CENTRAL BANK OF INDIA ,MUMBAI vs. THE NATIONAL FACELESS APPEAL CENTRE, DELHI

On the facts and in the circumstances of the case and in law, the learned NFAC be directed not to initiate penalty proceedings u/s. 270A of the Act for under-reporting of income.

The Appellant Bank reserves the right to add, alter, amend and delete any of the ground(s) before or during the course the hearing.”

Brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a banking company and the main activity includes Page | 2

The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and held that the AO in the present case has recorded satisfaction of not accepting the claim of the assessee that no expenditure has been incurred in relation to earning exempt income and consequently has invoked the provisions of section 14A and proceeded to apply Rule 8D to compute the amount of disallowance. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorised Representative (“learned AR”) submitted that no objective satisfaction was recorded by the AO while making the disallowance under section 14A read with Rule 8D. The learned AR further submitted that since the exempt income earning securities were held by it in the ordinary course of its banking business and the profit and gains arising therefrom are consistently offered to tax while computing the income under the head “profits and gains from business or profession”, therefore such securities constitutes stock in trade of the banking business and thus in view of the decision of the Hon’ble Supreme Court in Maxopp Investments Ltd. (supra), no disallowance under section 14A read with Rule 8D can be made. The learned AR placed reliance on various decisions forming part of the caselaw paper book and submitted that in various decisions including in its own case for the assessment year 2012-13, similar disallowance made under section 14A read with Rule 8D was directed to be deleted.

On the contrary, the learned Departmental Representative vehemently relied upon the order passed by the lower authorities.

We have considered the submissions of both sides and perused the material available on record. The dispute raised by the assessee is limited to disallowance of expenditure under section 14A read with Rule 8D in respect of income exempted under section 10 of the Act. As per the assessee, the securities are held by it in the ordinary course of its business and the profits and gains on sale/transfer of such securities are offered to tax while computing the income under the head “profits and gains from business or profession”, therefore such securities constitute stock in trade of assessee’s business. No dispute has been raised by the Revenue as regards the aforesaid submission. The assessee further submitted that since the exempt income earning securities are held by it as stock in trade, therefore, disallowance of expenditure under section 14A of the Act cannot be made.

We find that while deciding a similar issue in PCIT v/s Punjab National Bank, [2022] 449 ITR 468 (Del.), the Hon’ble Delhi High Court dismissed the appeal filed by the Revenue and upheld the findings of the Tribunal in deleting the disallowance made under section 14A read with Rule 8D, by observing as under:-

The learned counsel for the Appellant has contended that the decision of the Tribunal deleting the addition of Rs. 1,58,00,000/- made by the JAO under section 14A of the Act read with rule 8D(iii) is incorrect since the said amount was offered for disallowance suo moto by the Respondent.

In this regard, the Tribunal has observed that the facts of the Respondent in the present appeal are similar to the order passed by another Bench of the Tribunal in the case of Nice Bombay Transport (P.) Ltd. v. Asstt. CIT [2019] 103 taxmann.com 338/175 ITD 684 (Delhi - Trib.) wherein issue relating to Section 14A of the Act read with Rule 8D of the Rules in respect of shares held in stock has been discussed and adjudicated in favour of the Assessee therein.

Learned counsel for Appellant has submitted that the facts of the assessee in the case of Nice Bombay Transport (P.) Ltd. (supra) are distinct from the case at hand, however, no submissions have been made with respect to the said 'distinguishing facts'. On the contrary, it is noted that the Supreme Court has held in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 that in cases where the main purpose for investing in shares was to hold the same as stock-in-trade, the expenditure incurred by the Respondent shall be permissible to be deducted from its gross income. The relevant paragraph of the judgment of the Supreme Court reads as under : "…40 It is to be kept in mind that in those cases where shares are held as "stock-in-trade", it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee-company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee-company. In that case, whenever dividend is declared by the investee-company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove…."

The Supreme Court in this judgment upheld the decision of the High Court of Punjab and Haryana arising under section 14A of the Act with respect to an assessee bank. It further held that when the shares were held as stock-in-trade and not as investment particularly by banks, the main purpose was to trade in those shares and earn profits there from and therefore section 14A of the Act was not attracted and the expenditure could not be disallowed. The judgment of Maxopp Investment Ltd. (supra) has been duly noted by the Tribunal in its Central Bank of India ITA no.235/Mum./2023 impugned order and in our opinion the Tribunal has correctly disallowed the disallowance under rule 8D(2)(iii) of the Rules.

In the present case as well, the Tribunal has considered that the Respondent was holding the shares as a stock-in-trade and has, therefore, disallowed the addition made by the JAO. Learned counsel for the Appellant has not disputed the fact that the shares are held as stock-in-trade by the Respondent.

In the aforesaid view of the matter, the questions of law proposed by the Appellant do not arise for consideration either in fact or in law in view of the judgments of the Supreme Court, which have conclusively decided the questions sought to be canvassed by the Appellant.

The appeal is accordingly dismissed.”

The Revenue could not show us any reason to deviate from the aforesaid decision. We also find that similar findings were rendered by the coordinate bench of the Tribunal in assessee’s own case in Central Bank of India v/s DCIT, ITA No. 3739/Mum./2018, vide order dated 29/01/2020. Therefore, respectfully following the decision of the Hon’ble Delhi High Court cited supra, we direct the AO to delete the disallowance made under section 14A read with Rule 8D. Since the relief is granted to the assessee on the aforesaid limited aspect, the other aspects raised by the assessee in ground no.1, are rendered academic and therefore are left open. Ground no. 1 raised in assessee’s appeal is decided accordingly.

Ground No.2, is pertaining to the initiation of penalty proceedings, which is premature in nature and therefore is dismissed.

In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 25/08/2023