Investments held as stock-in-trade do not attract disallowance U/s. 14A

Dy. CIT Vs. Infina Finance (P) Ltd. (ITAT Mumbai)

Section 14A dis allowance was called for in case the assessee was holding shares as stock-in-trade, therefore, investments held as stock-in-trade do not attract dis allowance under section 14A.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The captioned appeal by revenue for assessment year [AY] 2012-13 contest the order of the learned Commissioner (Appeals)-5 [CIT (A)], Mumbai, Appeal No. IT-473/14-15/266/15-16, date 15-2-2016 by raising the following grounds of appeal :–

“1. The Order of the Commissioner (Appeals) is opposed to law and facts of the case.

2. On the facts and circumstances of case, the Commissioner (Appeals) has erred in holding that while calculating dis allowance under section 14A read with rule 8D, investments lying as stock in trade should not be included in average investments.

3. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in directing the assessing officer to restrict the dis allowance under section 14A read with rule 8D(2)(iii) by excluding the long term investments which are in the nature of strategic investments relying on the decision of ITAT in case of Gar ware Wall Ropes Ltd. (2014) 65 SOT 86 (Mum-Trib), without appreciation the fact that the decision of the ITAT has not been accepted by the department and appeal has been admitted by the Hon’ble High Court.”

The assessment for impugned assessment year was framed by learned Assistant Commissioner of Income Tax Circle 2(2)(1), Mumbai [AO] under section 143(3) of the Income Tax Act on 18-2-2015. None has appeared for assessee despite notice and therefore, we proceed to dispose-off the appeal on the basis of material available on record and after hearing learned Departmental Representative [DR].

2.1 Facts leading to the same are that the assessee being resident corporate assessee engaged as Non-Banking Finance Company (NBFC) was assessed for impugned assessment year under normal provisions at Rs. 113.38 crores after sole dis allowance under section 14A for Rs. 1.29 crores as against returned income of Rs. 112.08 crores filed by the assessee on 28-9-2012. The solitary issue involved in the appeal is quantum of dis allowance under section 14A.

2.2 During assessment proceedings, it was noted that the assessee was engaged in the business of investment in shares and securities, financing and granting loans and advances against shares. The assessee earned exempt dividend income of Rs. 3,28,05,806 and made suo moto dis allowance against the same under section 14A for Rs. 16,66,810. However, not convinced with the working made by assessee, learned assessing officer, applying the provisions of section 14A read with Rule 8D, computed the same under rule 8D(2)(iii) @ 0.5% of average value of investments. The dis allowance, thus worked out, came to Rs. 1,46,59,004 and after adjusting suo moto dis allowance of Rs. 16,66,810 already made by the assessee, the net dis allowance came to Rs. 1,29,92,194 which was added to the income of the assessee.

3. Aggrieved, the assessee contested the same with partial success before learned Commissioner (Appeals) vide impugned order dated 15-2-2016 where learned Commissioner (Appeals), relying upon certain judicial pronouncements, directed learned assessing officer to make adjustment in the figures of investments and concluded the matter in the following manner :–

3.4 In the submissions appellant states that from his computation on average investment in stock-in-trade is Rs. 2,40,52,76592 at the end of 31-3-2012 and this amount at the end of 31-3-2011 is Rs. 1,06,35,14,887. The average investment as included in the computation under rule 8D(2)(iii) is Rs. 1,73,43,95,739. According to the appellant this has to be excluded from the computation of dis allowance under Rule 8D(2)(iii) in view of Bombay High Court decision in the case of CIT v. India Advantage Securities Ltd. [IT No. 1131 of 2013] where it is held that no dis allowance can be made for securities held as stock-in-trade. Further, the appellant states that there were strategic investments in Business Standard Ltd. and the said investments at the end of the year was Rs. 89,43,57,090. Appellant claims that this also should be excluded from the computation of dis allowance under section 14A read with rule 8D(2)(ii)(iii) read with rule 8D(2)(iii) in view of the decision of Mumbai ITAT in the case of Gar ware Wall Ropes in ITA No. 5409/2012.

3.5 In view of the above Bombay High Court decision and Mumbai ITAT decision, assessing officer is directed to compute the dis allowance under section 8D(2)(iii) after excluding stock-in-trade average investment of Rs. 1,73,43,95,739 and average strategic investment of Rs. 86,40,43,240. Assessing officer is directed to compute the above dis allowance after excluding both the investments and is also further directed to give credit to the appellant’s suo moto dis allowance of Rs. 16,66,810. The balance amount which arises after excluding above two investments and after giving credit to appellant’s dis allowance is upheld. This ground is partly allowed. Aggrieved, the revenue is in further appeal before us.

4. The learned DR supported the stand taken by learned assessing officer and drew our attention to the fact that statutory provisions do not envisage any adjustment in the value of investment and therefore, the stand of learned Commissioner (Appeals) was not justified.

5. We have carefully heard the contentions and perused relevant material on record. The short issue to be decided by us is whether the investments kept as stock-in-trade and strategic investments are to be excluded or not while arriving at dis allowance under section 14A?

6. So far as the question whether section 14A dis allowance is called for in case the shares are held as stock-in-trade is concerned, we find that the issue stood squarely in assessee’s favor by the ratio of following judicial pronouncements :–

(i) DCIT v. India Advantage Securities Ltd. [ITAT Mumbai ITA No. 6711/Mum/2011 order date 14-9-2012] [as confirmed by Hon’ble Bombay High Court by way of non-admission of revenue’s appeal (2016) 380 ITR 471 (Bombay)]

(ii) CCI Ltd. v. JCIT (2012) 250 CTR 291 (Karn)

(iii) PCIT v. State Bank of Patiala (2017) 391 ITR 218 (Punjab & Haryana)

(iv) CIT v. G.K.K. Capital Markets (P.) Ltd. (2017) 392 ITR 196 (Calcutta)

Respectfully following the ratio of above decisions, we conclude that investments held as stock- in-trade do no attract dis allowance under section 14A.

7. Further, learned Commissioner (Appeals) has noted that the assessee has made strategic investment in certain business entities. The stated fact has not been disputed by the revenue. We find that the predominant object of the strategic investment is to earn business profits and not to earn exempt income thereupon and the same also stood covered in assessee’s favor by the decision of this Tribunal rendered in Gar ware Wall Ropes Ltd. v. ACIT (2014) 65 SOT 86 (Mumbai-Trib.). The revenue could not point out any contrary decision of higher authority to controvert the same. Hence, we do not find any infirmity in the order of learned Commissioner (Appeals).

8. Resultantly, the revenue’s appeal stands dismissed.