DCIT, CIRCLE, PATIALA vs. M/S STATE BANK OF PATIALA, PATIALA

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH’B’, CHANDIGARH

BEFORE MS. DIVA SINGH, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER

ITA No. 1325/Chd/2017 Assessment Year: 2015-16

The DCIT Vs. M/s State Bank of Patiala Circle, Patiala The Mall, Patiala

PAN No. AACCS0143D

(Appellant) (Respondent)

Assessee By : Shri C. Naresh Revenue By : Shri Ashish Abrol

Date of hearing : 04/01/2018 Date of Pronouncement : 03/04/2018

ORDER PER DIVA SINGH, J.M.

The present appeal has been filed by the revenue assailing the correctness of the order dated 29/06/2017 of CIT(A) Patiala pertaining to 2015- 16 Assessment Year on the following grounds:

3.1 Addressing the first issue it was submitted that the CIT-A in paragraph 5.1 to paragraph 5.2 ot his order at pages 9 to 13 considering the past history of the assessee on the issue had deleted the additions made by way of a disallowance. It was also his submission that in assessee's own case the jurisdictional High Court considering the facts in 2008 - 09 assessment year had dismissed the departmental appeal wherein the Revenue had challenged an identical relief granted by the ITAT. Accordingly it was his submission that the issue is covered in favour of the assessee. The said position was not disputed by the senior DR.

5.1 During the appellate proceedings, the appellant made a detailed submission and reiterated the averments made during the assessment proceedings. The appellant during the assessment proceedings had also relied on the order of Id. CIT(Appeal) and Hon'ble ITAT, Chandigarh for the A.Y. 2010-11 wherein Hon'ble ITAT had deleted the disallowance made u/s 14A of the Act, relying upon the decision of Hon'ble Karnataka High Court in the case of CCI Vs. JCIT 250 CTR 291 (Kar) , wherein it was held that where securities are held as stock in trade, no disallowance u/s 14A can be made. 5.2 I have considered the assessment order and submissions made by the appellant. It is worthwhile to mention here that the issue involved in these grounds has been decided by Hon'ble ITAT, Chandigarh vide its consolidated order in appellant's own case in ITA No. 217/CHD/2015. for A.Y. 2010-11 & in ITA No. 1097 & 448/CHD/2014 for A.Y. 2010-11 and in appeals filed by the department in ITA No. 364/CHD/2015 for A.Y. 2010-11 and in ITA No. 126/CHD/2009 for A.Y. 2010-11 dated 11.08.2016. The Hon'ble ITAT Chandigarh Bench while deciding the appeal has allowed the plea of the appellant and dismissed the appeal of the department by holding as under: "10. We have heard the rival submissions and perused the order of the authorities below as also the documents placed before us. From the perusal of the order of the ITAT in assessee's own case for assessment year 2008-09 and 2009-10 in ITA No. 215, 363/Chd/2015 dated 28.3,2016, we find that said issue has been decided by the ITAT at pages 8 to 11 (para 11 to 16) as under;_ ‘’11. We have heard the learned representatives of both the parties, perused the findings of the authorities below and ' considered the material available on record. We are in total agreement with the argument of the learned D.R. that the computational provisions as provided under rule 8D are applicable in the relevant assessment year as the year is 2008-09. We are also not in agreement with the argument of the counsel of the assessee to the effect that since in the earlier years only 2.5% of the tax free income was held to be disallowed under section 14A of the Act by the ITAT, it should be followed in this year also. Since the year under consideration is assessment year 2008-09, in which year the provisions of Rule 8D are applicable in full. However we find ourselves in agreement with the argument of the counsel that the bank is holding securities as stock in trade, therefore earning of income therefrom is only incidental to its business, the provisions of section 14A cannot be applied. In the case of State Bank of Hyderabad versus DOT, ITA No. 450/Hyd/2015, dated 14th of August 2015 it has been held very categorically that since earning of exempt income is

incidental to assessee' s business and securities are held in the nature of stock in trade, holding of such incomes ancillary and incidental to assessee's business, income from such shares and securities cannot be treated as Investment so as to attract provisions of section 14A of the Act. 12. We have also perused the circular issued by the CBDT No. 18/2015 dated 02/11/2015, whereby in some other context it has been stated that income arising from investments of a banking concern is attributable to the business of banking falling under the head profits and gains of business and profession. The content of this circular were shown to us to emphasise the fact that the shares and stocks held by the bank are its stock in trade and not investments. 13. In another order of the ITAT Ahemedabad bench in the case of Anjali Exam private limited versus ACIT, ITA No. 2386/AHD/11 dated 29.0.2014 it has been held as under: The issue is covered by a coordinate bench decision in the case of DCIT Vs Gulshan Investment Co Ltd [(2013) 2013-TIQL-206-ITAT-KOL in as much as even if the provisions of Section 14A are- to be held applicable in this case-as was held therein, computation provisions under rule 8D2 (ii) and (Hi) will fail because the dividend yielding shares are held as stock in trade and not as investments, and the disallowance under rule 8D(2)(i) will be confined to only direct expenses for earning the tax exempt income. Having noted that there are admittedly no direction expenses incurred in earning the dividends which could qualify for being covered by rule 8D2(i), we delete the impugned disallowance of Rs 42,97,650; "

herein above. In this order it has been very categorically analysed that if the shares are held that as stock in trade and not as investment then even the disallowance under section under rule 8D will be Nil as rule 8D (2)(i) will be confined to only direct expenses for earning the tax exempt income. In the present case also since there are no direct expenses incurred in earning the dividend the disallowance will come to nil. 16. In view of the above, ground raised by the assessee is allowed." 11. It is clear from the above that the ITAT had deleted the disallowance made under section 14A of the Act, relying upon the decision of Hon'ble Karnataka High Court in the case of CCI Vs. JCIT250 CTR 291 (Kar), wherein it was held that where securities are held as stock in trade, no disallowance u/s 14A can be made. We find that ITA also relied upon various decisions of the Tribunal to this effect. 12. Before us, no change in facts in the current year as compared to the preceding years was pointed out by the Ld.DR. Therefore the facts in the present case being identical to that in assessment years 2008-09 and 2009-10, that the securities earning exempt income undisputedly were held as stock in trade, the decision rendered by the ITA T in that case is squarely applicable to the present ground of appeal raised and respectfully following the same, we uphold the ground raised by the assesses deleting the disallowance made u/s/ 14A. This ground of appeal raised by the assessee is, therefore, allowed." Thus, the issue in these grounds is squarely covered by the judgement of Hon'ble Jurisdictional ITAT in the appellant's own case for the A.Y. 2010-1 1(supra) wherein the addition made on similar ground is deleted. It is worthwhile to mention-4 here that on this issue the same decision has also been followed by me while deciding Appeal No. 314/15-16 on 31.01.2017 and appeal No. 10399/16-17 on 15.03.2017 in the appellant's own cases for the A.Y. 2013-14 & 2014-15 respectively. Therefore, looking into the facts of the case and ratios of various decisions referred and respectfully following the decision of Jurisdictional ITAT in the appellant's own case(supra), it is held that the impugned addition on account of apportionment of expenses in relation to interest on tax free bonds, dividend income, tax free securities and income from infrastructure projects of the appellant company is not warranted. The same is, therefore, deleted.

that if shares are held as stock-in-trade and not as investment even the disallowance under rule 8D would be confined to direct expenses for earning the tax exempt income. The assessee it is noted argued that its investment in shares and bonds was not made under any obligation under the Banking Regulation Act 1949 and infact the assessee was dealing in shares and bonds as a trader which was permitted by section 6 of the Banking Regulation Act 1949. It had been argued that the assessee in view of section 6 of the Banking Regulation Act, 1949, was entitled to purchase and sell such securities. It was elaborated that Section 6 of the said Act specifies the forms of business in which banking companies can be engaged. Sub Section (1) of Section 6 permitted the banking company to deal in scrips and other instruments and securities whether transferable or negotiable or not as well as in stock, funds, shares, debentures, debenture stocks, bonds, securities and investments of all kinds in addition to the business of banking. In view thereof any profit or loss arising from such activities it was submitted was liable to be shown either as a business income or business loss for the purposes of computation of income under the Act. In the background of this legal position it was argued that the assessee was engaged in the purchase and sale of shares as a Trader with the object of earning profit and not with a view to earn interest or dividend. The argument of the assessee that it does not have an investment portfolio the securities constitute the assessee’s stock in trade these submissions were supported by circular No. 18 dated 02/11/2015 issued by the CBDT which carves out a distinction between stock in trade and investment and provides that if the motive behind the 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 profit would be said to have accrued from the investment. The Court took note of the argument that the assessee may have two portfolios namely investment portfolio and trading portfolio. In the case of the former the securities were to be treated as capital assets and in the latter as trading assets. The investments made by the assessee in the facts of the present case before the Hon'ble High Court it was argued were part of its banking business and the income arising from trading in the securities was attributable to the business of the bank/assessee falling under the head profits and gains of business thus in this background relying upon the decision of the apex court in the case of CIT versus Nawanshaher Central co-operative bank Ltd (2007) 289 ITR 6 (SC) it had been

argued that the assessee had held the shares, bonds debentures etc which constituted its stock in trade and thus the provisions of section 14 A were stated to be not applicable. Considering the aforesaid decision their Lordships held as under:

We have held that the securities in question constituted the assessee's stock-in-trade and the income that arises on account of the purchase and sale of the securities is its business income and is brought to tax as such. That income is not exempt from tax and, therefore, the expenditure incurred in relation thereto does not fall within the ambit of section 14A.

Now, the dividend and interest are income. The question then is whether the assessee can be said to have incurred any expenditure at a l l or any part of the said expenditure in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee's stock-in-trade. The answer must be in the negative. The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in-trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same. 27. The securities were the assessee's stock-in-trade. Mr. Bansal, as noted earlier, submitted that the assessee did not hold the securities to earn dividend or interest, but traded in them and the dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom and would not, therefore, be subject to the provisions of section 14A. Mr.Bansal's reliance on a judgment of the Karnataka High Court in CCI Ltd. vs. Joint Commissioner of Income-tax, Udupi Range, [2012] 250 CTR 291 (Karnataka) is well founded. Paragraph-5 thereof reads as follows:- "5. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside. Accordingly, we pass the following: " (emphasis supplied)

We are, in respectful agreement with the judgment and, in particular, the observations emphasized by us. The Division Bench held that when the assessee has not retained shares with the intention of earning dividend income and that the dividend income is incidental to the business of sale of shares it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be d i sa1 1 owed from deduction. 28. A financial decision of an assessee that trades in securities may and, in fact, would factor in the dividend or interest that the securities it acquires as its stock-in-trade yields or is likely to yield. Such a decision would be taken for acquisition, retention and disposal of the securities. That, however, is a financial consideration not with a view to earning the dividend or interest but with a view to assessing the price at which the security ought to be acquired, retained and sold. In other words, such dividend or interest is an aspect that the assessee takes into consideration for incurring the expenditure for the purpose of acquiring the stock-in-trade and dealing with it thereafter as well as for the sale thereof. This is entirely different from saying that the expenditure is incurred for earning the dividend or interest. 29. Once it is found that no expenditure was incurred in earning this income, there would be no further expenditure in relation thereto that falls within the ambit of section 14A. A l l that the assessee does thereafter i.e. after dividend and interest i s received i s to protect, preserve and uti l i ze the same. The expenditure incurred in that regard would be to administer and manage the same. In other words, such expenditure cannot be said to be for the purpose of earning the same. An amount once received as income loses its character as income and thereafter forms a part of the assets or wealth of the assessee. There is no concept, such as, once an income always an income. 30. It is not necessary to refer to Mr. Bansal 's further submissions in support of this issue. We w i l l , therefore, only note them. Mr. Bansal submitted that the computational provision of rule 8D is applicable to investments and not stock-in- trade. Rule 8D, therefore, would not come into play in relation to exempt income by way of dividend and interest from stock-in-trade and, accordingly, section 14A would not be applicable in relation to incidental income by way of tax free income, namely, interest or dividend which is exempt under sections 10(15)(iv)(h),(34) and (35). The term "investment" does not include stock-in-trade. He relied upon Accounting Standard (AS) 13, issued by the Institute of Chartered Accountants of India, to contend that there is a distinction between investment and stock-in-trade. Stock-in-trade is not investment as per clause 3.1 of AS 13. Rule 8D refers only to investment and not stock-in-trade. Section 14A and rule 8D constitute an integrated code and as the computation provisions do not apply, as the word used therein is investment and not stock-in-trade, the charging section cannot be read to include stock-in-trade. Mr. Bansal then relied upon the fact that variable-B in rule 8D(2)(ii) refers to "the average value of investment". He emphasized the word "investment". He relied upon clause 3.1 of AS 13 issued by the Institute of Chartered Accountants of India, recognized under section 145(2) of the Act, in so far as it draws a distinction between investment and stock-in- trade. As per clause 3.1, stock-in-trade is not an investment. He contended that section 14A, which is a charging section, and rule 8D, which is the computation provision, constitute an integrated code and as the computation provisions do not apply, as the word used therein is "investment" and not "stock-in-trade", the charging section also cannot apply. In view of what we have held, i t is not necessary to consider this aspect of the matter. 31. The Tribunal having accepted the assessee's contention that income from the said securities is not covered by section 14A, did not consider the other contentions raised on behalf of the assessee. As we have decided this issue in favour of the assessee, it is not necessary to decide the other contentions raised by the assessee. These issues may we 1 1 involved questions of fact some of which we indicated earlier. We, therefore, refrain from deciding them ourselves. Had we answered the question in favour of the Revenue, we would have

directed the Tribunal to decide the other contentions raised by the assessee for the Tribunal had not decided the same. 32. The question of law is, therefore, answered i n the affirmative in favour of the assessee. The appeal is accordingly dismissed. However we note that the Apex Court in its latest judgment dt. 12/02/2018 5.1 in the case of Maxopp Investment Ltd. Vs CIT in C.A. No. 104-109 of 2015 and others has had an occasion to consider the judgment of the jurisdictional High Court in the case of the assesee itself. Their Lordships considering the CBDT Circular No. 18/15 dt. 02/11/2015 in para 40 of this decision after considering the facts of the specific year concluded that the Hon’ble High Court has arrived at a correct conclusion, however the theory of dominant intention applied by the High Court was not approved. It is pertinent to note that in the facts of the said case the AO had restricted the disallowance to the amount claimed as exempt income as noted by the Hon’ble High Court in para 40. Since the parties admittedly in the decision rendered by the CIT(A) dt. 29/06/2017 did not have the benefit of the latest decision of the Apex Court, accordingly we deem it appropriate to set aside the impugned order back to the file of the AO with the direction to pass a speaking order in the light of the decision of the Apex court after giving assessee a reasonable opportunity of being heard. The impugned order accordingly is set aside and Ground No. 1 of the Revenue is allowed for statistical purposes.

6.2 I have considered the assessment order and submissions made by the appellant. It is worthwhile to mention here that the issue involved in this ground has been decided by Hon’ble ITAT, Chandigarh on 11.08.2016 vide appeal filled by the department against in ITA NO.364/CHD/2015 for AY .2010-11. The Hon’ble ITAT, Chandigarh Bench while deciding the issue has dismissed the plea of the department by holding as under: “63. We have heard the representatives of both the parties , perused the finding given and considered the materials available on record. From the perusal of the order of the ITAT in assessee’s own case for assessment years 2008-09 and 2009-10 in ITA No . 215& 363/CHD/2015 order dated 28.03.2016, we find that the issue has been decided at para 52to53 of the order, which reads as under:- “52.we have heard the learned representatives of both the parties ,perused the findings of the authorties below and considered the materiel available on record .The CIT (Appeals) has allowed the claim of assessee at para 9.1 of his order, which reads as under : “9.1 I have considered the submission made. As noted above the appellant has relied on the plethora of judgments in his favour. The latest decision pertains to Hon’ble Bombay High Court wherein it is held that ATM is a computer and entitled to depreciation @60% for the purpose of income tax proceedings. There is no order of the jurisdictional High court cited by either by the appellant or the Assessing officer. It is an established law that when two views are possible then the view favourable to the assesse has to be taken namely in CIT vs. polar cement pvt.ltd. 226 ITR 625 (SC). In this case, most of the latest judgments are in favour of the assessee including the order of hon’ble Bombay High Court. The issue in the case of diebold system pvt. Ltd. pertains to commercial taxes not income tax. There for looking into entirety of facts of the case and respectfully following the decision of hon’ble Bombay high Court. I am of the opinion that ATM has to be treated as a computer and is entitled to depreciation @ 60% in the result, this ground of appeal is allowed.” 53. “ On perusal of the above ,we do not find any infirmity in the same as there are a number of judgments of various High courts where the ATM is held to be computer and depreciation is allowed @ 60%. The grounds raised by the department are dismissed.” 64. On perusal of the above, we find that in the preceding year, the ITAT has decided the issue in the favour of the assessee in view number of judicial decisions of the Hon’ble high Courts which held ATMs to be computers. Respectfully following the same, we delete the addition made by the assessing officer and confirm the order of CIT (A) in this regard. This ground of appeal raised by the department is dismissed. In the result the appeal of the revenue is dismissed.” Thus, the issues in this ground is squarely covered by the judgement of the Hon’ble Jurisdictional ITAT in the department’s case for the A.Y.2010-11(Supra) wherein the addition made on similar ground is deleted. It is worthwhile to mention here that on this issue the same decision has also been followed by the while deciding appeal No. 314/15-16 on 31.01.2017 and appeal No.10399/16-17 on 15.03.2017 in the appellant’s own cases for the A.Y.2013-14 & 2014-15 respectively. Therefore, looking into the facts of the case and respectfully following the decision of jurisdictional ITAT in the department case (supra) , it is held that the impugned disallowance of Rs.1,37,77,410/- on account of excess depreciation on ATMs is not warranted. The same is, therefore, deleted.

8.1 Being satisfied by the reasoning and finding considering the detailed reasoning arrived at by the CIT-A wherein no distinction on facts or position of law has been brought to our notice by the Revenue we find no good reason to

vary the conclusion arrived at. The departmental ground accordingly is dismissed

Order pronounced in the Open Court on 03/04/2018.

Sd/- Sd/- (ANNAPURNA GUPTA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 03/04/2018 AG Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR