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ITA No.247/2020
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 3RD DAY OF JUNE, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE RAVI V. HOSMANI
I.T.A. NO. 247 OF 2020
BETWEEN:
PRINCIPAL COMMISSIONER OF INCOME TAX-5
BMTC COMPLEX
KORAMANGALA
BENGALURU.
ASSISTANT COMMISSIONER
INCOME TAX, CIRCLE-5(1)(1)
BMTC COMPLEX
KORAMANGALA
BENGALURU.
…APPELLANTS
[BY SRI. SANMATHI E.I., ADVOCATE (THROUGH VC)]
AND:
M/S. NADATHUR ESTATES PVT. LTD., 3RD FLOOR, NADATHUR PALACE PLOT NO.23, 8TH MAIN 3RD BLOCK, JAYANAGAR BENGALURU – 560 011.
… RESPONDENT
(RESPONDENT SERVED AND UNREPRESENTED)
THIS APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME-TAX ACT, 1961, ARISING OUT OF ORDER DATED 03.05.2019 PASSED IN ITA NO.268/BANG/2018, FOR THE ASSESSMENT YEAR 2013-2014 PRAYING TO 1. DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER
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QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT. 2. SET ASIDE THE APPELLATE ORDER DATED: 03.05.2019 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘A’ BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO. ITA 268/BANG/2018 (ANNEXURE-A) FOR THE ASSESSMENT YEAR 2013-2014 AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS APPEAL COMING ON FOR ORDERS, THIS DAY, SATISH CHANDRA SHARMA J., DELIVERED THE FOLLOWING:
JUDGMENT
The present ITA arises out of order dated 03.05.2019 passed in ITA No.268/Bang/2018.
In the present case the following Substantial Question of Law has to be adjudicated: “Whether on the facts and circumstances of the case and in law, the Tribunal is justified in restoring the issue of disallowance under section 14A to the file of the Assessing Officer with directions to recalculate the disallowance under section 14A r.w.r.8D (2)(iii) by taking into account only the investments which yielded exempt income during the said year, by relying on the decision of the Special Bench in the case of ACIT vs. Vireet Investment (P) Ltd., (82 taxman.com 415 (Del) when the assessing authority has rightly invoked section 14A r/w Rule 8D(2)(iii) as conditions set out therein are fully satisfied?”.
ITA No.247/2020
After hearing Sri. Sanmathi E.I. learned counsel for appellants, appeal is admitted on the aforesaid substantial question of law.
This Court in ITA No.168/2019 decided on 26.03.2011 has already answered the aforesaid question of law in favour of the assessee and against the revenue and in the aforesaid judgment this Court 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?”
ITA No.247/2020
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
ITA No.247/2020
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
ITA No.247/2020
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 is answered in favour of the assessee and against revenue.
Accordingly, Income Tax Appeal stands dismissed.
Sd/- JUDGE
Sd/- JUDGE BVK