Saktijit Dey, Member (J) -
(1.) THIS appeal of the assessee is directed against the order dt. 1st Oct., 2013 passed by CIT(A) -II, Hyderabad relating to the asst. yr. 2009 -10. The assessee has raised 7 grounds. At the outset, learned Authorised Representative submitted that he does not want to press ground No. 1, hence, this ground is dismissed as not pressed. Ground Nos. 2 and 7 are general in nature and do not require any adjudication. Ground Nos. 3 to 5 relate to only one issue of disallowance of expenditure of Rs. 1,97,36,624 under s. 14A r/w r. 8D of the Act. In ground No. 6, assessee has challenged levy of interest under ss. 234B and 234D of the Act.
(2.) BRIEFLY , the facts relating to the issue in dispute are the assessee is a non -banking financing company engaged in the business of investing in microfinance companies in India. The assessee was earlier known as 'Sufala Finance Ltd.', which was incorporated on 25th Nov., 1991 as a private limited company engaged in the business of providing financial services as hire -purchase and leasing of incomes. After change of management, it also changed its business model by making investments in equity, mutual fund and also advanced loans to micro finance institutions. Assessee entered into a fund management agreement with Caspian Advisors (P) Ltd. (in short CAPL) on 27th May, 2005 as per which the said company would render consultation services to the assessee in the matter of investment etc., as fund manager. For the assessment year under dispute assessee filed its return of income on 15th Sept., 2009 declaring 'Nil' income. Initially the return was processed under s. 143(1) and refund on account of TDS amounting to Rs. 62,21,130 was also issued to the assessee. Subsequently, assessee's case was selected for scrutiny. During the scrutiny assessment proceeding, after examining the books of account and other details submitted by the assessee, it was noted by the AO that the fund manager i.e., CAPL was holding 18.7 per cent shareholding in the assessee company. One of the directors in the assessee company Shri S. Viswanath Prasad was also a director in CAPL with 99 per cent shareholding. He further noticed that in lieu of the services rendered, the fund manager was to be paid remuneration to the fund based services, which was agreed upon as under:
(a) 3.50 per cent per annum on outstanding equity or equity -linked investments on cost basis.
(b) 2.25 per cent per annum on outstanding debt investments only on principal.
(c) 1.00 per cent per annum on all other assets.
2.1 The AO further noticed that while computing its income, assessee has disallowed expenditure of Rs. 35,65,860 under s. 14A r/w r. 8D, out of the fund management fees claimed, which worked out as under:
2.2 After examining the details, AO was of the view that the disallowance of fund management fees worked out by the assessee is not correct. On the basis of the agreement with fund manager, AO worked out the fees paid to the fund manager as under:
2.3 AO also quantified the expenditure pertaining to exempt/taxable income for the purpose of disallowance under s. 14A and called for an explanation from assessee for proposed disallowance. Assessee objecting to the disallowance proposed by the AO under s. 14A of the Act, submitted that dividend income and income from mutual fund cannot be regarded as exempt income since tax has been imposed and paid by the payer under ss. 115 -O and 115J. It was submitted that tax on dividend distributed cannot be anything other than tax on dividend income of the recipient/shareholder, which for the sake of administrative convenience and cost effectiveness is collected from the paying company. It was further submitted that the situation is analogous to FBT paid on ESOP issued to non -resident. Vide CBDT Circular No. 9 of 2007 the non - -resident employee is allowed to take credit, in a foreign country, for the FBT paid by the employer on ESOPs. It was submitted that in terms with r. 8D assessee has computed disallowance under s. 14A by arriving at the direct expenditure by considering fees attributable to those investments which have yielded income. AO rejecting each of the arguments of the assessee held that the assessee having not correctly computed disallowance under s. 14A, worked out the disallowance in the following manner and accordingly added Rs. 1,97,36,624 to the income of the impugned assessment year:
Under r. 8D(2)(i):
2.4 Being aggrieved of the assessment order, so passed, assessee preferred appeal before the CIT(A).
Before the CIT(A), assessee relying upon various judicial precedents contended that the disallowance made by the AO is not in accordance with the statutory mandate. It was submitted that as the assessee has not incurred any expenditure to earn exempt income, disallowance under s. 14A is not warranted. It was further submitted that fund management fees was not entirely towards exempt income. Assessee also earned long -term capital gain which was taxable. It was further submitted that assessee has made investment in equity which has not earned any exempt income. Therefore, the AO should have determined fund management fees relating to equity investments, which actually gave rise to exempt income. It was further submitted that dividend income received by the assessee cannot be considered to be exempt from tax as the companies have paid dividend distribution tax under s. 115O. The CIT(A) after examining the contentions of the assessee in the context of provisions contained under s. 14A r/w r. 8D upheld the addition made by the AO on the following findings:
"7 From the perusal of the assessment order it is evident that the AO was not satisfied with the correctness of the disallowance computed by the assessee. Based on the assessee's agreement with CAPL the AO correctly computed the disallowance under r. 8D(2)(i). The AO can apply the provisions of s. 14A even if no expenditure is incurred to earn exempt income. The AO was fair enough in computing the disallowance under s. 14A separately for exempt income and for taxable income. He disallowed only that part of expenditure which pertains to exempt income. It is also pertinent to mention that the r. 8D(2)(iii) applies even in cases where there is no exempt income as the formula relates to investment and not to income earned. Meaning thereby certain disallowance has to be made even in cases where there is no income at all and also in cases where no expenditure was actually incurred.
7.1 It is also pertinent to mention here that the Hon'ble Mumbai High Court in the case of Godrej & Boyce Co. Ltd. vs. Dy. CIT : (2010) 234 CTR (Bom) 1 : (2010) 43 DTR (Bom) 177 : (2010) 328 ITR 81 (Bom) held that the provisions of r. 8D are prospective and are applicable w.e.f. asst. yr. 2008 -09. It is also pertinent to mention that the CIT(A) -V, Hyderabad for the asst. yr. 2007 -08 had dismissed the appeal on the same issue vide order in IT Appeal No. 175/Dy. CIT -1(3)/CIT(A) -V/2012 -13, dt. 14th Feb., 2013.
7.2 In view of the above discussion the disallowance made by the AO of Rs. 1,97,36,624 is sustained, therefore, the grounds of the appeal of the assessee on this issue are dismissed."
(3.) THE learned Authorised Representative reiterating the contentions raised before the Revenue authorities submitted that disallowance made by the AO being not in accordance with the mechanism laid down in r. 8D(2) of the IT Rules, it cannot be sustained. It was submitted by the learned Authorised Representative that there being no expenditure incurred by the assessee towards earning of exempt income, provisions of s. 14A are not attracted. It was submitted that since dividend income earned by the assessee was subject to dividend distribution tax under s. 115 -O of the Act, it cannot be considered as exempt income so as to bring it within the ambit of s. 14A of the Act. Challenging the computation made by the AO, it was submitted that AO has committed fundamental error by disallowing expenditure relating to investments which have not yielded any income during the year. In this context, learned Authorised Representative referring to r. 8D(2)(i) of the Rules submitted that disallowance under the aforesaid sub -rule must relate to the income actually earned which is exempt. It has no relation to the investments made by assessee as a whole whereas r. 8D(2)(iii) applies to the whole of the investments irrespective of the fact whether income has been earned or not. It was, therefore, contended that while the AO may be correct in computing disallowance under r. 8D(2)(iii) by considering total investments made by assessee irrespective of the fact whether they have yielded income or not, but, while computing disallowance under r. 8D(2)(i), AO should not have considered the investments which have not yielded any income. It was, thus, contended by learned Authorised Representative that computation made by AO being erroneous and not in accordance with statutory provisions, the addition made may be deleted and the disallowance made by the assessee itself be accepted.;