I. Section 14A Disallowance: Capped at Exempt Income & Only Yielding Investments

Issue

Can the disallowance of expenditure under Section 14A exceed the total exempt income earned during the year?
Should Rule 8D calculations consider all investments or only those that actually yielded exempt income?

Decision

Cap on Disallowance: The Tribunal reiterated the settled principle (affirmed by Delhi/Bombay High Courts) that the disallowance under Section 14A cannot exceed the actual exempt income earned by the assessee during the relevant year.
Yielding Investments Only: For calculating the disallowance under Rule 8D (specifically the 0.5% average value clause), the Assessing Officer must consider only those investments which yielded exempt income during the year, not the entire investment portfolio.
Ruling: The matter was remanded to re-compute the disallowance based on these limits.

II. Strategic Investment Expenses allowability u/s 37(1)

Verdict: [In Favour of Assessee] – Controlling Interest expenses are Business Expenditure.

Issue

Whether interest or other expenditure incurred on investments made for the purpose of exercising controlling interest in other companies constitutes a “business activity” deductible under Section 37(1), or is it merely a capital/investment activity?

Decision

Strategic vs. Passive: The Tribunal held that making investments to acquire or maintain a controlling interest in group companies is a strategic business decision, distinct from passive investment for dividends.
Business Nexus: Therefore, expenditure incurred towards such strategic investment activities constitutes a valid business activity.
Ruling: The expenditure is allowable as a deduction under Section 37(1).

III. Overseas State Taxes deductible if no DTAA relief available

Verdict: [In Favour of Assessee] – State Taxes not covered by Sec 40(a)(ii) are deductible.

Issue

Whether foreign “State” or “Local” taxes paid overseas, which are not eligible for tax credit under Section 90 (DTAA) or Section 91, fall under the prohibition of Section 40(a)(ii) (which disallows “taxes on income”), or can they be claimed as business expenses under Section 37.

Decision

Scope of 40(a)(ii): Section 40(a)(ii) disallows taxes levied on profits if those taxes are eligible for relief/credit against Indian tax.
Residual Deduction: The Tribunal held that if a specific overseas tax (like a State/City tax in the US/Canada) is not eligible for relief under Section 90 or 91 (i.e., it’s not a “Central” tax covered by the treaty), it does not fall under the Section 40(a)(ii) disallowance.
Character: Such taxes take the character of a business expense incurred to operate in that jurisdiction.
Ruling: The AO was directed to verify eligibility for treaty relief. If no relief is available, the deduction under Section 37 must be allowed.

IV. Section 10(23G) Exemption for Infrastructure Capital Company

Verdict: [In Favour of Assessee] – Exemption Allowed.

Issue

Whether an Infrastructure Capital Company is entitled to exemption under Section 10(23G) on Long Term Capital Gains (LTCG) from the sale of shares of an enterprise engaged in developing an Information Technology Park.

Decision

Qualifying Investment: The Tribunal noted that the assessee was an infrastructure capital company and the investee (IT Park Ltd) was engaged in the business of developing, maintaining, and operating an infrastructure facility.
Ruling: The conditions for Section 10(23G) were met. The gain is exempt and cannot be taxed as business income.

Key Takeaway: Foreign State Taxes: This is a vital planning point for IT/Service exporters. US State Taxes (like California Franchise Tax) are often not creditable under the India-US DTAA. Instead of losing that money, claim it as a P&L expense (Section 37). The Reliance Infrastructure ruling supports this view.

IN THE ITAT MUMBAI BENCH ‘E’

Tata Industries Ltd.

ACIT^*

SAKTIJIT DEY, Vice President
and ARUN KHODPIA, Accountant Member

ITAppeal Nos. 3157, 4109 (MUM) OF 2012, 5690 (MUM) OF 2015
CO No. 144 (MUM) OF 2016
[Assessment year 2006-07]

NOVEMBER 19, 2025

Ms. Aarti Vissanji for the Appellant. Ritesh Misra, CIT DR for the Respondent.

ORDER

Arun Khodpia, Accountant Member. – The captioned appeals and cross objection are filed at the instance of assessee as well as revenue, emerging from the order of Commissioner of Income Tax (Appeals)-6, Mumbai dated 28.03.2012, which in turn arises from the order u/s 143(3) dated 29.12.2008 passed by Additional Commissioner of Income Tax, Range-2(3), Mumbai. Another connected appeal has been filed by the revenue emerging from the order of Commissioner of Income Tax (Appeals)-6, Mumbai, dated 29.09.2015, while deciding the penalty imposed on the assessee u/s 271(1)(c) vide order dated 25.03.2014 passed by Deputy Commissioner of Income Tax-2(3), Mumbai.

2. All the aforesaid appeals / CO pertains to AY 2006-07, emerging from common orders by the revenue, having interconnected facts and circumstances, therefore, for the sake of convenience and brevity, these are heard together and decided under this common order.

3. To decide the issues raised by the assessee, first we are taking up ITA No. 3157/MUM/2012, wherein the assessee has raised the following grounds of appeal along with Additional/supplementary and alternative grounds:

Grounds of Appeal:

(a) The CIT(A) erred in allocating proportionate interest expenditure of Rs.41,70 Crores under the provisions of Section 14A of the Income Tax Act, 1961 (‘the Act’), for the purpose of computing Income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act.

(b) The CIT(A) erred in allocating administrative and establishment of Rs.11.69 Crores under the provisions of Section 14A of the Income-Tax Act, 1961 (‘the Act’), for the purpose of computing Income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act.

The CIT(A) erred in confirming Rs.28,38,00.000 as capital expenditure on the grounds that as the Appellants main activity is to acquire controlling interest in the company in which it makes investment and the same cannot be treated to be a business activity, hence interest and other expenses are not allowable.

The CIT(A) erred in treating sub-license fees received by the appellant of Rs. 1,39,38,000 as Income from other Source.

The CIT(A) erred in directing that the flat at the Andheri Housing society, owned by the appellant and occupied temporarily by sportsmen of the Tata sports club, be considered for the purpose of computing income from House property.

The CIT(A) erred in confirming the disallowance of expenditure ofRs. 20,75.457/- incurred as brokerage expenses for the purpose of computing income from Business or Profession.

The CIT(A) erred in confirming the disallowance of legal & professional fees of Rs.1,99,50,893/- paid by the Appellant, for the purpose of computing income from Business or Profession.

The CIT(A) erred in confirming the disallowance of legal & professional fees of Rs.18.51,209/- paid by the Appellant, for the purpose of computing income from Business or Profession under section 40(a)(ia) on the grounds on non-deduction of tax at source

The CIT(A) erred in confirming the disallowance of legal & professional fees of Rs.38,84,420/- paid by the Appellant, for the purpose of computing income from Business or Profession on the grounds of expenditure being capital in nature.

The CIT(A) erred in confirming the disallowance under section 40(a)(ia) of interest expenditure of Rs.12,62,87,403/- paid by the Appellant to a Trust of which a banking company was a Trustee on the grounds of non-deduction of tax at source

10.

The CIT(A) erred in confirming the disallowance of Rs.10,01,707/- ofOverseas Taxes paid by the appellant claimed under section 37 of the Income Tax Act, 1961.

11.

The CIT(A) erred in confirming the addition of Rs.24,75,371 being the unrealized foreign exchange loss incurred by the appellant.

12.

Your Appellant craves leave to add to amend, alter, vary, omit or substitute the aforesaid ground of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.

Additional / Supplementary Grounds of Appeal

(a)

The CIT(A) erred in allocating proportionate interest expenditure of Rs. 41.70 crores under the provisions of Section 14A of the Income Tax Act, 1961 Act’), for the purpose of computing income from Business or Profession a for computing the Adjusted Book Profit under section 115JB of the Act.

– (i) Without prejudice to the above and in the alternate, the disallowance of interest should be made in relation to investments of Rs. 301.23 crores (on which dividend income is received during the year) in the same proportion it bears the value of total investment; and that the interest expenditure should considered after reducing interest income of Rs. 0.58 crores.

– (ii) Without prejudice to the above and in the alternate, the disallowance of interest should be made in the proportion to which the loan funds of Rs. 923.57 crores bears to the total funds of Rs. 2,239.97 crores; and that the interest expenditure should be considered after reducing interest income of Rs. 0.58 crores.

(b)

The CIT(A) erred in allocating administrative and establishment of Rs. 11.69 crores under the provisions of Section 14A of the Income Tax Act, 196 Act’), for the purpose of computing income from Business or Profession also for computing the Adjusted Book Profit u/s 115JB of the Act.

– (i) Without prejudice to the above and in the alternate, no disallowance administrative expenditure should be made, in absence of precise formulae (as held in CIT v. Dhanalakshmy Bank Ltd. and (other appeals) by Kerala High 344 ITR 259), in this regard.

– (ii) Without prejudice to the above and in the alternate, the disallowance administrative expenditure should be made only of 2% of expenditure of Rs. 5.27 crores incurred by the Project and Investment Division of HO and not 90% of Rs. 12.99 crores of the expenditure ofentire HO. For the purpose, the following amounts should be deducted:

(a)

Depreciation;

(b)

Disallowance made out of expenditure of said Division; and

(c)

Other expenses as stated hereunder

Sr. No.	Particulars	Rs.
1.	Foreign Travel	16,76,988/-
2.	Brokerage expenses	1,16,44,87//-
3.	Legal and professional fees	3,33,11,89//-
4.	Debenture and bond issue expenses	1,10,448/-
	Total	4,38,03,026/-

The CIT(A) erred in confirming Rs. 28,38,00,000/- as capital expenditure on the grounds that as the Appellants main activity is to acquire controlling interest in the company in which it makes investment and the same cannot be treated to be a business activity, hence interest and other expenses are not allowable.

2.1

The CIT(A) ought to have held that the expenditure incurred in relation to activities of HO is revenue expenditure allowable under the applicable provisions of the Act.

Without prejudice to the above and in the alternate

2.2

The CIT(A) ought to have held that the expenditure which can be disallowed as capital in nature has to be of the Project and Investment division only and not of entire HO.

The CIT(A) erred in treating sub-license fees received by the appellant of Rs. 139,38,000/- as Income from other Sources.

The CIT(A) erred in confirming the disallowance of expenditure of Rs. 20,75,457/-incurred as brokerage expenses for the purpose of computing income from Business or Profession.

The CIT(A) erred in confirming the disallowance of legal and professional fees of Rs. 1,99,50,893/- paid by the Appellant, for the purpose of computing Income from Business or Profession.

The CIT(A) erred in confirming the disallowance of legal and professional fees of Rs. 18,51,209/- paid by the Appellant, for the purpose of computing Income from Business or Profession under section 40(a)(ia) on the grounds on non-deduction of tax at source.

The CIT(A) erred in confirming the disallowance of legal and professional fees of Rs. 38,84,420/- paid by the Appellant, for the purpose of computing Income from Business or Profession on the grounds of expenditure being capital in nature.

8.1

Without prejudice to the above an in the alternate, The CIT(A) ought to have granted an opportunity to the Appellant on the principles of natural justice and or otherwise before confirming the disallowance of legal and professional fees of Rs.38,84,420/- as being capital in nature and consequently, the disallowance so made should be deleted.

The CIT(A) erred in confirming the disallowance under section 40(a)(ia) of interest expenditure of Rs. 12,62,87,403/- paid by the Appellant to a Trust of which a banking company was a Trustee on the grounds of non-deduction of tax at source.

9.1

Without prejudice to the above an in the alternate, directions should be given to the AO to apply second proviso to section 40(a)(ia) in deciding the admissibility of Rs. 12,62,87,405/- being interest paid to a Trust of which one of the Trustee is a Banking Company without deduction of tax at source, by giving an opportunity to the appellant in this regard and on satisfaction of the conditions of the said second proviso, the disallowance of Rs. 12,62,87,405/- should be deleted.

10.

The CIT(A) erred in confirming the disallowance of Rs. 10,01,707/- of Overseas Taxes paid by the appellant claimed under section 37 of the Income Tax Act, 1961.

11.

The CIT(A) erred in confirming the addition of Rs. 24,75,371/- being the unrealized foreign exchange loss incurred by the Appellant.

12.

4. At the outset, Ms. Aarti Vissanji, Authorized Representative on behalf of the assessee (in short “Ld. AR”) submitted that the assessee is not willing to press the grounds of appeal Nos: 1(a-ii), 1(b-i), 2.2, 3, 4, 6, 7, 8.1, 9, 9.1, 11, therefore, these grounds may be treated as withdrawn. Since the respondent revenue has no objection to the aforesaid request of the assessee, the assessee’s request is accepted, consequently, the mentioned grounds are dismissed as not pressed/withdrawn.

5. Afterwards, Ld. AR of the assessee has pressed /argued on rest of the grounds of appeal in ITA No. 3157/MUM/2012, which are dealt with and adjudicated as under:

6. Ground No. 1(a), (a-i), (a-ii), (b), (b-ii): Regarding disallowance u/s 14A of the Income Tax Act.

6.1 Apropos, the aforesaid disallowance, Ld. AR referred to the relevant findings from the assessment order, according to which an amount of Rs.57.37 crores has been disallowed by the Ld. AO invoking provisions of section 14A r.w. rule 8D(2)(i), (ii) & (iii). The aggregate disallowance of Rs. 57.37 crores is reduced by Rs.29.92 crores, which was suo-moto disallowed by the assessee itself in its Return of income. Therefore, the additional disallowance of Rs. 27.45 crores was made.

Being aggrieved, assessee preferred an appeal before the Ld. CIT(A), wherein the issue was discussed, deliberated, observed and decided as under:

Ground 1 is regarding disallowance u/s 14A of Rs. 27,45,00,000/-. The AO has discussed the issue of disallowance u/s. 14A from Para 3.1 to Para 3.22 Page 2 to 18 of the assessment order and has mad disallowance as per Rule 8D. The appellant submitted that the Bombay High Court in case of M/s. Godrej Boyce Ltd. v/s. DCIT (Bombay)/[2010] 328 ITR 81 (Bombay)) has held that Rule 8D is applicable for A.Y. 2008-09 onwards. The appellant submitted that it has itself made disallowance of Rs.29.92 Crores.

1.1

I have gone through the order of the AO and submission of the appellant.

1.1.1

The Bombay High Court in case of M/s. Godrej & Boyce Ltd. v/s. DCIT (Bombay)/[2010] 328 ITR 81 (Bombay)) has held that Rule 8D is applicable for A.Y. 2008-09 onwards and for earlier years reasonable disallowance should be mad The reasonable disallowance in case of appellant is being discussed hereunder:

1.1.2

The appellant has not incurred any direct expenditure towards earning of exempt income as that disallowance amounting to Rs.7.65 Crores as per computation under Rule 8D 2(i) is an estimation @10.59% of the total interest expenditure i.e. as a percentage of expenditure indirectly incurred, thus no amount is disallowable as direct expenses.

1.3

The proportionate interest expenditure incurred towards exempt income comes to Rs. 41.70 crores. The CIT(A)-XXX, Mumbai in case of the appellant for AY 2005-06 has examined this issue from Para 6 to Para 11 Pages 3 to 14 of the appeal order dated 26.03.2009. For the reasons recorded by my Learned Predecessor, it is found that the proportionate interest expenditure of Rs. 41.70 Crores can reasonably be attributed towards earning of exempt income.

1.1.4

The appellant has not attributed any administrative and establishment expense towards earning of exempt income. The total administrative expense and establishment expense other than interest is Rs.8575 (-) Rs. 7276 =”Rs.” 1299 Lacs as shown at Page No. 4 of the assessment order i.e. “‘ 12.99 Crores. The appellant’s dividend income is Rs. 6.39 Crores, further the appellant’s capital gain on transfer of shares in Information Technology Park amounting to Rs.52.35 Crores is held to be exempt while deciding Ground No. 11(a). Thus, the appellant’s exempt Income is at 58.74 Crores. The appellant has already been allowed deduction with respect to income from other sources i.e. rent and interest of Income-tax refund and appellant’s business income is basically a negative figure of Rs. 8.47 Crore as per assessment order at Page 40. Thus, it is obvious that appellant’s main activity leads to Income in form of dividend and long term capital gain which are exempt. Under the circumstances, 90% of the administrative and establishment expenses can reasonably be attributed towards earning of exempt income as more than 90% of appellant’s income are exempt. Thus, 11.69 Crore i.e. 90% of 12.99 Crores are attributed towards exempt income.

1.1.5

Thus, interest expenditure of Rs. 1.70 Crores and administrative & establishment expenses of Rs. 11.69 Crores totaling to 1″53.39 Crores can reasonably be attributed towards earning of exempt income. As the appellant has itself disallowed Rs. 29.92 Crores, the addition of 23.47 Crores is confirmed and the appellant gets a relief of Rs.3.98 Crores.

6.2 As the Ld. CIT(A) has allowed only the partial relief to the assessee, the assessee in appeal before us, to assail the addition sustained by the Ld. CIT(A).

6.3 Ld. AR of the assessee on the aforesaid issue has submitted that the total deemed income was earned by the assessee to the tune of Rs. 6,38,94,133/-, whereas in the assessment order, the total dividend income has been mentioned at Rs.63,89,41,330/-. It is submitted that the aggregate disallowance in relation to provisions of section 14A exceed the exempt dividend income which was Rs.6.38 crores only. It is further submitted that the issue is squarely covered by the assessee’s own case for the assessment years 2004-05 and 2005-06. Ld. AR also placed her reliance on the decision of Hon’ble Apex Court in the case of PCIT v. State Bank of Patiala (SC), according to which the amount of disallowance u/s 14A should be restricted to amount of exempt income only.

6.4 The next argument taken by the Ld. AR was that the disallowance of interest to be quantified in the ratio to which value of investment on which exempt income is received bears to the average value of assets. Accordingly, the disallowance should be 7.84 crores only. Ld. AR placed her reliance on the following decision:

(i)

ACIT v. Vireet Investment (P.) Ltd. (Delhi- Trib) (SB)

(ii)

ACIT v. Tata Sons Ltd. (Mumbai – Trib.)/ITA Nos 4630, 4637/Mum/2016) (Mumbai ITAT) (AY 2009-10) (07.08.2020)

(iii)Tata

Sons Ltd. v. ACIT [IT Appeal No. 3192 and 3508 (Mum) of 2013, dated 6-11-2019]

6.5 Ld. AR also submitted that the interest expenditure should be considered net of interest income and for this proposition she placed here reliance on the following decisions:

TATA Sons Ltd (supra) Page 163, Para 5.5(a)] [AY 2009-10] (07.08.2020)

Tata Sons Ltd. (supra) [Page 182 & 183, Para 3.6 (b)] [AY 2008-09] (06.11.2019)

6.6 It is also submitted that the increase under expenditure (f) to Section 115JB is only of Direct Expenses, therefore, estimated disallowance u/s 14A cannot be added in computing book profit u/s 115JB of the Act. On this count, Ld. AR placed her reliance on the following decisions:

(i)

Vireet Investment (P.) Ltd. (supra)

(ii)

Tata Sons Ltd. (supra) (AY 2009-10) (07.08.2020) Page No. 164, Para 6)

(iii)

Tata Sons Ltd. (supra) (AY 2008-09) (06.11.2019) page no. 183, Para 3.7

6.7 Regarding disallowance of administrative and establishment expenditure, it is submitted that the same should be restricted to 2% of expenses of HO for Rs. 12.99 crores in the relevant year which comes to Rs. 25.98 lacs only. It is submitted that this issue is squarely covered by assessee’s own case vide order dated 10.11.2017 for AY 2007-08 Tata Industries Ltd. v. Asstt. CIT/[2018] 168 ITD 340 (Mumbai).

6.8 While arguing on the issue of disallowance u/s 14A, Ld. AR also come up with a contention that Rule 8D was inserted by IT(Fifth Amdt.) Rule, 2008 w.e.f. 24.03.2008, accordingly, it was the submission that the Rule cannot be applied for the AY 2006-07 as the same is prospective in nature and has no retrospective applicability as has been settled by Hon’ble Courts.

6.9 With the aforesaid submissions, Ld. AR further submitted that without prejudice to the aforesaid contention in case, the additions if sustained, the same should not exceed the amount which the assessee has suo-moto disallowed in its computation of income in ITR for Rs. 29.92 crores.

6.10 Per contra, Ld. CIT DR, vehemently supported the orders of revenue authorities.

6.11 We have considered the rival submissions, perused the material available on record and case relied upon by the assessee and department. After a thoughtful consideration to the facts of the issue, on perusal of assessment order framed by the Ld. AO, appellate order by the Ld. CIT(A) and the submissions of the assessee stating that the issues regarding additions u/s 14A is squarely covered by assessee’s own case as well as other decisions by the Hon’ble High Courts and Hon’ble Apex Court, we are of the considered view that the disallowance u/s 14A should be computed afresh by the Ld. AO considering the following principles emerging from the various decisions relied upon:

(a)

As held in the assessee’s own case on AY 2004-05 that the disallowance u/s 14A cannot exceed the amount of exempt income earned by the assessee during the year under consideration. Which is covered by the decision of Hon’ble Apex Court in the case of State Bank of Patiala (supra).

(b)

Following the analogy drawn by the decision of Special Bench of ITAT, Delhi in the case of Vireet Investment Pvt. Ltd. (supra), wherein it is held that only those investments are to be considered for computing the average value of investments from which yielded exempt income during the year.

(c)

Following the judgement in the case of Tata Sons (supra) by ITAT, Mumbai for AY 2009-10, the disallowance under rule 8D(2)(i), 8D(2)(ii) and 8D(2)(iii) are to be made by considering only those investments which had actually yielded exempt income to the assessee. We find that this issue is also covered in favour of the assessee in its own case by the decision of this Tribunal in ITA No. 3192/Mum/2013 for AY 2008-09 dated 06.11.2019 and Vireet Investment Pvt. Ltd. (supra). However, such workings need not be made for the year under consideration for the reasons described in para (d) hereunder.

(d)

In present matter, which pertains to AY 2006-07, the question of applicability of Rule 8D is also raised by the assessee, which according to the Judgment of Hon’ble Apex Court in the case of Commissioner of Income Tax v. Essar Teleholdings Ltd. / [Civil Appeal No. 2165 of 2012 dated 31-07-2018] cannot be applied retrospectively, the same would have prospective applicability, it is held that Rule 8D, which is framed to give effect to provisions of sub-section(2) and (3) of Section 14A cannot operate from any date prior to the AY 2008-09, therefore, the year under consideration would be out of the ambit of Rule 8D and no disallowance following the provisions of Rule 8D can be apply in the present matter. This issue was also discussed at length by the Hon’ble Mumbai High Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT ITR 81 (Bombay), wherein the decision of ITAT observing that the Rule 8D is only prospective was challenged by the revenue, but the appeal of revenue has been dismissed by the Hon’ble High Court, which view was thereafter sustained by the Hon’ble Supreme Court. We, therefore, respectfully following the principle of law laid down by Hon’ble Apex Court are convince with the contention raised by the Ld. AR that the provisions of Rule 8D which are inserted in IT(Fifth Amdt.) Rule, 2008 w.e.f. 24.03.2008 shall come into effect only from AY 2008-09, therefore, no disallowance in terms of provisions of Rule 8D can be made for the year under consideration i.e., AY 2006-07.

(e)

That the interest expenditure should not be considered alone, it should be reduced by the interest income. As per the judgement in the case of Tata Sons (supra).

(f)

That the estimated disallowance u/s 14A cannot be added while computing the book profit u/s 115JB of the Act, as per analogy drawn by Special Bench of ITAT, Delhi in case of Vireet Investments (P) Ltd (supra).

(g)

That the disallowance of administrative expenses restricted to 2% as held by ITAT, Mumbai in assessee’s own case for AY 2007-08 Tata Industries Ltd. (supra), wherein the ITAT, Mumbai has held has under:

“We find that the FAA had considered the total expenditure incurred by the assessee for making disallowance. In our opinion, expenditure incurred for earning exempt income only can be disallowed. As stated earlier, Rule 8D was not applicable for the year under appeal. But, the honorable Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) has held reasonable disallowance can be made u/s 14A of the Act for the year under appeal. Therefore, we hold that disallowance should be restricted to 2% of the expenses of HO. First ground of appeal is decided in favour of the assessee.”

(h)

We also find substance in the argument of Ld. AR that adjustment u/s 115JB for computing the book profit in accordance with the analogy drawn by Special Bench in the case of Vireet Investment (supra) as well as in the case of Tata Sons (supra).

(i)

Considering all the aforesaid principles extracted from various judgments / decisions, the computation shall be made for working out the substantive addition u/s 14A as well as the disallowance of interest expenditure in terms of aforesaid principle of law mentioned in para “(a) to (h)” hereinabove, however, the same shall not be less than the amount of suo-moto disallowance offered by the assessee for Rs. 29.92 crores, which has been very fairly conceded by the Ld. AR on behalf of the assessee.

6.12 In backdrop of aforesaid observations, the aforesaid matter is restored back to the file of Ld. AO, only for exercising the computation of disallowance u/s 14A in terms of aforesaid directions. The assessee is also directed to assist and providing necessary information to Ld. AO in the aforesaid matter. Consequently, the ground of appeal no. 1 along with its sub grounds are partly allowed.

7. Ground No. 2. Regarding expenditure incurred towards investment activities:

7.1 On the aforesaid issues, Ld. AO has made an addition of Rs. 28.38 crores u/s 37 of the Act, which is an amount of interest expense and other expenses of HO, claimed by the assessee for Rs.85.75 crores, the amount is reduced by Rs.57.37 crores which has already been disallowed u/s 14A of the Act by the Ld. AO. Ld. CIT(A) on this issue has not allowed any relief to the assessee and have confirmed the findings of Ld. AO by stating that the ‘the appellant’s main activity is to acquire controlling interest in the company in which It makes investment and the same cannot be treated to be a business activity, and hence, interest and other expenses are not allowable. The observations of Ld. CIT(A) on the issue are as under:

Ground 2 is regarding treating Rs. 28,38,00,000/- as capital expenditure. The AO at Page 19 Para 3.23 observed, “an activity of investments to gather controlling interest in the capital of the other entity cannot be treated as a business activity. Hence the expenses of the HO also call for disallowance u/s 37. Since a total of 57.37 Crore is already disallowed u/s 14A, the balance interest expenses (of HO) and Other Expenses (of HO) of “‘ 28.38 Crore (85.75 – 57.37) are disallowed u/s 37 being capital expenditure.” The appellant’s main activity is to acquire controlling interest in the company in which it makes investment and the same cannot be treated to be a business activity, and hence, interest and other expenses are not allowable. The action of the AO is, therefore, confirmed. Ground 2 is dismissed.

7.2 In this context, Ld. AR before us has submitted that the aforesaid issue is squarely covered by assessee’s own case for AYs 2004-05, 2007-08 and 2016-17, which is decided by the jurisdictional bench of ITAT, Mumbai in favour of the assessee, wherein the relevant findings recorded for AY 2007-08 Tata Industries Ltd. (supra), were as under:

5.3

Ground 1.2 is about disallowance of Rs.1.33 crores pertaining to projects and investment Department of HO. The FAA had held that expenditure was capital nature and hence was not allowable u/s 37 of the Act.

5.3.1

Before us, the AR stated that identical issue was decided in favour of the assessee by the Tribunal in its order dated 20.07.2016, while deciding the appeal for the assessment year 2004-05 (ITA-4894/Mum/2008). We are reproducing paragraphs 16 to 19 of the said order and it reads as under:

16. The Hon’ble Supreme Court in the case of “S.A. Builders v. CIT” (supra) has held that no disallowance of interest expenditure is called for on account of advancing loans to sister concerns, if it is found that said advances were made for commercial expediency and those sister concerns have not used the amounts for personal purposes. The Hon’ble Apex Court has categorically held that what is to be seen as to whether the assessee has advanced loan to its sister concern or to a subsidiary as a measure of commercial expediency? The Hon’ble Supreme Court, while referring to section 37 of the Act, has held that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also gets benefitted thereby. The Hon’ble Supreme Court further explained the expression “commercial expediency” as under:

“The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”

17. The Hon’ble Supreme Court thereafter considering the various aspects of the matter has concluded as under:

“We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”

“We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”

18. A perusal of the above conclusion reveals that though as per the provisions of section 37, it is not necessary that the loan amount should be exclusively used in the business of the assessee. However, the requirement is that it should be used for the purpose of the business which need not necessarily be the business of the assessee itself. What is to be seen is that the transfer of borrowed funds to a sister concern was out of commercial expediency. The Hon’ble Supreme Court thereafter wished to make it clear that the order of the Hon’ble Supreme Court should not be interpreted as that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends upon the facts and circumstances of the respective case. The two conditions which are to be fulfilled are that the loan should be advanced out of commercial expediency and secondly the sister concern should use the loan for its business purpose and not for the personal purpose of its directors or partners etc. The Hon’ble Supreme Court thereafter held in the said case that since the sister concern was a subsidiary of the assessee company and the assessee company being the holding company had a deep interest in its subsidiary, hence the loan advanced to subsidiary was out of commercial expediency.

19. Though, in the case in hand, issue is not regarding the interest free advance to the sister concerns, yet, the proposition of law laid down by the Hon’ble Supreme court can be very well applied in this case as the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies. In the light of the proposition of law laid down by the Hon’ble Bombay High court in the case of “CIT, Panaji, Goa v. Phil Corpn. Ltd.” (supra), Hon’ble Delhi High Court in the case of “Eicher Goodearth Ltd. v. CIT” (supra) and the Hon’ble Supreme Court in “S.A. Builders v. CIT” (supra); it is held that no disallowance in this case is attracted u/s 36(iii) of the Act.

Respectfully, following the above Ground 1.2 is allowed.

7.3 On the other hand, Ld. CIT-DR vehemently supported the orders of revenue authorities. 7.4 We have considered the rival submissions and have carefully appreciated the facts as well as interpretation of law qua the issue. On perusal of the decision in assessee’s own case for earlier years as decided by the jurisdictional bench of ITAT, Mumbai, since it is held that the expenditure incurred towards investment activities for exercising controlling interest constitutes business activity and hence allowable as deduction, which is not even otherwise contradicted by the revenue by way of any further submission or arguments or placing on record and contrary decision supporting the contentions of the revenue. We, therefore, hold that the subject expenditure incurred under the head ‘interest and other expenses of HO’ was not capital in nature and, therefore, the same is allowable u/s 37 of the Act. Resultantly, the Ground No. 2 of the appeal is allowed.

8. Ground No. 5: Regarding expenditure incurred for the purpose of obtaining term loans /ICD’s : On this issue, Ld. AO has made disallowance of Rs. 20,75,457/- towards brokerage expenses paid for arrangements for ICD’s/ term loans, the same is dismissed by the Ld. CIT(A), however, similar expenditure has been allowed in assessee’s own case by ITAT, Mumbai for AY 2007-08, wherein the findings of ITAT Mumbai are as under:

7. Disallowance of Rs.8.41 lakhs, paid towards brokerage expenses for arranging the term

loans and ICD’s, is the subject matter of third Ground of appeal.

It was brought to our notice that while deciding the appeal for the AY 2004-05 (supra), the Tribunal had decided the issue in favour of the assessee. We are reproducing paragraphs 35 and 36 of the order and same reads as under:

35. “Ground No. 7:

Ground No. 7 relates to the issue of disallowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the non-convertible debentures. The AO concluded that since the term of the debentures was spread over two years, hence benefit arrived at by the assessee was of enduring nature spread over two years. The AO therefore calculated the expenses pertaining to the year under consideration and disallowed the remaining expenses.

36. We find that this issue is also covered with the decision of the Hon’ble Supreme Court’ in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowal is a long term or short term one. It was held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assessee.”

Respectfully, following the above order of the Tribunal, ground number three is decided in favour of assessee.

8.1 Since the issue is squarely covered by assessee’s own case, we are unable to persuade and subscribe to the findings of Ld. CIT(A) to adopt a view contrary to the decision of the jurisdictional ITAT. We, therefore, reverse the decision of Ld. CIT(A) and hold that the brokerage expenses paid for arrangements for ICD’s/ term loans is an incidental expenditure to carry the business activities of the assessee qualifies as allowable expenditure, consequently, the disallowance made by the Ld. AO stands deleted. Resultantly, Ground No. 5 of the appeal of the assessee is allowed.

9. Ground No. 8: Regarding disallowance of legal and professional fees of Rs. 38,84,420/- by the Ld. AO stating that the same was not incurred for the purpose of business or profession of the assessee company and the same is in the nature of capital expenditure.

9.1 On this issue, Ld. AR placed before us the orders of Jurisdictional Bench of ITAT, Mumbai in assessee’s own case for AY 2004-05 and 2007-08, it is also submitted that the issue is identical to the issue raised in ground no. 2 of the present appeal, therefore, the expenditure on legal and professional fees incurred by the assessee in the business of acquisition of shares which was not considered by the Ld. CIT(A) as assessee was involved in such activity, whereas the facts are contrary and are duly demonstrated by the assessee which is accepted by the jurisdictional ITAT also in its decisions for AY 2004-05, 2007-08 and 2016-17.

9.2 Per contra, Ld. CIT-DR vehemently supported the orders of revenue authorities.

9.3 We have considered the rival submissions, perused the material available on record and decisions relied upon by the assessee. Since the expenditure are incurred for the business activities of the assessee our decision in ground no. 2 shall apply mutatis mutandis for ground no. 8 also. Accordingly, ground no. 8 of present appeal of assessee stands allowed.

10. Ground No. 10: Regarding disallowance of Rs. 10,01,707/- of overseas taxes paid by the assessee and claimed as deduction u/s 37 of the Act

10.1 On this issue the Ld. AO observed that the assessee has claimed expenditure with respect to overseas taxes paid. A question was raised to the assessee to substantiate its claim in terms of provisions of section 40(a)(ii). Assessee submitted that the same were claimed u/s 147 of the Act and since the taxes paid are akin to state taxes therefore, does not fall under the ambit of section 40(a)(ii) of the Act. It is also submitted by the assessee that as per amendment of the section w.e.f. 01.04.2006, the deduction of overseas taxes paid is not allowed if the relief u/s 90/91 of the Act is available to the assessee on such overseas payments. Such submissions of the assessee are not considered good by the Ld. AO, therefore, an addition was made with the observation that the taxes are paid in respect of activity within the respective area of other countries, therefore, provisions of section 40(a)(ii) shall apply and as the assessee has not claimed any relief u/s 90/91, the same cannot be granted in terms of judgment by Hon’ble Apex Court in case of Goetz (I) Ltd. v. CIT (SC)/[2006] 284 ITR 323 (SC)).

10.2 Aggrieved with the aforesaid findings of Ld. AO, assessee preferred an appeal before the Ld. CIT(A), wherein the Ld. CIT(A) has also coincided with the findings of Ld. AO and has dismissed the contentions of the assessee and have observed that the assessee is not eligible for relief u/s 90/91 of the Act, therefore, would attract the provisions of section 40(a)(ii) and accordingly, such overseas taxes paid by the assessee cannot be allowed as expenditure u/s 37 of the Act.

10.3 On the aforesaid issue, Ld. AR of the assessee before us have submitted that the relevant AY under consideration is AY 2006-07 and explanation 2 to section 40(ii) was inserted w.e.f. 01.04.2006 therefore, the same has no applicability in the present case which concerns a year subsequent to the date of insertion of the said provision. On this issue, Ld. AR placed his reliance on the following judgments:

Reliance Infrastructure Ltd v. CIT ITR 271 (Bombay) dated 20.12.2016

Regarding question (iii):-

(a)

The applicant assessee claimed that it should be allowed a deduction of the tax paid in Saudi Arabia, if it is held that the benefit of Section 91 of the Act is not available. This deduction is claimed only to the extent tax has been paid in Saudi Arabia on the income which has accrued/ arisen in India. This claim was made on the basis of Real Income Theory.

(m)

It therefore, follows that the tax which has been paid abroad would not be covered with in the meaning of Section 40(a) (ii) of the Act in view of the definition of the word ‘tax’ in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word “In this Act, unless the context otherwise requires” the meaning of the word ‘tax’ as found in Section 2 (43) of the Act would apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act.

(n)

However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides / clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the tax paid abroad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expenditure on account of not being covered by Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India under Sections 90 or 91 of the Act, were also claiming deduction of the tax paid abroad as it was not tax under the Act. In view of the above, Explanation inserted in 2006 to Section 40(a)(ii) of the Act, would require in the context there of that the definition of the word “tax” under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from the meaning of the word “tax” as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word “tax” as defined in the Act to include all taxes on income / profits paid abroad.

(o)

Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and / or arisen in India is not eligible to deduction under Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itselfexcludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India.

(p)

It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assessee such as the applicant assessee is entitled to a deduction under Section 40(a)(ii) of the Act. This is so as it is a tax which has been paid abroad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen / accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii) of the Act.

(q)

The Explanation to Section 40(a)(ii) of the Act was inserted into the Act by Finance Act, 2006. However, the use of the words “for removal of dobuts” it is hereby declared “…….” in the Explanation inserted in Section 40(a)(ii) of the Act, makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by the Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of the Supreme Court in CIT Vs. Vatika Township (P) Ltd. 367 ITR 466 and CIT v. Gold Coin Health Foods (P) Ltd. 304 ITR 308.

(r)

In the above facts and circumstances, question (iii)(a) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Question (iii)(b) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee.

Tata Consultancy Service Ltd. v. ACIT (Mumbai)/ ITA No. 5713/Mum/2016 (AY 2009-10) and IT(TP)A No. 5823/Mum/2016 (AY 2009-10) dated 30.10.2019.

We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term “tax”, as defined under section 2(43) of the Act would only include taxes chargeable under the Indian Income Tax Act. It is the further case of the assessee that since in respect of the State taxes paid overseas, the assessee is not eligible to claim relief under section 90 or 91 of the Act, it will not be covered under section 40(a)(ii) of the Act. On a perusal of provisions of sub-section (43) of section 2 of the Act, it becomes clear that the term “tax” has been defined to mean any tax paid under the provisions of the Act. Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of the Act would not be allowable as deduction under section 40(a)(ii) of the Act. It is the say of the assessee that the tax eligible for relief under section 90 of the Act are only those taxes which are levied by Federal / Central Government and not by any local authority of State, City or County. Thus, it is ineligible for any relief under section 90 of the Act. The aforesaid submissions of leaned Sr. Counsel for the assessee, prima facie, is acceptable if one has to strictly go by the meaning of “tax”, defined under section 2(43) of the Act, as it only refers to tax paid under the provisions of the Act. It is also worth mentioning, the State taxes paid by the assessee in DTAA countries are not eligible for relief under section 90 of the Act. Therefore, the issue which arises is, whether it can be allowed as deduction under section 37 of the Act. No doubt, in assessee’s own case in assessment year 2005-06, the Tribunal in the order referred to above following its own decision in DCIT v/s Tata Sons Ltd., [2011] 43 SOT 27 (Mum.), has held that the State taxes paid overseas cannot be allowed as deduction in view of the provisions of section 40(a)(ii) of the Act. However, the aforesaid legal position has substantially changed after the decision of the Hon’ble Jurisdictional High Court in Reliance Infrastructure Ltd. (supra). While interpreting the provisions of section 2(43) of the Act, vis-a- vis section 40(a)(ii) of the Act, the Hon’ble Court held that the tax which has been paid abroad would not be covered within the meaning of section 40(a)(ii) of the Act, since, the meaning of the word “tax” as defined under section 2(43) of the Act would mean only the tax chargeable under the Act. Thus, as per the aforesaid decision of the Hon’ble Jurisdictional High Court, taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act. Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression ‘income tax’. In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee’s claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required.

10.4 In terms of aforesaid observations by the Hon’ble Mumbai High Court in the case of Reliance Infrastructure Ltd. (supra), which is further discussed and deliberated upon by the ITAT, Mumbai in the case of Tata Consultancy Service Ltd. (supra), respectfully following the same, the issue is allowed in favour of the assessee with the directions to Ld. AO to verify whether the overseas taxes paid by the assessee are eligible for any relief u/s 90 of the Act and if not so, the claim of assessee u/s 37 should be allowed. Ground No. 10 of the assessee, therefore, is allowed in terms of our aforesaid observations.

10.5 Resultantly, ITA No. 3157/Mum/2012 of the assessee is partly allowed, as per our observations hereinabove.

CO No. 144/Mum/2016

(in ITA No. 4109/MUM/2012 & ITA No. 3157/MUM/2012)

11. The aforesaid Cross Objection (CO) has been filed by the revenue challenging the eligibility of the assessee company in raising the additional grounds.

11.1 Since the additional grounds raised by the assessee are already withdrawn before us, therefore, the Cross Objection filed by the revenue became infructuous. As this fact is conceded by both the parties herein accordingly, CO No. 144/MUM/2016 filed by revenue stands dismissed without any adjudication to the same.

ITA No. 4109/Mum/2012 (filed by Revenue)

12. Ground No.1: Regarding addition of Rs. 85,876/- on account of annual value of house property.

12.1 An addition was made by the Ld. AO, observing that the assessee is utilizing its property for the sports-men of Tata Sports Club for training and technical part in various competitions, however, no rent income for the said premises was declared. Ld. AO has worked out the Annual Lettable Value (ALV) of the said property at Rs. 85,876/- (Rs. 8.55 psqft x 837 sqft x 12 months). Matter carried before Ld. CIT(A), wherein the issue is directed back to Ld. AO to adopt annual value of the house property as per rent control Act. In accordance with the decision which was deliberated in assessee’s own case for AY 2005-06.

12.2 Before us, Ld. AR of the assessee has submitted that the issue is restored back to the Ld. AO for adopting the annual value of house property as per rent control act, however, no relief was granted giving effect to the order of Ld. CIT(A) and the assessee has also not contested the same. Ld. AR on this issue has placed her reliance on the decision of Hon’ble Mumbai High Court in the case of Tip Top Typography. It is also submitted that the decision rendered by the Ld. CIT(A) for AY 2005-06 was never appealed against by the revenue also no addition was made on this issue in the subsequent years thus, should not have been assailed by the revenue in the year under consideration.

12.3 Ld. CIT-DR on the other hand supported the order of Assessing Officer.

12.4 After considering the aforesaid facts, circumstances and submissions, we find substance in the contentions raised by Ld. AR, thus, in absence of any cogent reasoning by the revenue as to why the decision taken by Ld. CIT(A) in restoring the matter back to Ld. AO for adopting the annual value of property as per Rent Control Act, the decision of Ld. CIT(A) was not found to be suffering with any infirmity, we, therefore, approve the same. Consequently, Ground No. 1 of the revenue’s appeal in ITA No. 4109/Mum/2012 stands dismissed.

13. Ground No. 2(a)& (b) : Regarding allowing exemption u/s 10(23G) on LTCG / loss on sale of Equity Shares of Information Technology Park Ltd.

13.1 This issue was raised by the Ld. AO during the assessment proceedings with the observation that the income / loss resulted from the transaction of sale of shares by the assessee company is in the nature of business transaction therefore, would be added or deducted while computing the book profits of the assessee company. It is therefore, decided by the Ld. AO that the assessee’s claim of exemption u/s 10(23G) showing profit / loss from such transactions as LTCG / loss would not be allowable accordingly, the aforesaid addition was made.

13.2 This issue was dealt with by Ld. CIT(A) and has held as under:

11.

Ground 11A is regarding not allowing long term capital gains/loss on sale of shares of Information Technology Park Ltd.

11.1

The AO has discussed this issue at Para 12 Page 27 to 37 of the assessment order. After detailed discussed of the facts of the case and the provisions of section 10(23G), the AO observed that the intention of legislature was to provide tax exemption only to such ‘Infrastructure capital funds’ or ‘infrastructure capital companies’ which are established for the purpose of mobilizing resources for financing infrastructure facilities. The assessee was neither established for the purpose of mobilizing resources for financing infrastructure facilities nor can it be turned-as ‘Infrastructure Capital Company’. The AO has referred to CBDT Circular No. 762 dated 18.02.1998 being explanatory note on the provisions of Finance Act(No.2) 1996 and quoted Para 17.4 of the circular at Circular at Page 33 of the assessment order and Para 17.2 on Page 34 and further discussed principles of statutory interpretation and observed that no word is redundant or superfluous in an statue and as the assessee company is neither an “an Infrastructure fund” “Infrastructure Co” or “Co-operative Bank”, they do not qualify u/s 10(23G) of the Income Tax Act. The AO computed LTCG on transfer of 14 Crore Equity Share of face value of 10/- each and sale consideration of “‘ 13.50 per share by giving benefit of indexation at Rs.15.68 Crores.

11.2

The appellant submitted as under :

“Exemttion of Long Term Capital Gain under section 10(23G)

Tata Industries Limited (TIL) was incorporated on April 07,1945

TIL is a company incorporated under the Companies Act, 1913 and is registered with the Reserve Bank of India as a non- banking financial institution u/s 45-IA of the Reserve Bank of India Act, 1934. TIL is an-investment company and a loan company and is engaged in the promotion of new business ventures. It however, does not carry on activities like Leasing, Hire Purchase etc., no trading in shares but is essentially one of the main promoter and holding companies of the Tata Group.

TIL was incorporated as the Managing Agency Company for a number of Tata Group Companies. Its aim was to implement the Tata approach to enterprise management. After the end of the managing agency system in 1969 it continued its role as one of the main Tata holding companies and thereafter also acting as a promoter company.

TIL has two operating divisions. One of these is Tata Interactive Systems (TIS) which is engaged in the design and development of customized e-learning solutions. TIS currently has about 700 employees and has development centers at Mumbai and Kolkata. TIS also has two subsidiaries viz. Tata Interactive Systems AG, lug, Switzerland and Tata Interactive Systems, GmbH, Germany. The other division is Tata Strategic Management Group which acts as strategic management consultants to clients both within and outside the Tata Group.

Clause 9 of the Objects Clause in the Memorandum of Association of the Company states as under:

‘To acquire any shares, stock, debentures, debenture-stock, bonds, obligations or securities by original subscription, participation in syndicates, tender, purchase, exchange or otherwise and to subscribe for the same, either conditionally or otherwise, and to guarantee the subscription thereof and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof.

Section 10 (23G)

Section 10(23G) was introduced in the Finance Bill No. 2 of 1996. Honorable Finance Minister in his speech while introducing the Budget for 1996-97 has at Para 88 stated as under:

“Infrastructure funds have become an important source of capital to finance infrastructure projects. In order to encourage such funds established to mobilise resources for financing infrastructure facilities. I propose to exempt them from income- tax. Any dividend, interest or long -term capital gains of such funds or companies from investments in the form of shares_ or long-term finance in any enterprise set up to develop, maintain and operate an infrastructure facility will be free from income-tax.

Memorandum explaining the Finance Bill stated as under:

FOR INFRASTRUCTURE DEVELOPMENT AND INDUSTRIALIZATION

Income-tax exemption to infrastructure development funds and companies

The availability of adequate infrastructure facilities is vital for accelerating the economic development of the Country. In recognition of this-fact, the existing provisions of the Income-tax Act provide a five year tax holiday to an enterprise carrying on the business of developing maintaining and operating any infrastructure facility. However, in order to attract further investment in this sector, an urgent need has been felt for providing more tax incentives to investors.

It is therefor, proposed to provide tax exemption to such infrastructure capital funds and companies which are established for the purpose of mobilizing resources for financing infrastructure facilities.

Accordingly, any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investments made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility which fulfills the conditions specified in sub-section (4A) of section 80-IA is proposed to be exempt from income tax.

The expression “infrastructure capital fund” shall mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 established to raise moneys for investments by way acquiring shares or providing long-term finance to an enterprise engaged in providing infrastructure facility. The expression “infrastructure capital company” shall mean a company which has made investment by way acquiring shares or providing long-term finance to enterprise engaged in the business of providing infrastructure facility. The expression “infrastructure facility” shall mean a road, highway, bridge, airport, port, a rail system or any other public facility of a similar nature as may be notified by the Central Board of Direct Taxes in this behalf in the Official Gazette. It will also include water supply projects, sewerage, sanitation, or irrigation systems. The expression “Long-term finance” shall mean any Joan or advance which is repayable along with the interest during a period of Jess than 7 years.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to Assessment Year 1997-98 and subsequent years.

From the above it is clear that the introduction of section 10(23G) was specifically made in order to provide exemptions to investors/financers who have made investments by way of acquiring shares or providing long-term finance to an enterprise engaged in the business of providing infrastructure facility.”

11.3

I have gone through the order of the AO and submission of the appellant.

11.3.1

Explanation (a) of section 10(23G) is as under:

(a) “infrastructure capital company” means such company as has made investments by way of acquiring shares or providing long-term finance to an enterprise wholly engaged in the business referred to in this clause;-

Thus, a company which has made investment by way of acquiring shares in a business referred to in sub section (4) of section 80IA would mean an “infrastructure capital company”.

13.3 Being aggrieved with the relief granted by the Ld. CIT(A), the revenue is in appeal before us.

13.4 On the aforesaid issue, Ld. AR has made the following submissions:

“Infrastructure capital company Explanation (a) to s. 10(23G)

“means such company as has made investments by way of acquiring shares or providing long-term finance to an enterprise carrying on the business of developing, maintaining and operating infrastructure facility”

The Company (TIL) falls within the definition of Infrastructure capital company having made an investment in shares of an enterprise which is engaged in the business of infrastructure facility.

The CIT(A) in 11.3.4 and 11.3.5 of CIT(A) Order had held as under:

11.3.4. The entire discussion of AO regarding interpretation of status and its conclusion is basically meaningless as the AO has ignored the definition of the term “infrastructure capital company” are provided in clause (a) of Explanation (1) of sub-section 23G of section 10. Basically the definition refers to any company which has made investment by way of acquiring share or providing long term finance to an enterprise wholly engaged in the business referred in section 10(23G)

11.3.5

. As the appellant is an infrastructure capital company” coming within the definition of 10(23G)(1)(a) and, it has made investment in the Information Technology Park Ltd, Whitefield Road, Bangalore, the appellant qualifies for exemption u/s 10(23G) of the Income-tax Act, Ground No. 11(a) is therefore allowed.

Legal decision (Favour)

Jammu & Kashmir Bank Limited v. ACIT [2009] 118 ITD 146 (Amritsar ITAT) [Page 26 to 29, Para 9]

Held:

There is no dispute about the fact that the assessee is a banking company. The essential feature of the business of a banking company is to mobilise resources from the public and lend it on interest to various sectors. The revenue has not denied that assessee had indeed made investment in shares and providing long-term finance to enterprises engaged in infrastructural facility. Therefore, all the conditions laid down for claiming exemption under section 10(23G) are fulfilled by the assessee. Therefore, we are of the opinion that it is not proper to take a narrow view of the issue when the assessee had in fact made investments in shares and financed the enterprises engaged in providing infrastructure. facilities on long-term basis, We therefore, feel that it is not necessary that the ‘Infrastructure Capital Company’ should be formed solely for the purpose of mobilising resources for financing infrastructure facilities. If it includes one of the objects of the Banking business, the same should be sufficient to entitle the assessee to claim exemption of its income under section 10(23G). This view also finds support from the fact that subsequently this benefit of section 10(23C) has been extended to Co-operative Banks, though such banks have also not been set up for the purpose of mobilising resources for financing the infrastructure facilities. Therefore, we arc of the opinion that the assessee falls in the category of Infrastructure capital company entitled to exemption under section 10(23G)-

DCIT – Circle 3(1) v. ICICI Bank Limited (Mumbai ITAT), ITA No. 5191/Muml2009 and CO 127/Mum/2010 – Assessment year • 2004-05 (At page 41 and 42, Para 3.5) following Jammu & Kashmir Bank Limited”

13.5 In back drop of the aforesaid submission, respectfully following the decision cited, we do not find any infirmity in the decision of Ld. CIT(A) in allowing the exemption u/s 10(23G) of the Act to the assessee company, we thus, approve the same. Accordingly, Ground No 2(a) & (b) of the revenue in ITA No. 4109/Mum/2012, therefore stands dismissed.

13.6 Resultantly, ITA No. 4109/Mum/2012 of the revenue is dismissed, as per our observations hereinabove.

ITA 5690/MUM/2015 (by revenue)

14. The appeal is filed by the revenue against the order of Ld CIT(A) for deleting the penalty imposed by Ld A.O. vide order dated 25.03.2014 emerging from assessment u/s 143(3) dated 29.12.2008.

14.1 Since substantial quantum additions are dealt with us in ITA Nos 3157/MUM/2012 and 4109/MUM/2012 as per our observations herein above, the penalty imposed on such additions / disallowances being consequential in nature needs to be revisited by Ld. AO. Thus, the matter is restored to the file of AO for fresh adjudications following our decision in the main appeals of the assessee as well as revenue for the year under consideration.

14.2 Resultantly, ITA No. 5690/Mum/2015 of the revenue is Partly Allowed for Statistical Purposes, as per our observations hereinabove.

15. In combined result ITA No 3157/MUM/2012 of assessee is partly allowed, CO No. 144/MUM/2012 of the revenue stands dismissed, ITA No 4109/MUM/2012 of the revenue is dismissed and ITA No. 5690/MUM/2015 of the revenue is partly allowed for statistical purposes.

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