Case Law Details
Central Bank of India Vs Assessing Officer National Faceless Appeal Centre (ITAT Mumbai)
Introduction: In a significant legal battle, Central Bank of India has emerged victorious against the Assessing Officer in a dispute over the disallowance of expenditure under Section 14A of the Income Tax Act. The Income Tax Appellate Tribunal (ITAT) Mumbai’s ruling offers valuable insights into the treatment of exempt income-earning securities held as stock-in-trade.
Detailed Subheading-Wise Analysis:
1. Background of the Appeal: Central Bank of India contested an order dated 13/12/2022 issued by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (CIT(A)). The appeal was filed for the assessment year 2019-20.
2. Section 14A Disallowance Dispute: The primary contention in this appeal revolves around the disallowance of expenditure under Section 14A of the Income Tax Act. The bank objected to a disallowance of Rs. 1911,07,68,683 under Section 14A read with Rule 8D, pertaining to income claimed as exempt under Section 10 of the Act.
3. Nature of Central Bank of India’s Business: Central Bank of India clarified that it holds securities as part of its ordinary banking business operations. These securities are considered stock-in-trade, and any profits or gains from their sale or maturity are consistently subjected to taxation under the “profits and gains from business or profession” head.
4. AO’s Disallowance and Rationale: The Assessing Officer (AO) disputed Central Bank of India’s claims and held that it was unrealistic to assert that no expenses were linked to the exempt income. The AO proceeded to calculate the disallowance as per Rule 8D, arriving at a figure of Rs. 1911.07 crore, which was added to the bank’s total income.
5. CIT(A)’s Decision: The Commissioner of Income Tax (Appeals) upheld the AO’s disallowance decision. The CIT(A) deemed that the AO had valid reasons to reject the bank’s claim that no expenses were attributable to earning exempt income.
6. Legal Precedents and Maxopp Investment Ltd Case: Central Bank of India, during its defense, relied on various legal precedents and highlighted that similar disallowances were overturned in previous cases, including one involving the bank for the assessment year 2012-13. Importantly, the bank cited the Maxopp Investment Ltd case, a pivotal Supreme Court decision, to support its argument that when shares are held as stock-in-trade, disallowance under Section 14A is not applicable.
7. ITAT Mumbai’s Ruling: The ITAT Mumbai considered the bank’s submissions and noted that there was no dispute regarding the bank’s claim that the securities constituted stock-in-trade. In line with the Maxopp Investment Ltd case and the decision in the PCIT v/s Punjab National Bank case, the ITAT ruled in favor of Central Bank of India. It directed the AO to delete the disallowance made under Section 14A read with Rule 8D.
8. Conclusion: Central Bank of India’s victory in this case has broader implications for businesses holding securities as stock-in-trade. The ITAT’s ruling, consistent with the Maxopp Investment Ltd case and legal precedents, clarifies that disallowance under Section 14A is not applicable in such scenarios. This decision provides clarity and relief to businesses engaged in similar practices, ensuring a fair and accurate assessment of their tax liabilities. It highlights the importance of considering the nature of securities and their treatment in the ordinary course of business for tax purposes.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned order dated 13/12/2022, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2019–20.
2. In this appeal, the assessee has raised the following grounds.
“1A On the facts and in the circumstances of the case and in law, the NFAC has erred in making disallowance of Rs. 1911,07,68,683 u/s 14A of the Income-tax Act, 1961 (“the Act”) read with Rule 8D of the Income- tax Rules, 1962 (“the Rules”) towards expenditure incurred in relation to income claimed exempt u/s. 10 of the Act without appreciating that disallowance u/s. 14A is not warranted in the Bank’s case where securities are held as stock-in-trade and dividend/interest income is incidental to holding such securities for the purpose of trading. The Appellant Bank also has sufficient owned fund to make investment in Tax- free securities and hence 14A disallowance is not warranted. The NFAC be directed to delete disallowance u/s. 14A read with Rule 8D of Rs. 1911,07,68,683 towards expenditure incurred in relation to income claimed exempt u/s. 10 of the Act and reduce the total income accordingly.
1B. Without prejudice to Ground no. 1A above, assuming without accepting that the disallowance u/s. 14A is applicable, the Appellant Bank prays that the disallowance u/s. 14A read with Rule 8D of Rs. 1911,07,68,683 towards expenditure incurred in relation to income claimed exempt u/s. 10 of the Act made by the learned NFAC is excessive and unreasonable. The Hon’ble CIT(A) has erred in dismissing the ground. The learned NFAC be directed to make a reasonable disallowance u/s. 14A and reduce the total income accordingly.
1C. Without prejudice to Ground no. 1A and 18 above, the Appellant Bank prays that the disallowance u/s 14A read with Rule 8D towards expenditure incurred in relation to income claimed exempt u/s 10 of the Act should be made considering only the investment which are capable of yielding exempt income. The Hon’ble CIT(A) has erred in dismissing the ground. The NFAC be directed to compute disallowance u/s 14A read with Rule 8D(ii) considering only investments which are actually capable of yielding exempt income and restrict the disallowance to Rs. 8,83,07,678 and reduce the total income accordingly.
1D. Without prejudice to Ground no. 1A, 18 and 1C above, the Appellant Bank prays that the disallowance u/s 14A read with Rule 8D of Rs.1911,07,68,683 towards expenditure incurred in relation to income claimed exempt u/s 10 of the Act is excess of exempt income of Rs. 8,86,91,514 earned during the year under appeal. The Hon’ble CIT(A) has erred in dismissing the ground. The NFAC be directed to restrict disallowance u/s 14A to amount of exempt income earned during the year under appeal and reduce the total income accordingly.
2. On the facts and in the circumstances of the case and in law, the learned NFAC be directed not to initiate penalty proceedings u/s. 270A of the Act for under-reporting of income.
3. The Appellant Bank reserves the right to add, alter, amend and delete any of the ground(s) before or during the course the hearing.”
3. The issue arising in ground no.1, raised in assessee’s appeal, is pertaining to disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962 (“the Rules”).
4. Brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a banking company and the main activity includes the banking and other related activities. During the year under consideration, the assessee filed its revised return of income on 21/05/2020declaring a total loss of Rs. 3408.24 crore under normal provisions of the Act. During the year under consideration, the assessee earned Rs.8,86,91,514, which is exempt under section 10 of the Act. In response to the show cause notice regarding the computation of disallowance under section 14A of the Act, the assessee submitted that it holds securities in the ordinary course of its banking business and such securities constitute stock in trade of its business. The assessee further submitted that the profits and gains on sale or maturity or redemption or transfer in any manner of such securities are consistently offered to tax while computing profits and gains from business or profession. It was submitted that the dividend/interest income accruing on such securities is only a by-product thereof or an incidental benefit arising on account of holding such securities in the normal course of banking business. The assessee also placed reliance upon the decision of the coordinate bench of the Tribunal in its own case for the assessment year 2012-13, wherein the disallowance under section 14A read with Rule 8D was deleted following the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd v/s CIT, 402 ITR 640 (SC). The Assessing Officer (“AO”) vide order dated 30/09/2021, passed under section 143(3) read with section 144B of the Act did not agree with the submissions of the assessee and held that it is difficult to appreciate that no expense is attributable to the exempt income earned by the assessee. The AO held that zero disallowance made by the assessee is not satisfactory and accordingly proceeded to compute the disallowance as per the provisions of Rule 8D of the Rules. Accordingly, the AO computed the disallowance of Rs.1911.07 crore under section 14A read with Rule 8D(2)(iii) as expenses incurred for earning the exempt income and inter-alia added the same to the total income of the assessee.
5. The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and held that the AO in the present case has recorded satisfaction of not accepting the claim of the assessee that no expenditure has been incurred in relation to earning exempt income and consequently has invoked the provisions of section 14A and proceeded to apply Rule 8D to compute the amount of disallowance. Being aggrieved, the assessee is in appeal before us.
6. During the hearing, the learned Authorised Representative (“learned AR”) submitted that no objective satisfaction was recorded by the AO while making the disallowance under section 14A read with Rule 8D. The learned AR further submitted that since the exempt income earning securities were held by it in the ordinary course of its banking business and the profit and gains arising therefrom are consistently offered to tax while computing the income under the head “profits and gains from business or profession”, therefore such securities constitutes stock in trade of the banking business and thus in view of the decision of the Hon’ble Supreme Court in Maxopp Investments Ltd. (supra), no disallowance under section 14A read with Rule 8D can be made. The learned AR placed reliance on various decisions forming part of the caselaw paper book and submitted that in various decisions including in its own case for the assessment year 2012-13, similar disallowance made under section 14A read with Rule 8D was directed to be deleted.
7. On the contrary, the learned Departmental Representative vehemently relied upon the order passed by the lower authorities.
8. We have considered the submissions of both sides and perused the material available on record. The dispute raised by the assessee is limited to disallowance of expenditure under section 14A read with Rule 8D in respect of income exempted under section 10 of the Act. As per the assessee, the securities are held by it in the ordinary course of its business and the profits and gains on sale/transfer of such securities are offered to tax while computing the income under the head “profits and gains from business or profession”, therefore such securities constitute stock in trade of assessee’s business. No dispute has been raised by the Revenue as regards the aforesaid submission. The assessee further submitted that since the exempt income earning securities are held by it as stock in trade, therefore, disallowance of expenditure under section 14A of the Act cannot be made.
9. We find that while deciding a similar issue in PCIT v/s Punjab National Bank, [2022] 449 ITR 468 (Del.), the Hon’ble Delhi High Court dismissed the appeal filed by the Revenue and upheld the findings of the Tribunal in deleting the disallowance made under section 14A read with Rule 8D, by observing as under:-
“15. The Appellant in the present appeal has also challenged the deletion of the disallowance under rule 8D(2)(ii) of Rs. 17,48,97,348/-. The said disallowance was deleted by the CIT (Appeals) vide order dated 28th June, 2017. The CIT (Appeals) noted that this issue was also covered by the order of the ITAT in the case of Respondent in Assessment Year 2009-10. It was noted that in the said Assessment Year the Tribunal had observed that no part of the borrowed funds were utilised by the Respondent for making investments yielding tax free income. It was also observed that the Assessing Officer had not brought on record any nexus between the borrowed funds and amounts invested by the Respondent. The Tribunal, therefore, held that the disallowance made by the Assessing officer under rule 8D(2)(ii) of the Rules was not permissible. The learned Counsel for the Appellant has not disputed the aforesaid facts and on this ground additionally, no challenge can be maintained to the deletion of the disallowance made under this Rule.
16. The learned counsel for the Appellant has contended that the decision of the Tribunal deleting the addition of Rs. 1,58,00,000/- made by the JAO under section 14A of the Act read with rule 8D(iii) is incorrect since the said amount was offered for disallowance suo moto by the Respondent.
17. In this regard, the Tribunal has observed that the facts of the Respondent in the present appeal are similar to the order passed by another Bench of the Tribunal in the case of Nice Bombay Transport (P.) Ltd. v. Asstt. CIT [2019] 103 taxmann.com 338/175 ITD 684 (Delhi – Trib.) wherein issue relating to Section 14A of the Act read with Rule 8D of the Rules in respect of shares held in stock has been discussed and adjudicated in favour of the Assessee therein.
18. Learned counsel for Appellant has submitted that the facts of the assessee in the case of Nice Bombay Transport (P.) Ltd. (supra) are distinct from the case at hand, however, no submissions have been made with respect to the said ‘distinguishing facts’. On the contrary, it is noted that the Supreme Court has held in the case of Maxopp Investment Ltd. v. CIT [2018] 91 com 154/254 Taxman 325/402 ITR 640 that in cases where the main purpose for investing in shares was to hold the same as stock-in-trade, the expenditure incurred by the Respondent shall be permissible to be deducted from its gross income. The relevant paragraph of the judgment of the Supreme Court reads as under :
“…40 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 deal in those shares as a business proposition. Whether 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 at 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 up in 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….”
19. The Supreme Court in this judgment upheld the decision of the High Court of Punjab and Haryana arising under section 14A of the Act with respect to an assessee bank. It further held that when the shares were held as stock-in-trade and not as investment particularly by banks, the main purpose was to trade in those shares and earn profits there from and therefore section 14A of the Act was not attracted and the expenditure could not be disallowed. The judgment of Maxopp Investment Ltd. (supra) has been duly noted by the Tribunal in its impugned order and in our opinion the Tribunal has correctly disallowed the disallowance under rule 8D(2)(iii) of the Rules.
20. In the present case as well, the Tribunal has considered that the Respondent was holding the shares as a stock-in-trade and has, therefore, disallowed the addition made by the JAO. Learned counsel for the Appellant has not disputed the fact that the shares are held as stock-in-trade by the Respondent.
21. In the aforesaid view of the matter, the questions of law proposed by the Appellant do not arise for consideration either in fact or in law in view of the judgments of the Supreme Court, which have conclusively decided the questions sought to be canvassed by the Appellant.
22. The appeal is accordingly dismissed.”
10. The Revenue could not show us any reason to deviate from the aforesaid decision. We also find that similar findings were rendered by the coordinate bench of the Tribunal in assessee’s own case in Central Bank of India v/s DCIT, ITA No. 3739/Mum./2018, vide order dated 29/01/2020. Therefore, respectfully following the decision of the Hon’ble Delhi High Court cited supra, we direct the AO to delete the disallowance made under section 14A read with Rule 8D. Since the relief is granted to the assessee on the aforesaid limited aspect, the other aspects raised by the assessee in ground no.1, are rendered academic and therefore are left open. Ground no. 1 raised in assessee’s appeal is decided accordingly.
11. Ground No.2, is pertaining to the initiation of penalty proceedings, which is premature in nature and therefore is dismissed.
12. In the result, the appeal by the assessee is partly allowed.
Order pronounced in the open Court on 25/08/2023
