MIRAE ASSET CAPITAL MARKETS (INDIA) PRIVATE LIMITED,MUMBAI vs. INCOME TAX OFFICER, WARD 4(3)(1), MUMBAI, MUMBAI

Aggrieved the assessee file an appeal before the FAA. The assessee made various submissions with regard to the adjustment made by the CPC before the FAA. However, the FAA dismissed the appeal by holding that:

The Ld. AR submitted that the difference of Rs. 5,21,93,081/- is arising out of the difference in the marked to market loss on securities held as stock in trade which is allowable under ICDS VIII whereas the tax auditor has inadvertently reported under ICDS I. The Ld. AR submitted that marked to market loss however, is an allowable loss and therefore, the addition arising out of inadvertent reporting is not sustainable. The Ld. AR also drew our attentions the gain of Rs. 6,22,34,815/- is arising out of marked to market gain on securities during the previous AY i.e. AY 2019-20 which is not reported in TAR since the same pertains to AY 2019-20 but the assessee still declared the said amount as taxable income in the ITR. Accordingly, the Ld. AR argued that, the adjustment made by the CPC has already been considered by the assessee in the return of income and the said Mirae Asset Capital Markets (India) Pvt Ltd adjustment is resulting in excess income being brought to tax. The ld AR raised the legal contention that upward adjustment made without providing an opportunity of being heard as per first proviso to section 143(1)(a) of the Act is not sustainable. The ld AR further raised the legal contention that amendment to clause (iv) of section 143(1)(a) inserting the words "increase in income" introduced by Finance Act 2021 is prospective in nature and therefore the adjustment done in assessee's case by CPC for AY 2020-21 increasing the income based on TAR is not sustainable. On merits the ld AR submitted that the auditor has erroneously reported the loss as part of ICDS-I whereas the said loss is allowable as per ICDS- VIII.

With regard to the disallowance made u/s. 14A the Ld. AR submitted that the assessee is engaged in the business of investment banking and the securities are accordingly held as stock in trade. The Ld. AR further submitted that Section 14A is not applicable to when the investments are held as stock in trade by the assessee as has been held by the Hon'ble Delhi High Court in the case of PCIT vs M/s. PNB Housing FinanceLimited (2023) 146 taxmann.com 445 (Delhi) and in the case of MUFG Bank Limited vs ACIT (IT) (2021) 126 taxmann.com 304 (Delhi-Trib.)

The Ld. DR on the other hand, submitted that the adjustment made by the CPC is well within the purview of Section 143(1)(a) and accordingly supported the order of the lower authorities.

We heard the parties and perused the material on record. We notice from the perusal of TAR, that the tax auditor has reported increase in profit towards MTM loss & Depreciation at Rs.35,46,62,635/- (page 93 of paper book) since according Mirae Asset Capital Markets (India) Pvt Ltd to the auditors the same is not an allowable deduction. We also notice from the perusal of Schedule ICDS in ROI (Page 60 of paper book) that the assessee has reported the adjustment against accounting policies i.e. MTM loss & Depreciation at Rs.30,24,69,554/- against which the CPC has made the impugned adjustment. The assessee in the said schedule has reported the MTM gain from securities other than those held as stock in trade separately at Rs.6,22,34,815/-. Schedule ICDS as per the ROI is extracted as under –

The above enumerated facts makes it clear that the addition made by the CPC is arising out of the difference between the disallowance as reported in the TAR and the actual amount of disallowance made by the assessee in the ROI. Though the difference is resulting in the increase in the income, the fact that is emanating from the records is that the same is arising out of the "disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return" as per clause (iv) of section 143(1)(a) of the Act.

On merits with regard to the adjustment made towards ICDS the ld AR during the course hearing submitted the following table –

It is submitted that the MTM loss arising from the above two securities is an allowable deduction since the same is arising from the securities held for Trading. However from the perusal of the financial statements, we notice that the above two securities viz., Equity and ETF Securities and Debt Securities are classified under the head "Investments held for Trading" in the financial statements (page 156&157 of paper book). We further notice that in the ICDS schedule of ROI (as extracted herein above) the assessee has adjusted the loss against Accounting Policies while Mirae Asset Capital Markets (India) Pvt Ltd disclosing the MTM gain from Securities held as other than stock in trade is disclosed separately. Accordingly in our view, the real nature of the MTM loss of the above two securities which as per the claim of the assessee is an allowable deduction needs to be factually examined. Therefore we are remitting the issue back to the AO with a direction to examine the facts by calling for relevant details from the assessee and allow the deduction in accordance with law. The assessee is directed to submit the details as may be called for and cooperate with assessment proceedings. It is ordered accordingly.

The assessee through Ground No.4 has raised the contention that the adjustment is made without providing opportunity of being heard. Considering that both the parties did not present any arguments in this regard during the course of hearing and in the light of our decision on the merits of the impugned issue, we are leaving the said ground open.

With regard to the disallowance under section 14A, we notice that the assessee is primarily engaged in the business of trading in listed securities and the income from trading is offered to tax. The breakup of dividend income earned by the assessee during the year under consideration is as listed below:

The argument of the assessee is that the shares & securities from which the dividend income is earned are held by the assessee is stock in trade and therefore the provisions of section 14A are not applicable. Further it is brought to our attention that the shares & securities which yielded the dividend income for the year are sold during the year and are not part of the stock held as of 31.03,2020. Hence there is merit in the submission that the dividend income earned is from the shares and securities held as stock in trade. We in this regard notice that the issue of whether section 14A is applicable for the exempt income earned from assets held as stock in trade has been considered by the Hon'ble Delhi High Court in the case of PCIT vs PNB Housing Finance Ltd [(2023) 157 taxmann.com 465 (Delhi)] where it has been held as: “6. With respect to the challenge of the deletion of the disallowance made under section 144 of the Act this issue is no longer res integra, It is an admitted fact then the exempt income was earned try the assesses from the investment held by it as stock-in-trade. This issue has been conclusively determined by the Supreme Court in Maxopp Investment Lid v. CIT [2018] 91 taxmann com 154/254 Tam 325-482 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 P. CIT. Stan 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 cast 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 -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 AD as well as CITIA). The High Court upheld the order of the ITAT and dismissed the appeal filed by the Revenue. The Supreme Court after Mirae Asset Capital Markets (India) Pvt Ltd deliberating on the object and purpose of section 144, 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 144 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 AD, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by ITAT. 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.

It is to be kept in mind that in those cases where shares are held as "stock-in- trade", in 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 quick 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.”

Ld. AR further relied on the decision of the coordinate bench in the case of MUFG Bank Limited vs ACIT (IT) (2021) 126 taxmann.com 304 (Delhi- Trib.)where it has been held as: “19. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case the assessee has earned and tax free income of interest of Rs. 1 37,002,619/- which is claimed is an exempt income u/s 10 [35A] of the Act. The assessee has not disallowed any sum u/s 14 A of the act. The learned assessing officer has computed the disallowance of Rs. 22,521,366/ The learned AO did not Mirae Asset Capital Markets (India) Pvt Ltd disallow any interest expenditure income which is directly relating to the investment in the passthrough certificates. However, he imputed the proposed disallowance of indirect interest expenditure of Rs. 197,40,048/-, He further disallowed 0.5% of the average value of investment as administrative expenditure. Thus the total disallowance was computed at Rs. 22,521,366/-. The assessee has raised the first issue that it is treated the passthrough certificates as its stock in trade in case of a bank, provisions of section 14 a cannot be applied and no disallowance of expenditure can be made. The Hon’ble Supreme Court in Maxopp Investment Lid v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 in paragraph number 40 has held that when a bank is holding securities as stock in trade it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is on door not becomes immaterial. In fact, it would be at work of fate that when the investee company declared dividend, though shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to on profits. In the present case the assessee is holding this pass through is certificates which are exempt under the provisions of Section 10 (35A) of the act. The distribution of income by the trust which is claimed as exempt by the assessee is also a quirk of the fact. The assessee has constantly arguing that it is holding those pass through certificates as its stock in trade and profit on and from them are offered as a business income. In view of this we do not find any difference if the income is received as a dividend u/s 10 (34) or is distributed by a securitization trust which is also exempt u/s 10 (35A) of the act. In view of this, we are of the view that if these pass through certificates are held as stock in trade by the assessee and distribution of income is also exempt in the hands of the assessee, it is also on the same footing as in case of other banks which are receiving the dividend from securities held as stock in trade. Therefore, we hold that in this case, provisions of section 14A does not apply. Hence no disallowance is called for under that Section Accordingly, made by the learned assessing officer u/s 14A of the income tax act of Rs. 22,521,366/- is unwarranted. Further, as the assessee is granted relief on the first argument that section 14A is not applicable in case of bank when the investments are held as stock in trade, other arguments raised are merely academic. Accordingly ground number [3] of the appeal of the assessee is allowed.”

As already stated, the facts in the present case supports the claim that the exempt earning assets in assessee's case are held as stock in trade and therefore in our considered view the ratio laid down in the above judicial precedence is applicable to assessee's case. Further the fact that the assessee suo-motu has made disallowance under section 14A cannot be a hindrance to the allowing the claim of the assessee since the legal position as held in the above decisions support the claim of the assessee that the provisions of section 14A is not applicable to its case.

Ground No.1 is general and Ground No.8 is consequential. Hence these grounds do not warrant any separate adjudication.

In result the appeal of the assessee is allowed for statistical purposes.