Income Tax Appeal No. 244 of 2016 (O&M). Case: The Pr. Commissioner of Income Tax, Patiala Vs State Bank of Patiala. High Court of Punjab (India)
| Case Number | Income Tax Appeal No. 244 of 2016 (O&M) |
| Counsel | For Appellant: Zora Singh Klar, Advocate and For Respondents: Sanjay Bansal, Senior Advocate, B.M. Monga, Amit Parsad and Rohit Kaura, Advocates |
| Judges | S.J. Vazifdar, C.J. and Deepak Sibal, J. |
| Issue | Banking Regulation Act, 1949 - Section 6; Income Tax Act, 1961 - Sections 10, 10(15)(iv)(h), 10(33), 10(34), 10(35), 14, 14A, 145(2), 147, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 154, 251, 57(i), 80P(2)(a)(i) |
| Citation | 2017 (245) Taxman 273 (P&H) |
| Judgement Date | January 30, 2017 |
| Court | High Court of Punjab (India) |
Judgment:
S.J. Vazifdar, C.J.
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This is an appeal against the order of the Income Tax Appellate Tribunal allowing the respondent/assessee's appeal against the order of the Commissioner of Income Tax (Appeals). The appeal pertains to the Assessment Year 2008-09.
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The appeal is admitted on the following substantial question of law:-
"Whether in the facts and circumstances of the case, the Hon'ble ITAT is right in law in deleting the addition made on account of disallowance under section 14A of the Income Tax Act, 1961?"
The question really is whether the provisions of section 14A of the Income Tax Act (for short - 'the Act') apply where the exempt income such as dividend or interest is earned from securities held by the assessee as its stock-in-trade. The assessee had raised other issues as well. The Tribunal having decided the above question in favour of the assessee did not decide the other issues.
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As we have also decided the question in favour of the assessee, it follows that section 14A is inapplicable altogether. The appeal must, therefore, be dismissed. Had we decided the issue against the assessee, we would have remanded the matter to the Tribunal for its decision on the other aspects, such as, whether the investments and securities yielding exempt income were from interest free funds/assessee's own funds or from interest bearing funds as the Tribunal had not decided the same.
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The respondent filed a return declaring an income of about Rs. 670 crores which was selected for scrutiny. The return showed dividend income exempt under section 10(34) and (35) of about Rs. 11.07 crores and net interest income exempt under section 10(15)(iv)(h) of about Rs. 1.12 crores. The total exempt income claimed in the return was, therefore, Rs. 12,19,78,015/-.
The assessee while claiming the exemption contended that the investment in shares, bonds, etc. constituted its stock-in-trade; that the investment had not been made only for earning tax free income; that the tax free income was only incidental to the assessee's main business of sale and purchase of securities and, therefore, no expenditure had been incurred for earning such exempt income; the expenditure would have remained the same even if no dividend or interest income had been earned by the assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income. The assessee also contended that in any event it had acquired the securities from its own funds and, therefore, section 14A was not applicable.
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The Assessing Officer restricted the disallowance to the amount which was claimed as exempt income and added the same to the assessee's income by applying section 14A. The Assessing Officer accordingly applied rule 8D for determining the expenditure to be disallowed as per section 14A. He computed the exempt income as claimed by the assessee, namely, about Rs. 12.20 crores. The Assessing Officer found the total expenses allocated against exempt income to be Rs. 40.72 crores, but held that the same should not exceed the exempted income and, therefore, he restricted the expenses to the extent of exempt income claimed by the assessee i.e. about Rs. 12.20 crores and added the same to the assessee's income.
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The CIT (Appeals) by the said notice for enhancement under section 251 enquired of the assessee its obligation to maintain the securities. The assessee replied that the investment in shares and bonds was not made under any obligation under the Banking Regulation Act, 1949, but that it was dealing in shares and bonds as a trader which was permitted by section 6 of the Banking Regulation Act, 1949. The CIT (Appeals) held as follows: In view of section 14A the assessee was not to be allowed any deduction in respect of income which is not chargeable to tax. The assessee had incurred interest expenditure and administrative expenditure for earning its income both exempt and non exempt. The Assessing Officer had wrongly restricted the disallowance to the extent of exempt income claimed by the assessee to Rs. 12.20 crores and that the entire sum of Rs. 40.72 crores should have been disallowed by the Assessing Officer as there was no legal provision either in section 14A or rule 8D to limit the disallowance to the amount of dividend received. Expenditure incurred in respect of earning taxable income alone can be all owed as deduction and expenses incurred in relation to exempt income were not to be all owed as a deduction. The application of rule 8D by the Assessing Officer was also upheld.
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The Tribunal set aside the order of the Assessing Officer and of the CIT (Appeals). The contention on behalf of the assessee was that as it held the securities as stock-in-trade the income earned therefrom was only incidental to its business and that, therefore, the provisions of section 14A were not attracted. The Tribunal referred to a CBDT Circular No. 18/2015 dated 02.11.2015 which states that income arising from investment of a banking concern is attributable to the business of banking which falls under the head "Profits and gains of business and profession". The circular states that shares and stock held by the bank are stock-in-trade and not investment. Referring to certain judgments, which we will also refer to, and the earlier orders of the Tribunal, it was held that if shares are held as stock-in-trade and not as investment even the disallowance under rule 8D would be nil as rule 8D(2)(i) would be confined to direct expenses for earning the tax exempt income.
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In view of the issue involved, it is necessary to refer to the facts only briefly.
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The CIT (Appeals) by the said notice for enhancement under section 251 enquired of the assessee its obligation to maintain the securities. The assessee rightly replied that the investment in shares and bonds was not made under any obligation under the Banking Regulation Act, 1949, but that it was dealing in shares and bonds as a trader which was permitted by section 6 of the Banking Regulation Act, 1949. The assessee was, in view of section 6 of the Banking Regulation Act, 1949, entitled to purchase and sell such securities. Section 6 specifies the forms of business in which banking companies may engage. Sub-section (1) permits a banking company in addition to the business of banking to deal, inter-alia, 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. Accordingly, any profit or loss arising from such activities is liable to be shown either as a business income or business loss for the purposes of computation of income under the Act.
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Mr. Bansal rightly contended that the assessee is 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 assessee does not have an investment portfolio. The securities constitute the assessee's stock-in-trade. The Department, in fact, rightly accepted, as a matter of fact, that the dividend and interest earned was from the securities that constituted the assessee's stock-in-trade. The same is, in any event, established. The assessee carried on the business of sale and purchase of securities.
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The submission is firstly supported by the said Circular No. 18 dated 02.11.2015, issued by the CBDT, which reads as under:-
"Subject: Interest from Non-SLR securities of Banks-Reg.
It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, "expenses relatable to investment in non-SLR securities need to be disallowed u/s. 57(i) of the Act as interest on non-SLR securities is income from...
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