Poonawalla Investments & Industries P ... vs Assessee

आयकर अपील य अ धकरण "C" यायपीठ मब ंु ई म।

IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI SANJAY GARG, JUDICIAL MEMBER

आयकर अपील सं./I.T.A. No.1631 /Mum/2013 ( नधारण वष / Assessment Year : 2009-2010

Poonawalla Investments & बनाम/ Dy. CIT - 3(2), Industries Pvt. Ltd., Mumbai. Vs. 508, Dalamal Towers, Nariman Point, Mumbai - 400 021. थायी ले खा सं . /PAN : AAACP 3265 B (अपीलाथ /Appellant) .. ( यथ / Respondent)

Appellant by Shri Prasad Bapat Respondent by : Shri Premanand J

ु वाई क तार ख / Date of Hearing सन : 10-12-2014 घोषणा क तार ख /Date of Pronouncement : 21-01-2015 [

आदे श / O R D E R PER R.C. SHARMA, A.M. :

This is an appeal filed by the assessee is directed against the order of ld. CIT(A) -4, Mumbai dated 6-12-2012 for the A.Y. 2009-10 in the matter of order passed u/s 143(3) of the Income Tax Act, 1961.

2. The following grounds have been taken by the assessee in this appeal:-

"1 . O n t h e f a c t s a n d c i r c u m s t a n c e s o f t h e case and in law, the le arned Commissioner of Income tax (Appeals)-4, Mumbai erred in c o n f i r m i n g disallowance of expenses amounting to Rs. 83,44,713/- u/s. 14A re ad with Rule 8D The disallowance confirmed by the learned CIT(A) be either deleted or at least suitably reduced.

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2 On the facts and circumstances of the case a n d i n l a w , t h e l e a r n e d Co mm i s s i o n e r o f I n c o me tax ( A ppe a l s ) - 4 , M u mb ai e r re d i n n o t re du c i n g disallowance u/s 14A by an amount of Rs. 60,00.000/- being Contingencies' as per declaration made by the company during action u/s 132 of the Income tax Act, 1961 while computing disallowance u/s 14A.

3 On the facts and circumstances of the case and in law , th e le arne d Commissioner of Income tax (Appeals)-4, Mumbai erred in c o n f i r m i n g disallowance of Rs. 1,12,032/- being provision made for leave encashment on actuarial valuation.

4. On the facts and circumstances of the c a s e a n d i n l a w , t h e l e a r n e d Co mm i s s i o n e r o f I n c o me t a x ( A p pe a l s ) - 4 , M u m b a i e r r e d i n n o t a l l o w i n g amo u n t o f Rs . 17,15 ,457/ - be in g PMS F e e s c l ai me d as de du c tio n U /s 48 while computing Capital Gain.

5. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) -4, Mumbai erred in not allowing an amount of Rs. 4,20,863/- being expenses/reducing from consideration while working out capital gain on transfer of investment in Venture Capital Fund."

3. The facts in brief are that the assssee is engaged in the business of dealing in shares/securities and investments in shares/securities/bonds/mutual funds and finance etc. During the year the assssee received dividend income and share from partnership firm of Rs. 24,55,39,132/- which is claimed exempt from Income-tax and offered Rs.39,69,299/ for disallowance u/s. 14A, whereas, however the A.O. has applied Rule 8D of the Income Tax Rules, 1962 and made disallowance of Rs.99,30,165/- u/s. 14A, which has been disputed by the assessee claiming that indirect expenses are not to be allocated to the exempt income because A.O. is not authorized to estimate expenditure which 3 ITA 1631/M/13

assessee would have incurred in relation to exempt income. Assessee has claimed that it has made investments under the portfolio management scheme (PMS) and, therefore, no expenditure is incurred by the assessee. It is also claimed that Cyrus Poonawalla Group of Companies were subjected to search u/s. 132 and the group declared Rs.60 lakh as additional income towards disallowance of expenses for the year under consideration and, therefore, that should also be set off against the disallowance u/s. 14A. However, the A.O. rejected assessee's contention and disallowed Rs. 99,30,165/- u/s 14A of the Act. By the impugned order, the ld. CIT(A) confirmed the disallowance made by the A.O.

4. It was contended by the ld. A.R. that investment was made in foreign company, income from which are liable to tax in addition to its investment in shares of co-operative society which yielded taxable dividend income. As per the ld. A.R. all these investment were not excluded by A.O. while applying Rule -8D.

5. We have considered the rival contentions, carefully gone through the orders of the authorities below and found that similar issue was dealt by the Tribunal in the immediately preceding year i.e A.Y. 2008- 09 in ITA No. 5118/Mum/2012 vide order dated 25-7-2014in assessee's own case wherein the Tribunal has held as under:-

"This is the case where assessee made huge investment in shares of the cooperative society which yielded taxable dividend income or investment is made from the foreign companies, whose income is also taxable in India. Further, Ld Counsel mentioned that certain investments were made in the 'short term capital gains' with an intention to earn gains rather than exempt income, thus, the investments have different segments which should be considered by the AO while applying the Rule 8D. Ld Counsel also mentioned that AO already quantified the disallowable expenditure to the tune of Rs. 28,63,916/- on the basis of proportionality qua the expenses to the 4 ITA 1631/M/13

investments, whereas the AO mechanically adopted the Rule 8D @ 0.5% of the average amount of investment of Rs. 151.05 Crs. The AO did not analyze the investment patterns and considered all the accounts of investment without examining if the related dividend income is otherwise taxable or not. He also mentioned about the absence of AO's satisfaction in rejecting the assessee's computation of disallowable expenditure u/s 14A without making proper speaking order.

4. On the other hand, ld DR mentioned that the AO has no option but to quantify the disallowance as per the provisions of section 14A read with Rule 8D and therefore, there is no need for discussion into investment patterns to the assessee. In response, Ld Counsel for the assessee mentioned that no disallowance is called for under section 14A if there is no dividend income from certain investments. He also mentioned that certain investments were made in sister concerns to obtain control and management of the concerns and not with an intention to earn dividend income. Ld Counsel is of the opinion that such investments should be excluded for the purpose of computing the average investments to arrive at the net investments before applying the formula of 0.5% of the average investment. For this purpose, Ld Counsel mentioned that the matter may remand to the file of the AO for a fresh adjudication.

5. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties, we find merit in the argument of the Ld Counsel and proceed to remand the matter to the file of the AO for adjudicating the matter afresh after affording a reasonable opportunity of being heard to the assessee. Accordingly, ground no.1 raised by the assessee is allowed for statistical purposes."

6. As the facts and circumstances of the issue are similar, respectfully following the order of the Tribunal in assessee's own case, the matter with regard to computation of disallowance u/s 14A read with Rule 8-D is restored back to the file of the A.O. for deciding the issue afresh in terms of the directions given by the Tribunal in its order dated 25-7-2014.

7. With regard to ground No. 2, the claim of the assessee that amount offered during search for taxation needs to be set off against disallowance u/s 14A was not examined by the A.O. The ld. A.R. drawn our attention to the 5 ITA 1631/M/13

order of A.O. in case of another group member of assessee wherein set off was allowed by the A.O. after having following observations:-

"Further, the Company has offered a sum of Rs 75 lacs as additional income under the head Contingencies towards disallowance of expenses, claims other additions, errors, omissions etc for current Assessment Year and hence any disallowance made in the assessment proceedings (including U/s 14A) should be set off or adjusted first against this contingency.

As there is a further disallowance in respect of above expenditure in the assessment, hence the disallowance U/s 14A further reduced to Rs 5,74,397/- as computed below in order to maintain ceiling of expenditure to the extent of debited to Profit & Loss Account:

Particulars Amount Amount Disallowance as computed in para 4 above 88,89,961 Disallowance of Aircraft expenses 8,15,564 Contingency towards disallowance of 75,00,000 83,15,564

expenses, claims, other additions, errors, omissions etc. Net disallowance u/s 14A 5,74,397

We found that in case of other group member wherein similar additional income was offered under the head contingencies was allowed by the A.O. to be set off against disallowance made u/s 14A in case of Adurjee & Brothers P. Ltd. (covered under the same search on 21-6-2011 in case of Poonawal group). The A.O. vide his order dated 16-12-2011 at page 13 & 14 had given the necessary adjustment as reproduced above. Accordingly we restore this issue also to the file of A.O. for necessary verification and deciding the issue afresh as per law.

8. The grievance taken in ground No. 3 is with regard to the provision made for leave encashment on actuarial valuation. We find that this issue has been decided by the Tribunal in assssee's own case in the preceding assessment year 2008-09 vide its order dated 25-7-2014. We have carefully gone through the order of the Tribunal order 25-7-2014 (supra). The ld. A.R. 6 ITA 1631/M/13

fairly conceded that this issue has been decided against the assessee. Respectfully following the order of the Tribunal in assessee's own case supra, we confirm the order of the ld. CIT(A) for disallowance of Rs. 1,12,032/- being provision made for leave encashment on actuarial valuation.

9. In ground No. 4 the assessee has agitated the disallowance of Rs. 17,15,457/- being PMS fees claimed as deduction u/s 48 of the Act while computing capital gain.

10. It was contended by the ld. A.R. that the assessee's claim of portfolio management services (PMS) fees Rs.17,15,457/- should be allowed u/s. 48 while calculating capital gain on account of purchase and sale of securities, which has been rejected by the A.O. relying on the decision of Pradeep kumar Harlalka 14 Taxman.com 42 (Mum). Reliance was placed on the decision of Shri Homi K. Bhabha vs. ITO (ITAT Mumbai Bench) order dated 1-10-201.

11. We have considered the rival contentions and found that this issue has been decided against the assessee by the Mumbai Bench of the Tribunal in the case of Shri Homi K. Bhabha vs. ITO order dated 01-10-2011. Precise observation of the Bench was under:-

"While in Devendra Motilal Kothari 50 DTR 369, the Mumbai Bench held that the fees paid for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement, a contrary view was taken by the Pune Bench in KRA Holding & Trading by relying on the judgment of the Bombay High Court in Shakuntala Kantilal 190 ITR 56 (Bom). Subsequently, the Mumbai Bench in Pradeep Kumar Harlalka (included in the file) declined to follow the Pune Bench on the ground that the judgment of the Bombay High Court in Shakuntala Kantilal had been held to not be good law in Roshanbabu Mohammed 275 ITR 231 (Bom). The majority opinion (in terms of number of orders) and the latest order (in the point of time) were against the assessee)."

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Respectfully following the order of Tribunal, we do not find any infirmity in the order of lower authorities declining the claim of Portfolio Management Service.

12. The assessee has claimed incidental expenses s. 4,20,863/- to be reduced from capital gain from venture funds. The A.O. has not discussed the issue in his order. By the impugned order, the ld. CIT(A) confirmed the action of the A.O.

13. We have considered rival contentions and found that before the ld. CIT(A) assessee had furnished full details of expenses so incurred for earning capital gains. In the interest of justice, matter is restored back to file of A.O. for deciding afresh after giving due opportunities.

14. In the result, appeal of the assessee is allowed in part for statistical purpose.

Order pronounced in the open court on 21st January, 2015.

आदे श क घोषणा खल ु े यायालय म दनांकः 21-01-2015 को क गई ।

Sd/- sd/- (SANJAY GARG) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; दनांक Dated 21-01-2015 [

व. न.स./ RK , Sr. PS 8 ITA 1631/M/13

आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. आयकर आयु त(अपील) / The CIT(A) -4,, Mumbai 4. आयकर आयु त / CIT -3Mumbai 5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai C Bench

6. गाड फाईल / Guard file. ु ार/ BY ORDER, आदे शानस

स या पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai