Asstt. Commissioner of Income tax Range-10(1) Room No.455, Aayakar Bhavan, M.K. Road Mumbai-400 020. Vs. M/s. Global Trade Finance Ltd. Metropolitan Building, 6th Floor Bandra-Kurla Complex Bandra (E) Mumbai-400 051.
December, 05th 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "G", MUMBAI
BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
ITA No. 2844/Mum/2011
Assessment Year : 2007-08
Asstt. Commissioner of M/s. Global Trade Finance Ltd.
Income tax Range-10(1) Metropolitan Building, 6th Floor
Room No.455, Aayakar Bandra-Kurla Complex
Bhavan, M.K. Road Bandra (E)
Mumbai-400 020. Mumbai-400 051.
PAN No.AABCG 4119 L
ITA No. 3270/Mum/2011
Assessment Year : 2007-08
M/s. Global Trade Finance Ltd. Asstt. Commissioner of Income
Mumbai-400 051. Vs. tax Range-10(1)
Appellant by : Shri Rajarshri Diwedi
Respondent by : Shri Pavan Ved
Date of hearing : 03.12.2012
Date of Pronouncement : 03.12.2012
These cross appeals are directed against the order dated
27.1.2011 of CIT(A) for the assessment year 2007-08. The disputes
2 ITA No.2844 & 3270/M/11
raised in these appeals relate to disallowance of expenses under
section 14A of the Act and disallowance of discount expenses.
2. We first take up the issue relating to disallowance of expenses
u/s 14A of the Act. The AO noted that the assessee had earned tax
free dividend income of Rs.1,50,31,052/- but no expenses relating to
exempt income had been disallowed. The AO therefore disallowed the
expenses under section 14A which were computed as per Rule 8D
which came to Rs.1,80,06,342/- consisting of interest disallowance of
Rs.1,65,84,338/- and other expenses of Rs.14,22,004/-. The AO
however restricted the disallowance to the extent of dividend income
at Rs.1,50,31,052/-. In appeal the assessee submitted that no
expenditure had been incurred for the purpose of earning exempt
dividend income. It was pointed out that the assessee was engaged in
the business of financial services and it had not incurred any
operational expenses for making investments, holding investments or
for earning dividend income. Alternatively, it had been also submitted
that the cash from operating profits of Rs.1,09,72,73,000/- showed
increase of 276.64% over the earlier year and therefore, assessee was
having surplus cash for making investments.
2.1 CIT(A) after considering the submission of the assessee
observed that Rule 8D was not applicable for assessment year 2007-
3 ITA No.2844 & 3270/M/11
08. He also did not accept the contention of the assessee that
investments were made from surplus funds and no expenses were
incurred. It was observed by him that own capital/reserves were only
to the tune of Rs.138.00 crores whereas loan funds were Rs.1725.00
crores and interest expenditure was Rs.78.00 crores. Therefore,
CIT(A) observed that reserves/surplus and cash profit generated
during the year were of no help to the assessee to explain expenses
incurred for earning exempt income. CIT(A) further observed that
investment in FDRs were Rs.110.00 crores and average daily
investment in mutual fund was Rs.56.00 cores. Therefore CIT(A) held
that allocation of interest of Rs.1,65,84,338/- towards investment
yielding exempt income was reasonable. As regards other expenses,
CIT(A) confirmed the disallowance to the tune of Rs.10.00 lacs against
disallowance of Rs.14.22 lacs made by the AO. Aggrieved by the said
decision, the assessee is in appeal before the Tribunal.
2.2 Before us, the ld. AR for the assessee submitted that CIT(A) had
upheld the disallowance of Rs.165.00 crores of interest under section
14A which meant enhancement of disallowance made by the AO
without giving any opportunity of hearing to the assessee. CIT(A) had
calculated the disallowance on expenses without giving any
opportunity to the assessee. It was therefore requested that the order
4 ITA No.2844 & 3270/M/11
of CIT(A) be set aside and matter be restored to AO for fresh
examination. The ld. DR had no serious objection in the matter.
2.3 We have perused the records and considered the matter
carefully. The dispute is regarding disallowance of expenses under
section 14A in relation to exempt income. The assessee had earned
substantial dividend income of Rs.1.50 crores but no expenses had
been allocated to the exempt income. The AO computed disallowance
under section 14A as per Rule 8D. It is not in dispute that Rule 8D was
not applicable in assessment year 2007-08 in view of judgment of
Hon'ble High Court of Bombay in case of Godrej and Boyce Mfg. Co.
Ltd. vs. DCIT (328 ITR 81). CIT(A) has also held that Rule 8D was not
applicable. However, it is noted that he has computed disallowance
which is the same as per Rule 8D in so far as interest disallowance is
concerned without giving any objective basis. Moreover, CIT(A)
enhanced the disallowance of interest made by AO without giving any
specific opportunity of hearing to the assessee which is not correct.
Therefore, considering the facts and circumstances of the case in our
view matter requires fresh examination at the level of AO who had not
examined the disallowance on merit. Accordingly we set aside the
order of the CIT(A) and restore the matter to the file of AO for passing
a fresh order after necessary examination and after allowing
opportunity of hearing to the assessee.
5 ITA No.2844 & 3270/M/11
3. The second dispute is regarding disallowance of discount
expenses in relation to commercial papers issued by the assessee.
The assessee had debited a sum of Rs.3,82,55,367/- on account of
such expenses. The assessee explained that the commercial papers
(CP) had been issued at a discount to face value which was payable on
expiry of the specified period. The discount value had been amortised
over the specified period and expenses had been claimed on
proportionate basis. The AO however did not accept the explanation
given. It was observed by him that discount had been claimed as
interest under section 36(1)(iii) which was not correct as discount was
not interest. It was also observed by him that even if nature of
discount was accepted as interest, the no deduction was allowable as
assessee had not deducted tax at source. The AO therefore, disallowed
3.1 In appeal assessee submitted that discount was different from
interest and provisions of TDS were not applicable. Assessee placed
reliance on Circular No.647 dated 22.3.1993 issued by CBDT. CIT(A)
after considering the submission of the assessee observed that
discount was not of the nature of interest and, therefore, assessee was
not required to deduct TDS. He, therefore, deleted the disallowance
made by AO aggrieved by which revenue is in appeal before Tribunal.
6 ITA No.2844 & 3270/M/11
3.2 We have heard both the parties, perused the records and
considered the matter carefully. The assessee had issued commercial
paper (CP) at a discount to face value and face value was payable on
expiry of the specified period for which CP was issued. The discount
value had been amortised by assessee over the specified period and
expenses had been claimed as deduction on proportionate basis. There
is no dispute raised that CP had been issued for the purpose of
business only. Therefore the proportionate amount claimed by
assessee is allowable as deduction. As regards non-deduction of tax at
source CBDT in circular No.647 dated 22.3.93 has clarified that
difference between issue price and face value has to be considered as
discount and not interest paid and therefore, TDS provisions are not
applicable. In view of this position we do not find any infirmity in the
order of CIT(A) in allowing claim of the assessee and same is upheld.
4. In the result appeal of the revenue is dismissed whereas that of
the assessee is allowed for statistical purposes.
Order pronounced in the open court on 3.12.2012.
(AMIT SHUKLA ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 3.12.2012.
7 ITA No.2844 & 3270/M/11
Copy to: The Appellant
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
Dy/Asstt. Registrar, ITAT, Mumbai.