Gruh Finance Ltd. v. Dy. Commissioner of Income-tax, Circle – 4, Ahmedabad
[Citation -2016-LL-0930-207]

Citation 2016-LL-0930-207
Appellant Name Gruh Finance Ltd.
Respondent Name Dy. Commissioner of Income-tax, Circle – 4, Ahmedabad
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 30/09/2016
Assessment Year 2008-09
Judgment View Judgment
Keyword Tags administrative expenditure • disallowance of interest • bad and doubtful debts • interest-bearing funds • interest bearing fund • interest expenditure • proportionate basis • addition to income • regular assessment • finance company • sticky advances • interest income • actual payment • accrual basis • share capital • reserve bank • housing loan • mutual fund • bad debt
Bot Summary: The appellant has contended that no disallowance out of interest should be made, as the interest free funds i.e. Share capital and reserves were more than the investment made in mutual funds. The appellant has submitted that it had got sufficient own funds to make the investment in mutual funds though the same may be made out of borrowed funds used for temporary purpose. The appellant has also given a working of the disallowance to be made, on without prejudice basis, for the investment made in mutual fund out of the borrowed funds. There is an immediate and direct nexus of the ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 1881/Ahd/2015 -8- investment made in the mutual funds with the borrowed money as the appellant's bank account clearly showed the funds invested consisted of the borrowed money at that point of time. The appellant has given the working of the investment of borrowed funds in mutual fund by taking the withdrawal of funds from both the accounts i.e. HDFC and IDBI. For working out the interest, it has adopted the same method by taking the investment at initial stage and reducing the withdrawals from the mutual funds for working out the interest by applying the product method. As pointed out in the preceding discussion, that whenever the appellant had surplus idle funds it used to park the same in HDFC mutual fund for earning some dividend. To sum up, total disallowance of Rs.3,28,52,064/-, consisting of following amounts, is made out of interest under section 14 A: - I. Rs 1,10,75,570/- for the interest-bearing funds withdrawn from IDBI bank account and invested in Mutual Funds, II. Rs. 1,1 5,75,905/- for the interest-bearing funds withdrawn from HDFC bank account and invested in Mutual Funds, and ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 1881/Ahd/2015 - 11 - III. Rs. 1,02,00,589/- for the balance funds utilised for making the investment in Mutual Fund.


IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AHMEDABAD BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI S. S. GODARA, JUDICIAL MEMBER. ITA. Nos.1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) Gruh Finance Ltd., Gruh , Netaji Marg, Mithakali Six Roads, Ellisbridge, Ahmedabad - 380006 Appellant Vs. Dy. Commissioner of Income-tax, Circle 4, Ahmedabad Respondent By Assessee : Shri M. G. Patel with Shri A. N. Shah, A.R. By Revenue : Shri K. Madhusudan, Sr.D.R. Date of Hearing : 20.09.2016 Date of Pronouncement : 30.09.2016 ORDER PER S. S. GODARA, JUDICIAL MEMBER These four assessee s appeals for assessment years 2008- 09 to 2011-12 arise from separate orders of CIT(A)-2, CIT(A)-4, CIT(A)-VIII & CIT(A)-2, Ahmedabad, dated 31.03.2015 (in first and last case), dated 08.03.2016 & 19.08.2013, in case no. CIT(A)-2/DCIT, Cir.4/118/13-14, CIT(A)-4/160/DCIT, ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -2- Cir.2(1)(2)/14-15, CIT(A)-VIII/ACIT/Cir.4/104/12-13 & CIT(A)- 2/DCIT, Cir.4/215/13-14; respectively; in proceedings u/s.143(3) r.w.s. 263, 143(3) rw.s. 147 & 143(3) (in last two assessment years) of Income Tax Act, 1961, in short Act . perusal of assessee s pleadings in appeal pertaining to assessment years 2008-09 & 2009-10 ITA Nos. 1880/Ahd/2015 & 776/Ahd/2016 reveals that is its identical substantive grievances therein challenges CIT(A) s orders enhancing Section 14A r.w. Rule 8D disallowance (s) from Rs.1,03,33,474/- to Rs.3,28,52,064/- in former and from Rs.1,24,70,377/- to Rs.5,55,97,599/- in latter assessment year before us. Both ld. representatives inform us that relevant backdrop of facts is identical in these two assessment years. We thus take up ITA No.1880/Ahd/2015 as lead case. 2. This assessee company is engaged in housing, finance business and other activities. It filed return on 29.09.2008 stating income of Rs.50,51,78,789/-. Assessing Officer completed regular assessment on 29.10.2010 determining total income as Rs.53,61,37,830/-. CIT(A) thereafter revised said regular assessment vide order dated 11.01.2013 by exercising Section 263 revisional jurisdiction on ground that Assessing Officer had not properly computed Section 14A disallowance as per law. ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -3- 3. Assessing Officer took up consequential proceedings. There is not dispute about assessee s exempt income from dividends amounting to Rs.1,89,42,065/-. It has suo moto disallowed of Rs.9,45,960/-. Assessing Officer sought to apply Rule 8D. assessee filed reply inter alia pleading that its suo moto disallowance hereinabove was just and proper, it had not incurred any direct expenditure in earning above exempt income, proportional expenditure disallowance formula did not apply since its balance sheet schedule would reflect taxable income only, so was case qua administrative expenditure disallowance and it raised claim to have utilized interest free funds only. Assessing Officer framed consequential assessment on 27.09.2013 rejection all above pleas. He observed first of all that there was no direct expenditure involved in deriving above exempt income. assessing authority then computed proportionate and administrative expenditure disallowance under Rule 8D (2)(ii & iii) of Rs.1,13,72, 901/- and Rs.8,52,493/-; respectively aggregating to Rs.1,22,25,394/-. 4. assessee preferred appeal. CIT(A) enhances above disallowance to Rs.3,28,52,064/- as under; 2.3 Decision: I have carefully considered facts of case, assessment order and written submission of appellant. AO has made disallowance under section 14 by applying provisions of rule 8D. appellant has earned dividend income of Rs. 1,89,42,065/- on which exemption has been claimed by it in return of income. appellant has also made suo motu disallowance of expenditure for earning dividend income by working out administrative expenses in proportion to exempt income and regular ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -4- income. assessing officer, did not accept submission of appellant and worked out disallowance of Rs.1,12,79,434/- by applying provisions of rule 8D. appellant on other hand has submitted that it has already made disallowance of administrative expenses under section 14 for earning exempt income. investment which are reflected in balance sheet of appellant were taxable investments. income arising from these investments are taxable and same has also been offered by it in return of income. In formula provided in rule 8D, figure of 'average investment' would be NIL in case of appellant as there is no exempt investment at beginning as well as at closing of financial year. appellant has, therefore, submitted that no disallowance out of interest as well as out of administrative expenses can be made as value of average investment would be zero. On careful consideration of entire facts of case, it is noted I that contention of appellant that there is no tax exempt investment in balance sheet as on 01/04/2007 and 31/03/2008 is factually correct. Accordingly, figure of average investment which is used in formula in rule 8D for working out disallowance under section 14 would be zero and, therefore, figure of disallowance under second and third limb of rule 8D would be zero. Accordingly, disallowance made by AO by applying provisions of rule 8D is directed to be deleted. disallowance is to be restricted to disallowance already made by appellant by allocating administrative expenses in proportion to exempt income. During course of appellate proceedings, it was noted that appellant has made substantial investment in units of mutual funds and has also earned substantial dividend income which has also been claimed as exempt from tax. However, since opening and closing balance of investment in mutual fund appearing in balance sheet of appellant was NIL, no disallowance u/s. 14A could be made by applying provisions of rule 8D. It was also observed that appellant is borrowing money from various financial institutions for purpose of its business of home loan finance. appellant was accordingly requested to furnish copies of bank accounts from which investment in units of mutual funds was made by it. It was also requested to furnish details of purchase and sales of mutual fund and direct expenses incurred thereon. ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -5- perusal of details furnished and bank account reflected that appellant is parking funds which are available with it for short period of time in case same are not required for purpose of giving finance for home loan purpose. appellant is borrowing money from national housing bank, IDFC and other banks and as soon as money is credited in its bank account and same is not required for financing home loans, it is parked in mutual funds for short period till it is required for financing. It was further observed that appellant is maintaining two bank accounts for purpose of business. One account is maintained with HDFC bank and other with 1DBI bank Ahmedabad. appellant is parking funds which are not required for time being, from both accounts with mutual funds. It is further observed that accounts with IDBI bank was primarily used by appellant for crediting borrowings made from IDBI bank and other financial institutions. It is noted from perusal of that account that whenever large amount of borrowed money was received in that account appellant immediately transferred funds to HDFC CASH MANAGEMENT SAVINGS DIVIDEND PLAN. other account in HDFC bank is utilised by appellant for day-to-day business, for disburse! of loan, for collection of business receipts from various branches. Further examination of appellant's account with HDFC bank revealed that, in this account also, there are certain instances where appellant has received large amount of borrowed money from other financial institutions on which appellant had to pay interest and name has also been parked in mutual fund as was done from IDBI bank account. There was immediate and direct nexus of investment made in mutual funds with borrowed money as appellant's bank account clearly showed funds in bank consisted of borrowed money at that point of time. above instances of investment were pointed out to appellant, during course of appellate proceedings, and it was also asked to give working of interest attributable to period for which these funds were invested in mutual fund. Therefore, amount of investment made from IDBI bank is clearly out of borrowed money and there is direct nexus. Similarly, amount of investment made from HDFC bank account in respect of certain instances of investment is clearly out of borrowed money as there was direct nexus of loan money receipt and investment in Mutual Fund. Other investments which have been made from HDFC bank account are out of mixed funds. appellant was, ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -6- therefore, show caused as to why interest disallowance under section 14 be not made as there was direct interest expenditure for making investment and mutual funds out of borrowed funds. appellant has contended that no disallowance out of interest should be made, as interest free funds i.e. Share capital and reserves were more than investment made in mutual funds. appellant has submitted that it had got sufficient own funds to make investment in mutual funds though same may be made out of borrowed funds used for temporary purpose. It is also been submitted by appellant that end statement of investment show that at no point of time, investment made in mutual fund exceeds own fund. appellant has, therefore, submitted that no further disallowance should be made in addition to what has already been made by it suo moto in return of income. On careful consideration of entire facts related to issue, it is noted that claim of appellant that its share capital and reserves and surplus i.e. interest free funds available were more than investment made in mutual funds is not acceptable. It is general argument which may be accepted in case no nexus between investment in mutual funds and interest-bearing funds can be established. In present case, there is clear nexus and evidence to prove that borrowed funds have been diverted and parked in mutual fund, income from which is claimed as exempt. Therefore, interest expenditure for period in which interest-bearing funds were used for making investment in mutual fund cannot be considered as respect for earning business income but same was spent for earning exempt income. In these circumstances, it is hereby held that having regard to accounts of the, appellant, I am not satisfied with correctness of claim of appellant in respect of no interest expenditure in relation to income which does not form part of total income under this Act. There is clear nexus of borrowed funds with investment made in mutual funds. Accordingly interest expenditure pertaining to same should be disallowed under provisions of Section 14 A. rule 8D, which has been provided for computing disallowance under this section, has first limb which provides for direct expenditure incurred for earning exempt income. This interest expenditure is direct in nature as there is direct nexus ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -7- between funds and investment in mutual funds which has given rise to exempt income claimed by appellant. As mentioned above, appellant is using account with IDBI bank for depositing loans received by it for purpose of business. funds received on loan are subsequently parked in mutual fund for small period till it is required to be disbursed as loan for housing. perusal of bank account clearly shows that there is direct nexus of funds received on loan and investment in mutual fund. These instances were pointed out to appellant and appellant was also asked to give working of interest attributable to period during which borrowed money was invested in mutual funds. appellant has given working of interest, without prejudice to written submissions, which is to be disallowed under section 14 A. For working out disallowance, appellant has submitted that it has paid interest at rate of 8% on these loans. appellant has also given working of disallowance to be made, on without prejudice basis, for investment made in mutual fund out of borrowed funds. For this purpose appellant has taken product method for calculating interest. initial amount of investment has been mentioned on day one and subsequent withdrawals have been reduced from that fund and interest amount has accordingly been calculated on reduced amount by counting number of days for which amount was invested. method given by appellant is acceptable. working of interest on amount is enclosed with order as Annexure- 1. Accordingly disallowance of Rs.1,10,75,570/- is hereby made as direct cost of interest under section 14 for making investment in mutual funds on which appellant has earned dividend income. As discussed above, there are certain instances of direct nexus of borrowed money and investment in mutual fund in HDFC bank account also. Wherever appellant has received large amount of borrowed money from other financial institutions such as national housing bank, IDBI bank etc, on which appellant had to pay interest, same has also been parked in mutual fund as was done from IDBI bank account. There is immediate and direct nexus of ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -8- investment made in mutual funds with borrowed money as appellant's bank account clearly showed funds invested consisted of borrowed money at that point of time. instances of these investments were pointed out to appellant during course of appellate proceedings and it was also asked to give working of interest attributable to period for which these funds were invested in mutual fund. appellant has given working of investment of borrowed funds in mutual fund by taking withdrawal of funds from both accounts i.e. HDFC and IDBI. For working out interest, it has adopted same method by taking investment at initial stage and reducing withdrawals from mutual funds for working out interest by applying product method. interest which is to be disallowed by taking funds of both banks, as per working given by appellant comes to Rs.2,26,51,475/-. working of interest on amount is enclosed with order as Annexure- 2. Since disallowance of interest for withdrawals from IDBI account amounting to Rs.1,10,75,570/- has already been made in previous discussion, balance amount of disallowance which is to be made corresponding to utilisation of interest- bearing funds from HDFC bank account will come to Rs. 1,15,75,905/-. Accordingly this amount is also disallowed under section 14 of Act. Further, it is noted that majority of funds deployed in business by appellant are borrowed funds. As pointed out in preceding discussion, that whenever appellant had surplus idle funds it used to park same in HDFC mutual fund for earning some dividend. appellant has earned dividend which is exempt from tax and has also claimed exemption on same. Therefore, amount of interest which has been paid by it on borrowed fund which has been parked for some period in mutual fund should also be disallowed under section 14 A. This interest is clearly attributable to earning of exempt income. appellant was accordingly requested to explain as to why this disallowance be not made, and also give working for same. appellant has relied on explanation given by it stating that at any point of time investment in mutual fund never exceeded reserves and share capital, which were interest free. However, without prejudice to submission and objection to addition, appellant has also given working ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) -9- of total amount of interest which can be / attributed to utilisation of fund for investment in mutual funds. working of interest on amount is enclosed with order as Annexure-3. It is noted that appellant has also included funds withdrawn from IDFC bank and HDFC bank account which were having direct nexus of interest-bearing funds for working out interest disallowance. total interest worked out by appellant in above fable also includes interest attributable to funds which have direct nexus with investment. Disallowance of interest on account of direct nexus of funds with investment has already been made in preceding discussion and same totals to Rs.2,26,51,475I-. Accordingly, net amount which remains to be disallowed comes to Rs. 1,02,00,589/-. Accordingly, further disallowance out of interest of Rs. 1,02,00,589/-is also made under section 1 4 A. AO is, however, directed to check working given by appellant in respect of various disallowance of interest enclosed with this order as Annexures 1, 2 and 3. In case any discrepancy is noted, same may be brought to knowledge of this office so that it can be rectified. appellant has also placed reliance on judgment of Gujarat High Court in case of Torrent Power Ltd [363 ITR 474]. It was held by honourable High Court, that since shareholders funds were sufficient for making investment and appellant had not used borrowed funds for such purpose, no disallowance could be made. I have carefully perused judgment relied by appellant. First of all, it is noted that judgment relates to A. Y. 2006 - 07 and in that year Rule 8D was not applicable. Secondly, in that case there was no direct nexus of interest-bearing funds with investment. facts of present case are different, as there is direct nexus of borrowed money and investment in mutual funds from which exempt income has been earned. judgment relied by appellant is, therefore, respectfully distinguished. appellant has also placed reliance on judgement of honourable Delhi High Court in case of Joint Investments Pvt Ltd, 1 16 DTR 289. I have carefully gone through judgement given by honourable court and it has been held ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 10 - that computation of assessee, or claim that no expenditure was incurred for earning exempt income should be examined with reference to accounts and only if assessee's explanation is unsatisfactory, can AO proceed further; that apart, by no stretch of imagination can section 14 or rule 8D be interpreted so as to mean that entire tax exempt income is to be disallowed. On further examining facts of case decided by High Court, it is noted that disallowance was worked out on proportionate basis by applying formula given in rule 8D. facts of present case are entirely different from that case. In present case scrutiny of bank account clearly reveals that interest- bearing funds have been invested in mutual funds for earning dividend income. Therefore there is direct nexus of interest expenditure and dividend income. Further, claim of no expenditure has also been examined in preceding discussion and finding u/s. 14A(2), to that effect has also been given in order. judgement given by honourable Delhi High Court is therefore respectfully distinguished. Regarding disallowance out of administrative expenditure which is also required to be made under section 14 A, it is noted that appellant has itself made disallowance of Rs. 9,.45,960/- by considering ratio of exempt income to total income earned by appellant and apportioning that mistreated expenses in that ratio. As has been discussed in preceding pages that, since there is no opening and closing balance of exempt investment in balance sheet of appellant, third limb of Rule 8D cannot be applied for making disallowance. Since appellant has followed systematic method for making disallowance, no further disallowances are required to be made under section 14 out of administrative expenses. To sum up, total disallowance of Rs.3,28,52,064/-, consisting of following amounts, is made out of interest under section 14 A: - I. Rs 1,10,75,570/- for interest-bearing funds withdrawn from IDBI bank account and invested in Mutual Funds, II. Rs. 1,1 5,75,905/- for interest-bearing funds withdrawn from HDFC bank account and invested in Mutual Funds, and ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 11 - III. Rs. 1,02,00,589/- for balance funds utilised for making investment in Mutual Fund. Accordingly, disallowance made by AO is directed to be deleted and income is enhanced on account of disallowance made under section 14 as discussed above. Without prejudice to disallowance made under section 14 A, as discussed above, above interest is also not allowable as deduction under section 37 of Act, as same has not been incurred for purpose of business but has been incurred for purpose of making investment in Mutual Funds and earning exempt income. ground of appeal is accordingly partly allowed and income is enhanced. 5. Ld. counsel representing assessee firstly argue that it is NBFC arranging funds from National Housing Bank NHB for disbursing same in housing loan sector. It share capital, reserves and surplus of Rs.190.26 crores are stated to be exceeding tax free investment of Rs.16,64,21,520/- leaving behind no scope of Section 14A disallowance. It is further stated that there is no opening or closing balance of impugned tax free investments for purpose of invoking proportionate expenses disallowance. Ld. counsel pleads that Reserve Bank of India and NHB are relevant regulator in filed. All assessee s investments are in nature of funds availed from NHB as deputed in mutual funds for maximum period of day or two in order to complete necessary paper formality of housing loan disbursement. Ld. counsel contends that CIT(A) has ordered impugned enhancement under challenge without following principles of natural justice. This plea is given up after sometime in course of hearing. Ld. counsel s last submission is that ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 12 - Section 14A disallowance cannot exceed exempt income itself as per this tribunal s order in K. Ratanchand & Co. vs. ITO 45 ITR (Tribunal) 608 (Ahd) and Joint Investments vs. CIT (2015) 372 ITR 694 (Delhi). He accordingly prays for acceptance of instant appeal. 6. Ld. Departmental Representative appearing at Revenue s behest strongly supports CIT(A) s order. He inter alia submits that there is no dispute about its suo moto disallowance of Rs.945960/-, assessee has been maintaining two separate bank accounts qua housing loan disbursal and one deriving impugned exempt income. He highlight fact that impugned disallowance is of direct expenditure and not of any proportionate or any administrative expenses. Revenue accordingly prays for confirming CIT(A) s findings under challenge. 7. We have heard both parties. There is no dispute about relevant facts and figure involved in assessee s exempt income, tax free investments and availability of interest free funds. There is further no quarrel that Assessing Officer had not disallowed any direct expenditure relating to assessee s exempt income. factual position in lower appellate proceedings is that CIT(A) has dealt with each and every aspect of assessee s exempt income and corresponding investment to establish direct nexus between latter and its interest bearing funds avail from NHB. He has further arrived at conclusion that assessee has been maintaining separate accounts (supra). assessee is unable ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 13 - to rebut this factual position. We thus find no reason to interfere in lower appellate order so far as first two direct expenditure disallowances of Rs.1,10,75,570/- for interest bearing funds withdrawn from IDBI account and Rs.1,15,75,905/- drawn from HDFC Bank account; both invested in mutual funds are concern. We proceed to deal with third figure of Rs.1,02,00,589/- stated to be involving balance funds utilized in mutual funds investment. We repeat that we are dealing with case falling under direct expenditure disallowance covered by Rule 8D (2)(i) of Income Tax Rules. CIT(A) has no where establish direct link between assessee s interest bearing fund vis vis its impugned tax free investment. It has further come on record that assessee s interest free funds far exceed its tax free investment. We observe in these facts that inference as per hon ble jurisdictional decision (2015) 376 ITR 553 (Guj) PCIT vs. India Gelatine and Chemicals Ltd. can safely withdrawn that impugned tax free funds have been made from non interest bearing funds. We thus delete this third item of disallowance. We accordingly uphold CIT(A) s enhancement action under challenge in principle. We now come to equally important aspect as to whether Section 14A r.w. Rule 8D disallowance could exceed exempt income amount or not. coordinate bench of this tribunal as well as Delhi high court (supra) have already held that same cannot in any case be computed beyond exempt income amount. We thus direct assessing ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 14 - authority to frame consequential computation restricting impugned Section 14A disallowance to extent of exempt income of Rs.1,89,42,065/- only. This substantive ground as well as main appeal ITA No.1880/Ahd/2015 for A.Y. 2008- 09 is partly accepted. 8. Same order to follow in assessee s appeal ITA No.776/Ahd/2016 for A.Y. 2009-10 since both ld. representatives have already indicated that CIT(A) has followed very reasoning as in preceding assessment year for enhancing Section 14A disallowance from Rs.1,25,70,377/- to Rs.5,55,97,599/-. We quote our discussion hereinabove and direct Assessing Officer to finalize necessary computation in same terms. ITA No.776/Ahd/2016 partly succeeds. 9. We now come to assessment year 2010-11 involving assesse s appeal ITA No.2536/Ahd/2013 raising following substantive grounds: 1. Learned Commissioner of Income Tax (Appeals)-VIII, Ahmedabad has erred in law and on facts of case by confirming disallowance of Rs.6,00,997/- made by Assessing Officer out of NCD expenses after holding that same has to be allowed equally for 5 years as NCD are for 5 years period and Appellant has also not charged same to Profit & Loss Account. 2. Learned Commissioner of Income Tax (Appeals)-VIII, Ahmedabad has erred in law and on facts of case by confirming disallowance of bad debt of Rs.2,71,30,625/- made by Assessing Officer after holding that same has not become bad during year under consideration. 3. Learned Commissioner of Income Tax (Appeals)-VIII, Ahmedabad has erred in law and on facts of case by ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 15 - confirming findings given by Assessing Officer that deduction u/s 36(1)(viii) cannot be allowed on bad debt recovered in respect of long term housing finance and EMI Residuals offered for taxation on accrual basis during assessment year and accordingly has upheld reduction of claim u/s 36(1)(viii) by Rs. 18,05,205/-. 4. Learned Commissioner of Income Tax (Appeals)-VIII, Ahmedabad has erred in law and on facts of case by confirming disallowance of prepayment charges of Rs.25,80,740/- made by Assessing Officer. 10. Ld. counsel representing assessee files before us compilation chart. He inter alia states that first two issues of NCB expenses and bad debt claim of Rs.6,00,997/- and Rs.2,71,30,625/- are covered by this tribunal s order in assessee s favour in its own cases for assessment years 2005- 06 to 2009-10 decided on 17.08.2016. Copies of tribunal s order form part of case record. Ld. Departmental Representative fails to rebut this factual position. We accept assessee s contention qua its first two grounds in light of coordinate bench decision hereinabove. 11. We come to third issue of Section 36(1)(viii) deduction of Rs.18,05,205/- comprising of bad debts recovered and EMI residual offered for taxation. assessee submits that this tribunal s order dated 17.08.2016 (supra) has upheld its claim qua former limb and has turned down its contentions qua latter one. There is no rebuttal of this legal and factual position coming from Revenue s side. We thus accept assesse s argument on bad debt aspects and decline to interfere in CIT(A) s finding qua EMI residual issue. Assessing Officer ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 16 - is accordingly directed to frame necessary computation. This third substantive ground is treated as partly allowed. 12. Assessee s next substantive ground challenges disallowance of housing loans prepayment charges of Rs.25,80,740/- made by both lower authorities. Ld. counsel representing both parties inform bench that assessee has already succeeded on this issue before tribunal in assessment years 2005-06 to 2009-10 decided on 17.08.2016 (supra). No distinction on facts is pointed out at Revenue s behest. We thus direct Assessing Officer to accordingly allow assessee s claim qua impugned prepayment charges in tune with tribunal s order in above assessment years. 13. assessee s last substantive ground pleads that both lower authorities have erred in making disallowance of rate revision charges of Rs.47,13,412/-. It has availed loan from NHB at rate between 9.5% to 13.75% in floating scheme. These rates came down subsequently. assessee then approached NHB for reduction and this interest rate. This lender in turn sought to invoke impugned rate revision charges. assessee paid same. All this lead to interest rate deduction between 8.6% to 8.75%. assessee raised impugned claim on payment basis. It amortized same in books of accounts and further debited these sums in P&L account. Assessing Officer followed his reasoning as adopted in assessment year 2005-06 to disallow this assessee s ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 17 - claim. CIT(A) confirms this disallowance by observing as under: I have carefully considered facts of case, assessment order and written submission of appellant. It is noted that issue is covered against appellant by order of my predecessor for assessment year 2005 - 06 vide order No.CIT(A)-VIII/ACIT/JC-4/2I7/07-08 Dtd 30/01/2009. issue has been discussed in order in paragraph 5.5 and 5.6 on page 4 and decision has been given in Para 5.12 on page 9. While deciding appeal claim of appellant has been discussed and dismissed by following decision of honourable Supreme Court in case of Madras Industrial Investment Corporation to 25 ITR 802 and decision of honourable Bombay High Court in case of Taparia Tools Ltd 260 ITR 102. Respectfully following decision of my predecessor disallowance made by AO on account of prepayment charges and rate revision charges is upheld. ground of appeal is, therefore, dismissed. 14. Heard both sides reiterating their respective stands. There is no dispute between parties qua actual payment of impugned rate revision charges. CIT(A) follows hon ble Bombay high court s decision in Taparia Tools (supra) to reiterate his findings in assessment year 2005-06 rejecting very claim. Hon ble apex court in its decision reported that (2015) 372 ITR 605 (SC) has reversed same in very assessee s appeal. It also considers other case law of Madras Industrial Investment Corporation Ltd. (supra). net corollary that flows therefrom is that CIT(A) s findings under challenge have no legal basis to be sustained. There is further no dispute that assessee has been declaring corresponding housing loan income as its business income. We thus allow its instant substantive ground in view of ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 18 - above facts and circumstances. Its appeal ITA No.2536/Ahd/2013 is partly allowed. 15. This leaves us with last assessment year 2011-12 involving assessee s appeal ITA No.1881/Ahd/2015 raising following substantive grounds: 1. Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in law and on facts of case by confirming disallowance of Rs.33,56,232/- made by Assessing Officer in respect of NCD expenses. 2. Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in law and on facts of case by confirming disallowance of Rs.l,25,83,792/- made by Assessing Officer in respect of bad debts. 3. Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in law and on facts of case by confirming reduction in claim u/s.36(l)(viii) of Rs.25,44,385/- made by Assessing Officer holding that bad debts recovered in respect of long term housing finance is not eligible for deduction u/s.36(l)(viii). 4. Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in law and on facts of case by holding that in present case, disallowance u/s.14A r.w.r. 8D is required to be made, and accordingly, has erred in enhancing disallowance by Rs.3,55,20,488/- from Rs.2,25,92,673/- made by Assessing Officer, which has resulted into total disallowance u/s.UA at Rs.5,81,13,161/-. 4.1 Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in enhancing disallowance u/s.14A r.w.r. 8D without allowing any opportunity to Appellant as required by section 251(2), and therefore, action of enhancing disallowance by learned C.IT.(Appeals) is illegal and bad at law. 4.2 Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has died in law and on facts of case by ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 19 - not accepting contention of Appellant that disallowance u/s. 14A cannot exceed exempt income, which is of Rs.3,28,02,115/- only in case of Appellant. 4.3 Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in law and on facts of case by not accepting contention of Appellant that Appellant has sufficient own fund to make investment, income of which is exempt and in view of this, no disallowance u/s.14A can be made. 5. Learned Commissioner of Income Tax, (Appeals)-2, Ahmedabad has erred in law and on facts of case in confirming addition of Rs.23,05,334/- made by Assessing Officer in respect of interest income on NPA as per Rule 6EB of Income Tax Rules, 1962 r.w.r. 43D(b). 16. Ld. counsel representing assessee files before us compilation chart stating therein that its first three substantive grounds of NCD expenses, bad debts and Section 36(1)(viii) deduction of Rs.33,56,232/-, Rs.1,25,83,792/- & Rs.25,44,385; respectively are covered in its favour by tribunal s order dated 17.08.2016 for assessment years 2005- 06 to 2009-10. Section 14A r.w. disallowance of Rs.5,81,13,161/- is stated to be similar as adjudicated in assessment year 2008-09 hereinabove. Ld. departmental representative is fair enough in not disputing correctness thereof. We thus accept first three substantive ground in tune with this tribunal s earlier order. We come to fourth issue of Section 14A disallowance. It has already come on record that our adjudication in assessment year 2008-09 on very issue has restricted same to extent of exempt income. We adopt same reasoning herein as well and direct Assessing Officer to modify impugned disallowance to ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 20 - tune of assessee s exempt income of Rs.3,28,02,115/- earned from dividends. This ground is partly allowed. 17. This leaves us with assessee s last substantive ground challenging disallowance/addition of Rs.23,05,334/- in respect of interest income on NPAs as per Rule 6EB r.w.s 43D(b) of Act. Assessing Officer invoked same by observing that assessee had been following mercantile system of accounting. His view accordingly was that income in respect of bad and doubtful debts is required to be taxed on accrual basis barring exceptions provided under Rule 6EA r.w.s. 43D of Act. All this reasoning lead to impugned addition being made in assessee s hand. 18. CIT(A) upholds Assessing Officer s findings as follows: 6.3. Decision: I have carefully considered facts of case, assessment order and written submission of appellant. appellant has claimed deduction on income on account of NPA with appellant in accordance with RBI policy. AO has pointed out that there is difference between policy of RBI and provisions of income tax Act rule 6EA read with section 43D of Act. It has been held by Assessing Officer that income in respect of bad and doubtful debt is required to be taxed on accrual basis except for exceptions provided in rule 6EA read with section 43 D of Act. It has been held by him that sticky advances which have not been considered by appellant following RBI guidelines cannot be excluded and same should have been considered. He accordingly made addition of Rs. 23,05,334/-. appellant on other hand has submitted that it was regularly following guidelines and directions of National Housing Bank for purpose of non-recognition of interest income on NPA which have also been accepted by Dept. appellant company ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 21 - was housing finance company regulated by NHB and therefore it has to comply with prudential norms prescribed by NHB. It is submitted by appellant that under Income Tax Act only real income can be taxed and in case of NPA when principal amount was not realised, no interest can be recognised in respect of those advances which have become NPA. On careful consideration of entire facts it is noted that assessing officer has properly dealt issue of contradiction between rules given in Income Tax Act and RBI guidelines. I am in complete agreement with findings given by him in para 7.4 to 7.8 of his order. rules given in Income Tax Act will prevail over other guidelines. Unless otherwise proved that rules are ultra vires, same have to be considered for determining income. In view of detailed discussion given by AO in his order addition to income of Rs. 23,05,334/- is upheld. Penalty proceedings u/s. 271(1)(c) are also initiated as appellant has furnished inaccurate particulars of its income. 19. Ld. counsel for assessee strongly argued that both lower authorities have erred in making impugned addition of interest income on NPAs on accrual basis. Revenue quotes before us coordinate bench of this tribunal in ITA No.1874/Mum/2010 GIC Housing Finance Ltd. vs. ACIT decided on 09.02.2011 already rejecting real income plea after placing reliance on hon ble apex court s decision in Southern Techologies Ltd. vs. JCIT 320 ITR 577 (SC). 20. assessee at this stage take alternative plea that three months deadline for purpose of declaring NPAs extends upto succeeding assessment year. Its case is that same may also resulting double disallowance in this manner. We are of view that this alternative plea is too ITA No. 1880/Ahd/2015, 776/Ahd/2016, 2536/Ahd/2013 & 1881/Ahd/2015 (Assessment Years:2008-09 to 2011-12) (Gruh Finance Ltd.) - 22 - premature at this stage in impugned preceding assessment year. However, we observe that assessee deserves to be granted liberty to raise same in assessment proceedings of succeeding assessment year in case it successfully makes out case of double addition by tendering supportive evidence. We reject this substantive ground with these observations. ITA No.1881/Ahd/2015 is taken as partly allowed. 21. All these four appeals are partly allowed. [Pronounced in open Court on this 30th day of September, 2016.] Sd/- Sd/- (N. K. BILLAIYA) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 30/09/2016 True Copy S.K.SINHA Copy of Order Forwarded to:- 1. Revenue 2. Assessee 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order Gruh Finance Ltd. v. Dy. Commissioner of Income-tax, Circle 4, Ahmedabad
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