BANK OF INDIA,MUMBAI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX-2(1)(1), MUMBAI

आदेश/ ORDER

PER VIKAS AWASTHY, JM:

“1. On the facts and in the circumstances of the case and in law, the learned Assistant Commissioner of Income-Tax - 2(1)(2) (herein after referred to as 'ACIT') has erred in disallowing Rs.33,68,49,017 u/s. 14A of the Income-tax Act, 1961 (herein after referred to as 'the Act') read with Rule 8D of Income-tax Rules, 1962 towards expenditure incurred in relation to income claimed exempt u/s. 10 of the Act and the Hon'ble CIT(A) has erred in confirming the said disallowance up to Rs.6,71,46,150 u/s. 14A read with Rule 8D(iii) without appreciating the fact that securities held in the ordinary course of banking business constitute the Appellant Bank's stock-in-trade in respect of which disallowance u/s.14A is not applicable. The Appellant Bank prays that the learned ACIT be directed not to make disallowance u/s. 14A read with Rule 8D and delete the addition of Rs.6,71,46,150/- made to the total income and reduce the total income accordingly.

1A. Without prejudice to Ground no. 1 above, assuming your Honors is of the view that the contention of the Appellant Bank is not acceptable, ‘on the facts and in circumstances of the case and in law, the learned ACIT be directed to restrict the disallowance u/s. 14A in respect of expenses (other than interest) Treasury Division of the Bank to Rs.9,58,601/- (being proportionate expenses suo-moto disallowed in the return of income) and reduce the total income accordingly.

2. On the facts and in the circumstances of the case and in law, the learned ACIT has erred in disallowing the exclusion of profits of branches in countries with whom India has entered into a Double Taxation Avoidance Agreement (DTAA) namely United Kingdom (UK), France, Belgium, Kenya, Japan, USA, Singapore and China amounting to Rs.635,19,04,811 u/s. 90 of the Act. The learned ACIT be directed to exclude the profits of aforesaid foreign branches amounting to Rs. 635,19,04,81 u/s. 90 of the Act and reduce the total income accordingly.”

(A.Y. 2012-13) ITA NO. 973/MUM/2023(A.Y. 2012-13)

3. The Revenue has assailed the order of CIT(A) by raising following grounds:

"2. Whether on the fads and circumstances of the case and in law the Ld CIT(A) was right in holding that if there are funds available both interest free and loans fund then presumption would arise that investment is made out of interest free fund for calculation of disallowance u/s.14A r.w.r. 8D2(ii) when the issue of mixed fund as pending before larger Bench of Supreme Court. More so when no nexus is established by the assessee to prove that own i.e. interest free funds were initiated to make the investment?

2. Whether on the fads and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding that disallowance u/s.14A is to be restricted to the exempt income, where as in Finance Act 2022, explanation Io Section 14A has been inserted which provides for applicability of the said section even in the absence of exempt income, which being clarificatory in nature has retrospective effect?

(A.Y. 2012-13) ITA NO. 973/MUM/2023(A.Y. 2012-13) dated 31/12/2017. The Assessing Officer made disallowance u/s. 14A r.w.r. 8D of the Act to the tune of Rs.80,33,90,425/- and thereafter, restricted the disallowance to the extent of exempt income Rs.33,68,49,017/- earned during the Financial Year 2011-12. The assessee carried the issue in appeal before the CIT(A). The CIT(A) placing reliance on the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd. vs. DCIT, 67 taxamann.com 42 deleted the disallowance in respect of interest expenditure u/r.8D(2)(ii), however, in respect of disallowance u/r.8D(2)(iii), the CIT(A) confirmed the addition.

4.1 The ld. Authorized Representative of the assessee submitted that law is now settled and that in the case of Banks where the shares are held as “stock- in-trade” no disallowance u/s. 14A of the Act is warranted. In support of his submissions, he placed reliance on the following decisions:

(i) Maxopp Investment Ltd. vs. CIT, 402 ITR 640(SC)/ 91 taxmann.com 154. (ii) South India Bank Ltd. vs.CIT, 130 taxamann.com 178 (SC) (iii) PCIT vs. Punjab & Sind Bank in decided on 16/10/2019 by Hon'ble Delhi High Court. (IV) PCIT vs. PNB Housing Finance Ltd., 146 taxmann.com 445(Del) (v) Union Bank of India vs. DCIT in ITA No.1804/Mum/2018 decided On 27/11/2020. 4.2 In respect of ground No.2 of appeal relating to exclusion of income of foreign branches, the ld. Authorized Representative of the assessee fairly stated that the issue is covered against the assessee by order of the Tribunal in assessee’s own case for Assessment Year 2015-16 in ITA

(A.Y. 2012-13) ITA NO. 973/MUM/2023(A.Y. 2012-13)

No.1767/Mum/2019 decided on 11/12/2020. The ld. Authorized Representative of the assessee submitted that while rendering the said decision, the Tribunal has placed reliance on the decision in the case of Tecnimont Private Ltd. vs.ACIT, 166 taxmann.com 996(Mum). In Tecnimont Private Ltd.(supra) reliance is placed on Notification No.91 of 2008 dated 28/08/2008 to reject assessee’s claim. The said notification is inconsistent with the provisions of the Act and hence, the notification issued by Central Government cannot be used to deny the legitimate claim of assessee under the provisions of the Act.

5.1 In respect of ground No.2 of appeal, the ld. Departmental Representative submits that the Notification dated 28/08/2008 is valid and does not run contrary to the provisions of the Act. He pointed that there are catena of judgments wherein the Tribunal placing reliance on the said notification has decided the issue against the assessee.

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“38. From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' and 'investment' and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter.

(A.Y. 2012-13) ITA NO. 973/MUM/2023(A.Y. 2012-13) which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. 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.”

7. The Hon'ble Delhi High Court in the case of PCIT vs. Punjab & Sind Bank (supra) after considering the judgment rendered in the case of Maxopp Investment Ltd. vs. CIT(supra) has upheld the decision of Tribunal in deleting disallowance made u/s. 14A of the Act in respect of exempt income earned on shares held as stock-in-trade. Similar view has been expressed by Hon'ble Delhi High Court in the case of PCIT vs. Punjab National Bank, 140 taxman.com 131 following the judgment rendered in the case of Maxopp Investment Ltd. vs. CIT(supra). The relevant extract of the judgment reads as under:

“19. 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 (A.Y. 2012-13) ITA NO. 973/MUM/2023(A.Y. 2012-13) attracted and the expenditure could not be disallowed. The judgment of Maxopp Investment Ltd. (supra) has been duly noted by the Tribunal in its impugned order and in our opinion the Tribunal has correctly disallowed the disallowance under rule 8D(2)(iii) of the Rules.”

8. Thereafter, in the case of PCIT vs. PNB Housing Finance Ltd.(supra) the Hon'ble Delhi High Court again following the decision rendered in the case Maxopp Investment Ltd. vs. CIT(supra) and the decision of Hon'ble Apex Court in the case of South Indian Bank Ltd. (supra) held that no disallowance u/s. 14A of the Act is warranted where shares are held as stock-in-trade. The relevant extract of the decision rendered by Hon'ble Apex Court reads as under:

“6. With respect to the challenge of the deletion of the disallowance made under section 14A of the Act, this issue is no longer res integra. It is an admitted fact that the exempt income was earned by the assessee from the investment held by it as stock-in-trade. This issue has been conclusively determined by the Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640/[2018] 15 SCC 523. In this matter, the Supreme Court was concerned with a batch of appeals which also included a challenge to the judgment of the Punjab and Haryana High Court Pr. CIT v. State Bank of Patiala [2017] 78 taxmann.com 3/245 Taxman 273/391 ITR 218 and the facts of the said case are para materia to the case in hand. In the case of State Bank of Patiala, (supra) the AO restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in rule 8-D and holding that section 14A of the Act would be applicable. The CIT(A) issued a notice of enhancement under section 251 of the Act and disallowed the entire expenditure claimed by the assessee therein instead of restricting the disallowance to the amount which was claimed as exempt income. The ITAT set aside the order of the AO as well as CIT(A). The High Court upheld the order of the ITAT and dismissed the appeal filed by the Revenue. The Supreme Court after deliberating on the object and purpose of section 14A, conclusively held that in cases where shares are held by assessee as stock-in-trade, the dividend earned on the said shares is incidental and would not attract the provisions of section 14A of the Act. In this regard, the following paragraphs of the judgment are apposite :- "49. We note from the facts in State Bank of Patiala case that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in rule 8-D of the Rules and holding that section 14-A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by ITAT.

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Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court.

stock-in-trade, we are of considered view that disallowance u/s. 14A of the Act is unsustainable in the instant case. Thus, the assessee succeeds on ground No.1 of the appeal.

9. Since, we have accepted primary contention of the assessee raised in ground No.1, the alternative prayer made in ground No.1A of the appeal has become infructuous and the same is dismissed.

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7. Learned counsel has shown, in accepting the fact that even though the issue is covered in favour of the assessee by earlier decisions of the coordinate benches, these coordinate bench decisions cease to be binding judicial precedents inasmuch as reasoning adopted therein does not hold good any longer in the light of the decision in the case of Technimont (supra), admirable grace. It is not clear to us whether this approach is to preempt a detailed discussion on merits of the matter, or whether this approach is indeed bonafide stand of the assessee. That does not, however, matter much at this stage, as all the facets of this matter are covered above nevertheless. The basis on which the relief was granted in the earlier years has been examined and that basis being ex facie incorrect and even rendered by inadvertence is glaring in the analysis that has been extensively reproduced above. Learned counsel for the assessee, however, does not give up; he has an even more innovative plea now. He submits that above decision is per incuriam for some other reason, which has not been discussed in any judicial precedent so far, inasmuch as it overlooks the fact that the notification dated 28th August 2008 was not issued in the context of the business income, and, should accordingly not be applicable so far as business income earned abroad, as in this case, is concerned. We see no substance in this plea either. The notification deals with connotations of the expression “may be taxed , appearing in the tax treaties entered into by India, and there is absolutely no basis whatsoever to support the proposition that the effect of the notification has to be restricted in its application to non-business income only. No such differentiation in treatment of business and non-business income is envisaged in the said notification, nor to do we see any justification for inferring the same. Learned counsel does not have any material whatsoever in support of the proposition canvassed by him, nor does this proposition make any sense on the first principles- inasmuch as once the notification is issued without any such specific restriction for application to business income, we cannot infer a restriction in its application. We, therefore, reject the plea of the assessee, and thus decline to interfere in the matter. We uphold the action of the Assessing Officer in including the profits of the assessee’s overseas branches, amounting to Rs1,408.32 crores, in its taxable income in India.

entered into double taxation avoidance agreement. While granting the tax credit, the Assessing Officer will examine the provisions of the respective tax treaty, and compute the admissible tax credit separately for each jurisdiction in accordance with the scheme of related treaty. With these directions, the matter stands restored, for the limited purposes of granting tax credit, in terms of the related double taxation avoidance agreements, if, and to the extent, admissible.

ITA NO.973/MUM/2023-A.Y. 2012-13:

assessee. Thus, ground No.2 of appeal raised by the Revenue is misconceived and not maintainable. The ground No.2 of appeal is thus, dismissed as such.