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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


                     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

(Appellant)                                   (Respondent)

                     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)
                                     Mumbai-400 020.

(Appellant)                                   (Respondent)

                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
                                                            A.Y. 07-08

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
                                                                  A.Y. 07-08

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
                                                                       A.Y. 07-08

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
                                                             A.Y. 07-08

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

the claim.

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
                                                              A.Y. 07-08

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.

      Sd/-                                    Sd/-
(AMIT SHUKLA )                          (RAJENDRA SINGH)

Mumbai, Dated: 3.12.2012.
                                7                   ITA No.2844 & 3270/M/11
                                                         A.Y. 07-08

Copy to: The Appellant
         The Respondent
         The CIT, Concerned, Mumbai
         The CIT(A) Concerned, Mumbai
         The DR " " Bench

True Copy
                                         By Order

                      Dy/Asstt. Registrar, ITAT, Mumbai.
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