Subject: Payment made to Tusk Investment Fund 1
Referred Sections:
Section 14A of the Act.
Section 10
Section 37(1) of the Act
Referred Cases / judgments
CIT vs Holcim India (P) Ltd.,
Joint Investment (P.) Ltd. vs CIT reported at (2015) 373 ITR 694 (Del.).
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `SMC', NEW DELHI
Before Sh. N. K. Saini, Accountant Member
ITA No. 4115/Del/2017 : Asstt. Year : 2012-13
Elephant India Finance Pvt. Ltd., Vs DCIT,
4th Floor Punjabi Bhawan, 10, Circle-11(1)
Rouse Avenue, New Delhi
New Delhi-110002
(APPELLANT) (RESPONDENT)
PAN No. AAACE0472F
Assessee by : Sh. M. P. Rastogi, Adv.
Revenue by : Ms. Ashima Neb, Sr. DR
Date of Hearing : 12.04.2018 Date of Pronouncement : 10.07.2018
ORDER
This is an appeal by the assessee against the order dated 14.03.2017 o f
ld. CIT(A)-3, Delhi.
2. Following grounds have been raised in this appeal:
" 1. That both the Ld C1T(A) and Ld AO erred similarly in
law and in facts that the investment advisory fees paid to
Tusk Investment Fund 1 and Tusk Investment Fund 2 of
Rs 60,46,010 respectively is without any basis and hence
cannot be allowed deduction u/s 37(1) of the Income-tax
Act.
2. That both the Ld CIT(A) and Ld AO erred similarly in
law and in facts that the investment advisory fees paid to
Tusk Investment Fund 1 and Tusk Investment Fund 2 of
Rs 60,46,010 respectively is for earning tax free income
and hence cannot be allowed deduction u/s 14A of the
Income-tax Act.
3. That the Ld. CIT(A) erred in holding on facts that the
assessee failed to provide any service details/ or logic or
2 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
basis why the payment was made to Tusk Investment Fund
1 and Tusk Investment Fund 2 of Rs 60,46,010 each.
Consequently, the order passed the Ld CIT(A) is
incorrect and without any basis.
4. The Assessee craves to leave to alter, amend or
withdraw any grounds of appeal which is necessary in the
interest of justice. "
3. From the above grounds, it is gathered that the only grievance
of the assessee relates to the sustenance of addition of
Rs.60,46,010/- made by the AO by making the disallowance out o f
the expenses of Rs.1,20,92,020/- i.e. Rs.60,46,010/- each o n
account of payment made to Tusk Invest ment Fund 1 and Tusk
Investment Fund 2.
4. Facts of the case in brief are that the assessee filed its return
of inco me on 24.09.2012 declaring a loss of Rs.42,14,949/-. Later
on, the case was selected for scrutiny. During the course o f
assessment proceedings, the AO noticed that the assessee had
debited expenses of Rs.1,26,07,718/- against the total revenue o f
Rs.68,76,847/- in the profit and loss account and that the revenue
consisted of interest inco me of Rs.49,48,372/- earned as interest o n
FD with banks and Rs.18,48,394/- as dividend income which had
been claimed exempted u/s 10 of the Income Tax Act, 1961
(hereinafter referred to as the Act). Apart from this, miscellaneous
inco me of Rs.80,081/- had been credited in the profit and loss
account. He, also noticed that the total expenses debited in the
profit and loss account included legal and professional fees
amounting to Rs.1,21,88,827/-. Out of which the assessee had
3 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
claimed payment of Rs.60,46,010/- each to the Tusk Investment
fund 1 and Tusk Investment Fund 2 respectively totaling to
Rs.1,20,92,020/-. The AO asked the assessee to explain the service
received from those two parties. According to the AO, the assessee
failed to bring on record any detail in this regard. The AO pointed
out that there was no change in the shareholding pattern of the
assessee company as well as the long term borrowing which was
basically the loan taken from the related parties. He also pointed
out that on the assets side, no a mount was shown as inventory or
stock in trade and there was no opening as well as closing stock,
hence, no business activities were undertaken by the assessee
during the year under consideration except investments in quoted
and unquoted shares on which, it had earned dividend inco me and
claimed it exempted u/s 10 of the Act which required disallowance
under the provisions of Section 14A of the Act. The AO held that
the expenses of Rs.1,20,92,020/- claimed by the assessee were
related to the invest ment, income from which did not or shall not
form part of the total inco me for the taxation. Therefore, the
amount of Rs.1,20,92,020/- was not allowable expense under the
provisions of Section 14A of the Act. He, therefore, disallowed the
said amount and as the assessee in the computation of income had
suo motto made disallowance of Rs.29,44,969/- u/s 14A of the Act
r.w. Rule 8D of the Inco me Tax Rules, 1962. Therefore, the AO
made a further disallowance of Rs.91,47,051/- (Rs.1,20,92,020-
Rs.29,44,969).
4 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
5. Being aggrieved the assessee carried the matter to the ld.
CIT(A) and furnished the written submissions which have bee n
incorporated by the ld. CIT(A) in para 2 of the impugned order
which read as under:
" This paper book submissions made before Your Honour
is due to grievance caused to Appellant against the
assessment order passed u/s 143(3) of the Income-tax Act
1961 by the id. AO for the AY 2012-13. The Ld AO vide
assessment order dated 03 November 2014 u/s 143(3) of
the Act had made additions u/s 14A of Rs 91,47,051/-.
Against the said assessment order the Appellant had filed
an appeal with Your Honour's office on 12 December
2014 u/s 246A of the Income-tax Act, 196.
The Ld AO had made a single addition for the expenses
totaling Rs 120,92,020 presumably incurred for earning
tax free returns under section 14A of the Act. The
Appellant had challenged this addition and filed an
appeal u/s 246A of the Act. The various grounds of
appeal are dealt below:
1. Grounds of Appeal 1 -Addition of Rs.120,92,020 -
14A
1.1 The Appellant contends that the Ld AO has
defaulted in application of section 14A of the Income-
tax Act, 1961 by disallowing a sum of Rs.1,20,92,020/-.
In the assessment proceedings the Ld AO called for the
details of Legal Professional Fees totaling to Rs
121,8,827 out of which Rs.120,92,020 was paid to two
Mauritian Companies after the deduction of tax. The
AO was of view the two Mauritian- Companies i.e. Tusk
Investment 1 and Tusk Investment 2 acted as
management advisor for the investments made in India
by the Appellant, hence any amount paid by the
Company for the purpose of investment in India to such
management advisors would be disallowed u/s 14A of
the Act In doing so, the Ld AO held as follows:
5 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
"In the present case, the assessee has claimed
expense of Rs. 1,20,92,020/- on account of payment
made to Tusk Investments Fund 1 and Tusk
Investments Fund 2 against the management fee
towards the cost of managing and receiving advice in
relation to the investment made.
Section 14A of the IT Act, 1961 regulates the
expenditure which was incurred in relation to exempt
income. By virtue of this section no deduction is
allowed in respect of expenditure incurred by the
assessee on account of income which does not form
part of the total income under the Act. Further, the
CBDT vide circular No, 5/2014 dated 11.02.2014 has
clarified that disallowance of expenses u/s 14A of the
Act, 1961 shall be made even in the cases where
corresponding exempt income has not been earned
during the year. The relevant portion of the circular
is reproduced below for reference:
Considering the facts mentioned above, it is
imperative to held that the expense of Rs.
1,20,92,020/- claimed by the assessee are related to
the investment, income from which does not or shall
not form part of total income for the taxation.
Therefore the amount of Rs. 1,20,92,020/- is not an
allowable expense under the provisions of Section
14A of the Income Tax Act, 1961. Hence the amount
of Rs. 1,20,92,020/- is disallowed u/s 14A of the Act
As the assessee in the computation of income has sub
motto made disallowance of Rs. 29,44,969/- u/s 14 A
r. w. Rule 8D, therefore the balance amount of Rs.
91,47,051/- is hereby added to the total income of the
assessee for the year under consideration".
1.2 The from above, it can seen that the id. AQ
disallowed a sum of Rs 120,92,020 as paid by the
company to the foreign ponies who were investment
advisors of the company stating that the entire expenses
6 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
paid were for the purpose of exempt income u/s 10 and
thus no expenses incurred primarily for earning such
income shall be allowable for tax deduction. While
coming to this conclusion the id AO failed to take the
following into consideration.
1.3 Not all the investments made had earned tax free
incomes and that the Appellant was in the business of
financial services holding a NBFC registration with the
RBI of India. The Company had an investment of Rs 60.99
crores out of which dividend received was only Rs 18.5
lakhs. It's impossible to imagine that an investment of
magnitude of Rs 61 crores would be invested just to earn
tax free dividends Rs 18.50 lakhs i.e. 0.3 % less than 1 %
every year. Even an investment in savings bank would
have given an assured return of 4-6 % gross. Thus, to
conclude that the Appellant had invested 61 crores just to
earn tax free returns in form of dividends is an argument
devoid of any merits. It is to be noted, earning dividends
is not an assured activity, no business man will ever
incur a recurring expenditure in anticipation of non
assured returns esp dividends. The receipt of dividend is
totally a feature which depends on lots of factors and
there cannot be guarantee just as in case of interest The
Mandate of section 14A requires to disallow such
expenses which were incurred for the purpose of earning
tax free dividends. The Ld AO has not given any reasons
why he considers expenses of Rs 120,92,020 is for the
purpose of earning dividends, In the purpose of the
Appellant was not only earn dividends based on past
records it could have very well invested Rs 61 crores only
in dividend paying companies such as SBI, ONGC and
others. On the contrary, Companies like Amar Chitra
Katha, Mahindra and others in losses are nor paid any
dividends. The investments made by the Appellant is thus
a strategic investment with an eye to acquire more
holding in such companies.
During the subject assessment year 2012-13, the
Appellant had not sold any investments and earned any
7 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
long term or short term capital gains. The investment
made by the Appellant was long term in nature with a
strategic eye on each of investments as follows:
Particulars Date of No. of Amount (Rs.) for Dividend
holding Shares AY 2011-12 received in AY
& 12-13 2012-13
1. Mahindra CIE 2008 169830 4,24,87,974 NA
Automotive Limited
2. EIH Limited 2008 & 2009 753526 8,50,25,171 6,78,173
3. Nitco Limited 2008 2,87,929 6,87,19,167 1,43,965
4. Param Not known 100 10,000 NA
Investments
Private Limited
5. Amar Chitra 2010 & 2011 15,042 4,23,37,399 NA
Katha Private
Limited
6. Air Works (I) 2011 7,357 3,22,01,074 NA
Engineering
Private Limited
7. RBL Bank 2010 & 2011 51,31,280 33,91,77,608 10,26,256
Limited
60,99,58,393 18,48,394
Not Applicable
1.5 The perusal of above chart reveals that the Appellant
on investment of Rs 61 crores in different listed and
unlisted equities have earned only Rs 18.50 lakhs as
dividends from only three companies. As already stated,
the status of dividend is not something which the
Appellant was assured off for which he could have
planned his expenditure. The income by way of dividend
is purely by chance, however investing in the company
with long term view calls for more understanding the
environment of business and other facts such as expertise
of top management etc. The objective of the Appellant in
investing in these equities was that of a private equity
investor with a view of long term gains and possible exit
once the valuation becomes attractive or may be to pit
more investments in order have a management say.
Further, the income tax taxation on exit from this
investment of both listed and unlisted equities might
attract taxation. However, such an event has not
8 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
happened in this year, hence there can be no question of
any disallowance. The payment was made to the
Mauritian Companies to act as guide and giving their say
about the kind of investments to be made in the Indian
equity market Thus, the cost incurred to be paid to the
Mauritian companies was genuine expenses tax
deductible u/s 37 of the IT Act. There can be no question
of disallowance if any u/s 14A of the Act, as no tax free
returns has been shown by the AO to be received by the
Appellant from sale of such of shares. As stated, equity
dividend cannot be a yard stick to disallow the total
business expenditure. At this juncture it is important to
note that what Hon ' ble Delhi High Court has held in case
of CIT vs Holcim India (P) Ltd., ITA Nos. 486/2014 and
299/2014 (Annexure) - ''Dividend may or may not be
declared. Dividend is declared by the company and
strictly in legal sense, a shareholder has no control and
cannot insist on payment of dividend. When declared, it
is subjected to dividend distribution tax " .
1.6 Further, In Holcim India's case (supra), Hon ' ble
Delhi High Court has held that AO was wrong is
disallowing the entire expenditure as if there was no
expenditure incurred by the respondent assessee
for conducting business. The expenditure had to be
incurred to protect the investment made. The genuineness
of the expenditure for the business activities has not been
doubted by the AO and thus in given circumstances there
is no merit in disallo wing such expenses.
1.7 Elucidating further, the Hon ' ble Delhi Court in
Holcim India's case (supra) held that Income exempt
under Section 10 in a particular assessment year, may
not have been exempt earlier and can become taxable in
future years. Further, whether income earned in a
subsequent year would or would not be taxable, may
depend upon the nature of transaction entered into in the
subsequent assessment year. For example, long term
capital gain on sale of shares is presently not taxable
where security transaction tax has been paid, but a
9 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
private sale of shares in an off market transaction
attracts capital gains tax. It is an undisputed position
that respondent assessee is an investment company and
had invested by purchasing a substantial number of
shares and thereby securing right to management.
Possibility of sale of shares by private placement etc.
cannot be ruled out and is not an improbability.
1.8 The, above ruling of Hon'ble Delhi High Court is a
land mark judgment as per the Appellant, as the facts of
the case are same or similar to the Appellant. In the
above ruling the quashed the disallowance u/s 14A of Rs
8.61 crores for AY 2007-08 and Rs 6.60 crores for AY
2008-09 holding that no expenses can be disallowed as
the Ld AO has not shown any tax free income earned in
the income schedule. The Hon' High Court also held that
dividend income is an discretionary item of income and
what would be important is whether any tax free return is
earned on sale of shares. In case of the Appellant, to no
tax free returns have been earned from sale of shares and
discretionary dividend income alone cannot be made the
basis to disallow substantial income of Rs 120,92,020. In
net summary, the Appellant prays before to quash the
additions of Rs 120,92,020 made the AO.
1.9 The Appellant states dividend earning was never the
objective of the Company and thus finding has not been
given by the Ld AO as to what was motive of the company
of the invests Rs 61 crores. The Appellant has already
stated that dividend earning was not its motive as
dividends does not assure a definite return, thus no
definite expenditure can be incurred on regular basis
purely on windfall income under dividend category. Thus,
the Ld AO has failed to clearly point out the expenses
incurred by the Appellant to earn the dividends. Given
that, the AO is guilty of disallowing a genuine business
expenses of Rs 120,92,020 payable to investment advisor.
Moreover, Hon'ble High Court in Holcim India's case has
rebutted the theory of dividends and upheld that
taxability of shares to be taken as basis to allow or
10 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
disallow the expenses u/s 14A of the Act. Moreover, time
and again it has been held by various tribunals that
strategic investment would fall outside the purview of
14A, Till 31 March 2015, the Appellant has not disposed
any holding in investments of Rs 61 crores. Given the
long term holding, it cannot be said that the Appellant
was holding the shares to earn the dividends. For the
period of 5 years, the investments has fairly shown a high
returns, still the Appellant has not sold its stake in such
companies. Thus, when stakes are with a view of long
term, no disallowance can be made of genuine expenses
made u/s 14A.
The appellant pleads that the order of the AO may kindly
be quashed being void ab initio as it is evident that the
disallowance u/s 14A made by the AO is not justifiable
and against the tenets of law and hence, should kindly be
deleted. "
6. The ld. CIT(A) after considering the submissions of the
assessee observed that the assessee vide order sheet entry dated
17.08.2015 was directed to establish the rendering of services b y
bringing on the record genuinity and capability of the investment
advice in the field of the equity market and the co mplete details o f
work executed in India. In response, the assessee sub mitted that it
had debt free funds and intended to maximize returns in India fro m
the equity market, despite having some knowledge about the India n
Equity Market but was not sure how it can reliably and in well
informed manner maximize value from the Indian Equity Market. It
was further stated that the assessee became aware of so me FIIs who
had an invest ment strategy in Indian Equity Market with a n
projected invest ment of Rs.400 crores in year 2008 and was keen to
get associated that FIIs and entered into agree ment for the portfolio
11 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
manage ment advisory and agreed to pay 2% fees to two co mpanies,
na mely, Tusk Invest ment Fund 1 (T1) and Tusk Investment Fund 2
(T2) based in Mauritius and that by going on the advice of T1 and
T2, the assessee invested a sum of Rs.60 crores for which the
assessee had paid a sum of Rs.1,20,92,020/- after the co mpliance o f
tax laws and claimed the same as deduction u/s 37(1) of the Act.
The ld. CIT(A) also observed that the analysis of the investment
made by the assessee co mpany revealed that mostly the money had
been invested in the privately held companies, there was nothing o n
record to show the role played by the management co mpanies for
making the invest ment in the Indian Co mpanies. He further
observed that the assessee had not sub mitted any documentary
evidence in support to establish the experience of Tusk Invest ment
Fund 1 and Tusk Invest ment Fund 2 regarding the Indian market.
He, therefore, asked the assessee to bring on the record, the
evidences regarding the experience and manage ment services
provided to other co mpanies in India. The ld. CIT(A) held that the
onus to proof was on the assessee to prove each of the following
ingredients before expenditure can be allowed as deduction:
" (a) The item of expenditure not being of the nature
described under ss. 30 to 36
(b) the item of expenditure must not be in the nature of
capital or personal expenses of the assessee;
(c) the expenditure must be laid out wholly and
exclusively for the purpose of business or profession. "
7. The ld. CIT(A) was of the view that the mere fact that the
accounts of the assessee contain debit entry and that the debit had
been duly authorized on behalf of the assessee will not make the
12 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
expenses deductible fro m the taxable profits. He observed that the
assessee had not submitted any evidence regarding the rendering o f
services, experience regarding the investment climate in India and
the reasonableness of the payment made to the Tusk Invest ment
Fund 1 & 2, Mauritius which was obligatory on the part of the
assessee to prove the reasonableness of the amount. He also
observed that the mere fact that the payment had been made under a
contract/agreement was not conclusive of the expenditure being
laid out wholly and exclusively for the purpose of business.
Accordingly, the disallowance made by the AO was sustained.
8. Now the assessee is in appeal. The ld. Counsel for the
assessee reiterated the sub missions made before the authorities
below and further sub mitted that the investments were made in the
earlier years on the advice of Tusk Investment Fund 1 & Tusk
Investment Fund 2 and no such disallowance was made in the
earlier years. It was further stated that for the year under
consideration, the payment had been accepted and the disallowance
was made u/s 14A of the Act. However, the ld. CIT(A) discussed
the provisions of Section 37(1) of the Act which were not before
him. It was further submitted that the assessee earned the dividend
inco me of Rs.18,48,394/- only which was claimed exe mpt u/s 10 o f
the Act and suo motto made the disallowance of Rs.29,44,969/-
which was more than the exempt income. Therefore, the arbitrary
disallowance made by the AO to Rs.1,20,92,020/- was not justified.
The reliance was placed on the judgment of the Hon ' ble
13 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
Jurisdictional High Court in the case of Joint Investment (P.) Ltd.
Vs CIT reported at (2015) 373 ITR 694 (Del.).
9. In her rival sub missions, the ld. Sr. DR reiterated the
observations made by the authorities below in their respective
orders and strongly supported the impugned order passed by the ld.
CIT(A). She made a reference to para 2.1 of the impugned order
and stated that the disallowance was made by the ld. CIT(A) u/s
37(1) of the Act, since no evidence for rendering of services
provided was furnished by the assessee. Therefore, the
disallowance made by the AO and sustained by the ld. CIT(A) was
fully justified.
10. I have considered the submissions of both the parties and
perused the material available on the record. In the present case, it
not in dispute that the AO made the disallowance u/s 14A of the
Act r.w. Rule 8D of the Inco me Tax Rules, 1962. It is also noticed
that the assessee although earned the dividend income of
Rs.18,48,394/- which was claimed as exe mpt, but the disallowance
was made by the assessee suo motto u/s 14A of the Act r.w. Rule
8D of the Income Tax Rules, 1962 for a sum of Rs.29,44,969/-, the
said fact has been accepted by the AO at page no. 4 of the
assessment order dated 03.11.2014. It is well settled that as per the
ratio laid down by the Hon ' ble Jurisdictional High Court in the
case of Joint Investment (P.) Ltd. Vs CIT (2015) 373 ITR 694
(supra) that the disallowance u/s 14A of the Act can be made only
to the extent of exempt income. In the said case, it has been held as
under:
14 ITA No. 4115/Del/2017
Elephant India Finance Pvt. Ltd.
"Section 14A or rule 8D of the Income-tax Rules, 1962, cannot be
interpreted so as to mean that the entire exempt income is to be
disallowed. The window for disallowance was indicated in section
14A and was only to the extent of disallowing expenditure
"incurred by the assessee in relation to the tax exempt income".
This proportion or portion of the exempt income surely cannot
swallow the entire amount. The order of the Assessing Officer was
set aside."
11. In the present case, since the assessee suo motto made the
disallowance of Rs.29,44,969/- u/s 14A of the Act r.w. Rule 8D o f
the Income Tax Rules, 1962, more than the exempt income claimed
at Rs.18,48,394/-. Therefore, no further disallowance was called
for. In that view of the matter, the impugned disallowance made b y
the AO and sustained by the ld. CIT(A) is deleted.
12. In the result, appeal of the assessee is allowed.
(Order Pronounced in the Open Court on 10/07/2018)
Sd/-
(N. K. Saini)
ACCOUNTANT MEMBER
Dated: 10/07/2018
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR
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