G R N FINSEC PRIVATE LIMITED,MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX - CIRCLE 1(1)(2), MUMBAI

ITA 5329/MUM/2024

AI Insights

The case involves appeals by GRN Finsec Private Limited against the orders of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre, Delhi, pertaining to the Assessment Years 2015-16 & 2016-17. The primary issues revolved around the disallowance of interest expenditure under section 36(1)(iii) and disallowances under section 14A read with Rule 8D of the Income Tax Act, 1961. The Tribunal found that the shares held as stock-in-trade should be excluded from the computation of disallowance under section 14A, aligning with precedents set by the Supreme Court and various High Courts.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 772799 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2015-2016
• Other Referred Cases: CIT vs. Quest Investment Advisors Pvt. Ltd., CIT vs. Reliance Industries Ltd., CIT vs. Reliance Utilities Ltd., Maxopp Investments Ltd. vs. CIT, Vireet Investment Pvt. Ltd. vs. ACIT, Godrej and Boyce Manufacturing Company Ltd. vs. DCIT, PCIT vs. Tata Industries Ltd., Infina Finance Pvt. Ltd. vs. ACIT, South Indian Bank Ltd. vs. CIT, PCIT vs. Punjab National Bank, Religare Securities Ltd. vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SWAPNIL CHOUDHARY
• Assessee Lawyers: MADHUR AGRAWAL; FENIL BHATT
• Keywords: Set aside; Business income; Proportionate interest; Business expenditure; Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 115JB

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “G” BENCH : MUMBAI BEFORE SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER ITA No. A.Y. Appellant Respondent 5329/Mum/2024 2015-16 GRN Finsec Private Limited, 815, Tulsiani Chambers, 212, Nariman Point, Mumbai-400021. [PAN: AAFCM2069R] Deputy Commissioner of Income Tax, Circle-1(1)(2), 533, 5th Floor, Aayakar Bhavan, Maharshi Karve Road, Mumbai-400020. 5341/Mum/2024 2016-17 Asst. Commissioner of Income Tax, Aayakar Bhavan, Maharshi Karve Road, Mumbai-400020. Assessee by : Shri Madhur Agrawal & Shri Fenil Bhatt Revenue by : Shri Swapnil Choudhary Date of Hearing : 29-07-2025 Date of Pronouncement : 26-08-2025 O R D E R PER VIKRAM SINGH YADAV, A.M : These are two appeals filed by the assessee against the respective orders of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)‟], pertaining to Assessment Years (AY) 2015-16 & 2016-17. Since common issues are involved in these appeals, both these appeals were heard together and are being disposed-off by way of this consolidated order. Printed from counselvise.com 2 ITA Nos. 5329 & 5341/Mum/2024 2. In ITA No. 5329/Mum/2024, for the AY. 2015-16, the assessee has taken the following grounds of appeal: “Ground No. 1: On the facts and in the circumstances of the case and in law, the National Faceless Appeal Centre has erred in disallowing proportionate interest expenditure of Rs. 12,65,097/-u/s.36(1) (iii) of the I.T. Act with respect to investments made during the year. The investments have been made through owned funds available with the company and no part of borrowed funds have been utilised. The disallowance of interest is based on assumptions/surmises and without any evidences on record. It is therefore prayed that the disallowance of interest u/s.36(1)(iii) of Rs. 12,65,097 may please be deleted. Ground No. 2: On the facts and in the circumstances of the case and in law, the National Faceless Appeal Centre has erred in confirming the disallowance of Rs. 78,83,103/-made under section 14A of the Income Tax Act, 1961 r.w. Rule 8D. The appellant prays that disallowance of Rs.78,83,103/- made by the A.O. may please be deleted and suo-moto disallowance offered by the appellant at Rs. 1,77,078/- may please be accepted. Ground No. 3 On the facts and in the circumstances of the case and in law, and without prejudice to contentions as per Ground No.2, the Ld. AO erred in taking the value of the stock- in-trade while calculating the disallowance u/s.14A r.w.r. 8D. The stock-in-trade is a business asset and quite distinct and different from the investments and therefore, value of the stock-in-trade should not have been considered while calculating the disallowance under Rule 8D(2)(ii) and (iii) of I.T. Rules. Under this Rule, value of investment alone is considered for disallowance u/s. 14A r.w.r. 8D and not stock-in-trade. It is therefore prayed that AO may be directed to exclude the value of stock-in-trade while calculating the disallowance u/s. 14A r.w.r. 8D. Ground No. 4: On the facts and in the circumstances of the case and in law, and without prejudice to contentions as per Ground Nos. 2, the AO erred in considering interest expenditure while calculating the disallowance u/s 14A rwr. 8D without considering the fact that the interest is paid for the borrowings taken for the business purpose and investments have been made from owned funds. It is prayed that the disallowance of interest under Rule 8D(2)(ii) may please be deleted Ground No. 5 On the facts and circumstances of the case and in law and without prejudice to ground no. 2, the appellant submits that in computing the disallowance under Printed from counselvise.com 3 ITA Nos. 5329 & 5341/Mum/2024 section 14A read with Rule 8D, only those investments on which dividend has been received ought to have been considered. Ground No. 6 On the facts and in the circumstances of the case and in law, the National Faceless Appeal Centre has erred in computing the disallowance of Rs 78,83,103/- u/s 14A r.w.s. 8D of the IT Rules, 1962 while computing income under MAT provisions. The appellant prays that the disallowance made under section 14A r.w.r. 8D under MAT provisions may please be deleted. The appellant craves leave to add, amend, omit or alter grounds of appeal before or during the hearing of the appeal.” 3. Briefly the facts of the case are that the assessee, a Non-Banking Financial Company (NBFC), filed its return of income on 29-05-2015, declaring total income of Rs. 63,20,290/- which was selected for scrutiny and after taking into consideration the information/documentation submitted by the assessee, assessment order was passed u/s. 143(3) of the Income Tax Act, 1961 („the Act‟) on 27-12-2017 wherein the AO has made a disallowance of Rs. 12,65,097/- u/s. 36(1)(iii) of the Act; and an amount of Rs. 57,42,556/- u/s. 14A of the Act, after reducing suo moto disallowance made by the assessee at Rs. 1,77,078/-. The assessee thereafter carried the matter in appeal before the Ld.CIT(A), who has since sustained the said findings of the AO and against the said order, the assessee is in appeal before us. 4. In Ground No.1, the assessee has challenged the sustenance of disallowance of interest u/s. 36(1)(iii) of the Act. In this regard, the Ld.AR submitted that the assessee company invested a sum of Rs. 8 crores as share application money in Trishakti Power Private Limited in the FY. 2010-11 and Rs. 1 crore in the FY. 2011-12 and part of the said share application money was refunded by the Trishakti Power Private Limited in the FY. 2012-13 and during the year under consideration, the balance Printed from counselvise.com 4 ITA Nos. 5329 & 5341/Mum/2024 amount of Rs. 4 crores was converted into equity shares having a face value of Rs. 10/- each and the assessee had been allotted 13,36,666 equity shares of the Trishakti Power Private Limited during the year under consideration. Further, the assessee invested in equity shares of Teracom Limited amounting to Rs. 39,62,500/-wherein the assessee was allotted 31,700 equity shares @ Rs. 125/- per share. It was submitted that the AO disallowance a sum of Rs. 12,65,097/- of interest expenditure on the ground that the assessee has not furnished cash flow statement or a fund flow statement to justify the utilization of share application money and it was also alleged that utilization of funds is made for non-business purposes in the form of purchase of shares and the said findings have been confirmed by the Ld.CIT(A). 5. In the above factual background, it was submitted that firstly, regarding the purchase of shares of Trishakti Power Private Limited, from the perusal of the ledger account in the books of the assessee-company, it is evident that during the year under consideration, against the share application money Rs. 4 crores which was paid in earlier years and outstanding at the beginning of the year, equity shares were allotted and as such, no fresh investments have been made during the year under consideration. It was accordingly submitted that during the year under consideration, no interest bearing funds as alleged by the AO was utilized by the assessee for investing in the shares of the said company. It was submitted that the factum of share application money being converted into equity shares has also been duly noted by the AO in paragraph No. 10 of the assessment order. It was further submitted that no disallowance of interest u/s. 36(1)(iii) of the Act has been made by the AO in scrutiny assessment proceedings in earlier years as well as in the subsequent years Printed from counselvise.com 5 ITA Nos. 5329 & 5341/Mum/2024 and in this regard, the assessee has furnished a detailed chart, which reads as under: 6. It was accordingly submitted that once the factual position remains the same, the AO cannot take a contrary stand and disallow interest u/s 36(1)(iii) of the Act and reliance was placed on the decision of the Hon‟ble Bombay High Court in the case of CIT vs. Quest Investment Advisors Pvt. Ltd., 409 ITR 545. 7. Regarding investment in shares of Teracom Ltd. amounting to Rs 39,62,500/-, it was submitted that the assessee has sufficient own funds available with it during the year under consideration, which is evident from the face of the Balance Sheet and as evident, it can be seen that the share capital, the reserves and surplus for the year under consideration stood at Rs. 321.83 lakhs. Therefore, the presumption lies that own funds have been utilized for the purposes of making the investment into the shares. In this regard, reliance was placed on the decision of the Hon‟ble Supreme Court in the case of CIT vs. Reliance Industries Ltd., 410 ITR 466(SC) as well as the decision of the Hon‟ble Bombay High Court in the case of CIT vs. Reliance Utilities Ltd., 313 ITR 340 (Bom). Printed from counselvise.com 6 ITA Nos. 5329 & 5341/Mum/2024 8. Per contra, the Ld. DR is heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A). 9. We have heard the rival contentions and perused the material available on record. Firstly, it is noted that during the year under consideration, shares of Trishakti Power Private Limited have been issued and allotted to the assessee against the share application money pending allotment. The share application money was appearing as outstanding at the beginning of the financial year and the same was adjusted against issue of share capital. There is thus no fresh investment during the year under consideration and thus, the question of utilization of any interest bearing funds doesn‟t arise for consideration. Secondly, it is noted that the assessee has invested share application in the financial year 2010-11 and 2011-12 and there is no adverse finding has been recorded in those years wherein the scrutiny assessment proceedings were completed by the AO u/s.143(3) of the Act and in absence of any change in facts and circumstances of the case, the disallowance so made by the AO u/s 36(1)(iii) in this regard is hereby directed to be deleted. Regarding investment in shares of Teracom Ltd., it is noted that the assessee has sufficient own funds to make such investments during the year to the tune of Rs 39,62,500/- and no disallowance is called for under section 36(1)(iii) of the Act. In the result, ground of appeal is allowed. 10. Regarding Grounds No. 2 to 6, it was submitted that it is an admitted position as accepted by the AO in paragraph No.17 of the assessment order that the assessee has earned exempt income amounting to Rs. 6,000/- in the year under consideration. It was submitted that the AO ignoring the suo moto disallowance of Rs. 1,77,078/- made a further disallowance of Rs. 57,42,556/- under the normal provisions as well as Printed from counselvise.com 7 ITA Nos. 5329 & 5341/Mum/2024 u/s. 115JB of the Act. It was submitted that the disallowance u/s. 14A of the Act cannot be more than the exempt income earned by the assessee during the year under consideration and since the assessee has made suo moto disallowance of Rs. 1,77,078/-, no further disallowance can be made. In support, reliance was placed on the decision of the Hon‟ble Bombay High Court in the PCIT vs. Tata Industries Ltd., in ITA No. 661 of 2018, dt. 18-01-2025. It was further submitted that in relation to adjustment of book profit u/s. 115JB of the Act on account of aforesaid 14A disallowance, no adjustment can be made to book profits and in support, reliance was placed on the Special Bench decision in the case of ACIT vs. Vireet Investment Pvt. Ltd. 165 ITD 27. 11. Per contra, the Ld. DR is heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A). 12. We have heard the rival contentions and perused the material available on record. The limited prayer on behalf of the assessee is that since the assessee has made a suo-moto disallowance of Rs 1,77,078/- under Section 14 r/w Rule 8D and has earned dividend income of Rs 6,000/- during the year under consideration, no further disallowance is warranted as there are decisions of the Hon‟ble Courts to the effect that disallowance cannot exceed the quantum of exempt income and reference has been drawn to the decision of the Hon‟ble Bombay High court in case of Tata Industries (supra). Respectfully following the same, we direct the AO not to make any further disallowance over and above what has been made suo-moto by the assessee. In other words, the disallowance under Section 14A r/w Rule 8D is to be restricted to an amount of Rs 1,77,078/- as suo-moto done by the assessee and disallowance made over and above the same is directed to be deleted. Printed from counselvise.com 8 ITA Nos. 5329 & 5341/Mum/2024 13. Further, we find that the Special Bench of the Tribunal in the case of Vireet Investments (supra) has held that the computation under clause (f) of explanation to Section 115JB(2) is to be made without resort to computation as contemplated under Section 14A read with Rule 8D. We accordingly direct the AO that the computation under clause (f) of explanation to section 115JB(2) is to be done without resort to the disallowance so computed u/s 14A r/w Rule 8D. 14. With the above directions, we restore the issues to the file of the AO for re-computation of disallowance after providing reasonable opportunity to the assessee. In the result, the grounds are allowed for statistical purposes. 15. In the result, the appeal filed by the assessee in ITA No. 5329/Mum/2024 is partly allowed for statistical purposes. 16. In ITA No. 5341/Mum/2024, the assessee has taken the following grounds of appeal: “Ground No. 1: On the facts and in the circumstances of the case and in law, the National Faceless Appeal Centre has erred in confirming the disallowance of Rs. 15,08,038/- made under section 14A of the Income Tax Act, 1961 r.w. Rule 8D. The appellant prays that disallowance of Rs 15,08,038/-made by the A.O. may please be deleted and suo-moto disallowance offered by the appellant at Rs 2,87,235/- may kindly be accepted. Ground No. 2 On the facts and in the circumstances of the case and in law and without prejudice to ground no. 1, the National Faceless Appeal Centre has erred in confirming the disallowance of STT and De-mat charges aggregating to Rs.7,65,000/- under rule 8D(2)(i) without appreciating the fact that the expenses were incurred for the purpose of business. The appellant prays to allow the said expense as business expense. Printed from counselvise.com 9 ITA Nos. 5329 & 5341/Mum/2024 Ground No. 3 On the facts and in the circumstances of the case and in law and without prejudice to ground no. 1, the National Faceless Appeal Centre has erred in confirming for taking both the shares held as investment as well as stock in trade for the purpose of computing average investments as per Rule 8D(2)(li). The appellant prays that the A.O. may be directed that for computing average investments, shares held as investments may only be considered. Ground No. 4 On the facts and circumstances of the case and in law and without prejudice to ground no.1, the appellant submits that in computing the disallowance under section 14A read with Rule 8D, only those investments on which dividend has been received ought to have been considered. Ground No. 5 On the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in computing the disallowance of Rs. 15.08.038/- (net) u/s. 14A r.w.r. 8D of I.T. Rules, 1962 while computing income under MAT provisions. The appellant prays that the disallowance made u/s 14A r.w.r. 8D under MAT provisions may please be deleted.” 17. Briefly the facts of the case are that the assessee filed its return of income, declaring total income of Rs.43,71,407/- under the normal provisions and book profits u/s.115JB of the Act was computed at Rs. 43,71,407/-. The return of income was selected for scrutiny and as per the assessment order passed u/s. 143(3) of the Act, dt. 30-12-2018, the AO made a disallowance amounting to Rs. 15,08,038/-, invoking the provisions of section 14A of the Act, which has since been sustained by the Ld.CIT(A) and against which, the assessee is in appeal before us. 18. During the course of hearing, the Ld.AR submitted that the assessee has received an exempt income of Rs. 46,67,770/- during the year under consideration and has made a suo moto disallowance of Rs. 2,87,235/- u/s. 14A of the Act and the AO has made a further disallowance amounting to Rs. 15,08,038/-. Referring to the financials of the assessee Printed from counselvise.com 10 ITA Nos. 5329 & 5341/Mum/2024 company, it was submitted that the only basis for the AO to make disallowance was that both the investments disclosed in non-current investments and stock in trade were considered for the purposes of disallowance u/s. 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962 („the Rules‟). In this regard, it was submitted that for the purposes of computation of disallowance u/s. 14A r.w. Rule 8D, the investment that are treated as under the stock in trade are to be excluded for the purposes of computation. In this regard, the Ld.AR placed reliance on the decision of the Co-ordinate Mumbai Benches decision in the case of Infina Finance Pvt. Ltd., vs. ACIT, in ITA No. 416/Mum/2024 and others, dt. 16-10-2024. It was submitted that the Tribunal in the said case has dealt with a similar assessee registered as an NBFC and after following the decision of the Hon‟ble Supreme Court in the case of Maxopp Investments Ltd. vs. CIT, 402 ITR 640 as well as various other decisions held that shares held as stock-in- trade are to be excluded for the purposes of computation of disallowance u/s. 14A of the Act. It was accordingly submitted that the shares that are held as stock in trade should be excluded for the purposes of computation u/s. 14A r.w. Rule 8D of the Rules. It was further submitted that disallowance made under Rule 8D(2)(i) of the Rules also be made in the same proportion, whereby shares held as stock in trade be excluded. It was further submitted that the investments that have not yielded exempt income are also be excluded while working out the disallowance u/s. 14A r.w. Rule 8D and no addition can be made to book profits u/s. 115JB of the Act by referring to the computation as provided u/s. 14A r.w. Rule 8D of the Rules and in support, reliance was placed on the decision of the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd.(supra). Printed from counselvise.com 11 ITA Nos. 5329 & 5341/Mum/2024 19. Per contra, the Ld.DR is heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A). 20. We have heard the rival contentions and perused the material available on record. We find that as far as shares held as stock in trade by the assessee, being an NBFC, and which is duly reflected as such in its financial statements, the matter is no more res integra and the value of shares so held as stock-in-trade amounting to Rs 11,19,27,754/- has to be excluded for the purposes of computation of disallowance u/s. 14A of the Act. In this regard, we can gainfully refer to the decision of the Co- ordinate Bench of the Tribunal in the case of Infina Finance Pvt. Ltd., vs. ACIT (supra) wherein relevant findings read as under: “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 Printed from counselvise.com 12 ITA Nos. 5329 & 5341/Mum/2024 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 „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 Printed from counselvise.com 13 ITA Nos. 5329 & 5341/Mum/2024 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:- “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 Printed from counselvise.com 14 ITA Nos. 5329 & 5341/Mum/2024 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 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 Printed from counselvise.com 15 ITA Nos. 5329 & 5341/Mum/2024 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 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 judgments of the Supreme Printed from counselvise.com 16 ITA Nos. 5329 & 5341/Mum/2024 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.” 21. Further, as noted earlier, we find that the Special Bench of the Tribunal in the case of Vireet Investments (supra) has held that the computation under clause (f) of explanation to section 115JB(2) is to be made without resort to computation as contemplated under section 14A read with Rule 8D. It has also been held in the said case that only those investments have to be considered which yield exempt income for the purposes of working out the disallowance u/s 14A r/w Rule 8D. 22. In light of aforesaid discussion, we direct the AO to exclude value of shares held as stock-in-trade and to include only those investments which yielded exempt income for the purpose of computation of disallowance u/s 14A r/w Rule 8D. Further, we direct the AO that the computation under clause (f) of explanation to section 115JB(2) is to be done without resort to the disallowance so computed u/s 14A r/w Rule 8D. With the above directions, we restore the issues to the file of the AO for re-computation of disallowance after providing reasonable opportunity to the assessee. 23. In the result, the appeal filed by the assessee in ITA No. 5341/Mum/2024 is allowed for statistical purposes. Order pronounced in the open court on 26-08-2025 Sd/- Sd/- [SANDEEP GOSAIN] [VIKRAM SINGH YADAV] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 26-08-2025 TNMM Printed from counselvise.com 17 ITA Nos. 5329 & 5341/Mum/2024 Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file By Order Dy./Asst. Registrar I.T.A.T, Mumbai Printed from counselvise.com "