Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BENCH : COCHIN
Before: SHRI N. V. VASUDEVAN & Ms. PADMAVATHY S.
IN THE INCOME TAX APPELLATE TRIBUNAL BENCH : COCHIN
BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S., ACCOUNTANT MEMBER
ITA No. 56/Coch/2021 Assessment Year : 2016-17
Dhanlaxmi Bank Limited, Vs. The Principal Commissioner Naickanal, of Income Tax, Thrissur. Thrissur. PAN : AABCT 0019J APPELLANT RESPONDENT
Assessee by : Shri Harikrishnanunny, CA Revenue by : Smt. M. Rajasekhar, CIT(DR)
Date of hearing : 07.12.2022 Date of Pronouncement : .12.2022
O R D E R Per Padmavathy S, Accountant Member: This appeal is against the order of the PCIT, Kozhikode passed u/s. 263 of the Act dated 29.3.2021 for the AY 2016-17.
“1. The order of the Principal Commissioner of Income Tax is against equity, law, and justice. 2. The learned Principal Commissioner of Income Tax (PCIT) erred in revising the assessment u/s 263 of the Act, as the assessment made under section 143 (3) of the Income Tax Act, 1961 (the Act) for the year is neither erroneous nor prejudicial to the interests of the revenue. 3. The learned PCIT erred in making the disallowance u/s 14 A to the extent of Rs.2,16,59.021. The learned PCIT ought
ITA No. 56/Coch/2021 Page 2 of 10
to have noticed that the disallowance u/s 14 A is to be restricted to the extent of exempt income received by your appellant. 4. For the above and other grounds to be adduced at the time of hearing it is prayed that the order passed by the learned Principal Commissioner of Income tax may be cancelled.” 2. The assessee filed the return of income for the AY 2016-17 on 15.10.2016 declaring a net loss of Rs.2,07,65,15,808. The case was selected for scrutiny and the notice u/s. 143(2) was duly served on the assessee. During the course of assessment, the AO noticed that the assessee has claimed exemption u/s. 10(33) for an amount of Rs.17,18,870 being dividend from tax free investment. The AO proposed to invoke provisions of section 14A and in this regard issued a notice to the assessee. The assessee submitted before the AO that the various funds in the nature of capital funds, reserves, current account deposits are invested in earning dividend income. The assessee also submitted that the assessee being a bank, funds are generated from all activities which is common. There is no segregation of interest bearing and interest free funds. The assessee in this regard had relied on the decision of Bombay High Court in the case of CIT v. Walfort Share & Stock Brokers P. Ltd., 310 ITR 421 (Bom) where it was held that section 14A contemplates the real expenditure and not assumed on deemed expenditure. The AO did not accept the contentions of the assessee. The AO relying on the decision of Kerala High Court in the case of South Indian Bank, ITA 730/2009 dated 21.10.2010 wherein it was held that non-maintenance of separate accounts is no excuse for being unable to substantiate the claim of
ITA No. 56/Coch/2021 Page 3 of 10
interest bearing funds being used to earn exempt income. Accordingly, the AO computed the disallowance u/s. 14A r.w. Rule 8D(2)(i)(ii) and (iii) at Rs.2,16,59,021. The AO restricted the disallowance to the amount of exempt income and thereby made a disallowance of Rs.17,80,870.
The PCIT invoked the provisions of section 263 and issued a notice as to why the entire amount computed as disallowance u/s. 14A r.w. Rule 8D cannot be disallowed. The assessee submitted that it is a well settled position in law as per the decision of Apex Court in the case of UCO Bank, 240 ITR 355 (SC) and the decision of the jurisdictional High Court in the case of Nedungadi Bank Ltd., 264 ITR 545 that the dividend income received from securities forming part of stock & trade held in the regular course of business is exempt u/s. 10(33). The assessee further submitted that in the case of Joint Investment P. Ltd., 372 ITR 694, the Delhi High Court has held that disallowance u/s. 14A cannot exceed the tax exempt income. The PCIT did not accept the submissions of the assessee and held that disallowance made u/s. 14A should be restricted to the extent of exempt income is not settled and therefore the contentions of the assessee cannot be accepted. Accordingly, to the extent of amount not disallowed by the AO, the PCIT held the order of assessment to be erroneous and prejudicial to the interest of the revenue.
ITA No. 56/Coch/2021 Page 4 of 10
The ld. AR submitted that the PCIT has invoked the provisions of section 263 for the reason that the AO has restricted the disallowance to the extent of exempt income earned by the assessee which the AO has arrived at based on various High Court and Tribunal’s decision on the same point. The ld. AR further submitted that in the case of Kollam Royal Park Hotel & Resorts P. Ltd. v. ACIT (ITA No.268/Coch/2019) where the Tribunal has passed an order stating that it is settled law that if no exempt income is received by the assessee in the concerned AY, there could be no disallowance u/s. 14A of the Act. The ld. AR further submitted that a similar view is held by the Cochin Bench of Tribunal in the case of Kerala Ayurveda Ltd., ITA No.506/Coch/2016. It is also the contention of the ld. AR that the assessee has interest free own funds which is more than the amount of investment made in the tax free securities. One more contention of the ld. AR is that the securities of the bank which though classified as investment in the balance sheet as per the format of the balance sheet given in the Banking Regulation Act, the same forms part of its stock- in-trade as held by Nedungadi Bank Ltd. (supra) and United Bank (supra). It is submitted that computation of disallowance with reference to the value of stock-in-trade cannot be computed under Rule 8D since the said Rule does not refer to stock-in-trade. It is therefore submitted that the PCIT cannot invoke the provisions of section 263 with regard to the impugned addition and the AO has correctly restricted the amount of disallowance to the extent of exempt income earned by the assessee.
ITA No. 56/Coch/2021 Page 5 of 10
The ld. DR supported the order of the PCIT.
We have heard the rival submissions and perused the material on record. We notice that during the year under consideration the assessee has earned income of Rs.17,80,870. The revisionary power invoked by the PCIT is contended on the following grounds:-
That the disallowance should be restricted to the amount of exempt income earned by the assessee. 2. The assessee’s own funds are much more than the amount of investment and hence no disallowance is warranted u/s. 14A r.w. Rule 8D. 3. The securities of the bank through classified as investment are in reality stock-in-trade and therefore the computation of disallowance under Rule 8D is not applicable. 7. It is well settled position that the amount of disallowance u/s. 14A should be restricted to the exempt income earned by the assessee. The following decisions are in support of this claim wherein the courts have held a similar view:-
(i) Joint Investments Pvt. Ltd. v. CIT (59 Taxmann.com 295) – it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income. (ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRV- ITAT-MUM-123) – has held that disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. (iii) M/s. Pinnacle Brocom Pvt. Ltd. v. ACIT (ITA No.6247/M/2012) – has held that disallowance u/s 14A cannot exceed the exempt income. (iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) – held that the disallowance u/s 14A of the Act cannot exceed the exempt income.
ITA No. 56/Coch/2021 Page 6 of 10
In view of the above settled position, the amount of disallowance u/s 14A of the I.T. Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income is Rs.10,80,870 and therefore the disallowance if at all should be restricted to the said amount.
The ld. AR during the course of hearing presented the below table with the details of total free funds available as per the statement of account of the assessee :-
Amount (Rs.) Interest free own funds available as on 1.4.2015 177,44,16,000 Share Capital Reserves 546,41,34,000 Current Deposit Accounts 1012,73,41,000 Total Interest free own funds available 1736,58,91,000 Interest free own funds available as on 31.03.2016 Share Capital 177,44,16,000 Reserves 330,51,30,000 Current Account Deposit 742,42,61,000 Total Interest free own funds available 1250,38,07,000
It is also noticed that the value of investments made by the assessee as of 31.03.2016 is Rs.30,84,12,303 and therefore substantiates submissions of the ld AR that the interest free funds available are much more than the investments made and therefore we
ITA No. 56/Coch/2021 Page 7 of 10
see merit in the argument of the ld. AR. We notice that the similar issue was considered by Hon’ble Karnataka High Court in the case of CIT Vs. Micro Labs Ltd. (2016) 383 ITR 490, where it was held that no disallowance out of interest expenditure is called for. The relevant extract of the observations made by Hon’ble Karnataka High Court in the above said case is as below
“40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paper book and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income. 41. The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. 42. In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly." Thereafter, it was held by Hon’ble Karnataka High Court as under:- “The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd.
ITA No. 56/Coch/2021 Page 8 of 10
[2014] 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335 . When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.” 11. Therefore, by placing reliance on the above judgment we hold that disallowance u/s 14A r.w. Rule 8D(2)(ii) is not warranted.
Therefore the issue of disallowance u/s. 14A with respect disallowance being restricted to the amount of exempt income and that no disallowance is warranted when own funds are available are settled by the judicial pronouncements herein above. Further the issue of the securities of the bank through classified as investment are in reality stock-in-trade and therefore the computation of disallowance under Rule 8D is not applicable has also been a subject matter of adjudication in the case of Nedungadi Bank Ltd., (supra) and United Commercial Bank (Supra).
From these discussions, it is clear that with respect to the impugned issue it is possible to take two views What is prejudicial to the interest of the Revenue is explained in the judgment of the Hon’ble Supreme Court in the case of Malabar Industries Co Ltd v. CIT [2000] 243 ITR 83 (SC) (head note):
"The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two
ITA No. 56/Coch/2021 Page 9 of 10
views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law." 14. The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.
Placing reliance on the decision of Hon’ble Supreme Court, we are of the considered view that the PCIT is not justified in setting aside the order of the AO for enhancing the disallowance u/s.14A. Further even on merits in our view there is no error prejudicial to the interest of the revenue. On these counts we quash the order of the PCIT passed u/s.263. Accordingly assessee’s appeal is allowed.
In result the appeal of the assessee is allowed.
Pronounced in the open court on this 19th day of December, 2022.
Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 19th December, 2022. /Desai S Murthy /
ITA No. 56/Coch/2021 Page 10 of 10
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar, ITAT, Bangalore/Cochin.