain Avinash Chander Batra v. DCIT in ITA no 7407/Mum2011 is reproduced hereunder:
"9. We have considered the rival contentions and also perused the material available on record including case laws relied upon by the rival parties. We have observed that the assessee has paid portfolio management services expenses of Rs.22,64,272/- to portfolio managers namely ICICI Prudential Asset Management Company Limited and Optimix ING for managing portfolio management services (PMS) account's of the assessee. These charges of Rs.22,64,272 being portfolio management fees are stated by the assessee to be paid on purchases and sales of shares and the same has been disallowed by the authorities below , except to the tune of Rs.2,59,879/- which was allowed by the CIT(A) towards PMS charges on sale of shares on which short term capital gains has been earned and the Revenue has challenged the same before the Tribunal, while the assessee is in appeal for the disallowance by the CIT(A) of the rest of the PMS expenses of Rs.20,04,393/- vide this appeal . It is an un-disputed and admitted position between the rival parties that the assessee has earned capital gains on sale of shares held under Portfolio Management Services account of the assessee with ICICI
29 ITA 7273-74/Mum/2012 Prudential Asset Management Company Limited and Otimix ING , which is managed by the Portfolio Managers for which portfolio management services fee of Rs.22,64,272/- has been paid by the assessee to the portfolio managers , the income arising thereof from sale of shares is chargeable to tax under the head 'Capital Gains' , for which the income is to be assessed under Chapter IV-E of the Act as per the provisions of Section 45 to 55A of the Act. The provisions of Section 48 of the Act stipulates as under :
"Section 48 [Mode of computation.
48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--
(i) expenditure incurred wholly and exclusively in connection with such transfer
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
********** **********"
Thus, as could be observed from provisions of Section 48 of the Act , for computing capital gains, it is required to deduct from full value of consideration, the expenditure incurred wholly and exclusively in connection with such transfer and also the cost of acquisition of the capital asset and cost of any improvement thereto.
With the above background, we have to see whether the portfolio management charges of Rs. 22,64,272/- paid by the assessee can be
30 ITA 7273-74/Mum/2012 allowed as deduction from the full value of consideration received or accruing to the assesse as a result of transfer of the capital asset being shares , provided the said PMS charges are either expenditure incurred wholly and exclusively in connection with the transfer of shares or PMS charges is a cost of acquisition or the cost of any improvement thereto of the capital asset being shares as per mandate of Section 48 of the Act. The assessee to support his contentions has relied on the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Rules, 2002 to contend that these PMS charges are allowable expenditure as the portfolio managers are allowed to be paid fee on 'return based fee' meaning thereby that it is an expenditure incurred wholly and exclusively in connection with the transfer of shares as these PMS charges are connected with sale and purchase of shares .
Before we proceed further to decide whether PMS charges paid by the assessee is allowable as deduction as per provisions of Section 48 of the Act, we must analyze the statutory and legal framework within which portfolio managers carry on their activities in India and their roles and responsibilities in discharging their duties.
The business activities of portfolio managers in India are regulated by Securities and Exchange Board of India Act,1992(15 of 1992) (in short "SEBI Act,1992") . The SEBI Act,1992 provide's for an establishment of the Board (Hereinafter called 'the SEBI') to protect the interests of investors in securities and to promote the development of, and regulate , the securities market and for matters connected therewith or incidental thereto. It is provided in Chapter IV of the SEBI Act,1992 which deals with power and functions of the Board u/s.11(1) of SEBI Act,1992 that it shall be duty of the SEBI to protect the interests of investors in securities and to promote the development of, and regulate , the securities market , 31 ITA 7273-74/Mum/2012 by such measures as it thinks fit. Section 11(2)(b) of SEBI Act,1992 provides , inter-alia, that such measures to achieve the objects of SEBI Act,1992 , the Board may require registering and regulating the working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , the conditions of certificate of registration obtained from the SEBI in accordance with the regulations made under the SEBI Act,1992. The SEBI Act,1992 by virtue of provisions of Section 30 grants the power to SEBI to make regulations by notification consistent with the SEBI Act,1992 and the rules made there-under to carry out purposes of the Act which is primarily investor protection and to promote the development of, and to regulate the securities market. In exercise of powers u/s. 30 of SEBI Act,1992, SEBI came out with regulations to regulate the business of portfolio managers in India by promulgating 'Securities and Exchange Board of India (Portfolio Managers) Regulation,1993' which were amended from time to time . Under clause 2(cb) of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , the portfolio manager is defined as under:
"(cb) "portfolio manager" means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be;] "Clause 14 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , it is stipulated as to contract which portfolio manager is required to enter with client and disclosures to be made as under:-
32 ITA 7273-74/Mum/2012 "[14. Contract with clients and disclosures.─(1) (a) The portfolio manager shall, before taking up an assignment of management of funds or portfolio of securities on behalf of a client, enter into an agreement in writing with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing the details as specified in Schedule IV.
(b) The agreement between the portfolio manager and the client shall, inter alia, contain:
(i) the investment objectives and the services to be provided;
(ii) areas of investment and restrictions, if any, imposed by the client with regard to the investment in a particular company or industry;
(iii) type of instruments and proportion of exposure;
(iv) tenure of portfolio investments; (v) terms for early withdrawal of funds or securities by the clients; (vi) attendant risks involved in the management of the portfolio; (vii) period of the contract and provision of early termination, if any;
(viii) amount to be invested subject to the restrictions provided under these regulations;
(ix) procedure of settling client's account including form of repayment on maturity or early termination of contract;
33 ITA 7273-74/Mum/2012
(x)fees payable to the portfolio manager;
(xi) the quantum and manner of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced);
(xii) custody of securities; (xiii) in case of a discretionary portfolio manager a condition that the liability of a client shall not exceed his investment with the portfolio manager;
(xiv) the terms of accounts and audit and furnishing of the reports to the clients as per the provisions of these regulations;
(xv) other terms of portfolio investment subject to these regulations."
The portfolio managers general responsibilities are defined in clause 15 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 as under :-
"15. General responsibilities of a Portfolio Manager.─(1) The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client.
[(1A) The portfolio manager shall not accept from the client, funds or securities worth less than five lacs rupees.]
34 ITA 7273-74/Mum/2012 (2) The portfolio manager shall act in a fiduciary capacity with regard to the client's funds.
[(2A) The portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank. Explanation.─For the purposes of this sub- regulation, the expression 'Scheduled Commercial Bank' means any bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).] (3) The portfolio manager shall transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934).
(4) The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities.
[(4A) The portfolio manager shall not borrow funds or securities on behalf of the client.] [(5) The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.] (6) The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately".
These Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 were amended from time to time and the relevant 35 ITA 7273-74/Mum/2012 amendments so far concerning issue's under this appeal are reproduced below :
" These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2006.
*******
3. In the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993:
(i) in regulation 2, clause (d) shall be substituted with the following, namely:
"(d) 'principal officer' means an employee of the portfolio manager who has been designated as such by the portfolio manager;"
(ii) in regulation 6, in sub-regulation (2), clause (c) shall be substituted with the following, namely:
"(c) the principal officer of the applicant has either -
(i) a professional qualification in finance, law, accountancy or business management from a university or an institution recognised by the Central Government or any State Government or a foreign university; or
36 ITA 7273-74/Mum/2012
(ii) an experience of at least ten years in related activities in the securities market including in a portfolio manager, stock broker or as a fund manager."
These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Second Amendment) Regulations, 2006.
"c) after clause (c) the following clauses shall be inserted, namely:
"(ca) "portfolio" means the total holdings of securities belonging to any person;
(cb) "portfolio manager" means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be;"
The perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is a regulated and controlled business which requires mandatory registration with SEBI to carry on activities of portfolio management in India and is subject to continuous control, regulation and monitoring by SEBI with an objective of investor protection and promote and regulate securities market. The qualification and experience of the portfolio 37 ITA 7273-74/Mum/2012 manager is also specified in the afore-stated regulations so that only professional, skilled, specialized and experienced persons are engaged in the activities of portfolio management . The roles and responsibilities of portfolio managers covers a vast spectrum of activities provided to clients for fee ranging from providing advises , or direct or undertake on behalf of client the management or administration of a portfolio of securities or funds of the client meaning thereby that the portfolio managers does not act merely as a stock-broker to buy and sell shares of the clients in execution of the instructions of the client's for a brokerage/commission , but portfolio manager renders a vast spectrum of activities which involves giving advises to clients and/or management and administration of securities or fund portfolio's of the client which is managed by experienced, specialized, skilled and qualified professionals who act as portfolio managers to render their expertise, skill and specialized knowledge to the investor's client for a fee with an objective to create wealth for the investor client's and maximizing gains for these investors client. The highly specialized and skill services are rendered by these qualified and experienced portfolio managers on continuous basis to clients in a highly volatile and complex securities market with an objective of wealth creation and maximizing gains for the investor's clients and are not rendering merely services connected with the transfer of shares nor are they connected with cost of acquisition or sale of shares even if these PMS charges are paid based and calculated on purchases and sales of shares or even if these PMS charges are return based fees. These fees have a major component 38 ITA 7273-74/Mum/2012 towards advisory charges being highly skilled and specialized knowledge and expertise based services being managerial and consultancy services of experienced and qualified professionals acting as portfolio managers who render these specialized and skilled services on a continuous basis to investor client for fee in a highly volatile and complex securities market to maximize gains and to create wealth for the investors , whether these fee paid to portfolio managers are calculated based on purchases or sales of securities, or a return based fee etc. is not relevant and material but the fact of the matter is that these PMS charges are not paid towards cost of acquisition of the capital assets or for improvement of the capital asset nor are these fees being expenditure incurred wholly and exclusively in connection with transfer of the capital asset and hence the same cannot be allowed as deduction u/s. 48 of the Act from the full value of consideration received or accruing to the assessee as a result of the transfer of the capital asset being shares.
Our above view is fortified by the decision of jurisdictional Mumbai-tribunal in the case of Devendra Motilal Kothari v. DCIT in (2011) 13 taxman.com 15 (Mum.-trib.), Homi K Bhabha v. ITO (2011)14 taxmann.com 165(Mum-trib.) and Pradeep Kumar Harlalka v. ACIT (2011) 14 taxmann.com 42(Mum-trib.). The findings of the Mumbai-tribunal in the case of Devendra Motilal Kothari(supra) on identical issue are as under:
39 ITA 7273-74/Mum/2012 "12. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profit arising to the assessee on sale of shares and securities chargeable to tax under the head "capital gains"
and this position is not in dispute. The only dispute is whether the fees paid by the assessee for PMS can be allowed as deduction in computing such income or not. In this regard, it is observed that the charge of Income-tax is created by virtue of the provisions contained in section 4 according to which the Income-tax is charged for the relevant assessment year in accordance with and subject to the provisions of Income-tax Act in respect of the total income of the relevant previous year of every person. As per the scheme of the Act, income is broadly classified under five different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to respective heads of income section 45 to section 55A falling under Chapter IV-E deal with assessment of income under the head 'capital gains' and section 48 in particular prescribes the mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto are deductible from the full value of the consideration received or accruing to the assessee as a result of transfer of the capital assets.
13. In the present case, the deduction on account of fees paid for PMS has been claimed by the assessee as deduction in computing capital gains arising from sale of shares and 40 ITA 7273-74/Mum/2012 securities. He however has failed to explain as to how the said fees could be considered as cost of acquisition of the shares and securities or the cost of any improvement thereto. He has also failed to explain as to how the said fees could be treated as expenditure incurred wholly and exclusively in connection with sale of shares and securities. On the other hand, the basis on which the said fees was paid by the assessee show that it had no direct nexus with the purchase and sale of shares and as rightly contended by the Ld. DR, the said fees was payable by the assessee going by the basis thereof even without there being any purchase or sale of shares in a particular period. As a matter of fact, when the ld. CIT(A) required the assessee to allocate the fees paid for PMS in relation to purchase and sale of shares as well as in relation to the shares held as investment on the last date of the previous year, the assessee could not furnish such details nor could he give any definite basis on which such allocation was possible. Having regard to all these facts of the case, we are of the view that the fees paid by the assessee for PMS was not inextricably linked with the particular instance of purchase and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with such sale or the cost of acquisition/improvement of the shares and securities so as to be eligible for deduction in computing capital gains under section 48.
14. As regards the case laws cited by the Ld. Counsel for the assessee in support of the assessee's case on the point under consideration, it is observed that the facts involved 41 ITA 7273-74/Mum/2012 therein were altogether different in as much as the relevant amounts claimed by the assessee as deduction in computing capital gains were found to be in the nature of expenditure/cost covered by section 48. For instance, in the case of Mathuradas Mangaldas Parekh (supra), payment of betterment charges made under town planning scheme had resulted in increase in potential value of land and the same therefore were held to be cost of improvement of the said land. Similarly, in the case of Chemmancherry Estates Co. ( supra), funds borrowed by the assessee were utilized for acquisition of land and the interest paid thereon thus was held to the forming part of the cost of acquisition of the land. In other cases also, the brokerage expenses incurred by the assessee were in respect of particular sale of capital assets and the same therefore were held to be deductable while computing capital gain being expenditure incurred wholly and exclusively in connection with such transfer/sale.
15. At the time of hearing before us, the Ld, Counsel for the assessee has raised an alternative contention in support of the assessee's claim for deduction on account of fees paid for PMS in computing the capital gains relying on the theory of real income and the rule of diversion of income by an overriding title. He has contended that the fees for PMS being contractual liability directly relatable to the capital gains, there was a diversion of income from capital gain by an overriding title to the extent of the amount of such fees and the same therefore was not the income belonging to the assessee which was chargeable to tax under the head "capital gains". In this regard, we may observe that even 42 ITA 7273-74/Mum/2012 though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source i.e. the profit earning apparatus itself and only in such cases where the source of earning income is charged by an overriding title, the same can be considered as diversion of income by an overriding title.
16. In the case of Sitaldas Tirathdas (supra), it was held by the Hon'ble Supreme Court that the true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, are there in every case, but it is the nature of the obligation which is the decisive fact. Explaining, further, it was observed by the Hon'ble Supreme Court that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income is diverted before it reaches to the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It was held by the Hon'ble Supreme Court that it is the first kind of payment which can truly be excluded and not the second. The second payment is merely an obligation to pay another a portion of 43 ITA 7273-74/Mum/2012 one's own income which has been received and is since applied.
17. In the present case, the profit arising from the sale of shares was received by the assessee directly which constituted its income at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. We, therefore, have not hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the contentions raised by the assessee in this regard cannot be accepted being devoid of any merit.
18. As regards the contention of the Ld. Counsel for the assessee in support of assessee's claim for deduction on account of fees paid for PMS based on real income theory, we agree with the ld. DR that the theory of real income cannot be applied to allow deduction to the assessee which is otherwise not permissible under the Income-tax Act. In the case of CIT v. Udayan Chinubhai [1996] 222 ITR 456 / 88 Taxman 114 (SC) it was held by the Hon'ble Supreme Court in the similar context that what is not permissible in law as deduction under any of the heads cannot be allowed as a deduction on the principle of real income theory.
44 ITA 7273-74/Mum/2012
19. For the reasons given above, we find no merit in the arguments raised by the Ld. Counsel for the assessee in support of the assessee's case on the issue under consideration and rejecting the same, we hold that the fees paid by the assessee for PMS was not deductible in computing the capital gains as rightly held by the Assessing Officer The impugned order of the Ld. CIT(A) confirming the disallowance made by the Assessing Officer on this issue is therefore upheld dismissing this appeal filed by the Assessee.
20. In the result, the assessee's appeal is dismissed"
The assesseee has placed reliance on decision's of Pune benches of the Tribunal including in the case of KRA Holding and Trading Private Limited (supra) which is distinguished by the Mumbai Tribunal in the case of Pradeep Kumar Harlalka(supra ) as under:-
"13. Coming to the decision of Pune Bench of the Tribunal in the case of KRA Holding & Trading (P.) Ltd. (supra), after perusing the judgment very carefully we find that in that decision the decision of co-ordinate Bench of Mumbai Tribunal in the case of Devendra Motilal Kothari (supra) was distinguished mainly on the basis of decision of Hon'ble Bombay High Court in the case of Smt. Shakuntala Kantilal (supra). The Pune Bench referred to various paras of Hon'ble Bombay High Court's decision in para-22 and ultimately concluded in para-23 that what was required was that the claim should be bona fide and claim for such genuine 45 ITA 7273-74/Mum/2012 expenditure has to be allowed so long as incurring of the expenditure is a matter of fact and necessity. However, as pointed out by the Ld. DR this decision was specifically over ruled by the Hon'ble Bombay High Court in the case of Roshanbabu Mohd. Hussein Merchant (supra) and at placitum 18 it has been observed as under:
"As regards the decisions of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 followed in the case of Abrar Alvi [2001] 247 ITR 312] and the decision of the Kerala High Court in the case of Smt. Thressiamma Abraham (No. 1) [2001] 227 ITR 802which are strongly relied upon by the counsel for the assessee, we are of the opinion that the said decisions are no longer good law in the light of the subsequent decisions of the apex court referred to hereinabove."
Thus, without going into further details we would only like to observe that the decision in the case of Smt. Shakuntala Kantilal (supra) is no more a good law in view of the latest decision and therefore that decision cannot be relied for the proposition that necessity of expenditure would make the same allowable."
Thus, Respectfully following the afore-stated decision's of the co-ordinate jurisdictional Benches of the Mumbai Tribunal and our detailed discussions and reasoning in this order, we hold that these PMS expenses of Rs.20,04,393/- paid to portfolio managers being management expenses incurred with respect to securities / funds of the assessee 46 ITA 7273-74/Mum/2012 being managed by portfolio managers , being disallowed by the AO and confirmed by the CIT(A), are not allowable as deduction u/s 48 of the Act from the full value of consideration on sale of securities received or accruing to the assessee . Accordingly, we dismiss this appeal filed by the assessee. We order accordingly.
10. In the result, the appeal filed by the assessee in ITA N0. 7407/Mum/2011 for the assessment year 2008-09 is dismissed."
Respectfully following the orders of the Mumbai Tribunal in the case of Captain Avinash Chander Batra v. DCIT in ITA no 7407/Mum2011 , we hold that the assessee company is not entitled for deductions of PMS Management fee of Rs.11,55,354/- paid to portfolio managers from the income computed under the head capital gains. We order accordingly.
11. In the result, the appeal filed by the assessee company in ITA N0. 7273/Mum/2012 for the assessment year 2007-08 is partly allowed.
ITA No. 7274/Mum/2012-Assessee's Appeal for assessment year 2009-1012. Now, we will take up assessee company's appeal in ITA No. 7274/Mum/2012 for the assessment year 2009-10
13. The grounds of appeal raised by the assessee company in Memo of appeal filed with the Tribunal read as under:
"
47 ITA 7273-74/Mum/2012
1. On the facts & in the circumstances of the case and in law the learned CIT(A) has erred in confirming the addition of Rs.2,58,415/- being Interest Income as per the AIR information.
Your appellant pray that the same be deleted.
2. On the facts & in circumstance of the case and in law the learned CIT(A) has erred in confirming the addition of Rs.97,51,158/- being Disallowance u/s. 14A.
Your appellant pray that the same be deleted."
14. During assessment proceedings it was observed by the AO on verification of ITS details of Revenue data base with the accounts of the assessee company that the assessee company failed to reconcile the ITS details vide AIR information with books of accounts of the assessee company and there was difference as under:
S.No. Name of Party Nature of As per As per Difference from whom sum Party AIR Assessee's received as per A/c ITS details
1. Sunflag Iron and Interest 7532586 7310869 221717 Steels Ltd.
2. SAL Steel Ltd. Interest 137590 100892 36698 Total 258415 The assessee company was asked by the AO to explain the difference and the assessee company failed to explain the difference. The AO made the additions of Rs.2,58,415/- to the income of the assessee company , vide assessment orders dated 25-03-2011 passed u/s 143(3) of the Act. The learned CIT(A) confirmed the assessment orders dated 25-03-2011 passed by the AO u/s 48 ITA 7273-74/Mum/2012 143(3) of the Act as the assessee company merely submitted that the assessee company has not received the said amounts from these parties while it failed to reconcile the AIR information as per ITS database with its books of accounts, vide appellate orders dated 26-09-2012 passed by learned CIT(A).
On second appeal filed by the assessee company before the Tribunal , the learned counsel for the assessee company submitted that the AO may call these parties and verify the contentions of the assessee company that the assessee company has not received any income from these parties in excess of what is declared by the assessee company in its books of accounts , and the AIR details as per ITS database is incorrect. The learned DR submitted that he has no objection if the matter is remitted back to the file of AO for making necessaries enquiries and examination with these parties about the interest income reflected in AIR information and what is reported by the assessee company as per its books of accounts.
We have heard rival contentions and perused the material on record and in our considered view, this issue of reconciliation of the difference in the interest income earned by the assessee company vide ITS database of the Revenue and the books of accounts of the assessee company needs to be set aside and remitted back to the file of the AO for denovo determination of the issue after making necessary enquiries and verifications with both the parties who have supposedly given interest to the assessee company as to the grant of interest in favour of the asssessee company as reflected in the AIR information database ITS. Needless to say the AO shall grant proper and adequate opportunity of being heard to the assessee company in accordance with principles of natural justice in accordance with law. The assessee company will be allowed to produce relevant evidences and explanation by the AO in its defense. We order accordingly.
49 ITA 7273-74/Mum/2012 The second issue is with respect to disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962. The facts are identical to the facts in the ITA No. 7273/Mum/2012 for assessment year 2007-08 with only exception that the instant year is assessment year 2009-10 and Rule 8D of Income Tax Rules, 1962 is applicable w.e.f. 2008-09 , while the appeal in ITA No. 7273/Mum/2012 was for assessment year 2007-08 whereby Rule 8D of Income Tax Rules, 1962 was not applicable. We are not repeating the facts for the sake of brevity which are para materia except the assessment year being 2009-10. The investment as made by the assessee company as at 31-03-2009 was Rs. 37.45 crores while the investment were at Rs.11.09 crores as at 31- 03-2008 while on the other hand net owned funds as at 31-03-2009 were 55.87 crores and net owned funds as at 31-03-2008 were Rs. 102.09 crores, as borne out from the audited financial statement for the financial year 2008- 09 in the paper book filed with the Tribunal . In our considered view, interest expenditure cannot be disallowed under Rule 8D(2)(ii) of Income Tax Rules, 1962 as it is demonstrated by the assessee company in the instant appeal that the assessee company's net owned funds are much higher than the investments in shares and mutual funds made by the assessee company. Thus, as held by Hon'ble Bombay High Court in the case of Reliance Utilities and Power Limited (supra) and two decisions in HDFC Bank Limited (supra), we are of considered view that no disallowance can be made by the Revenue on account of the interest expenditure as there will be presumption that the assessee company has utilized its net owned funds which are in far excess of the investments made by the assessee company in shares and mutual funds, for the purposes of making investments in shares and mutual fund. Thus, keeping in view the factual matrix of the instant case , in our considered view, no disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 is warranted towards interest expenditure incurred by the assessee company.Our decision in ITA no. 7273/Mum/2012 for assessment year 2007-08 shall apply mutatis mutandis with respect to disallowance of 50 ITA 7273-74/Mum/2012 interest expenditure under Section 14A of the Act is concerned as no disallowance of interest expenditure of Rs.86,72,298/- as made by the AO and confirmed by learned CIT(A) is warranted based on facts and circumstances of the case.
The AO has not made any disallowance under Section 14A read Rule 8D(2)(i) of Income Tax Rules, 1962 in his impugned assessment order passed u/s 143(3) of the Act , which has also attained finality. We have noted the same.
However. The AO has made disallowance of 0.5% of the average value of investments under Section 14A of the Act read with Rule 8D (2)(iii) of the Income Tax Rules, 1962. The learned CIT(A) confirmed the same vide his appellate orders . So, far as the contentions of the assessee company are concerned with respect to the investment of Rs.1,10,30,000/- made in foreign subsidiary company, we are in agreement with the assessee company that such investments in foreign subsidiaries shall not be included for computing disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 , as the income by way of dividend is chargeable to tax and is not exempt from tax. Thus , the said investments of Rs.1,10,30,000/- in foreign subsidiary shall not be included for computing disallowance of indirect expenditure under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act.
However, with respect to the contentions of the assessee company regarding other investments in shares and mutual funds, in our considered view, the same shall be included for computing disallowance u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act keeping in view the provisions of Rule 8D (2)(iii) of Income Tax Rules, 1962 to work out disallowance u/s 14A of the Act. The contentions of the assessee company that the investments are made in subsidiary 51 ITA 7273-74/Mum/2012 companies and hence no disallowance of indirect expenditure be made under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act be made cannot be accepted.It is a matter of fact as borne out from the Schedule F to the audited financial statements (paper book /page 8) that the investments as at 31-03-2008 were to the tune of Rs. 11.09 crores while the investments as at 31-03-2009 were Rs.37.45 crores, thereby the assessee company made net investments of Rs. 26.36 crores during the previous year relevant to the instant assessment year. We have observed that there are divergent view of the Tribunal on this issue and matter purely being factual is to be decided on the facts of the case keeping in view mandate of Section 14A of the Act whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act having regards to the accounts of the assessee and hence the matter is to be decided on each case based on the facts of the case. We have duly considered the judicial decisions relied upon by the assessee company. Reference is drawn to the decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in ITA No 5366/Mum/2013 for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under:
"12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the assessment year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 234 CTR 1. The assessee company has made average investments of Rs. 14.44 crores computed as per rule 8D(2)(iii) of Income Tax Rules,1962 .
52 ITA 7273-74/Mum/2012 The investments made by the assessee company includes the investment of Rs.19.37 crores made in 100% subsidiary company.
13. Coming to the submission of assessee that these are strategic investments and no disallowance made towards the administrative expenses. We would like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands of shareholders shall be exempt from tax. No doubt , the returns can also come by way of divestments of these investments but normally strategic investments are made with long term horizon where objective is to set up business and growth of these business over a long period of time. In these type of strategic investments, the investor has to normally devote significant time to plan, execute and monitor these investments regularly and periodically to ensure that these strategic investments are turned viable and profitable. These Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses 53 ITA 7273-74/Mum/2012 regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments . Our view is fortified by the following decisions :
1. The observation made by Hon'ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively wef 1st April 1962. The relevant observations are reproduced as under:
"The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the
54 ITA 7273-74/Mum/2012 practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. Insection 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further,section 14 specifies five heads of income which are chargeable to tax. In order to be 55 ITA 7273-74/Mum/2012 chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A.
Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37).
2. The ITAT,Mumbai in the case of ACIT v. Citicorp Finance (India ) Limited (2007)108 ITD 457 has negated the contention of the assessee that it had incurred no expenditure for earning high dividends as under:
"It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses 56 ITA 7273-74/Mum/2012 whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer (2004) 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for 57 ITA 7273-74/Mum/2012 acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments &Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. (1993) 200 ITR 488 (SC), the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Del), the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In Asstt.CIT v. Premier Consolidated Capital Trust (I). Ltd. (2004) 83 TTJ (Mum.) 843, the Mumbai Bench of this Tribunal has 58 ITA 7273-74/Mum/2012 held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A."
3. The ITAT, Chennai Bench has held in the case of Southern Petro Chemicals Industries v. DCIT(2005) 3 SOT 157 as under:
" We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of Rs. 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of 59 ITA 7273-74/Mum/2012 the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra), wherein the question was as under:
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. (1973) 90 ITR 348 (Bom) to the assessment year in question without considering the effect of the amendment operative from Ist April, 1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gross dividend before deduction of the proportionate management expenses ?"
Thus, when the decision of the Honble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can be made towards expenses. In view of the aforementioned discussion and keeping in view the submissions of the learned Departmental Representative, we restore this matter to the assessing officer to verify the quantum of deduction claimed by the assessee in earlier years under section 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes 60 ITA 7273-74/Mum/2012
4. The ITAT, Kolkatta Bench in recent reported judgment in Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced recently on 13th May 2015 has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962.
Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure under section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962.
The assessing officer has disallowed by computing the indirect expenditure being administrative and other in-direct expenses after invoking Rule 8D(2) (iii) of Income Tax Rules ,1962.
We, therefore, hold that the assessing officer has rightly invoked the provisions of section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 for disallowing the expenditure of Rs. 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. We order accordingly."
The assessee company has relied upon following decisions to contend that no disallowance should be made u/s 14A of the Act with respect of strategic investment / controlling interest investments made by the assessee company:
61 ITA 7273-74/Mum/2012
1. CIT v. Oriental Structures Engineers Private Limited , 35 taxmann.com 210 (Del. HC) - This case was decided by Hon'ble Delhi High Court on facts.The Tribunal gave finding that only interest of Rs. 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further it was observed by the Tribunal, there was SPV created to obtain contracts from NHAI and the SPV so formed engaged the tax-payer as contract to execute the works awarded to them(SPV) by the NHAI . The tax-payer has shown turnover from these contracts awarded by SPV in its Profit and Loss Account and hence it was held by the Tribunal that no interest can be disallowed u/s 14A read with rule 8D of Income Tax Rules, 1962 because it cannot be held that expenses/interest incurred for earning exempted income. The Hon'ble Delhi High Court held that it is a question of fact and no question of law much less substantial question of law arises and the appeal was dismissed . In the instant case, it is not the case of the assessee company that it has got any business contracts from its strategic investments/subsidiary companies in which controlling interest were acquired and hence the case are distinguishable on facts.
2. Garware Wall Ropes Limited v. ACIT 65 SOT 86, Mum-Trib.- In this case, the tax-payer was holding old investments made long back and no new investments were made during the previous year and on facts the Tribunal held that it could be concluded that the tax-payer did not incur any expenditure for earning income which does not form part of the total income and hence disallowance was deleted. In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has 62 ITA 7273-74/Mum/2012 incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act read with Rule 8D(2)((iii) of Income Tax Rules, 1962 having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act , excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
3.JM Financial Limited v. ACIT (ITA no. 4521/Mum/2012)-In this case, the tax-payer was made out a case to show that no expenditure has been incurred for maintaining the investment in subsidiary companies and therefore in the absence of finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO was held to be not justified by the Tribunal. However, in the instant case this facts has not been brought on record having regards to the accounts of the assessee company and hence we are setting aside this appeal to the file of the AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act read with Rule 8D(2)((iii) of Income Tax Rules, 1962having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act , excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
4. Sh Jigar P. Shah v. ACIT in ITA no 4366/Mum/2014 dated 24-02-2016)-In this case also there is a finding of fact that the tax-payer has made investments which were old investments and that no new investments were made during the year. . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been 63 ITA 7273-74/Mum/2012 brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act read with Rule 8D(2)((iii) of Income Tax Rules, 1962 having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act , excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
5. Daga Global Chemicals Private Limited v. ACIT in ITA No. 5592/Mum/2012 - The Tribunal has decided this appeal based on the facts of the case whereby it was established by the tax-payer that all the investments were made in the earlier years out of own funds and no expenditure was incurred and claimed by the tax-payer . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income.Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act read with Rule 8D(2)((iii) of Income Tax Rules, 1962 having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act , excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us.
64 ITA 7273-74/Mum/2012 Respectfully following the above decision of the Co-ordinate Benches of Mumbai ITAT in the case of Uma Polymers Limited in ITA no.5366/Mum/2012 dated 30-09-2015, and also of the decision of Kolkatta Tribunal Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced on 13th May 2015 whereby Kolkatta Tribunal has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962., we hold that the investment made by the assessee company in shares and units of mutual funds( excluding investment of Rs.1,10,30,000/- in foreign subsidiary) shall attract disallowance u/s 14A of the Act having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act keeping in view Rule 8D(2)(iii) of the Income Tax Rules, 1962,.We are therefore inclined to set aside the matter to the file of the AO for de-novo determination and quantification of disallowance u/s 14A of the Act of the indirect expenses incurred by the assessee company in relation to such income which does not form part of the total income having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act and also keeping in view Rule 8D(2)(iii) of Income Tax Rules, 1962. We order accordingly.
15. In the result, assessee appeal in ITA No 7274/Mum/2012 for assessment year 2009-10 is partly allowed .
16. In the result, assessee company's appeal in ITA No 7273/Mum/2012 for the assessment year 2007-08 and the assessee company's appeal in ITA no. 7274/Mum/2012 for the assessment year 2009-10 are partly allowed.
65 ITA 7273-74/Mum/2012 Order pronounced in the open court on 6th June , 2016. आदे श क घोषणा खुले #यायालय म% &दनांकः 06-06-2016 को क गई ।
Sd/- sd/-
(SAKTIJIT DEY) (RAMIT KOCHAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मंब
ु ई Mumbai; &दनांक Dated 06-06-2016
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व.9न.स./ R.K., Ex. 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. आयकर आयु:त(अपील) / The CIT(A)- concerned, Mumbai
4. आयकर आयु:त / CIT- Concerned, Mumbai
5. =वभागीय 9त9न?ध, आयकर अपील य अ?धकरण, मुंबई / DR, ITAT, Mumbai "B" Bench
6. गाडC फाईल / Guard file.
आदे शानुसार/ BY ORDER, स या=पत 9त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai