M/s. Nasik Road Deolali Vyapari Sahakari Bank Ltd., Nashik V. Assistant Commissioner of Income-tax,

ITA 2250/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1690 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 16-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.2250/PN/2014 #& & / ASSESSMENT YEAR : 2010-11 M/S. NASIK ROAD DEOLALI VYAPARI SAHAKARI BANK LTD., 16, KALPARUKSHA, ASHA NAGAR, NASIK ROAD, NASIK PAN NO.AAAAT4688C . / APPELLANT V/S ACIT, CIRCLE - 3(1), NASHIK . / RESPONDENT / ASSESSEE BY : SHRI PRAMOD SHINGTE / REVENUE BY : SHRI HITENDRA NINAWE / ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE O RDER DATED 05-11-2014 OF THE CIT(A)-I, NASHIK RELATING TO ASSE SSMENT YEAR 2010-11. 2. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE READ AS UNDE R: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOWAN CE OF RS.5,39,660/- BY INVOKING THE PROVISIONS OF SECTION 14 A OF THE INCOME TAX ACT, 1961 AND RULE 8D OF THE INCOME TAX RULES, 1 962 BY DISREGARDING APPELLANTS CONTENTION IN THIS REGARDS. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COOPERATIVE SOCIETY DERIVING INCOME FROM BANKING BUSINESS. IT FILED / DATE OF HEARING :14.06.2016 / DATE OF PRONOUNCEMENT:15.06.2016 2 ITA NO.2250/PN/2014 ITS RETURN OF INCOME ON 09-10-2010 DECLARING TOTAL INCOME OF RS.7,26,92,713/-. DURING THE COURSE OF ASSESSMENT PROCEED INGS THE AO NOTED THAT THE ASSESSEE HAS INVESTED IN MUTUAL FUNDS DURING THE IMPUGNED ASSESSMENT YEAR AND THERE IS NO OPENING OR CLO SING BALANCE OF INVESTMENT WHOSE INCOME WAS CLAIMED AS EXEMPT UNDER THE PROVISIONS OF THE INCOME TAX ACT, 1961. THE INCOME E ARNED OUT OF THESE INVESTMENTS CLAIMED BY THE ASSESSEE WAS RS.5,39,6 60/-. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWA NCE U/S.14A R.W. RULE 8D SHOULD NOT BE MADE. IT WAS EXPLAINED BY THE ASSESSEE THAT NO DISALLOWANCE U/S.14A R.W. RULE 8D IS CALLED FOR AS THERE IS NO OPENING AND CLOSING BALANCE OF INVESTMENT AND THEREFORE THE APPLICATION OF SECTION 14A R.W. RULE 8D FAILS. HOWEVER, T HE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESS EE AND APPLYING THE PROVISIONS OF SECTION 14A R.W. RULE 8D MADE A DDITION OF RS.7,92,151/-. 4. IN APPEAL THE LD.CIT(A) RESTRICTED SUCH DISALLOWANCE T O RS.5,39,660/- BY OBSERVING AS UNDER : 8. AS REGARDS ADDITION OF RS.7,92,151/- U/S.14A, THE C ONDITIONS FOR DISALLOWANCE UNDER SECTION 14A ARE FULFILLED BY THE A PPELLANT AS THE APPELLANT HAD INCURRED EXPENDITURE TO EARN EXEMPT I NCOME. THE APPELLANT IS A CO-OPERATIVE BANK AND ITS FUNDS ARE INT EREST BEARING FUNDS. ON ONE HAND APPELLANT IS INCURRING INTEREST EXPENDITU RE FOR THESE FUNDS AND ON THE OTHER HAND INTEREST BEARING FUNDS ARE INVE STED IN MUTUAL FUNDS TO EARN EXEMPT INCOME. APPELLANTS SUBMISSION TH AT IT HAS NO OPENING AND CLOSING BALANCE OF INVESTMENTS IN MUTUAL F UNDS AND THEREFORE, AS PER PART B OF RULE 8D R.W.S.14A, COMPUT ATION OF EXPENDITURE INCURRED TO EARN EXEMPT INCOME IS NIL IS NOT ACCEPTAB LE. A PERUSAL OF THE CALCULATION OF INTEREST PROVIDED BY THE APPELLANT RE VEALS THAT AN EXPENDITURE OF RS.11,13,970/- WAS INCURRED ON ACCOUN T OF INTEREST ON FUNDS WHICH WERE USED FOR MAKING INVESTMENT IN THE MUT UAL FUNDS DURING THE AY UNDER APPEAL. SINCE THE INTEREST EXPE NDITURE IS DIRECTED RELATED TO DIVIDEND INCOME ON MUTUAL FUNDS WHICH DOE S NOT FORM PART OF TOTAL INCOME PROVISIONS OF RULE 8D(2)(I) WILL BE APPL ICABLE. ACCORDINGLY, INTEREST OF RS.11,23,970/- INCURRED BY THE APPELLANT BANK ON FUNDS DIVERTED FOR INVESTMENT IN MUTUAL FUNDS IS DISALLOWABL E U/S.14A OF THE ACT. HOWEVER, A NUMBER OF DECISIONS HAVE HELD THAT A MOUNT OF DISALLOWANCE U/S.14A CANNOT THE EXEMPT INCOME. HENCE , DISALLOWANCE U/S.14A IS RESTRICTED TO RS.5,39,600/-, I.E. THE EXEMPT INCOME THAT 3 ITA NO.2250/PN/2014 APPELLANT HAS EARNED AS DIVIDEND FROM MUTUAL FUNDS. THE APPELLANT GETS A RELIEF OF RS.2,52,491/-. THE APPELLANTS GROUND IS PARTLY ALLOWED. 5. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THER E IS NO OPENING AND CLOSING BALANCES OF INVESTMENT IN MUTUAL FUNDS, T HE INCOME OF WHICH IS EXEMPT. THEREFORE, PROVISIONS OF SECTION 1 4A R.W. RULE 8D CANNOT BE APPLIED. REFERRING TO THE VARIOUS PAGES OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE MAXIMUM INVESTMENT AT ANY POINT OF TIME DURING THE YEAR IS RS.2,50,00,000/- AND THE OWN CAPITAL AND FREE RESERVES OF T HE ASSESSEE BANK IS RS.16,53,00,000/-. THEREFORE, IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V S. HDFC BANK LTD. REPORTED IN 366 ITR 505 NO DISALLOWANCE U/S.1 4A IS CALLED FOR. HE ALSO RELIED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DHARMVEER SAMBHAJI URBAN COOPERATIVE BANK LTD. VS. ACIT VIDE ITA NO.1287/PN/2012 ORDER DATED 20-0 9-2013 TO THE PROPOSITION THAT DISALLOWANCE U/S.14A REQUIRES FINDING O F INCURRING OF EXPENDITURE FOR EARNING EXEMPT INCOME. 7. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAV ILY RELIED ON THE ORDER OF THE CIT(A). 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND IN THE INSTANT CASE THE ASSESSEE IS A COOPERATIVE SOCIETY AND HAS EARNED EXEMPT INCOME OF RS.7,92,151/- ON ACCOUNT OF DIVIDEND FROM INVESTMENT IN MUTU AL 4 ITA NO.2250/PN/2014 FUNDS. WE FIND THE AO APPLYING THE PROVISIONS OF SECTION 14 A R.W.RULE 8D MADE DISALLOWANCE OF RS.7,92,151/- WHICH WAS RESTRICTED TO RS.5,39,660/- BY THE CIT(A). THE REASONS FO R SUCH RESTRICTION AT RS.5,39,660/- HAS ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. IT IS THE SUBMISSION OF THE LD. C OUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE U/S.14A R.W. RULE 8D IS CALLED FOR SINCE THE OWN CAPITAL AND FREE RESERVES OF THE ASSESSEE COMPANY AT RS.16,53,00,000/- FAR EXCEEDS THE INVESTMENT IN MUTUAL FUNDS AND THE MAXIMUM AT ANY POINT OF TIME IS RS.2.50 CRORES. FURTHE R, IT IS ALSO HIS SUBMISSION THAT THE OPERATION OF RULE 8D FAILS IN THE INSTANT CASE SINCE THE ASSESSEE DOES NOT HAVE ANY OPENING OR CLOSING INVESTMENT IN MUTUAL FUNDS. 9. WE FIND FORCE IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE. ADMITTEDLY, THERE IS NO OPENING AND CLOSIN G STOCK OF INVESTMENT IN MUTUAL FUNDS. THE ASSESSEE ON A DAY-TO-DA Y BASIS PURCHASES AND REDEEMS THE MUTUAL FUNDS. IN SOME CASE S THE HOLDING PERIOD IS FOR A FEW DAYS. FROM THE LEDGER ACCOUNT FILED BY THE ASSESSEE, WE FIND THE PEAK INVESTMENT AT ANY POINT OF TIME IS RS.2.50 CRORES WHICH IS ON 05-11-2009. FROM THE BALANCE SHEET FILED BY THE ASSESSEE, WE FIND THE CAPITAL AND FREE RESERVES OF THE ASS ESSEE BANK AS ON 31-03-2010 IS RS.16,53,39,924/- AND THE SAME WAS RS.14,87,16,634 AS ON 31-03-2009. THUS, THE OWN CAPITAL AN D FREE RESERVES OF THE ASSESSEE BANK FAR EXCEEDS THE INVESTME NT IN MUTUAL FUNDS, THE INCOME OF WHICH IS CLAIMED AS EXEMPT. 10. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC B ANK LTD. (SUPRA) HAS HELD THAT NO DISALLOWANCE U/S.L4A IS CALLED FO R WHEN THE OWN FUNDS AND OTHER NON-INTEREST BEARING FUNDS OF BA NK ARE 5 ITA NO.2250/PN/2014 MORE THAN THE INVESTMENT IN TAX FREE SECURITIES. SINCE TH E ASSESSEE IN THE INSTANT CASE IS HAVING SUBSTANTIAL OWN CAPITAL AND FREE RESERVES WHICH FAR EXCEEDS THE INVESTMENT IN MUTUAL FUNDS , THE DIVIDEND INCOME OF WHICH HAS BEEN CLAIMED AS EXEMPT U/S.14 A, THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT NO DISALLO WANCE U/S.14A IS CALLED FOR IN THE INSTANT CASE IN THE LIGHT OF THE RATIO OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF H DFC BANK LTD. (SUPRA). WE THEREFORE SET ASIDE THE ORDER OF TH E CIT(A) AND DIRECT THE AO TO DELETE THE DISALLOWANCE. GROUND RAISED B Y THE ASSESSEE IS ACCORDINGLY ALLOWED. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15-06-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 15 TH JUNE, 2016. ) *#,! -! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A) - I , NASHIK 4. 5. 6. THE CIT-I, NASHIK $ ''(, (, / DR, ITAT, B PUNE; - / GUARD FILE. / BY ORDER , // TRUE COPY // // $ ' //TRUE /0 ' ( / SR. PRIVATE SECRETARY (, / ITAT, PUNE