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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Chandra Poojari, Accountant Member and Shri Soundararajan K., Judicial Member ITA No. 249/Coch/2023 (Assessment Year:2014-14)
Muthoot Bankers ACIT, Circle - 1(2) Punnen Road Aayakar Bhavan vs. Trivandrum 695034 Kowdiar PAN – AAEFM0671P Trivandrum 625003 (Appellant) (Respondent) Assessee by: Shri Sreenivasan, CA Revenue by: Shri V. Swarnalatha, Sr. DR Date of hearing: 10.07.2024 Date of pronouncement: 06.08.2024 O R D E R Per: Soundararajan K., J.M. This appeal filed by the assessee challenges the order of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 21.03.2023 passed under Section 250 of the Income Tax Act, 1961 (the Act) in respect of Assessment Year (AY) 2014-15.
The brief facts of the case are that the assessee is a financial institution lending and accepting deposits. During course of their business they received dividend income of Rs.1,49,12,212/- which is exempt income and claimed no expenditure incurred towards earning of exempt income. The Assessing Officer (AO) not accepted the case of the assessee, had invoked s.14 of the Income Tax Act, 1961 (the Act) and disallowed the expenditure incurred in connection with exempted income and applied rule 8D of the I.T. Rules and made a disallowance of Rs.1,07,06,276/- as per s. 14A r.w.r. 8D. As against the
2 ITA No. 249/Coch/2023 Muthoot Bankers said order the assessee filed appeal before the CIT(A) and contended that the disallowance u/s. 14A of the Act is not correct, which was rejected by the ld. CIT(A) and, therefore, the assessee had filed this appeal before the Tribunal.
The assessee has raised the following grounds of appeal and also a written submissions and another supplementary written submission in the paper book :- “Grounds of Appeal 1) The Assistant Commissioner of Income Tax is not justified in invoking the provisions of section 14A r.w Rule 8D having regard to the nature of the business of the appellant, and these provisions are not applicable. 2) The assessing officer has grossly failed to pinpoint materially that investments have been made out of interest bearing funds, rather than proceeding to make addition in a casual manner by simply invoking the section. 3) It was only proper on the part of the assessing officer to have clearly established that expenditure have been incurred to earn exempted income which has not been done. 4) Without prejudice to the above contention, it is also contended that disallowance cannot exceed the exemption claimed. 5) For the above reasons and other reasons as may be adduced at the time of hearing your appellant prays that disallowance as has been done may be considered for deletion.” “WRITTEN SUBMISSIONS: 1. This appeal arises against the assessment for the year 2014/15 dated 2/12/16 by the Assistant Commissioner of Income-tax, Circle-1(2), Trivandrum. 2. The only addition made in the assessment is disallowance U/s. 14A r.w Rule 8D to tune of Rs. 1,07,06,276/-. According to the officer, the appellant had claimed an exempted amount of Rs. 1,49,12,212/- being dividend received. She is of the opinion that expenditure incurred in connection with such exempted income has not been excluded in computing the total income. To a proposal, it was explained to the officer that investment has been made in the earlier years which is subject to increase or decrease year after year depending on the market condition and they have not incurred any expenditure in relation to the earning of the dividend which is claimed as exempt. Apart from that the appellant being engaged in the financing business, money is stock in trade and investment have been made in the ordinary course of carrying of the business with a view to maximise profit and in such cases provisions ofsection 14A row Rule 8D are not applicable. It was also further submitted that dividend is subject to dividend tax in the hands of the paying company and by such act of the legislature, this was exempted in the hands of the recipients, since last couple of years. It was
3 ITA No. 249/Coch/2023 Muthoot Bankers also further submitted that they have not incurred any expenditure to earn this dividend as normally this get directly credited in the bank account through NEFT or RTGS mode. 3. According to the officer, the contention of the appellant cannot be accepted as they have not excluded, expenditure incurred in connection with the exempted income and section 14A envisages otherwise. Compared to the earlier year, investment of the assessee has increased by nearly Rs. 40 crores which would entitle various expenditure. Rule 8D has been prescribed to arrive at figure of expenditure attributable to the exempted income if it could not arrive directly. 4. The officer failed to appreciate that sufficient interest free funds are available with the assessee and it is not as if the interest bearing funds have been utilized to make the investment. Most of the unsecured loans obtained by the assessee from Associate concerns do not carry interest, i.e, to this extent adjustment in the calculation should have been made apart from that disallowance exceeds the exemption claimed, when is never contemplated under the Act. 5. It is submitted that the Assessing Officer has failed to clearly establish that the expenditure has been incurred to earn exempted income. 6. In the case of the appellant for the assessment years 2008/09 to 2013/14 to similar issue arose in respect of disallowance of expense the Hob'ble Income-tax Appellate Tribunal had an occasion to consider the issue and they have sent back the matter to the file of A.O. to reconsider the issue. Copy of appellate order of 1.T.A.T. dated 03/10/2018 is enclosed.” “SUPPLEMENTARY WRITTEN SUBMISSIONS: 1. We request your honours reference to the case of Supreme Courts in South Indian Bank Vs. CIT. In this case the appellant was in possession of mixed funds. i.e. interest bearing funds and non interest bearing funds (Form unsecured loans/Associates) It has been held that when mixed funds have been utilized for investment in exempted securities. Section 14-A will not apply. 2. I am also enclosing herewith the I.T.A.T. order of Cochin Bench in the appellant case for the Assessment years 2008/09 to 2013/14 setting aside the assessment to the files of the Assessing Officer.” 4. At the time of argument the assessee also filed a paper book containing the earlier order of the Tribunal and the computation of income and financial statement for AY 2014-15 and prayed to allow the appeal.
The learned D.R., on the other hand, relied on the orders of the lower authorities and prayed to dismiss the appeal.
We have heard the rival contentions and perused the material on record. The main argument advanced by the assessee is that the assessee had sufficient
4 ITA No. 249/Coch/2023 Muthoot Bankers interest free funds by way of unsecured loans obtained from the associate concerns which did not carry any interest and that the interest free funds were utilised for making the investments and earned exempt income. The learned A.R. also relied on the judgement of the Hon'ble Supreme Court in Civil Appeal No, 9606 of 2011 dated 09.09.2021 in the case of The South Indian Bank Ltd. v. CIT in support of its case. We have perused the above judgement in which the Hon'ble Supreme Court had given a finding as follows; - “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 02.11.2015, 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 Vs.Nawanshahar Central Cooperative Bank Ltd. 12 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, vs. State Bank of Patialal3 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. As seen from the judgement, the Hon'ble Supreme Court, had given the above findings that the stock and securities held by a bank is stock-in-trade and the income received on such shares and securities must be considered to be business income not attracting s. 14A of the Act. In the present case the assessee is a financial institution and therefore we have to analyse whether the judgement of the Hon'ble Supreme Court would apply to the facts of the present case or not. The assessee had also not submitted the entire facts before the AO or before the CIT(A) in order to find out whether they are a banking company comes under the provisions of the Banking Regulation Act, ifso, proper licence has been obtained from the Reserve Bank of India (RBI) to carry out banking business. We are, therefore, unable to give any findings with regard to the fact, whether the judgement of the Hon'ble Supreme Court is applicable to the facts of the present case before us. We are of the view that if
5 ITA No. 249/Coch/2023 Muthoot Bankers the assessee comes under the purview of the RBI and if the Banking Regulation Act would apply to them, then only we can apply the above cited judgement to the present case of the assessee.
Further, we have also perused the order cited by the learned A.R. in the paper book in respect of assessee’s own case for the preceding year. The Tribunal, in its order in ITA Nos. 12 to 17/Coch/2018 dated 03.10.2018, wherein similar disallowance was made u/s. 14A of the Act, remitted the issue to the assessing authority for considering the issue de nova after going through the financial statement filed by the assessee. The Tribunal in its order in para 6.1 had observed as follows: - “6.1 Insofar as the disallowance of indirect interest expenditure by invoking the provisions of section 14A of the I.T. Act r.w. rules 8D(2)(ii) of the 1.T.Rules, is concerned, the contention of the assessee is that it is having interest free funds in the form of reserves and advances from associate concern and no part of the interest bearing funds were diverted for making investments which had yield exempted income. However, this particular contention of the assessee was not demonstrated neither before the Assessing Officer nor before the CIT(A). Admittedly, interest on borrowed funds used for business purposes cannot be computed for disallowance u/s 14A of the I.T. Act r.w. rule 8D(2) (ii) of the I.T. Rules. It is the duty of the assessee to prove that interest was incurred on borrowings are used for the specific business purpose and non-interest bearing funds were utilized for making investments which has given rise to exempted income. The assessee to prove that it is having its own funds to make investment which had yielded exempted income, necessarily has to furnish the cash flow statement. The cash flow statement would disclose as on the date of making investments, which had given rise to the exempted income, that the assessee had interest free funds available with it. In the interest of justice and equity, we deed it fit to remand the case to the Assessing Officer for fresh consideration. The Assessing Officer shall afford a reasonable opportunity of hearing to the assessee. The assessee shall prove its case that it is having interest free funds for making investments, by furnishing cash flow statement for the respective assessment years. It is ordered accordingly.” 9. The above finding of the Tribunal in respect of the assessee’s own case bind up on us and, therefore, we, are following the same and remit the issue to the file of the AO for considering the issue afresh after granting proper opportunity of being heard to the assessee.
6 ITA No. 249/Coch/2023 Muthoot Bankers 10. We also make it clear that if the assessee is able to demonstrate before the AO that it is a banking company and doing the banking business as per the provisions of the Banking Regulation Act and also had obtained licence from the RBI for doing banking business, then the assessee can claim the benefit of the judgement of Hon'ble Apex Court cited supra, otherwise the AO is at liberty to follow the earlier order of the Tribunal in assessee’s own case cited supra and complete the assessment in accordance with law.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 6th August, 2024.
Sd/- Sd/- (Chandra Poojari) (Soundararajan K.) Accountant Member Judicial Member Bengaluru, Dated: 6th August, 2024 n.p. Copy to: 1. The Appellant 2. The Respondent 3. The CIT, concerned 4. The DR, ITAT, Cochin 5. Guard File By Order //True Copy// Assistant Registrar ITAT, Cochin