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IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI
, ,
BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM
./I.T.A. No.1087/Mum/2013
( / Assessment Year: 2009-10)
Catalyst Finance Ltd. Income Tax Officer 3(1)(3),
3rd Floor, Bajaj Bhavan, / Aayakar Bhavan, M. K. Marg,
Jamnalal Bajaj Marg, Nariman Point, Vs. Mumbai
Mumbai-400 021
. / . /PAN/GIR No. AAACC 5094 M
( /Appellant) : ( / Respondent)
/ Appellant by : Dr. K. Shivram &
Shri Ajay R. Singh
/Respondent by : Shri V. K. Bora
/ : 11.11.2014
Date of Hearing
Date of Order : 17.11.2014
/ O R D E R
Per Sanjay Arora, A. M.:
This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-6, Mumbai (`CIT(A)' for short) dated 16.01.2013, partly
allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax
Act, 1961 (`the Act' hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated
09.12.2011.
2. The appeal raises two grounds, i.e., qua the disallowance of interest expenditure
u/s. 14A(1) and, two, the corresponding disallowance of book profit u/s.115JB of the Act.
The assessee-company, in the business of investment, leasing and finance, was observed
during the course of hearing to have received gross dividend at Rs.6,55,522/-, claimed
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Catalyst Finance Ltd. vs. ITO
and allowed tax exempt u/s.10(34) of the Act. The assessee had further made suo motu
disallowance on account of interest at Rs.30,98,069/- there-against, besides another in
respect of demat charges at Rs.4,714/-. The disallowance u/s. 14A(1), in its view, had
been rightly made, and ought to be accepted as such. In view of the Assessing Officer
(A.O.), there was no basis for such restriction, either on facts or in law, so that the same
was not admissible and, accordingly, computed the disallowance u/s.14A, applying Rule
8D, at Rs.59,84,395/-, including qua indirect administrative expenditure, covered under r.
8D(2)(iii), at Rs.5,78,704/-, which though is not in dispute before us.
The same stood confirmed in appeal; the ld. CIT(A) observing that the funds are
fungible, and that the assessee had failed to establish a nexus between the interest earned
and that expended; interest (at Rs.84.30 lacs) being the principal source of the assessee's
income, so that the prescribed formula for allocating interest attributable to other income,
based on proportionate investment, would apply. Aggrieved, the assessee is in appeal.
3. Before us, the ld. Authorized Representative (AR), the assessee's counsel, on
being queried on the basis of the disallowance of interest at Rs.30.98 lacs, would submit
the same to be the difference between the interest earned (Rs.84.30 lacs) and that paid
(Rs.115.28 lacs). On it being pointed out to him that the interest received could be at a
rate higher than that at which the same was paid; would rather understandably be so, so
that there could be some profit element therein, which would need to be excluded, i.e.,
even applying the assessee's method, he conceded thereto, submitting that a direction for
a further adjustment toward such interest differential, based on the average rate of interest
earned and expended, could be made, i.e., vis-à-vis that disallowed by the assessee per
its' return of income. On it being further pointed out to him that the assessee's method
was even otherwise flawed in-as-much as it was based on the assumption, which may not
obtain, that the entire funds lent, earning interest, are sourced from borrowed capital only,
it was explained by him that no further disallowance would be warranted in-as-much as
the investments were made in the past from the assessee's own capital, adducing a chart
detailing the investment in shares along with the dates of their acquisition, as well as the
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Catalyst Finance Ltd. vs. ITO
source of their funding. On being queried if this information had been also furnished
before the authorities below, he admitted to it being not so.
The ld. Departmental Representative (DR), on the other hand, would submit that
no case for any interference with the impugned order was made out in-as-much as the
assessee had abysmally failed to substantiate at any stage its claim of the investments,
liable to yield income not forming part of the total income, as having been financed from
non-interest bearing capital, so that no part of the interest paid could be, as claimed, said
to be attributable thereto. In fact, the ld. CIT(A) has clarified that the funds are fungible,
so that even if the assessee's claim, as being now made before the tribunal, was true, it
would have to substantiate the same with reference to the fund position as obtaining for
the current year, for which the interest expenditure is being claimed.
4. We have heard the parties, and perused the material on record.
The facts of the case are not in dispute. The fund position of an entity is liable to
change over time. As such, whatever may have been the source of financing the
investment in shares by the assessee in the past, it is its financing, as discerned from the
financial position for the relevant year, that is relevant in-as-much as the disallowance, if
any, to be made, is only qua the interest on the borrowed capital as would be attributable
to such investment for the current year. E.g., if the investment was financed by borrowed
capital, since repaid from own capital or profit, could it be said that the investment
continues to be financed by interest bearing borrowed capital? In fact, as we observe
from the investment chart adduced, the source of funding of many an investment in
shares is `ICD', i.e., inter-corporate deposits, which only denotes borrowed capital.
Further, even as observed during the course of hearing, with reference to the assessee's
balance-sheet (PB pgs.3-14), to of-course no repudiation by the ld. AR, the assessee's
entire capital of Rs.8.36 crores, both at the beginning and the close of the year, stands
completely wiped off; the debit balance of the profit and loss account as at the relevant
dates being at Rs.11.36 crores and Rs.11.62 crores respectively. The assessee's net worth
being negative throughout the year, all its assets, including the tax-exempt investment in
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Catalyst Finance Ltd. vs. ITO
shares, stand financed from borrowed capital in the form of unsecured loans.
Proportionate allocation, as advocated by r. 8D(2)(ii), statutorily prescribed per s. 14A,
thus becomes even otherwise, i.e., having regard to the assessee's accounts, the most
appropriate method. It needs to be appreciated that sec. 14A has, as explained by the
hon'ble court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom),
widened the theory of apportionment.
We are conscious that it could be argued that the assessee's method, which
presumes the entire portfolio of loans and advances - yielding interest income, as being
financed from borrowed capital, also gets thus validated, i.e., save the adjustment for the
profit element afore-noted. The argument, impressive at face, is misplaced. This is as it
fails to consider the interest corresponding to the capital not represented by any assets,
referred to here-in-before, being at Rs. 3 crs. and Rs. 3.26 crs. as at the beginning and the
close of the year respectively. The interest in respect of the said funds, since lost, would
also stand to be allocated amongst the assessee's assets. Qua this, we observe the interest
(income) on advances to be much higher than on investments yielding dividend, so that
the loss or deficiency on account of interest cost, which is the principal expenditure, is
substantially, if not wholly, attributable to these investments. The proportionate method
u/r. 8D(2)(ii) followed by the Revenue, according equal weight to all the assets,
irrespective of the income generated by them, and therefore their contribution to the loss
(of capital), thus, rather, favours the assessee in the facts of the case.
We accordingly find no merit in the assessee's case, and have no hesitation in
upholding the impugned order qua this disallowance. Gd. 1 is dismissed.
5. No specific arguments were raised by the assessee qua its Ground 2, which was in
fact also not a subject matter of appeal before the first appellate authority. The matter,
however, being legal, we admit the same. The disallowance of expenditure, interest or
administrative, is only of that incurred by the assessee. If the same is not in the books of
account, where we wonder it is? Both the income and expenditure, determining the net
profit, which forms the basis for computing income under the Act, are only as per the
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Catalyst Finance Ltd. vs. ITO
books of account. The provision of section 14A only codifies the law, which is otherwise
inherent in tax jurisprudence, that only the net income (i.e., net of the expenditure), from
whatever source, is to be brought to tax and, consequently, only the net income, where
tax-exempt, is to be so. Further, rule 8D prescribes a method/s toward determining the
said income, i.e., on net basis, providing a uniform basis for ascertaining the amount of
expenditure liable to be excluded in computing the income chargeable to tax.
The legal basis for the relevant adjustment, i.e., qua the expenditure relatable to
the exempt income, in determining the book profit, which is an alternate method of
taxation, i.e., where the income computed under the regular provisions of the Act falls
below the prescribed percentage of book profit, is per clause (f) of Explanation 1 below
sub-section (2) of section 115JB.
We, therefore, again find no basis for not confirming the adjustment of the
expenditure, as finally sustained for disallowance u/s. 14A(1), in computing the book
profit u/s.115JB. We decide accordingly; our decision being supported by a host of
decisions by the tribunal, viz.
- JSW Energy Limited v. ACIT (in ITA No. 498/Bang/2010 dated 27/12/2013)
- ITO v. RBK Share Broking Pvt. Ltd. (in ITA Nos.7546 & 6678/Mum/2011 dated
24.07.2013);
- Esquire Private Limited vs. DCIT (in ITA No.5688/Mum/2011 dated 29.08.2012);
- ITO vs. Sea Wind Investment & Trdg. Co. Ltd. (in ITA No.6320/Mum/2004 dated
17.10.2007).
6. In the result, the assessee's appeal is dismissed.
Order pronounced in the open court on November 11, 2014 at the conclusion of the
hearing
Sd/- Sd/-
(Amit Shukla) (Sanjay Arora)
/ Judicial Member / Accountant Member
Mumbai; Dated : 17.11.2014
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Catalyst Finance Ltd. vs. ITO
. ../Roshani, Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent
3. () / The CIT(A)
4. / CIT - concerned
5. , , / DR, ITAT, Mumbai
6. / Guard File
/ BY ORDER,
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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