Income Tax Appellate Tribunal - Mumbai
Kotak Mahindra Prime Limited, Mumbai vs Acit (Hq) (Judl) To The Pr. Cit . 14 , ... on 17 February, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "H", MUMBAI
BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER &
SHRI RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA NO.5659/MUM/2018(A.Y.2012-13)
Dy.Commissioner of Income Tax 14(2)(1)
Room No.432, 4th Floor,
Aaykar Bhavan, M.K.Road,
Mumbai- 400 021 ...... Appellant
Vs.
M/s. Kotak Mahindra Prime Ltd.,
C-27, "G"Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051
PAN: AAACK 5934A .....
Respondent
ITA NO.5603/MUM/2018(A.Y.2012-13)
M/s. Kotak Mahindra Prime Ltd.,
C-27, "G"Block, Bandra Kurla Complex,
Bandra (E), Mumbai 400 051
PAN: AAACK 5934A ..... Appellant
Vs.
Dy.Commissioner of Income Tax 14(2)(1)
Room No.432, 4th Floor,
Aaykar Bhavan, M.K.Road,
Mumbai- 400 021 ....
Respondent
Revenue by : Shri Narendra Singh Jangpangi,
Assessee by : S/Shri F.V.Irani / Chetan Kakka
Date of hearing : 05/02/2020
Date of pronouncement : 17/02/2020
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ORDER
PER VIKAS AWASTHY, JM:
These cross appeals by the assessee and the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-22, Mumbai ( in short 'the CIT(A) ) dated 09/07/2018 for the assessment year 2012-13.
2. The assessee in its appeal has raised nine grounds. All the grounds of appeal are directed against a single issue of disallowance made under section 14A of Income Tax Act, 1961 (in short 'the Act') r.w. Rule 8D(2)(iii) of the Income Tax Rules, 1962.
3. The Revenue in its appeal has raised five grounds and the same are reproduced here under:-
"1. Whether on the facts of the instant case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.6,59,63,725/- without appreciating the fact that decision of Hon'ble High Court in the case of C1T Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) was rendered prior to introduction of Rule 8D and in that case the issue was regarding disallowance of interest u/s.36(l)(iii) and not 14A and assessee had made non-current investment of Rs.100.48 crore. The Ld.CIT(A) further erred in not considering the decision of the Hon'ble Supreme Court in the case of M/s.Maxopp Investments Pvt. Ltd.
2. Whether on the facts of the instant case and in law, the CIT(A) erred in deleting the disallowance of Rs.20,52,47,434/- in respect of mark to market loss on index options without appreciating that such loss is notional and contingent in nature which had not crystallized at the end of the year.
3. Whether on the facts of the instant case and in law, the CIT(A) erred in deleting the disallowance of Rs.18,97,915/- on account of discount on buy back of debentures. As part of the terms of the debenture contract, the amount returned by the assessee to the investor is less than the original amount received from the investor. Difference amount not repaid back by the assessee is in the nature of business income of the assessee as it is a benefit.
4. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.3
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5. The appeal prays that the order of CIT(A) on the above ground be set-aside and that of the assessing officer be restored."
4. Shri F.V.Irani appearing on behalf of the assessee submitted that the grounds raised in the appeal by assessee on the different facets of disallowance made under section 14A r.w.r 8D and ground No.1 in the appeal by the Revenue can be taken up together as the said ground in the appeal by the Revenue is also on the issue of disallowance under section 14A of the Act .
4.1 The ld. Authorized Representative for the assessee explaining the facts submitted that the assessee has earned dividend income of Rs.3,83,579/- during the period relevant to the assessment year 2012-13. The assessee made suo-motu disallowance of Rs.11,90,846/-. The Assessing Officer invoked provisions of Rule 8D(2) and thereafter, computed disallowance of Rs.7,04,83,104/- under section 14A of the Act. The ld. Authorized Representative for the assessee submitted that now it is a well settled legal position that :
(i) disallowance under section 14A of the Act cannot exceed exempt income earned;
(ii)only investments yielding exempt income should be considered for making disallowance.
To support his contention, the ld. Authorized Representative for the assessee placed reliance on the judgment of the Hon'ble Supreme Court of India in the case of Principal CIT vs. State Bank of Patiala, 259 Taxman 314 and the decision of Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments Pvt. Ltd., reported as 188 TTJ 1(Del-Trib)(SB).
4ITA NO.5659/MUM/2018(A.Y.2012-13) ITA NO.5603/MUM/2018(A.Y.2012-13) 4.2 The ld. Authorized Representative for the assessee contended that Assessing Officer while computing disallowance under section 14A of the Act r.w.r.8D had also made disallowance in respect of interest expenditure. The CIT(A) granted relief to the assessee in respect of disallowance on interest expenditure by following the decision of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd.,313 ITR 340 (Bom) and CIT vs.HDFC Bank Ltd., 49 taxmann.com 335(Bom). The ld. Authorized Representative for the assessee further submitted that the Tribunal in assessee's own case in ITA No.6993/Mum/2013 for assessment year 2011-12 decided on 05/05/2017 and in the case of assessee's group concern M/s.Kotak Securities Ltd. vs. DCIT in ITA No.6666/Mum/2016 assessment year 2012- 13 decided on 19/09/2018 had adjudicated the issue of disallowance under section 14A r.w.r. 8D(2). The Tribunal in both the aforesaid cases has held that the disallowance be restricted to exempt income earned and only dividend yielding investments be considered for computing avg. value of investments.
5. The ground No.2 raised in the appeal by the Revenue is with regard to disallowance of mark to market loss. The ld. Authorized Representative for the assessee submitted that the issue has been decided by the Tribunal in assessee's group concern M/s.Mahindra Investment Ltd. in ITA No.1502/Mum/2012 assessment year 2008-09 decided on 03/05/2013 and in assessee's own case in ITA No.6993/Mum/2013 for assessment year 2011-12 decided on 05/05/2017. While dismissing the ground raised by the Revenue, the Tribunal held that mark to market loss claimed by the assessee is allowable.
6. The ground No.3 of the appeal by Revenue is relating to disallowance on discount on buy back of debentures. The ld. Authorized Representative for the assessee placed reliance on the decision of Hon'ble Karnataka High Court in the case 5 ITA NO.5659/MUM/2018(A.Y.2012-13) ITA NO.5603/MUM/2018(A.Y.2012-13) of CIT vs. Industrial Credit & Development Syndicate Ltd. reported as 285 ITR 310(Kar) to contend that no addition in respect of discount on back of debentures is warranted.
7. Shri Narendra Singh Jangpangi representing the Department vehemently defended the assessment order and submitted that Assessing Officer has made disallowance under section 14A of the Act r.w.r. 8D in accordance with law. However, the ld. Departmental Representative fairly admitted that the issues raised in ground No.1 & 2 of the appeal by Revenue were also subject matter of consideration by the Tribunal in immediately preceding assessment year in assessee's own case. In respect of ground No.3 of the appeal ld. Departmental Representative supported the findings of Assessing Officer and prayed for reversing the finding of CIT(A) on the issue.
8. We have heard the submissions made by rival sides and have perused the orders of authorities below. The ground No.1 of the appeal of Revenue and ground No. 1 to 9 in the appeal of assessee are is in respect of disallowance under section 14A of the Act r.w.r 8D(2). Undisputedly, the assessee earned exempt income of Rs.3,83,579/-. The assessee made suo-motu disallowance under section 14A of the Act Rs.11,90,846/-. The Assessing Officer enhanced the disallowance under section 14A r.w.r 8D as under:-
(i) Under Rule 8D(2)(i) - Nil
(ii) Under Rule 8D(2)(ii) - Rs. 6,59,63,725/-
(iii) Under Rule 8D(2)(iii) - Rs. 45,19,379/-
Total: - Rs. 7,04,83,104/-
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In the first appellate proceeding, the assessee demonstrated that own interest free funds of the assessee were sufficient to cover the investment made. The CIT(A) deleted the disallowance made u/r 8D(2)(ii) by following the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. HDFC Bank Ltd. (supra). The Revenue in ground No.1 of the appeal has impugned the findings of CIT(A) in deleting the disallowance made un Rule 8D(2)(ii) in respect of interest expenditure. No material has been placed on record by the Revenue to controvert the findings of CIT(A) . We do not find any infirmity in the findings of CIT(A) in deleting the disallowance made under Rule 8D(2)(ii). The ground No.1 raised by the Revenue is devoid of any merit. The same is dismissed, accordingly.
9. The two fold contentions of the assessee before us is, that the disallowance may be restricted to exempt income earned and only investments yielding exempt income should be considered for making disallowance under section 14A of the Act. The Special Bench of the Tribunal in the case of M/s. Vireet Investment Pvt. Ltd.(supra) has held that while computing disallowance under section 14A r.w. Rule 8D(2)(iii) only those investments that yield exempt income should be considered for computing average value of investments The second contention of the assessee that disallowance under section 14A of the Act should be restricted to the extent ofexempt income earned is supported by the judgment of Hon'ble Punjab & Haryana High Court in the case of PCIT vs. State Bank of Patiala (supra). The SLP filed against the said judgment was dismissed by the Hon'ble Apex Court. Thus, in the light of aforesaid decisions we deem it fit and proper to restore this issue to the file of Assessing Officer for the limited purpose of recomputation of disallowance under Rule 8D(2)(iii) in line 7 ITA NO.5659/MUM/2018(A.Y.2012-13) ITA NO.5603/MUM/2018(A.Y.2012-13) with the principles laid down in the case of PCIT vs. State Bank of Patiala and ACIT vs. Vireet Investment Pvt. Ltd. (supra)
10. In so far as the other grounds of appeal challenging disallowance under section 14A of the Act r.w. Rule 8D, no arguments were raised by ld. Authorized Representative for the assessee, accordingly the same are dismissed.
11. The appeal of the assessee is partly allowed for statistical purposes in the terms aforesaid.
12. The Ground No.2 of the appeal by Revenue is in respect of disallowance of mark to market loss. The assessee had made provision for mark to market loss on derivatives Rs.20,52,47,434/-. The Assessing Officer held that the provision for mark to market loss is an unascertained liability, it is a provision for loss, which may or may not occur at the time of settlement of the contract at future date and hence, disallowed the same in entirety. The CIT(A) allowed assessee's claim by following the order of Tribunal in assessee's own case in ITA No.6993/Mum/2013(supra). The Co-ordinate Bench of the Tribunal in assessee's own case for assessment year 2011- 12 has considered this issue and has held that mark to market loss claimed by the assessee is allowable. We find no infirmity in the impugned order in accepting assessee's claim in line with the order of Tribunal . Respectfully following the decision of Tribunal in assessee's own case, we dismiss Ground No.2 of the appeal by the Revenue.
13. The ground No.3 of the appeal by the Revenue is in respect of disallowance of discount on buy back of debentures. The assessee during period the relevant to assessment year under appeal has received Rs.18,97,915/- on premature redemption of debentures. The assessee has treated the receipts on buy back of 8 ITA NO.5659/MUM/2018(A.Y.2012-13) ITA NO.5603/MUM/2018(A.Y.2012-13) debentures as capital in nature. The Assessing Officer held that the receipts are on revenue account and thus, made addition of Rs.18,97,915/-. The CIT(A) reversed the findings of Assessing Officer and upheld the asessee's contention that receipts on redemption of debenture are capital in nature. The Hon'ble Karnataka High Court in the case of CIT vs. Industrial Credit and Development Syndicate (supra), in a case where the assessee had redeemed debentures at a rates less than the face value and treated difference between its face value and buy back cost as capital receipt, the Assessing Officer treated the said surplus as income, the Hon'ble High Court endorsing the finding of Tribunal in holding the surplus as capital innature observed:
"14. In the instant case, admittedly the assessee had issued debentures which are redeemable after a period of ten years at a face value thereof. Though debenture-holders sold the debentures before the stipulated period at a discounted price to the nominee of the assessee, the consideration paid to those debenture-holders was paid by the assessee as reflected in the books of account by a loan advanced to the nominee. Thereafter, on the due dates, the assessee has redeemed those debentures. For the purpose of accounting, the entire liability was shown as a liability at the price paid by the nominee of the assessee. In the balance sheet, the entire amount due under debentures was shown as a liability. After redemption, the difference in the amount was transferred to the P&L a/c and it was shown as surplus. It is obviously on the ground that after redemption so much liability is saved by the assessee and actually the same has to be shown as surplus though there is no real income or profit derived. Notwithstanding the nomenclature adopted in the balance sheet to depict that amount and the place where it is shown, in reality the assessee did not receive the said amount as income. The assessee was only able to discharge its liability at a lesser amount as against the face value of the debentures. It is well recognised that in revenue cases, regard must be had to the substance of the transaction rather than to its mere form. It is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact did not exist. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law. Merely because the aforesaid amount was shown as a surplus amount in the P&L a/c, when the assessee did not actually receive any income, we are unable to accede to the submission of Sri Seshachala that it constitutes income under Section 2(24) of the Act, Having regard to the reality of the situation, as the assessee has not derived any income, he is entitled not to treat it as an income. Therefore, the 9 ITA NO.5659/MUM/2018(A.Y.2012-13) ITA NO.5603/MUM/2018(A.Y.2012-13) Tribunal was fully justified in its conclusion that the said surplus amount reflected in the balance sheet cannot be treated as an income of the assessee. We do not find any error in the said conclusion reached by the Tribunal."
We concur with the findings of CIT(A) that the amount received by the assessee on redumption of debentures is not a source of income to the assessee. The buyback of debentures at a lower a mount simply reduces the loan liability of assessee , which is capital in nature. It is not a trading liability and hence, any reduction in such liability cannot be on revenue account. Thus, in view of the facts of case and decision discussed above, we find no reason to interfere with the reasoned findings of CIT(A) on this issue. The ground No.3 raised in the appeal by the Revenue is devoid of any merit, hence, the same is dismissed.
12. The Grounds No.4 & 5 of the appeal by Revenue are general in nature, hence, require no adjudication.
13. In the result, the appeal of the Revenue is dismissed.
14. To sum up, appeal of the assessee is partly allowed for statistical purpose and the appeal of the Revenue is dismissed.
Order pronounced in the open court on Monday , the 17th day of February, 2020.
Sd/ Sd/-
(RIFAUR RAHMAN) (VIKAS AWASTHY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated 17/02/2020
Vm, Sr. PS(O/S)
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Copy of the Order forwarded to :
1. The Appellant ,
2. The Respondent.
3. The CIT(A)-
4. CIT
5. DR, ITAT, Mumbai
6. Guard file.
BY ORDER,
//True Copy//
(Dy./Asstt. Registrar)
ITAT, Mumbai