INDUSIND BANK LIMITED, MUMBAI V. DCIT CIR. - 2(3)(2), MUMBAI

ITA 5332/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8275 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 30-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITTAL
• Assessee Lawyers: KARTIC NATRAJAN
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C MUMBAI BEFORE HONBLE S/SHRI JOGINDER SINGH (JM), AND RAJESH KUMAR, ( AM ) I.T.A. NO. 5331 AND 5332 /MUM/201 6 ( / ASSESSMENT YEA R :20 08 - 09 AND 2009 - 1 0 ) INDUSIND BANK LIMITED 8 TH FLOOR , TOWER 1, ONE INDIABULLS CENTRE, 841, S B MARG, ELEPHISTONE, MUMBAI - 400013 / VS. DY. COMMISSIONER OF INCOME TAX CIRCLE 2(3)(2),MUMBAI. / ASSESSEE BY : SHRI KARTIC NATRAJAN / REVENUE BY : SHRI RAJAT MITTAL PAN : AAAC I1314G / DATE OF HEARING : 1.11. 2017 / DATE OF PRONOUNCEMENT : 24. 11 .2017 / O R D E R PER RAJESH KUMAR, A. M: THESE TWO APPEALS BY THE ASSESSEE ARE DIRECTED AG AINST THE ORDER DATED 27.6.2016 PASSED BY THE LD. CIT(A) - 6 FOR THE ASSESSMENT YEARS 2008 - 09 AND 2009 - 10 WHEREIN THE ASSESSEE HAS RAISED GROUND AGAINST THE CONFIRMATION OF DISALLOWANCE AS MADE BY THE AO U/S 14A OF THE INCOME TAX ACT, 1961 READ WITH RUL E 8D OF THE INCOME TAX RULES, 1962 AT THE RATE OF 0.5% OF THE AVERAGE INVESTMENT S AND ALSO AO HAS NOT RECORDED ANY SATISFACTION BEFORE INVOKING THE PROVISIONS OF RULE 8D. 2 I.T.A. NO. 5331 - 5332 /MUM/201 6 2. FACTS IN BRIEF ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBS ERVED THAT THE ASSESSEE DID NOT DIS ALLOW ANY EXPENDITURE RELATING TO EARNING OF EXEMPT INCOME. THEREFORE, THE AO CALCULATED DISALLOWANCE ON ACCOUNT OF INTEREST B Y APPLYING RULE 8D(2)(II) AT RS.2,16,00,000/ - AND OTHER EXPENDITURE AT THE RATE OF 0.5% OF A VERAGE INVESTMENT S I N TAX FREE SECURITIES AT RS.15 ,00,000/ - . IN THE APPELLATE PROCEEDINGS, TH E LD.AR SUBMITTED THAT RULE 8D WE RE NOT APPLICABLE TO THE CASE OF THE ASSESSEE AS THE ASSESSEE IS A BANKING ENTITY. SINCE, THE LD.AR SUBMITTED THAT THE INVEST MENT S IN SECURITIES BY THE ASSESSEE WAS A PART OF THE BUSINESS ACTIVITIES OF THE ASSESSEE AND ANY INCOME EARNED FROM THE SAID ACTIVITY IS ATTRIBUTABLE TO BUSINESS OF THE ASSESSEE AND THUS THE DISALLOWANCE BY THE ASSESSING OFFICER UNDER RULE 8D IS BAD IN LAW . THE LD.AR RELIED ON THE DECISION OF PCIT V/S STATE BANK OF PATIALA IN INCOME TAX APPEAL NO.244 OF 2016 (O&M) DATED 30.1.2017 (P&H HIGH COURT) WHEREIN AN IDENTICAL ISSUE HAS BEEN DECIDED BY HOLDING THAT THE DIVIDEND INCOME THAT ARISES OUT OF SECUR ITY WHICH ARE HELD AS STOCK - IN - TRADE IS FROM THE BUSINESS ACTIVITY AND THEREFORE NO EXPENDITURE SHOULD HAVE BEEN DISALLOWED IN RESPECT OF THE DIVIDEND INCOME FROM THE SAID TAX FREE SECURITIES. 3 . THE LD.DR ON THE OTHER HAND RELIED UPON THE ORDER OF AU THORITIES BELOW AND SUBMITTED THAT IT IS MANDATORY FROM THE ASSESSMENT YEAR 2008 - 09 TO APPLY THE PROVISIONS OF SECTION 14A R.W.RU 8D OF THE RULES AND WERE RIGHTLY 3 I.T.A. NO. 5331 - 5332 /MUM/201 6 APPLIED AND UPHELD BY THE CIT(A) AND PRAYED THAT THE ORDER OF CIT(A) DESERVED TO BE AFFIRMED. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE IMPUGNED ORDERS AND CASE LAW RELIED UPON BY THE ASSESSEE. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE IS A BANKING COMPANY AND IS CARRYING ON BY BA NK ING BUSINESS. THE LD AR SUBMITTED THAT SHARES/ SECURITIES ARE HELD IN THE ORDINARY COURSE OF BUSINESS AS INVESTMENTS IN THE SHARES/SECURITIES ARE PART OF ASSESSEE ACTIVITY. IT IS ONLY BY VIRTUE OF INVESTMENTS IN THE SECURITIES HELD AS STOCK IN TRADE TH E DIVIDEND ACCRUED TO THE ASSESSEE AND IT IS SETTLED LAW THAT PROVISIONS OF SECTION 14A RULE 8D ARE NOT APPLICABLE TO SUCH CASE . THE CASE OF THE ASSESSEE IS ALSO SUPPORTED BY THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN T HE CASE OF PCIT V/S SBO P (SUPRA) VIDE PARA 26 IN WHICH IT HAS BEEN HELD THAT: 26. WHAT IS OF VITAL IMPORTANCE IN THE ABOVE JUDGMENT ARE THE OBSERVATIONS EMPHASISED BY US. EACH OF THEM EXPRESSLY STATES THAT WHAT IS DISALLOWED IS EXPENDITURE INCURRED TO 'EARN' EXEMPT INCOME. THE WORDS 'IN RELATION TO' IN SECTION 14A MUST BE CONSTRUED ACCORDINGLY. THUS, THE WORDS 'IN RELATION TO' APPLY TO EARNING EXEMPT INCOME. THE IMPORTANCE OF THE OBSERVATION IS THIS. WE HAVE HELD THAT THE SEC URITIES IN QUESTION CONSTITUTED THE ASSESSEE'S STOCK - IN - TRADE AND THE INCOME THAT ARISES ON ACCOUNT OF THE PURCHASE AND SALE OF THE SECURITIES IS ITS BUSINESS INCOME AND IS BROUGHT TO TAX AS SUCH. THAT INCOME IS NOT EXEMPT FROM TAX AND, THEREFORE, THE EXPE NDITURE INCURRED IN RELATION THERETO DOES NOT FALL WITHIN THE AMBIT OF SECTION 14A . 4 I.T.A. NO. 5331 - 5332 /MUM/201 6 NOW, THE DIVIDEND AND INTEREST ARE INCOME. THE QUESTION THEN IS WHETHER THE ASSESSEE CAN BE SAID TO HAVE INCURRED ANY E XPENDITURE AT ALL OR ANY PART OF THE SAID EXPENDITURE IN RESPECT OF THE EXEMPT INCOME VIZ. DIVIDEND AND INTEREST THAT AROSE OUT OF THE SECURITIES THAT CONSTITUTED THE ASSESSEE'S STOCK - IN - TRADE. THE ANSWER MUST BE IN THE NEGATIVE. THE PURPOSE OF THE PURCHAS E OF THE SAID SECURITIES WAS NOT TO EARN INCOME ARISING THEREFROM, NAMELY, FOR SUBSEQUENT ORDERS SEE ITA - 277 - 2016 16 OF 21 ITA - 244 - 2016 - 17 - DIVIDEND AND INTEREST, BUT TO EARN PROFITS FROM TRADING IN I.E. PURCHASING AND SELLING THE SAME. IT IS AXIOMATIC, THEREFORE, THAT THE ENTIRE EXPENDITURE INCLUDING ADMINISTRATIVE COSTS WAS INCURRED FOR THE PURCHASE AND SALE OF THE STOCK - IN - TRADE AND, THEREFORE, TOWARDS EARNING THE BUSINESS INCOME FROM THE TRADING ACTIVITY OF PURCHASING AND SELLING THE SECURITIES. IRRE SPECTIVE OF WHETHER THE SECURITIES YIELDED ANY INCOME ARISING THEREFROM, SUCH AS, DIVIDEND OR INTEREST, NO EXPENDITURE WAS INCURRED IN RELATION TO THE SAME. 5 . IN THE LATEST CIRCULAR NO. 18/2015, F.N 0.2 79/MISC./140/20 IS/IT J , GOVERNMENT OF INDIA , MINIS TRY OF FINANCE , DIRECTORATE OF INCOME - TAX LEGAL & RESEARCH , NEW DELHI, 2ND NOVEMBER, 2015 , VIDE PARA 3 IT HAS BEEN P[ROVIDED AS UNDER: - 3. THE MATTER HAS BEEN EXAMINED IN LIGHT OF THE JUDICIAL DECISIONS ON THIS ISSUE. IN THE CASE OF C I T VS NAWANSHAHAR C ENTRAL COOPERATIVE BANK LTD. [2007] 160TAXMAN 48(SC), THE APEX COURT HELD THAT THE INVESTMENTS MADE BY A BANKING CONCERN ARE PART OF THE BUSINESS OF BANKING. THEREFORE, THE INCOME ARISING FROM SUCH INVESTMENTS IS ATTRIBUTABLE TO THE BUSINESS OF BANKING FAL LING UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS AND PROFESSION 6 . WE, THEREFORE, RESPECTFULLY FOLLOWING THE RATI O LAID DOWN IN THE DECISION OF HONBLE PUNJAB AND HARYANA HIGH COURT AND THE DIRECTION OF THE CBDT VIDE CIRCULAR DATED 2.11.2015 INCLINE D TO SET ASIDE THE ORDER OF THE LD.CIT(A) 5 I.T.A. NO. 5331 - 5332 /MUM/201 6 AND DIRECT THE AO TO DELETE THE DISALLOWANCE U/S 14A OF THE ACT . RESULTANTLY, THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2008 - 09 IS ALLOWED. I.T.A. NO.5332/MUM/2016 7 . THE FACTS OF THIS CASE ARE IDENTICA L TO THAT ONE WHICH WE HAVE DECIDED IN I.T.A. NO.5331 /MUM/2016 IN FAVOUR OF THE ASSESSEE. T HEREFORE, OUR DECISION TAKEN THEREIN WOULD , MUTATIS MUTANDIS , APPLY TO THIS APPEAL AS WELL. ACCORDINGLY, THIS APPEAL ALSO STANDS ALLOWED. 8 . IN THE RESULT, BO TH TH E APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24TH NOV , 2017 . S D SD (JOGINDER SINGH ) ( RAJESH KUMAR ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 24. 1 1 . 2017 SR.PS:SRL: / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER, T RUE COPY / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI