INDUSIND BANK LIMITED,MUMBAI vs. DCIT CIR. - 2(3)(2), MUMBAI

PAN : AAACI1314G सुनवाई की तारीख /Date of Hearing : 1.11.2017 घोषणा की तारीख /Date of Pronouncement : 24.11.2017 आदेश / O R D E R PER RAJESH KUMAR, A. M: These two appeals by the assessee are directed against the order dated 27.6.2016 passed by the ld. CIT(A)-6 for the assessment years 2008- 09 and 2009-10 wherein the assessee has raised ground against the confirmation of disallowance as made by the AO u/s 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962 at the rate of 0.5% of the average investments and also AO has not recorded any satisfaction before invoking the provisions of rule 8D.

2 -533 2/ Mum/ 201 6 2. Facts in brief are that during the course of assessment proceedings, the AO observed that the assessee did not disallow any expenditure relating to earning of exempt income. Therefore, the AO calculated disallowance on account of interest by applying rule 8D(2)(ii) at Rs.2,16,00,000/- and other expenditure at the rate of 0.5% of average investments in tax free securities at Rs.15,00,000/-. In the appellate proceedings, the ld.AR submitted that rule 8D were not applicable to the case of the assessee as the assessee is a Banking entity. Since, the ld.AR submitted that the investments in securities by the assessee was a part of the business activities of the assessee and any income earned from the said activity is attributable to business of the assessee and thus the disallowance by the assessing officer under rule 8D is bad in law. The ld.AR relied on the decision of PCIT V/s State Bank of Patiala in Income Tax Appeal No.244 of 2016 (O&M) dated 30.1.2017 (P&H High Court) wherein an identical issue has been decided by holding that the dividend income that arises out of security which are held as stock-in- trade is from the business activity and therefore no expenditure should have been disallowed in respect of the dividend income from the said tax free securities.

“26. What is of vital importance in the above judgment are the observations emphasised by us. Each of them expressly states that what is disallowed is expenditure incurred to "earn" exempt income. The words "in relation to" in section 14A must be construed accordingly. Thus, the words "in relation to" apply to earning exempt income. The importance of the observation is this. We have held that the securities in question constituted the assessee's stock-in-trade and the income that arises on account of the purchase and sale of the securities is its business income and is brought to tax as such. That income is not exempt from tax and, therefore, the expenditure incurred in relation thereto does not fall within the ambit of section 14A.

4 -533 2/ Mum/ 201 6 Now, the dividend and interest are income. The question then is whether the assessee can be said to have incurred any expenditure at all or any part of the said expenditure in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee's stock-in-trade. The answer must be in the negative. The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, For Subsequent orders see ITA- 277-2016 16 of 21 ITA-244-2016 - 17 - dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in-trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same.”