M.R. Shah, J.

Oral:

1. Feeling aggrieved and dissatisfied with the impugned common Order passed by the Income Tax Appellate Tribunal, "C" Bench, Ahmedabad dated 18th March 2016 passed in ITA No. 851/Ahd/2011 [for A.Y 2009-2010] by which the learned Tribunal has dismissed the appeal preferred by the Revenue [ITA No. 851/Ahd/2011] for A.Y 2009-2010, the Revenue has preferred the present Tax Appeal with the following proposed questions of law :

A. "Whether the Tribunal erred in law and on facts in deleting the disallowance of expenditure in respect of interest and administrative expenses of Rs. 90,97,470/- under Section 14A of the Act?"

B. "Whether the Tribunal erred in law and on facts in deleting the disallowance of expenditure of Rs. 24,37,500/- incurred towards consultancy charges ?"

2. Facts leading to the present Appeal in nutshell are as under :

2.1 That, the assessee filed return for A.Y 2009-2010. That, the Assessing Officer made disallowance of expenditure in respect of interest and administrative expenses of Rs. 90,97,470/- under Section 14A of the Income-tax Act, 1961. The Assessing Officer also made disallowance of expenditure of Rs. 24,37,500/- incurred towards Foreign Exchange gain under section 37 of the Act.

3. Feeling aggrieved and dissatisfied with the order passed by the Assessing Officer in making the aforesaid disallowances, the assessee preferred appeal before the learned CIT [A]. The learned CIT [A] confirmed the disallowance of expenditure in respect of interest and administrative expenses of Rs. 90,97,470/- under Section 14A of the Act, however, deleted disallowance of expenditure of Rs. 24,37,500/- incurred towards Foreign Exchange gain.

4. Feeling aggrieved and dissatisfied with the order passed by the learned CIT [A], both the Revenue as well as assessee preferred appeals before the learned Tribunal. The Revenue preferred Appeal, being ITA No. 1524/Ahd/2012 against the order passed by the learned CIT [A] deleting the disallowance of expenditure of Rs. 24,37,500/- incurred towards foreign exchange gain. The assessee preferred appeal against the order passed by the learned CIT [A] confirming the disallowance made by the Assessing Officer of expenditure in respect of interest and administrative expenses of Rs. 90,97,470/- under Section 14A of the Act.

5. By the impugned common judgment and order, the learned Tribunal has allowed the appeal preferred by the assessee and has deleted the disallowance of expenditure in respect of interest and administrative expenditure of Rs. 90,97,470/- under Section 14A of the Act. By the impugned common judgment and order, the Tribunal has dismissed the appeal preferred by the Revenue and has confirmed the order passed by the learned CIT [A] deleting the disallowance of Rs. 24,37,500/- incurred towards foreign exchange gain.

6. Feeling aggrieved and dissatisfied by the impugned common judgment and order passed by the learned Tribunal, the Revenue has preferred the present Tax Appeal with the afore stated proposed question of law.

7. We have heard learned advocate Shri Nitin K Mehta, learned counsel appearing on behalf of the Revenue and Shri J.P Shah, learned Senior Advocate appearing on behalf of the respondent-assessee.

8. At the outset, it is required to be noted that the Assessing Officer made disallowance in respect of interest and administrative expenses of Rs. 90,97,470/- under Section 14A of the Act read with Rule 8D of the I.T Rules. However, it is required to be noted and it does not seem to be in dispute that in the A.Y 2009-2010, the assessee was having reserve fund of Rs. 1981.55 Crores and made investment of Rs. 144.51 Crores. Thus, the assessee was already having surplus interest free reserve fund of Rs. 1981.55 Crores against which investment was made of Rs. 144.51 Crores only. It is also required to be noted that in the A.Y 2009-2010, a sum of Rs. 19.22 Crores was offered for taxation as short/long term capital gain. Thus, the investment made by the assessee was not out of interest bearing fund. As observed herein above, the assessee was already having its own surplus fund, out of which investment was made. Considering the aforesaid facts and circumstances, the Assessing Officer was not justified in making the disallowance under Section 14A of the Act and thereafter to determine the expenses in respect of interest and administrative expenses of Rs. 24,37,500/- under Section 14A of the Act read with Rule 8D. The relevant observations made by the learned Tribunal, while deleting the disallowance of expenditure in respect of interest and administrative expenses in respect of interest and administrative expenses, read as under :

"36. We have duly considered rival contentions. As far as the proposition of the learned CIT-DR that even in the absence of any mechanism for disallowance, the expenditure, which is attributable to earning of exempt income can be worked out on estimate basis or reasonableness basis after looking into the facts and circumstances of a particular case is concerned, we do not have any dispute. The amounts can be disallowed on estimate basis. In the present appeals, the assessee itself has made disallowance of Rs. 5.10 lakhs in the Asstt. Year 2009-2010, and Rs. 52,000/- in the A.Y 2010- 11. In the A.Y 2009-2010, the exempt income is of Rs. 2.02 Crores whereas in the A.Y 2010- 2011, it is Rs. 22.50 lakhs. Before embarking upon the facts of the present case, we deem it pertinent to take note of the observations of the Delhi High Court recorded in para 29 of the judgment in the case of Maxopp Investment Limited [Supra]. It reads as under :

"Scope of sub-sections (2) and (3) of Section 14A.

29. Sub-section (2) of Section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specified a positive amount of expenditure in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same."

37. According to the Hon'ble Delhi High Court, when an assessee demonstrate actual incurrence of the expenditure, then Rule 8D would not be automatically applied without looking into the explanations. In other words, when an assessee has worked out the expenditure relatable to earning of exempt income on actual basis and demonstrated to the AO the incurrence of such expenditure, then AO record a finding that he was not satisfied with the correctness of the expenditure shown by the assessee. In other words, he has to verify the account of the assessee, and if he was not satisfied with the correctness of the claim made by the assessee, then, after assigning reasons, he would proceed to compute the expenses on the basis of the method brought in the Rule 8D. In light of the above proposition, let us examine the facts in both the years and finding recorded by the A.O. The main contention of the assessee in both the years is that it has made investment in the mutual fund with "growth option". In the case of growth option, no dividends are declared by the mutual fund, and only income declared by an investor is in the form of capital gains. The capital gains derived by the assessee on mutual fund are taxable and not an exempt income derived by the assessee on mutual fund are taxable and not an exempt income derived from such investment. In the Asstt. Year 2009- 2010, the assessee has offered a sum of Rs. 19.,22 Crores on sale of such investment for taxation as short/long term capital gain. Similarly, in the Asstt. Year 2010-2011, a sum of Rs. 8.23 Crores has been offered. The investment made by the assessee was not out of interest bearing fund. It has its own surplus fund out of which investment has been made. The assessee has demonstrated that it had own funds of Rs. 1981.55 Crores in the A.Y 2009-10 and investment in the mutual fund was only 144.51 Crores. The assessee had also submitted that its investment in earning exempt income has reduced during the year from 78.45 crores to Rs. 18.09. The assessee has submitted these details in its submissions reproduced by the AO. Similarly, in the A.Y 2010-11, it has reserve fund of Rs. 2319.17 Crores and made investment of Rs. 111.09 crores. The learned AO has not given any heed to these submission or figures submitted by the assessee. The assessee has further made disallowance of Rs. 5.12 lacs in the A.Y 2009-10. This was mainly for management of investment. He simply discussed the background for bringing section 14A as well as Rule 8D on the statute book. He has specifically not worked out the amounts even on the basis of Rule 8D. He called for a working from the assessee and made a lumpsum addition in both the years. The learned AO has not recorded any finding that amounts added back by the assessee are not commensurate with the administrative expenses which might be attributable to earning exempt income. Because, on interest expenses account, there cannot be any disallowance as the assessee has far more interest free fund than investment. We are of the view that the learned CIT [A] has looked into all these aspects in the A.Y 2009-2010 before deleting the disallowance. We do not find any error in the order of the learned CIT [A] on this issue in A.Y 2009-10. Consequently, we allow the ground of appeal raised by the assessee in the A.Y 2010- 2011 and delete the disallowance made by the A.O."

9. Considering the aforesaid facts and circumstances, more particularly the fact that the assessee was already having its own surplus fund and that too to the extent of Rs. 1981.55 Crores against which investment was made of Rs. 144.51 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses of Rs. 24,37,500/- under rule 8D of the Rules. Under the circumstances and in the facts of the case, narrated herein above, it cannot be said that the learned Tribunal has committed any error in deleting the disallowance of expenditure of Rs. 24,37,500/- incurred in respect of interest and administrative expenses under Section 14A of the Act. We are in complete agreement with the view taken by the learned Tribunal. At this stage, decision of Division Bench of this Court in the case of Principal Commissioner of Income-tax v. India Gelatine & Chemicals Limited, reported in [2015] 376 ITR 553 [Gujarat] needs a reference. In the said decision, it is observed and held by the Division Bench of this Court that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 14A is not justified.

10. Now so far as Question [B] is concerned, it appears that the Assessing Officer made disallowance of expenditure of Rs. 24,37,500/- incurred towards Consultancy charges. The Assessing Officer made disallowance under Section 37 of the Act, treating the same as capital expenditure. However on appeal, the learned CIT [A] deleted the disallowance made by the Assessing Officer by observed that the expenditure incurred by the assessee towards Consultancy charges was purely revenue in nature and therefore was allowable expenditure. The aforesaid finding and observation has been confirmed by the learned Tribunal by making observations in par-42, as under:

"42. We have duly considered rival contentions and gone through the record carefully. No doubt, the expenses were incurred by the assessee towards consultancy charges for making investment. On sale of investment, capital gain would arise to the assessee, but the expenses incurred by the assessee are not directly linked to the purchase of investment. These are paid for consultancy. If the expenses are not to be capitalized in the investment, then how the assessee will get this set off. Therefore, the learned CIT [A] has rightly observed that the expenses were not incurred towards purchase of investment, rather, these were incurred towards consultancy charges in order to keep track on the investment. Therefore, we do not see any error in the order of the learned CIT [A]. This ground of appeal is rejected."

11. Considering the aforesaid facts and circumstances of the case when the assessee incurred expenses towards consultancy charges in order to make investment, the Assessing Officer was not justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure, disallowable under Section 37 of the Act. Under the circumstances, the learned Tribunal has rightly deleted the disallowance of Rs. 24,37,500/- incurred by the assessee towards consultancy charges. We are in complete agreement with the view taken by the learned Tribunal.

12. No substantial question of law arises, as sought to be contended on behalf of the Revenue.

13. In view of the above and for the reasons afore stated, the present Tax Appeal fails and the same deserves to be dismissed and is accordingly dismissed.