DY COMMISSIONER OF INCOME TAX CIRCLE 3(3)(1),MUMBAI, MUMBAI V. SIDDHESH CAPITAL MARKET SERVICES PRIVATE LIMITED, MUMBAI

ITA 7578/MUM/2025

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The case involves Siddhesh Capital Market Services Pvt. Ltd., which was assessed under section 143(3) of the Income Tax Act, 1961, leading to a disallowance of Rs. 2,81,49,102 under section 14A. The First Appellate Authority (FAA) reduced this disallowance to Rs. 49,82,899, the amount of exempt dividend income earned by the assessee. The revenue appealed against the reduction, arguing that the FAA erred in law by not applying the disallowance to shares held as stock-in-trade, as per the Supreme Court's decision in Maxopp Investment Ltd. The assessee, in its cross-objection, contested the remaining disallowance. The Tribunal, referencing various judicial precedents, including those of the Supreme Court and High Courts, directed a re-computation of the disallowance, excluding shares held as stock-in-trade and considering only those investments which yielded exempt income.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 848401 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2026
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Mumbai
• Assessment Year: 2017-2018
• Appeal Filed On: 21-11-2025
• Other Referred Cases: Maxopp Investment Ltd v. CTT, Vireet Investments Pvt. Ltd., DCIT v. Viraj Profile Ltd, South Indian Bank Ltd. vs. CIT, PCIT vs. Punjab National Bank, Religare Securities Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAGHVENDRA P. CHAMBOLKAR
• Assessee Lawyers: MADHUR AGRAWAL
• Keywords: Set aside; Business income; Retrospective amendment; Business expenditure; Earning of tax free income; Rule 8D
• Section: 143(3); 10; 14A; 115JB

Judgement Text

" आयकर अपीलीय अिधकरण Ɋाय पीठ मुंबई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SMT BENNA PILLAI, JM & SHRI ARUN KHODPIA, AM I.T.A. No.7578/Mum/2025 (Assessment Year: 2017-18) DCIT, CC-3(3)(1), 522, 5th Floor, Aayakar Bhavan, Mumbai-400020. Vs. Siddhesh Capital Market Services Pvt. Ltd. 122, Maker Chambers III, 12th Floor, Nariman Point, Mumbai-400021. PAN: AACCS4582N Revenue - अपीलाथŎ / Appellant : Assessee - ŮȑथŎ / Respondent C.O. No.18/Mum/2026 (Assessment Year: 2017-18) Siddhesh Capital Market Services Pvt. Ltd. 122, Maker Chambers III, 12th Floor, Nariman Point, Mumbai-400021. PAN: AACCS4582N Vs. DCIT, CC-3(3)(1), 522, 5th Floor, Aayakar Bhavan, Mumbai-400020. Assessee - अपीलाथŎ / Appellant : Revenue - ŮȑथŎ / Respondent Revenue by : Dr. Raghvendra P. Chambolkar, Sr. DR Assessee by : Shri Madhur Agrawal, Advocate, AR Date of Hearing : 09.02.2026 Date of Pronouncement : 25.03.2026 Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 2 O R D E R Per Arun Khodpia, AM: The aforesaid appeal and Cross appeals are filed by the revenue and the assessee, directed against the order of Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre (NFAC), Delhi [in short “Ld. CIT(A)”] dated 29.09.2026 for the Assessment Year (AY) 2017-18, which in turn arises from the assessment order under section 143(3)of the Income Tax Act, 1961 (the Act) dated 19.1.2019 passed by the DCIT, CC-3(3)(1), Mumbai. 2. The grounds of appeal raised by the Revenue in their appeal and assessee in the C.O. are as under: Revenue’s Grounds “1. Ground Whether on the facts and in the circumstances of the case and in lay, the Ld.CIT(A) was justified in restricting the disallowance made under section 14A of the Income Tax Act, 1961 from Rs.28149102 to Rs.4982899, ignoring that section 14A applies even to shares held as stock in trade, as held by the Hon'ble Supreme Court in Maxopp Investment Ltd v. CTT (2018) 402 IRR 640 (SC) and that the Assessing Officer had correctly determined the expenditure relatable to exempt income in accordance with Rule 8D? 2. Ground Whether the Ld.CIT(A) erred in law in deleting the addition of Rs.19617028 made by the Assessing officer while computing book profit under section 115JB without appreciating that clause (f) of Explanation I to section 115JB expressly mandates that expenditure relatable to income not forming part of total income shall be added back to net profit for the purpose of determining book profit. 3. Ground Whether the Ld.CIT(A) erred in relying upon the decision of the ITAT Special Bench in Vireet Investments Pvt. Ltd. ignoring that the Assessing Officer has correctly followed 3 the decision of the ITAT, Mumbai in DCIT v. Viraj Profile Ltd (2016) 156 ITD 72 (Mumbai-Trib.) and that judicial interpretation Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 3 supports inclusion of disallowance made under section 14A while computing book profits under section 115JB. 4. Ground Whether the Ld.CIT(A) failed to appreciate the legislative intent as clarified by CBDT circular No. 5/2014 dated 11.02.2014 and the retrospective amendment made by the Finance Act, 2022, which provide that disallowance under section 14A applies and shail be deemed to have always applied even WHARE no exempt income has actually accrued, arisen OR been received during the year. 5. Ground Whether, on the facts and in law, the Ld.CIT(A) erred directing the Assessing Officer to allow set off of brought forward business losses against speculation profit of Rs. 191469 contrary to the express provisions of section 73 of the Income Tax Act, 1961 which restrict such adjustment.” Assesse’s Grounds in C.O. “1. The Learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre ('Ld. CIT(A') erred in law and on facts in not deleting the disallowance under section 14A of the Income-tax Act, 1961 ('the Act'), read with Rule 8D(2) of the Income-tax Rules, 1962, made by the Respondent Assessing Officer under the regular provisions of the Act (i.e., other than the provisions of section 115JB) in its entirety and in upholding the disallowance to the extent of the actual exempt income of Rs. 49,82,899/- earned by the Appellant during the year, despite accepting the Appellant's submissions on the amounts disallowable under section 14A of the Act. in its order dated 29 September 2025. The Ld. CIT(A) proceeded to restrict the disallowance under section 14A of the Act, to Rs. 49,82,899/-, as against deleting it in toto, despite expressly holding vide its order dated 29 September 2025, that the Appellant had correctly computed the disallowance under section 14A of the Act, for the year, at Rs. 1,00,000/-, which amount already stood disallowed suo motu in the Appellant's return of income, without assigning any reasons therefor.” 3. Briefly stated the case of assessee was assessed under section 143(3) wherein a disallowance of Rs. 2,81,49,102/- was made under section 14A of the Act. To challenge the aforesaid disallowance assessee preferred the appeal before the First Appellate Authority (FAA) who had partly allowed the appeal of Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 4 assessee by restricting the disallowance under section 14A for Rs. 49,82,899/- i.e. the amount earned by the assessee in the form of exempt dividend income. 4. Being aggrieved with the relief allowed by the ld. CIT(A), the revenue is in appeal before us, whereas to the extent the disallowance was sustained the assessee has filed the C.O. 5. At the outset, the ld. DR submitted that the FAA has committed an error in restricting the disallowance under section 14A up to the quantum of exempt income despite the ld. AO having recorded a categorical dissatisfaction in terms of section 14A(2) after examining the assessee’s account. It is also submitted that the Hon’ble Supreme Court in Maxopp Investment Ltd. has categorically held that section 14A applies even where shares are held as stock-in-trade, dividend is incidental and that the theory of dominant purpose is irrelevant, accordingly the disallowance made by ld. AO was well reasoned having alignment with binding law whereas the approach of ld. CIT(A) amounts to re-appreciation without any legal foundation. 6. The ld. AR on the other hand placed his reliance on the decision of ITAT, Mumbai in the case of Infinia Finance Pvt. Ltd. in ITA No. 413 to 415/Mum/2024 vide order dated 16.10.2024, wherein the Tribunal has held that shares held as stock-in-trade should be excluded for the purpose of computation of disallowance under section 14A and that the only those investments have to be Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 5 considered which yield exempt income. The relevant findings of the Tribunal in aforesaid case are extracted hereunder for better interpretation: “6. We have given a thoughtful consideration to the orders of the authorities below and have carefully perused the relevant documentary evidence brought on record in the light of Rule 18(6) of the ITAT Rules, 1963. In the balance sheet of the assessee, the fact is that certain shares are held as stock-in-trade. Whether disallowance u/s 14A of the Act can be made in the case of shares held as stock- in-trade was considered by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC). The relevant findings read as under:- “36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as ‘stock-in-trade’ and not as ‘investment’, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37) This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head ‘profits and gains of business and profession’. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head ‘income from other sources’ or it is to fall under the head ‘profits and gains of business and profession’. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head ‘profits and gains of business and profession’. The Board also went to the extent of saying that this would not be limited only to co- operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38) From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between ‘stock-in-trade’ and ‘investment’ and provides that if the motive behind 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 the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 6 ‘stock-in-trade’ and not as ‘investment’. We proceed to discuss this aspect hereinafter. 39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non- taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. 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.” 7. The same view was followed by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT [2021] 438 ITR 1 (SC). The relevant findings read as follows:- Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 7 “23. It would now be appropriate to advert in some detail to Maxopp Investment Ltd. v. CIT10. This case interestingly is relied by both sides’ counsel. Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for incorporation of Section 14A in the Act in the following words: - “3…………. The purpose behind Section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income……..” The following was written explaining the scope of Section 14-A(1): “41. In the first instance, it needs to be recognised that as per Section 14-A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “in relation to income which does not form part of the total income under this Act”. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such 10 (2018) 15 SCC 523 expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.” Adverting to the law as it stood earlier, this Court rejected the theory of dominant purpose suggested by the Punjab & Haryana High Court and accepted the principle of apportionment of expenditure only when the business was divisible, as was propounded by the Delhi High Court. Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri: “ 50. 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. [Maxopp Investment Ltd. v. CIT, 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272] 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 Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 8 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……….” The learned Judge then considered the implication of Rule 8D of the Rules in the context of Section 14-A(2) of the Act and clarified that before applying the theory of apportionment, the Assessing Officer must record satisfaction on Suo Moto disallowance only in those cases where, the apportionment was done by the assessee. The following is relevant for the purpose of this judgment: 51. ……………….It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect.………….” 24. Another important judgment dealing with Section 14A disallowance which merits consideration is Godrej and Boyce Manufacturing Company Ltd. V. DCIT11. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in earning an income, it is a condition precedent that such income should not be includible in total income of assessee. This Court accordingly concluded that for attracting provisions of Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi’s judgment reads as follow: “36. ……… what cannot be denied is that the requirement for attracting the provisions of Section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income………….” 25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 9 securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd.12 wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala13 while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income.” 8. The Hon’ble High Court of Delhi in the case of PCIT vs. Punjab National Bank reported in [2022] 140 taxmann.com 131 (Delhi), had the occasion to consider a similar grievance and held as follows:- “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 Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 10 judgments of the Supreme Court, which have conclusively decided the questions sought to be canvassed by the Appellant.” 9. The Co-ordinate Bench in the case of Religare Securities Ltd. in ITA No. 7291/Del/2019; AY 2015-16 has followed the view taken by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra). 10. In light of the aforementioned decisions of the Hon’ble Supreme Court, Hon’ble High Courts and Co-ordinate bench, we direct the AO to exclude the shares held as stock-in-trade for the purpose of computation of disallowance u/s 14A of the Act and recompute the disallowance. 11. Further we find that the Special Bench in the case of Vireet Investments (supra) has held that only those investment have to be considered which yield exempt income, therefore, respectfully following the same, we direct the AO to consider only those investments for the purpose of disallowance u/s 14A r.w.r. 8D which yielded exempt income.” 7. We have considered the rival submissions and perused the material available on record and the judicial pronouncement relied upon by the parties. We find that the issue raised herein is squarely covered by the decision referred to by the assessee in the case of Infinia Finance Pvt. Ltd. (supra), wherein the various judicial pronouncements are analyzed including Maxopp Investment Pvt. Ltd. vs. CIT, South Indian Bank Ltd. vs. CIT and PCIT vs. Punjab National Bank along with Religare Securities Ltd. (supra) and the ld. AO was directed to exclude the shares held as stock-in-trade, while computing the disallowance under section 14A of the Act, also the investments which yield exempt income should only be considered while computing the disallowance under section 14A. We thus respectfully following the aforesaid decision which is not contradicted by the Printed from counselvise.com ITA No. 7578/Mum/2025& C.O. 18/Mum/2026 Siddhesh Capital Market Services Pvt. Ltd. 11 revenue with any decision or facts which are distinguishable in the present matter as against the case laws relied upon by the assessee. The matter accordingly has been restored back to the file of ld. AO to re-compute the disallowance under section 14A, by excluding the investment made in stock-in-trade and by including the investment only which yields exempt income. The issue therefore shall be decided afresh following the relevant provisions and settled precedents. 8. In result, the appeal of revenue and CO of the assessee, both are allowed for statistical purposes, in terms of our aforesaid observations. Order pronounced in the open court on 25-03-2026. Sd/- Sd/- (BENNA PILLAI) (ARUN KHODPIA) Judicial Member Accountant Member Mumbai, Dated : 25-03-2026. *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "