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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 4TH DAY OF JUNE, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE RAVI V. HOSMANI
ITA NO.107/2020
BETWEEN
PRINCIPAL COMMISSIONER
OF INCOME TAX-7,
BMTC COMPLEX,
KORAMANGALA,
BENGALURU.
THE DEPUTY COMMISSIONER
OF INCOME TAX,
CIRCLE – 7(1)(1),
BMTC CMPLEX,
80 FT ROAD, 6TH BLOCK,
KORAMANGALA, BANGALORE.
... APPELLANTS
(BY SRI SANMATHI E.I, ADVOCATE)
AND
M/S UNIVERSAL POWER TRANSFORMERS PVT.LTD., NO.26/A, 2ND PHGASE, PEENYA INDUSTRIAL AREA, BANGALORE 560 058, PAN NO.AACCM 7268F
...RESPONDENT
(SERVED AND UNPRESENTED)
THIS ITA IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT 1961 PRAYING TO DECIDE THE FOREGOING QUESTIONS
OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT, SET ASDIE THE APPELLATE ORDER DATED 31.7.2019 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘A’ BENCH, BANGALORE IN ITA.NO.2799/BANG/2018, FOR ASSESSMENT YEAR 2012-2013,
THIS ITA COMING ON FOR HEARING THIS DAY, SATISH CHANDRA SHARMA. J., DELIVERED THE FOLLOWING:
JUDGMENT
The present appeal is arising out of a common order dated 31.7.2019 passed in ITA No.2511/2018 and ITA.No.2799/2018. Hence, two appeals have been filed by the department in respect of two different assessment orders.
In the present appeal, the appeal was admitted on the following substantial questions of law;
Whether on the facts and circumstances of the case and in law, the Tribunal was right in law in dismissing the appeal of the Revenue by holding that assessing authority is not right in making disallowance under Section 14A of the Income Tax Act, 1961, without considering the CBDT Circular No.5/2014 which clarifies that Rule 8D read with Section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income?
Whether on the facts and circumstances of the case and in law, the Tribunal was right in law in dismissing the appeal of the Revenue, ignoring the fact that the interest bearing funds were utilised
for generating exempt income in the form of dividend for past as well for the future years?
Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the amendments made to Section 50C vide Finance Bill 2016 which was made effective from 1st April, 2017 are declaratory and curative in nature and they will have retrospective effect?
So far as substantial question of law No.3 is concerned, as the appeal was in respect of the assessment year 2012-13 and the question of law relates to Finance Bill 2016, which was made effective w.e.f., 1.4.2017, is certainly not at all material to the present appeal.
Insofar as substantial question of law Nos.2 and 3 are concerned, the issue has already been decided by this Court in ITA No.168/2019, decided on 26.3.2021.
This Court in the aforesaid judgment from paragraph 3 has held as under;
“3. This Court has admitted the present appeal on the following substantial question of law.
“whether on the facts and in the circumstances of the case and law, the Tribunal is right in law in setting aside the addition of Rs.2,48,72,710/- to total income of the assessee as the ingredients of Section 14A read with Rule 8D(2)(iii) are satisfied in the case of the assessee and without appreciating that the investment in the form of share application money by the company would only result in exempt income and provision of Section 14A would clearly apply?”
Learned Counsel for the respondent, at the outset, has drawn the attention of this Court towards the judgment delivered in the case of THE COMMISSONER OF INCOME TAX, BANGALORE & OTHERS VS QUEST GLOBAL ENGINEERING SERVICES PVT. LTD., and the contention is that the aforesaid question of law has already been answered in I.T.A.No.133/2015 decided on 15.02.2021. The question of law framed in the aforesaid appeal reads as under:
“2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing carry forward of loss on derivatives contracts without appreciating that the transaction was speculative in nature in terms of Board’s Circular No.3/2010 and Section 73 does not allow setting off of speculation loss against any other income other than speculation income?”
The Division Bench of this Court in the aforesaid appeal in paragraphs 14 & 15 has held as under:
“14. Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No.5/2014 dated 11.02.2014 is not applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in COMMISSIONER OF INCOME TAX VS. KINGFISHER INVESTMENT INDIA LTD. vide judgment dated 29.09.2020 inter alia held that disallowance under Section 14A read with Rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11.02.2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16.01.2021 passed in I.T.A.No.271/2017 (PRINCIPAL COMMISSIONER OF INCOME TAX VS. NOVEL SOFTWARE DEVELOPMENT) in which it was held that decision of this court in KINGFISHER FINVEST LTD. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in MAXOPP INVESTMENTS LTD. supra and it was held that the aforesaid decision does not deal with applicability of Section 14A of the Act. However, eventually this court agreed with the view taken by High Court of Madras in CIT VS. CHETTINAD LOGISTICS P LTD., (2017) 80 TAXMANN.COM 221 (MAD.) AND KEM
INVEST LTD. VS. CIT, (2015) 16 TAXMANN.COM 118 (DELHI) and held that since no exempt income has accrued to the assessee therefore, the provisions of Section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., KINGFISHER FINVEST INDIA LTD. AND M/S NOVEL SOFTWARE INDIA (P) LTD. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under:
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 the 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 that 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 upon 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.
From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP INVESTMENT LTD. supra deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of Section 14A in M/S NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same. However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is to
curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in COMMISSIONER OF INCOME TAX VS. WALFORT SHARE AND STOCK BROKERS (2010) 326 ITR 1 wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in M/S NOVEL SOFTWARE INDIA (P) LTD. is affirmed but for different reasons. It is also clarified by us that while recording the conclusion in KINGFISHER FINVEST LTD. that disallowance under Section 14A has to be made even taxpayer has not earned any exempt income, this court has misread the ratio of the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent.”
In the light of the aforesaid, as identical appeal has already been decided and the question of law has been answered against the revenue, the present appeal also stands dismissed. The question of law in the present appeal is answered in favour of the assessee and against the revenue.
In light of the aforesaid judgment, substantial question of law Nos.1 and 2 are answered in favour of the assessee and against the revenue. The appeal stands dismissed accordingly.
Sd/- JUDGE
Sd/- JUDGE nd