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Income Tax Appellate Tribunal, KOLKATA BENCH (B
Before: SHRI P.M. JAGTAP(KZ) & SHRI A.T. VARKEY]
order : February 28, 2020 ORDER PER P.M. JAGTAP, VICE PRESIDENT (KZ) This appeal is preferred by the revenue against the order of Ld. CIT(A) -23, Kolkata dated 22.04.2019 and the solitary issue involved therein relates to the deletion by the Ld. CIT(A) of the disallowance of Rs. 18,18,00,031/- made by the AO u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
The assessee in the present case is a banking company which filed its return of income originally on 29.11.2014 which was subsequently revised on 30.03.2015. In the said returns, dividend income of Rs. 5,82,37,880/- and interest income on tax free bonds of Rs. 7,22,96,510/- was claimed to be exempt by the assessee. In the return of income originally filed, no disallowance on account of expenditure incurred in relation to the said exempt income was Assessment Year: 2014-15 M/s. United Bank of India offered by the assessee. In the revised return of income filed by the assessee, such disallowance to the extent of Rs. 1,94,00,000/- was offered by the assessee as required by the provisions of section 14A. In the assessment completed u/s 143(3) vide an order dated 28.12.2017, the disallowance to be made u/s 14A was worked out by the AO at Rs. 20,82,00,031/- by applying Rule 8D of Income Tax Rules, 1962 and accordingly a further disallowance of Rs. 18,88,00,031/- (20,82,00,031/- - 1,94,00,000/-) was made by the AO.
The disallowance made by the AO u/s 14A read with Rule 8D was challenged by the assessee in the appeal filed before the Ld. CIT(A) and by following the decision of this Tribunal in the case of DCIT vs UCO Bank (ITA No. 585/Kol/2013), the Ld. CIT(A) deleted the disallowance made by the AO u/s 14A read with Rule 8D by holding that such disallowance was not warranted in the case of the assessee company being bank which dealt with shares and securities by way of stock in trade. Aggrieved by the order of the Ld. CIT(A), the assessee has preferred this appeal before the Tribunal.
We have heard the arguments of both the sides and also perused the relevant material available on record. The learned counsel for the assessee has submitted that a similar issue relating to the disallowance u/s 14A of the Act read with Rule 8D was involved in assessee’s own case for A.Y. 2010-11 and the coordinate bench of this Tribunal vide its order dated 19.02.2020 passed in deleted the said disallowance by following the decision of Delhi Bench of ITAT in the case of Nice Bombay Transport Pvt. Ltd. rendered vide its order dated 19.11.2018 in ITA No. 1331/Del/2012.
Assessment Year: 2014-15 M/s. United Bank of India He has also placed on record a copy of the said order and perusal of the same shows that a similar disallowance made u/s 14A read with Rule 8D in assessee’s own case for A.Y. 2010-11 was deleted by the Tribunal vide paragraph no. 16 of its order which is extracted below: “16. We see no reasons to take any other view of the matter than the view so taken by the Division Bench of ITAT, New Delhi vide order dated 19.11.2018. In this order, the Tribunal has inter alia observed as follows: “6. We have carefully considered the submissions and perused the records. There is no denial of the assertions by the assessee that the assessee is engaged in the business of trading in share and all the shares are held by the assessee company as part of its stock-in-trade and not as an investment as is evidenced by the balance sheet of the company. However, Ld. AO recorded that a profit making company pays dividend to its shareholders who have invested some money to its shares, whether the Shareholder is a trader of share or not. Ld. AO further noted that the assessee company has purchased units from the mutual funds under the Dividend Reinvestment Plan and earned day to day dividend in the shape of units and value of the purchase account had increased by such units and the motive of the assessee company is clear to earn the dividend income. Ld. AO further observed that for a trader of shares, two types of gains are available, simultaneously. Firstly, earning profit from the settling of shares at higher prices from its cost price and secondly is the dividend income and without making investments, the assessee could not have earned dividend income.
Thus, as per Ld. AO the investments and dividend are integral part of financial transactions, and they are inseparable. One cannot claim that investment in shares is made only for earning trading benefits or for having dividend income only, because both the gains are existing simultaneously. Ld. AO further noted that in the same way, the expenditure incurred by way of interest on the money taken on loan for investment/purchase of shares cannot be segregated as the expenditure incurred exclusively for investment/purchase of shares. Actually, the expenditure has been incurred for having both the benefits. Thus, it is amply clear that the expenditure incurred by way of payment of interest has direct link with the dividend income and hence, disallowance as per section 14A of the I.T. Act.
Assessee placed reliance on the decision reported in the case of Vora Financial Services (P). Ltd. vs. ACIT, Mumbai by the ITAT, Mumbai Bench (2018) 96 com88 (Mum-Trib) wherein, it was held that where a major portion of dividend income had been received as shares held as stock-in- trade, it cannot be appropriate to apply the provisions of Rule 8D. It is further argued by the Ld. Autherized Representative that whatever the expenses that are debited to the profit and loss account are the business
Assessment Year: 2014-15 M/s. United Bank of India expenses relating to trading of the shares and not additional expense whatsoever made.
Further reliance is placed on the decision of the Hon’ble Kerala High Court in the case of CIT vs. Smt. Leena Ramachandran (2010) 235 CTR 512 (Ker.) for the principle that the assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on borrowed funds utilized for the acquisition of shares, when the shares held as stock-in-trade which arise if the assessee is engaged in the trading of shares.
In fact, this question had fallen for consideration in the case of Maxopp investment Ltd versus CIT (2018) 91 taxman.com 154 (SC), wherein the Hon’ble Apex Court considered two cases wherein the question of apportionment of expenditure had arisen and predominant intent of investment in shares was pleaded, though an different facts, on the ground that the objective of investing in shares was not to the dividend income, but to either retain controlling interest over the company in which the investment was made or to earn the profit from trading in shares. The question was whether the disallowance under section 14 A of the Act could be invoked in the cases where exempt income was earned from shares held as “trading assets” or “stock in trade”. The first case relates to Maxopp investment Ltd and the second case relates to the case of State Bank of Patiala. In the case of Maxopp investment Ltd the assessee company is in the business of finance, investment and was dealing in shares and securities; that they held the shares and securities, partly as investments on the “capital account” and partly as “trading assets” for the purpose of acquiring and retaining control over its group companies, primarily Max India Ltd.; and that the profits resulting on the sale of shares held as trading assets were duly offered to tax as business income of the assessee. In the case of State Bank of Patiala the assessee the exempt income in the form of dividend was earned by the bank from securities held by an stock in trade.
The Hon’ble Supreme Court was considering the question that has arisen under varied circumstances where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as “stock in trade”, though incidentally income is also generated in the form of dividends as well.
It was argued before the Hon’ble Apex Court that though incidentally income was also generated in the form of dividends, the dominant intention for purchasing the shares was not to earn the dividend income but to acquire and retain the controlling the business in the company in which shares were invested, or for the purpose of trading in the shares as business activity.
Assessment Year: 2014-15 M/s. United Bank of India 13. After considering the entire case law on this aspect in the light of the peculiar facts involved in both the matters, the Hon’ble Apex Court vide paragraph No. 39 and 40 held as follows:- 39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in- trade’, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.
40) We note from the facts in the State Bank of Patiala cases 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 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 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.
It is, therefore, clear from the above observations of the Hon’ble Apex Court that depending upon the facts of each case, the expenditure incurred in acquiring the shares will have to be apportioned. Hon’ble Apex Court held that the tribunal and the Hon’ble High Court of Punjab and Haryana
Assessment Year: 2014-15 M/s. United Bank of India arrived at a correct conclusion by setting aside the disallowance under section 14 A of the Act in respect of the dividend earned on the shares held as stock in trade, because such shares were held during the business activity of the assessee and it is only by a quirk of fate that when the investee company declared dividend, those shares were held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits.
Hon’ble Apex Court made a clear distinction of this case from the case of Maxopp investment Ltd were the assessee knew that whenever dividend would be declared by the investee company such dividend would necessarily be earned by the assessee and assessee alone, and it would be in the common knowledge of the assessee that such shares would generate dividend income as well as and when such dividend income is generated that would be earned by the assessee Hon’ble Apex Court in unequivocal terms held that in contrast, where the shares are held as stock in trade, this may not be necessarily a situation and the main purpose was to liquidate those shares whenever the share price goes up in order to earn profits. In the words of the Hon’ble Apex Court, 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.
Hon’ble Apex Court, therefore, while rejecting the theory of dominant purpose in making investment in shares- whether it was to acquire and retain controlling interest in the other company or to make profits out of the trading activity in such shares – clearly made a clear distinction between the dividend earned in respect of the shares which were acquired by the assessee in their exercise to acquire and retain the controlling interest in the investee company, and the shares that were purchased for the purpose of liquidating those shares whenever the share price goes up, in order to earn. It is, therefore, clear that though not the dominant purpose of acquiring the shares is a relevant for the purpose of invoking the provisions under section 14 A of the Act, the shares held as stock in trade stand on a different pedestal in relation to the shares that were acquired with an intention to acquire and retain the controlling interest in the investee company.
In the circumstances and respectfully following the aforesaid binding precedent, we are of the considered opinion that Application of Rule 8D to the facts of the case is not correct, hence, the addition on this account is hereby directed to be deleted.”
We note that the issue is squarely covered in favour of assessee by the judgment of Co-ordinate Bench of ITAT New Delhi in the case of Nice
Assessment Year: 2014-15 M/s. United Bank of India Bombay Transport Pvt. Ltd. (supra) therefore, respectfully following the judgment of Co-ordinate Bench, we delete the addition of Rs. 1.58 crores.”
As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2010-11, we respectfully follow the decision of the coordinate bench of this Tribunal rendered for A.Y. 2010-11 and uphold the impugned order of the Ld. CIT(A) deleting the disallowance made by the AO u/s 14A of the Act read with Rule 8D.
In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 28th February, 2020.