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Facts
The assessee had earned exempt income and suo motu disallowed a portion of expenses under Section 14A. The Assessing Officer (AO) computed a higher disallowance. The CIT(A) dismissed the assessee's appeal. The assessee argued that investments held as stock-in-trade should not be considered for disallowance.
Held
The Tribunal held that investments held as stock-in-trade, even if yielding dividend income, should not be subject to disallowance under Section 14A. This is because the primary purpose is business trading, and any dividend earned is incidental. The Tribunal relied on Supreme Court judgments, including Maxopp Investment Ltd.
Key Issues
Whether disallowance under Section 14A is applicable to investments held as stock-in-trade which yield dividend income.
Sections Cited
Section 14A, Rule 8D
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Income Tax Appellate Tribunal, ‘C ‘ BENCH
Before: SHRI AMIT SHUKLA & SHRI AMARJIT SINGH&
PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 07-08-2023, passed by ld. CIT (A)-56 Mumbai for
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quantum of assessment passed u/s. 143(3) for the assessment year 2012-13.
The assessee has raised following grounds of appeal:-
“1. On the facts and circumstances of the case, the Learned Assessing Officer / CIT (Appeals) has erred by not excluding the value of investments which represents the stock in trade while computing the disallowance under Section 14A of the Act read with Rule 8D. 2. On the facts and circumstances of the case, the Learned Assessing Officer / CIT (Appeals) has erred by not restricting the disallowance under Section 14A of the Act read with Rule 8D to 0.5% of only those investment from which the assessee had earned exempt income during the year. 3. On the facts and circumstances of the case, the Learned AO / CIT (Appeals) has erred by not considering that suo-moto disallowance under section 14A of the Act offered by the appellant in the return of income was inadvertently higher than to be computed as per section 14A of the Act and revenue cannot make disallowance or charge tax on income which never chargeable to tax.” 3. The brief facts qua the issue raised are that the assessee has earned exempt income of Rs. 9,06,59,498/- to the dividend income. The assessee in the computation of income had suo moto disallowed disallowance of Rs. 6,85,86,679/- which consists of expense directly relating exempt income of Rs. 1,94,21,954/- under Rule 8D(2)(i) and under Rule 8D(2)(iii), 0.5% on average value of investment which worked out to Rs. 4,91,64,725/- which was in the following manner:-
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In so far as interest is concerned, the assessee submitted that assessee has huge interest free fund which was sufficient to meet the investment, therefore in view of various decisions of Hon’ble Bombay High Court, no disallowance should be made out of interest. However, the ld. A.O. held that CBDT Circular No. 5 of 2015 dated 11-05-2014 has clarified that disallowance on expenditure has to be made even when taxable in a particular year has not earned any exempt income and therefore assessee has not earned dividend income from the investments during the year, the same shall also be part of disallowance. Accordingly, AO computed the disallowance at Rs. 8,32,21,265/-. Thus, there was enhancement of disallowance of Rs. 2,29,71,733/- under Rule 8D(2)(iii). Since assessee had suo moto amount of Rs. 6,85,86,679/-, the balance of Rs. 1,46,34,586/- was disallowed. The ld. CIT(A) has dismissed the said disallowance.
Before us, one of the issues raised that while computing the average value of investment, the shares held as ‘stock in trade’ should not be considered for computing the disallowance which plea was also taken before the CIT(A) and the same was rejected 3
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following judgment of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT 402 ITR 640. Another plea taken before us is that investments which had not yielded any exempt income should also be removed for computing the disallowance under Rule 8D2(iii). Thus, the total disallowance challenged before us are in the following manner:
From the aforesaid chart, now the assessee’s claim is that stock in trade of equity shares should be removed.
We have heard both the parties and perused the relevant finding given in the impugned order. Two issues have been raised on the working of the disallowance under Rule 8D2 (iii). Firstly, investments which have yielded exempt income during the year should be removed from calculating the disallowance under Rule 8D2(iii); and secondly, stock-in-trade of equity shares is also be removed from the said workings. In so far as the first proposition, now it is well settled issue that for the purpose of computing of disallowance, investments which have not yielded exempt income during the year cannot be taken for the purpose of disallowance
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u/s. 14A. This issue has been settled by the several decisions following the decisions of Special in the case of Vireet Investment Pvt. Ltd. 82 taxmann.com 415 and Hon’ble Delhi High Court in the case of Cheminvest Investment, ( 61 taxmann.com 188).
Now coming to the issue, whether shares held as stock in trade even though they have yielded dividend income should be considered for the purpose of disallowance or not. Before us, the ld. Counsel for the assessee had strongly relied upon the judgement of Hon’ble Supreme Court in the case of Maxopp Investment vs. CIT (438 ITR 1). Secondly, judgement of Hon’ble Delhi High Court in the case of PCIT vs. Punjab National Bank, 449 ITR 468 and also that SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court.
The ld. D.R. submitted that the Hon’ble Supreme Court have clearly held that even shares held as stock in trade, the disallowance u/s. 14A get triggered and expenditure has to be apportioned for the purpose of disallowance u/s. 14A.
We find on perusal of the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra), on the issue shares held stock in trade, whether the disallowance can be triggered or not, Hon’ble Apex Court have analysed the judgement of Punjab and Haryana High Court in case of State Bank of Patiyala reported in (2017) 78 taxmnan.com 3, wherein the issue had arisen where exempt income in the form of dividend was earned by the bank from
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the securities held as stock in trade. The claim of the assessee was that investment in shares and bonds etc. constituted stock in trade and investment had been made only for earning business income and that tax free income is only incidental to the assessee’s main business of sell and purchase of securities and therefore no expenditure can be said to be incurred for earning for such exempt income, because expenditure would have remained the same even if no dividend income has been earned by the assessee on such securities and therefore no expenditure on proportionate basis could be calculated against the exempt income. The Hon’ble Punjab and Haryana High Court accepted the contention of the assessee that assessee is engaged in purchase and sale of shares as a trader with the object of earning profit and not with a view to earn interest or dividend. It does not have investment portfolio as the securities constitute stock in trade of assessee. The Hon’ble High Court referred to CBDT Circular No. 18 dated 2nd Nov, 2015 which was with reference to expenditure relatable to investment in non- SLR activities which need to be disallowed u/s. 57(1) as interest on SLR securities was income from other sources. Thereafter, the CBDT examined the provision in view of the judgment of Hon’ble Supreme Court in the case of CIT vs. Nawan Shahar Central Co- operative Bank Ltd. (2017) 160 taxman.com 48 (SC) wherein Hon’ble Apex Court held that investment made by banking concern are part of business of banking. Therefore, income arising from such investment is attributable to the business of banking following under the head “profits and gains from business or profession”. 6
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Accordingly, Circular provided that even though it was in the context of co-operative society/banks claiming deduction u/s. 80(2)(a)(i) of the Act. However, this principle would be applicable to all banks of the commercial banks. Thus, the directions were given that not should be applied at this ground by the officers of Department. Based on this circular Punjab and Haryana High Court held that if the CBDT Circular carves out a distinction between stock in trade and the investment and provide that if the motive behind purchase and sell 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 the investment. If the assessee is found to have treated the shares and securities as stock-in-trade, the income arising there from would be business income. A loss would be a business loss. Thus, an assessee may have two portfolios, namely, investment portfolio and a trading portfolio. In the case of the former, the securities are to be treated as capital assets and in the latter as trading assets. Finally, the High Court held that what is to be disallowed is the interest incurred to earn exempt income since the purpose of purchase of such securities was not to earn income arising there from namely dividend/interest to earn profits from trading and no expenditure was incurred in relation to company dividend/interest.
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The Hon’ble Supreme Court in this context of the judgement of Hon’ble Punjab and Haryana High Court in the case of Special Bench has observed as under:-
“36. There is yet another aspect which still needs to be looked into What happens when the shares are held as stock in trade and not as investment particularly, by the banks on this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015
This Circular has already been reproduced in Para 19 above This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments attributable to business of banking falling under the head profits and gains of business and profession On that basis, the Circular contains the decision of the Board that no appeal would be fled on this ground by the officers of the Department and if the appeals are already filed they should be withdrawn reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head income from other sources of it is to fall under the head profits and gains of business and profession. The Board, going by the decision of this Court in Nawanshahar case clarified that it has to be treated as income falling under the head profits and gains of business and profession. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(1) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 8
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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
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 & 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.
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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 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
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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.”
From the plain reading of para 38-39 of the aforesaid judgment, it is seen; firstly, Hon’ble Apex Court had disagreed with the test of dominant intention applied by Hon’ble Punjab and Haryana High Court that if the motive behind purchase and sell is to earn profit then same would be treated as trading profit. Secondly, in para 39 Hon’ble Apex Court have clearly held that where shares held are stock in trade, the main purpose is to treat those shares and profits there from, however if in the process the shares held as stock in trade if dividend is also earned which is incidental and such an income are exempt, that is, not including in the total income u/s 10(34), this will trigger the applicability of section 14 of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held by Hon’ble Supreme Court in the case of CIT Wolfort Shares Stock Brokers Pvt. Ltd. Lastly, in para 40 the Hon’ble Court has distinguish the facts of State Bank of Patiyala and the case of Maxopp Investment Ltd. wherein the assessee had continued to hold the shares to retain control over the investee company. Thus, in our view, para 40 does not dilute proposition laid down in para 38-39 of the judgement.
However, we find Hon’ble Delhi High Court in the case of PCIT vs. Punjab National Bank (supra) wherein one of the issues raised
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for disallowance r.w.r. 8D in respect of shares held in stock Hon’ble Delhi High Court quoted para 40 of Maxopp Investment (supra) and applied the said paragraph as under:-
“18. 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 IIR - 40 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 12
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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…..” 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 attracted and the expenditure could not be disallowed. The judgment of Maxopp Investment Lad (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)(i) of the Rules. 20. 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. 21. 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.” 11. We further find in case the case of PCIT vs. P N B Housing Finance, the Hon’ble Delhi High Court reported in (2023) 146 taxman.com 445 wherein similar issue was involved, Hon’ble High Court observed and held as under:-
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“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 T [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 [20171 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
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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. 50. 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 divend 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 judgment of the Punjab and Haryana Court in the case of State Bank of Patiala (supra) was also cited with approval by the Supreme Court in a subsequent judgment South Indian Bank Ltd. v. CIT (20211130 taxmann.com 178/283 Taxman 178/438 ITR 1 and held as under:- “25 The Punjab and Haryana High Court, in the case of Pr CIT v. State Bank of Patiala (2017) 88 taxmann.com 667/393 ITR 15
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476 (Punj. & Har), while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock-in-trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income.” 7.1 The law settled by the aforesaid judgments of the Supreme Court is squarely applicable facts of the present case as there is no dispute that the exempt income was earned from stock- in-trade.” Here again, the Hon’ble Delhi High Court quoted the same paragraph of Maxopp Investment Ltd. (supra). Apart from that, the Hon’ble Delhi High court has also quoted from the judgement of Supreme Court in the case of South Indian Bank Ltd. vs. CIT wherein the only issue was as under:-
"Whether proportionate disallowance of interest paid by the banks is called for under section 14A of Income-tax Act for investments made in tax free bonds/securities which yield tax free dividend and interest to assessee Banks when assessee had sufficient interest free own funds which were more than the investments made" In that case, Hon’ble Supreme Court concluded as under:-
“27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.”
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However, in para 25 Hon’ble Supreme Court by referring CBDT Circular No. 18 of 2015 dated 2-11-2024 and the judgment of Punjab and Haryana High Court in the case of PCIT vs. State Bank of Patiala what was there, for the sake of ready reference reproduced as under:-
“25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 2-11-2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT v Nawanshahar Central Co-operative Bank Ltd. [2007] 160 Taxman 48/289 ITR 6 (SC), wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr CIT v State Bank of Patiala [2017] 88 taxmann.com 667/393 ITR 476 (Punj, & Har.), while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock- in-trade, and all income received on such shares and securities must be considered to be business income. That is why section 14A would not be attracted to such income.” Though Hon’ble Supreme Court had only stated what was held in Punjab and Haryana High Court in the case of PCIT vs. State Bank of Patiyala (supra), but in any case, since the Hon’ble Delhi High Court in the aforesaid two cases relying upon the same judgement of Maxopp Investment Ltd. (supra) have held that even if the shares were held as stock in trade, dividend earned on such shares would
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not attract disallowance under section 14. Thus, being the judgement of Hon’ble High Court, we are bound to follow the same despite we have expressed our opinion slightly differently while interpreting the para 39 of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra). Accordingly, we agree with the contention raised by the ld. counsel for the assessee that the decision of Hon’ble Delhi High Court in the case of PCIT in the case of PNB Housing Finance Ltd (supra) has decided this issue in favour. Accordingly, the claim of the assessee that no disallowance should be made u/s. 14A r.w.r. 8D on dividend earned on stock in trade is accepted and also from the investments which have not yielded exempt income. Accordingly, the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced on 26th February, 2024
Sd/-/- Sd/- (AMARJIT SINGH) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 26/02/2024 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT BY ORDER, 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// (Asstt. Registrar) ITAT, Mumbai 18