Disallowance u/s 14A

Citation of the Case:- UTI Bank Ltd. vs. ACIT (ITAT Ahmedabad), Income tax (Appeal) nos.152 & 2572 of 2006 and 65 of 2009, Date of Judgment: 28/10/2015

Brief of the Case

ITAT Ahmedabad held In the case of UTI Bank Ltd. vs. ACIT that we find that the assessee’s interest free deposits exceed its tax free investment in current year as well as in succeeding assessment year 2003-04. The tribunal and hon’ble jurisdictional high court deleted an identical section 14A disallowance based on the very presumption. The Revenue’s Special Leave Petition stand admitted qua administrative expenses only. The only distinction that is to be seen in these two assessment years is that the assessee has suo moto disallowed Rs. 6.23 crores in the impugned assessment year. The Revenue seeks to apply estoppel principle. We are of the view that purpose of scrutiny assessment is to determine correct taxable income as per law and not to rely on such technicalities. The same principle applies even in appellate proceedings being in the nature of continuity of original proceedings. Therefore, we follow consistency and hold that the impugned disallowance of Rs. 36.68 crores made in the course of assessment partly sustained in lower appellate proceedings; suo moto or the one computed by the lower authorities, is not liable to be sustained.

Facts of the Case

The assessee company M/s UTI Bank Ltd is now known as M/s Axis Bank Ltd. It started its banking operations in 1995. The assessee filed its return on 30-10-2002 admitting income of Rs. 208, 83,29,510/- and claimed refund of Rs. 42,15,67,337/-. This was followed by a revised return of income reading a sum of Rs. 208,95,81,108/- with refund of Rs. 41,76,27,996/-. The Assessing Officer took up scrutiny. He noticed exempt income of Rs. 39.65 crores arising from tax free bonds, debentures and dividends. The assessee had invested a sum of Rs. 4,14 crores in these instruments.

The assessee had suo moto disallowed a sum of Rs. 6.23 crores comprising of interest pertaining to incremental demand deposits. The Assessing Officer in assessment order computed section 14A disallowance of Rs. 36.68 crores i.e. net figure of Rs. 30.45 crores over and above Rs. 6.23 crores added back suo moto.

Contention of the Assessee

The assessee’s submissions on merits are that its suo moto disallowance of Rs. 6.23 crores is qua interest sums only. Our attention is invited to details of its interest free funds vis-à-vis tax free investment right from its initial year of business i.e. up to 31-03-1995 to 31-03-2003. The assessee’s interest free deposits in the impugned assessment year are Rs. 1,766 crores in capital reserves and deposits. Tax free interest investment in question are of Rs. 4,14 crores leaving behind a surplus of Rs. 1,352 crores. This results in surplus percentage of interest free funds @ 327%. The assessee then takes us to its suo moto disallowance. It pleads that its interest free funds are much more than tax free investments.

The tribunal in assessment year 2003-04 relied upon the case law of CIT vs. Reliance Utilities and Power Ltd 313 ITR 340 for deleting an identical disallowance. The only difference being that the assessee therein had not challenged suo moto disallowance. The Revenue filed tax appeal no. 119 of 2013 before the hon’ble jurisdictional high court. The same stood dismissed on 22-03-2013. The Revenue preferred Special Leave Petition (Civil) No. 468 of 2014. The hon’ble apex court in its order dated 07-02-2014 admitted it only qua disallowance of administrative expenses. The assessee accordingly submits that even on merits, it deserves to succeed qua the entire issue as well.

Contention of the Revenue

The ld counsel of the revenue supports Assessing Officer’s action in making the disallowance of Rs. 36.68 crores. Its case is that the CIT( A) has erred in granting part relief to assessee. It opposes assessee’s arguments that our adjudication is confined to the limited issue of suo moto disallowance only by referring to the crucial expression of ‘entire issue’ used in the hon’ble high court remand directions reproduced hereinabove. It accordingly presses for restoration of entire disallowance as against that added suo moto and seeks rejection of the instant appeal. Case law of (2014) 363 ITR 11 (Kerala), South Indian Bank Ltd vs. CIT, (2011) 16 taxmann.com 289 (Kerla) CIT vs. State Bank of Travancore, (2015) taxmann.com 297 (Pan) Avon Cycles Ltd vs. CIT is also quoted.

Held by CIT (A)

CIT (A) partly allowed the appeal of the assessee. It was held that the action of the A.O. is not correct as regards disallowing interest expenses amount after allocating it to the investments for exempted income. The appellant has filed the details before the A.O. admitting that only part of the interest bearing funds is used for investing in the investments giving tax exempted income. The interest cost is calculated at Rs. 6.23 Cr. which is offered for taxation. Hence, the A.O. is not justified in further allocating the interest expenditure for this purpose disregarding the fact that the appellant has surplus funds.

However as regards the other operating expenses are concerned, appellant has not filed any details as to how much expenditure is to be apportioned for earning the exempt income. The total operating expenses are Rs. 205.47 Cr. and the exempt income claimed by the appellant is Rs. 39.65 Cr. whereas the total income earned by appellant is Rs. 1595.40 Cr. Hence the exempted income is 2.485% of the total income. Therefore, by allocating the operating expenses of Rs. 205.47 Cr. in this ratio, the expense allocable to the exempt income comes to Rs. 5.11 Cr. (205.47 x 2.485%) Therefore, this expenditure has to be disallowed out of the total expenditure for earning the exempt income under the provisions of Sec. 14A.

Held by ITAT

 It has come on record that the tribunal in first round had remitted the issue of this disallowance back to the assessing authority for afresh adjudication. The net result was that corresponding ground in assessee’s instant appeal as well as that filed at Revenue’s behest stood restored for afresh adjudication. The Revenue’s limited grievance was accordingly confined to the issue of suo moto disallowance of Rs. 6.23 crores in assessee’s appeal as it could not have been aggrieved against the tribunal’s decision in restoring the issue in appeal. It framed only two substantial questions of law before the hon’ble jurisdictional high court i.e. suo moto disallowance and correctness of co-ordinate bench decision in admitting additional ground. Their lordships hon’ble jurisdictional high court considered tribunal’s common order in cross appeal for using the crucial expression ‘entire issue in the operative part of para no. 8 hereinabove. We reject assessee’s first argument seeking to restrict our adjudication in these facts and circumstances and proceed to decide the entire issue of section 14A disallowance.

We find that the assessee’s interest free deposits exceed its tax free investment in current year as well as in succeeding assessment year 2003-04. The tribunal and hon’ble jurisdictional high court deleted an identical section 14A disallowance based on the very presumption. The hon’ble jurisdictional high court in Tax Appeal No. 119 of 2013 decides the very question in assessee’s favour. It was held that in the present case, since the assessee has suo moto disallowed Rs. 5.53 crore u/s. 14A, respectfully following the decision of Bombay High Court in case of Reliance Utilities & Power Ltd, 313 ITR 340, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles the Hon’ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted. Disallowance u/s. 14A requires finding of incurring of expenditure, the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision of High Court, we are of the view that no disallowance of administrative expenses can be made

The Revenue’s Special Leave Petition stand admitted qua administrative expenses only. The only distinction that is to be seen in these two assessment years is that the assessee has suo moto disallowed Rs. 6.23 crores in the impugned assessment year. The Revenue seeks to apply estoppel principle. We are of the view that purpose of scrutiny assessment is to determine correct taxable income as per law and not to rely on such technicalities. The same principle applies even in appellate proceedings being in the nature of continuity of original proceedings. Therefore, we follow consistency and hold that the impugned disallowance of Rs. 36.68 crores made in the course of assessment partly sustained in lower appellate proceedings; suo moto or the one computed by the lower authorities, is not liable to be sustained.

The Revenue’s reliance placed on case law Goetze India Ltd vs. CIT (2006) 284 ITR 323 (SC) that the assessee ought to have file a revised return for deleting this suo moto addition also stands decided in assessee’s favour by hon’ble jurisdictional high court in case of Mitesh Impex Appeal No.2562/2009 for holding that if a claim though available in law is not made either inadvertently or on account of erroneous of belief of complex legal position, such claim cannot be shut out for all times to come merely because it is raised for the first time before the appellate authority without resorting to revising the return before the assessing authority.

We draw support from this decision for accepting the assessee’s additional ground leading to our adjudication in its favour on merits. The entire disallowance of Rs. 36.68 crores made by the Assessing Officer including that added suo moto at assessee’s behest of Rs. 6.23 crores is deleted by placing reliance on the hon’ble jurisdictional high court decision for succeeding assessment year. The assessee’s arguments on merits are accepted. The Revenue’s case law does not hold ground in view of hon’ble jurisdictional high court’s decision in assessee’s own case for succeeding assessment year. The ld. Assessing Officer need not proceed with the earlier remand directions. ITA 152/Ahd/2006 is allowed on the issue of section 14A disallowance.

Accordingly appeal of the assessee allowed.

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