Addl. CIT, New Delhi V. M/s. PNB Gilts Ltd., New Delhi

ITA 682/DEL/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2112 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2012-2013
• Appeal Filed On: 06-02-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUSHMA SINGH
• Assessee Lawyers: SANA BAQAI
• Keywords: Business income; Rule of consistency; Earning of tax free income; Proportionate interest; Rule 8D
• Section: 143(3); 14A; 115JB; 64; 13; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.682/DEL./2017 ASSESSMENT YEAR: 2012-13 ADDL. CIT, SPECIAL RANGE-7, NEW DELHI VS. PNB GILTS LTD., 5, SANSAD MARG, NEW DELHI PAN : AAACP7685B (APPELLANT) (RESPONDENT) APPELLANT BY SMT. SUSHMA SINGH, CIT(DR) RESPONDENT BY MS. SANA BAQAI, CA DATE OF HEARING 05.03.2020 DATE OF PRONOUNCEMENT 01.05.2020 ORDER PER O.P. KANT,A.M.: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST ORD ER DATED 25/11/2016 PASSED BY THE LEARNED CIT(APPEALS)-7, NE W DELHI [IN SHORT THE LD. CIT(A)] FOR ASSESSMENT YEAR 2012-13 RAISING FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN DELETING DISALLOWANCE OF RS.3,92,60,000/- U/S 14A OF THE INCOME TAX ACT, 1961. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN DELETING DISALLOWANCE OF RS.30,61,000/- U/ S 36(I)(III) OF THE INCOME TAX ACT, 1961. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN DELETING DISALLOWANCE OF RS.6,56,24,000/- ON ACCOUNT OF PROVISIONFOR DIMINUTION IN MARKET VALUE OF STOCK IN TRADE. 2 ITA NO.682/DEL/2017 4. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FR ESH GROUND(S) OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUND(S) OF APPEAL. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE, A NON- BANKING FINANCIAL COMPANY ( NBFC ) , FILED ITS RETU RN OF INCOME ON 20/09/2012 DECLARING TOTAL INCOME OF 25,77,78,259/-. THE RETURN OF INCOME FILED WAS SELECTED FOR SCRUTINY AS SESSMENT , WHICH WAS COMPLETED UNDER SECTION 143(3) OF THE INC OME-TAX ACT, 1961(IN SHORT THE ACT) ON 02/03/2015 AFTER MAKING CERTAIN ADDITION/DISALLOWANCES. AGGRIEVED, THE ASSESSEE FIL ED APPEAL BEFORE THE LD. CIT(A), WHO PARTLY DELETED THE ADDITION/DISALLOWANCES WHICH WERE MADE BY THE ASSES SING OFFICER. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. THE GROUND NO. 1 OF THE APPEAL RELATES TO DISALL OWANCE OF 3,92,60,000/-MADE UNDER SECTION 14A OF THE ACT, WHI CH HAS BEEN DELETED BY THE LD. CIT(A). 3.1 THE BRIEF FACTS QUA THE ISSUE IN DISPUTE ARE TH AT DURING THE YEAR, THE ASSESSEE RECEIVED DIVIDEND INCOME OF 4,78,249/-FROM INVESTMENT INCLUDING SHARES WHICH WERE HELD AS STOC K-IN-TRADE. THE ASSESSEE ALSO RECEIVED INTEREST ON BONDS AMOUNT ING TO 4,15,80,043/-. BOTH THE AMOUNT OF DIVIDEND AND INTE REST WERE CLAIMED BY THE ASSESSEE AS EXEMPT. IN THE RETURN OF INCOME, NO DISALLOWANCE OF EXPENSES WAS MADE BY THE ASSESSEE F OR EARNING SUCH EXEMPT INCOME. HOWEVER, ON BEING QUESTIONED BY THE ASSESSING OFFICER FOR DISALLOWANCE OF EXPENDITURE U NDER SECTION 14A, THE ASSESSEE WITHOUT PREJUDICE TO CLAIM THAT N O DISALLOWANCE WAS CALLED FOR, SUBMITTED WORKING OF DISALLOWANCE W HICH COULD BE MADE UNDER SECTION 14A READ WITH RULE 8D OF INCOME TAX RULES, 1962 ( IN SHORT THE RULES ) , AS UNDER:- 3 ITA NO.682/DEL/2017 (I) DIRECT EXPENDITURE [UNDER RULE 8D(2)(I) ]- NIL (II) APPORTIONED INDIRECT INTEREST EXPENSES [UNDER RULE 8D(2)(II) ]- NIL- ( THE ASSESSEE CONTENDED THAT ENT IRE INTEREST EXPENSES HAVE BEEN INCURRED TOWARDS: SHORT NOTICE MONEY BORROWING, CBLO BORROWING, REPO BORROWINGS, RBI BORROWINGS, OVERDRAFT BORROWING, IC D BORROWING. ACCORDING TO THE ASSESSEE ALL THE BORROW INGS UTILISED FOR THE PURPOSE OF THE BUSINESS AND THUS N O DISALLOWANCE IS CALLED FOR.) (III) 0.5% OF AVERAGE INVESTMENT(UNDER RULE 8D(2)(III) : 34.5 LAKHS 3.2 THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE REGARDING DISALLOWANCE U NDER RULE 8D(2)(II) OF THE RULES. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HAS MADE INVESTMENT IN ASSETS YIELDING EXE MPT INCOME OUT OF THE BORROWINGS AND THEREFORE DISALLOWANCE UN DER RULE 8D2(II) FOR PROPORTIONATE INTEREST TOWARDS INVESTME NT IN ASSETS YIELDING EXEMPT INCOME WAS JUSTIFIED. THE ASSESSING OFFICER COMPUTED SUCH DISALLOWANCE 392.62 LAKHSAND AFTER ADDING DISALLOWANCE OF 34.25 LAKHS UNDER RULE 8D(2)(III) OF THE RULES, MADE TOTAL ADDITION OF 426.85 LAKHS. THE LD. CIT(A) DELETED THE DISALLOWANCE UNDER RULE 8D(2)(II) OBSERVING AS UNDE R: 4.4 THE AO INVOKED PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE I.T. RULES, 1962 AND RELIED ON CIRCULAR NO. 5/2014 DATED 11.02.2014 OF CBDT AND COMPUTED DISALLOWANCE AT RS. 426.85 LACS CONSTITUTED OF RS.392.62 LACS AS PER RULE 8D(2)(II) AND RS.34.25 LACS AS PER RULE 8D(2)(III). THE LD. AR HAS CONTENDED TH AT AS THE SECURITIES/BONDS AND SCRIPS IS HELD AS STOCK IN TRA DE, NO AMOUNT OF INTEREST CAN BE ATTRIBUTED TO THE ACQUISITION OF TH ESE SCRIPS/SECURITIES AND BONDS ON WHICH EXEMPT INCOME IS EARNED AND THER EFORE, DISALLOWANCE UNDER RULE 8D(2)(II) IS NOT CALLED FOR . RELIANCE IS PLACED 4 ITA NO.682/DEL/2017 ON THE DECISION IN THE CASE OF CCI LTD. VS. JCIT 20 TAXMAN 196(KAR.) IN WHICH THE HONBLE KARNATAKA HIGH COURT HELD THAT EXEMPT INCOME EARNED ON STOCK IN TRADE WILL NO ATTRACT DISALLOWAN CE U/S 14A. THE LD. CIT(APPEALS) VIDE HER ORDER IN APPEAL FOR A.Y. 2011-12 HAD ALSO HELD THAT DISALLOWANCE UNDER RULE 8D(2)(II) WAS NOT ATTRACTED AS THE APPELLANT HELD THE SECURITIES, AS STOCK IN TRADE. I T IS ALSO NOTED THAT THE APPELLANT HAD INTEREST FREE FUNDS BY WAY OF SHA RE CAPITAL AND RESERVE AND SURPLUS OF RS.577.64 LACS WHEREAS THE A VERAGE INVESTMENT IN STOCK IN TRADE FROM WHICH EXEMPT INC OME IS EARNED IS AT RS.6850.45 LACS ONLY. IN THE CASE OF CIT VS. RLI ANCE UTILITIES AND POWER LTD. 313 ITR 340, IT WAS HELD THAT IF THERE I S SUFFICIENT INTEREST FREE FUNDS AVAILABLE, IT CAN BE PRESUMED T HAT THE INVESTMENTS WERE MADE FROM SUCH FUNDS. SIMILARLY, I N THE CASE OF CIT VS. HDFC BANK LTD., THE HONBLE BOMBAY HIGH COU RT THAT IN CASE THE ASSESSEES OWN FUNDS WERE MORE THAN THE IN VESTMENTS IN TAX FREE SECURITIES, IT WOULD HAVE TO BE PRESUMED T HAT THE INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. IN VIEW OF THE JUDICIAL PRONOUNC EMENTS REFERRED ABOVE, FACTS OF THE CASE AND FOLLOWING THE DECISION S OF THE LD. CIT(APPEALS) IN THE CASE OF THE APPELLANT FOR A.Y. 2011-12, DISALLOWANCE OF RS.34.25 LACS AS PER RULE 8D(2)(III ) WHICH IS CONCEDED BY THE LD. AR, IS SUSTAINED AND BALANCE DI SALLOWANCE OF RS.392.60 LACS UNDER RULE 8D(2)(II) IS DELETED. THI S GROUND OF APPEAL IS PARTLY RULES IN FAVOUR OF THE APPELLANT. 3.3 BEFORE US, THE LEARNED DR SUBMITTED THAT THE DE CISION IN THE CASE OF HONBLE KARNATAKA HIGH COURT, WHICH HAS BEE N RELIED UPON BY THE LD CIT(A) TO HOLD THAT EXEMPT INCOME EA RNED ON STOCK-IN-TRADE WILL NOT ATTRACT DISALLOWANCE U/S 14 A OF THE ACT IS NO LONGER A VALID LAW IN VIEW OF THE DECISION OF TH E HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. REPORTED IN 402 ITR 640 (SC). 3.4 ON THE OTHER HAND, THE LEARNEDCOUNSEL OF THE AS SESSEE FILED A PAPER BOOK CONTAINING PAGE 1TO 162 AND SUBMITTED THAT ISSUE IN DISPUTE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ITA NO. 810/DEL/2015 FOR ASSESSMENT YEA R 2010-11. 3.5 ON THE ISSUE OF OWN FUNDS SUFFICIENT TO MAKE IN VESTMENT IN ASSETS YIELDING EXEMPT INCOME, THE LEARNEDCOUNSEL R EFERRED TO PAGE 29 OF THE PAPER-BOOK AND SUBMITTED THAT TOTAL SHARE CAPITAL 5 ITA NO.682/DEL/2017 AND RESERVE AND SURPLUS WAS OF RS. 577.64 CRORES( W RONGLY MENTIONED BY THE LEARNED CIT(A) AS 577. 64 LAKHS) WHICH IS IN EXCESS OF AVERAGE INVESTMENT IN A STOCK-IN-TRADE OF RS. 68.50 CRORES, INCOME FROM WHICH WAS EXEMPT OF AND THUS NO DISALLOWANCE COULD HAVE BEEN MADE UNDER RULE 8D(2)( II) OF THE INCOME-TAX RULES. 3.6 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE. THOUGH IN ASSESSMENT YEAR 2011-12 THE I SSUE IN DISPUTE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE , BUT IN VIEW OF THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA), CITED BY THE LEARNED DR, THE ISSUE IN THE YEAR UNDER CONSIDERATI ON NEED TO BE RECONSIDERED. THE LD. CIT(A) HAS DELETED THE DISALL OWANCE UNDER RULE 8D(2)(II) AMOUNTING TO 392.6 LAKHS ON TWO GROUNDS. 3.7 FIRST GROUND BEING THE EXEMPT INCOME EARNED ON STOCK-IN- TRADE WILL NOT ATTRACT DISALLOWANCE UNDER SECTION 1 4A OF THE ACT IN VIEW OF THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD VS JCIT (SUPRA). HOWEVER, HONBLE S UPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA) AFTER CONSIDERING THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD (SUPRA) HELD 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 THI S SPECIFIC ASPECT, CBDT HAS ISSUED CIRCULAR NO. 18/2015 DATED NOVEMBER 02, 2015. 37) THIS CIRCULAR HAS ALREADY BEEN REPRODUCED IN PA RA 19 ABOVE. THIS CIRCULAR TAKES NOTE OF THE JUDGMENT OF THIS CO URT IN NAWANSHAHAR CASE WHEREIN IT IS HELD THAT INVESTMENT S 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 O F BUSINESS AND PROFESSION. ON THAT BASIS, THE CIRCULAR CONTAINS T HE DECISION OF THE 6 ITA NO.682/DEL/2017 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 O N SECURITIES SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD I NCOME FROM OTHER SOURCES OR IT IS TO FALL UNDER THE HEAD PROFITS A ND GAINS OF BUSINESS AND PROFESSION. THE BOARD, GOING BY THE DECISION O F THIS COURT IN NAWANSHAHAR CASE, CLARIFIED THAT IT HAS TO BE TREAT ED AS INCOME FALLING UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS AND PROFESSION. THE BOARD ALSO WENT TO THE EXTENT OF S AYING 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 POINTE D 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 WOU LD BE TREATED AS TRADING PROFIT AND IF THE OBJECT IS TO DERIVE INCOM E 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 APPLI ED BY THE PUNJAB AND HARYANA HIGH COURT, WHICH WE HAVE ALREADY DISCA RDED. IN THAT EVENT, THE QUESTION IS AS TO ON WHAT BASIS THOSE CA SES ARE TO BE DECIDED WHERE THE SHARES OF OTHER COMPANIES ARE PUR CHASED BY THE ASSESSEES AS STOCK-IN-TRADE AND NOT AS INVESTMEN T. 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 P ROFITS THEREFROM. HOWEVER, WE ARE NOT CONCERNED WITH THOSE PROFITS WH ICH WOULD NATURALLY BE TREATED AS INCOME UNDER THE HEAD PR OFITS AND GAINS FROM BUSINESS AND PROFESSION. WHAT HAPPENS IS THAT , IN THE PROCESS, WHEN THE SHARES ARE HELD AS STOCK-IN-TRADE, CERTA IN DIVIDEND IS ALSO EARNED, THOUGH INCIDENTALLY, WHICH IS ALSO AN INCOM E. 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 PAT IALA CASES THAT THE AO, WHILE PASSING THE ASSESSMENT ORDER, HAD ALREADY RESTRICTED THE DISALLOWANCE TO THE AMOUNT WHICH WAS CLAIMED AS EXE MPT 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 7 ITA NO.682/DEL/2017 THIS EXERCISE OF APPORTIONMENT OF EXPENDITURE CARRI ED OUT BY THE AO, CIT(A) DISALLOWED THE ENTIRE DEDUCTION OF EXPENDITU RE. THAT VIEW OF THE CIT(A) WAS CLEARLY UNTENABLE AND RIGHTLY SET AS IDE BY THE ITAT. THEREFORE, ON FACTS, THE PUNJAB AND HARYANA HIGH CO URT HAS ARRIVED AT A CORRECT CONCLUSION BY AFFIRMING THE VIEW OF TH E ITAT, THOUGH WE ARE NOT SUBSCRIBING TO THE THEORY OF DOMINANT INTEN TION APPLIED BY THE HIGH COURT. IT IS TO BE KEPT IN MIND THAT IN TH OSE CASES WHERE SHARES ARE HELD AS STOCK-IN-TRADE, IT BECOMES A B USINESS ACTIVITY OF THE ASSESSEE TO DEAL IN THOSE SHARES AS A BUSINESS PROPOSITION. WHETHER DIVIDEND IS EARNED OR NOT BECOMES IMMATERIA L. IN FACT, IT WOULD BE A QUIRK OF FATE THAT WHEN THE INVESTEE COM PANY DECLARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASSESSEE, TH OUGH THE ASSESSEE HAS TO ULTIMATELY TRADE THOSE SHARES BY SE LLING THEM TO EARN PROFITS. THE SITUATION HERE IS, THEREFORE, DIF FERENT FROM THE CASE LIKE MAXOPP INVESTMENT LTD. WHERE THE ASSESSEE WOUL D CONTINUE TO HOLD THOSE SHARES AS IT WANTS TO RETAIN CONTROL OVE R THE INVESTEE COMPANY. IN THAT CASE, WHENEVER DIVIDEND IS DECLARE D BY THE INVESTEE COMPANY THAT WOULD NECESSARILY BE EARNED B Y THE ASSESSEE AND THE ASSESSEE ALONE. THEREFORE, EVEN AT THE TIME OF INVESTING INTO THOSE SHARES, THE ASSESSEE KNOWS THAT IT MAY GENERA TE 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 NECESSA RILY A SITUATION. THE MAIN PURPOSE IS TO LIQUIDATE THOSE SHARES WHENE VER THE SHARE PRICE GOES UP IN ORDER TO EARN PROFITS. IN THE RESU LT, THE APPEALS FILED BY THE REVENUE CHALLENGING THE JUDGMENT OF THE PUNJ AB AND HARYANA HIGH COURT IN STATE BANK OF PATIALA ALSO FA IL, THOUGH LAW IN THIS RESPECT HAS BEEN CLARIFIED HEREINABOVE. 3.8 ON THE SHARES HELD AS STOCK-IN-TRADE , AN ASSES SEE EARN PROFIT OR LOSS ON TRADING OF THE THOSE SHARE AND AD DITIONALLY EARN DIVIDEND ALSO. THE HONBLE SUPREME COURT HAS DIRECT ED TO APPORTION EXPENSES TOWARDS EXEMPT DIVIDEND INCOME F ROM STOCK- IN-TRADE AS WELL AS PROFIT EARNED ON TRADING OF STO CK-IN-TRADE AND THE EXPENSES APPORTIONED TOWARD EXEMPT INCOME ARE ONLY HELD AS LIABLE FOR DISALLOWANCE. ACCORDINGLY , THE ASSESSIN G OFFICER IS REQUIRED TO APPORTION THE PART OF EXPENSES RELATED TO EXEMPT DIVIDEND INCOME AND CONSIDER THAT PART FOR DISALLOW ANCE ONLY . 3.9 THE SECOND GROUND ON WHICH THE LD. CIT(A) HAS D ELETED THE DISALLOWANCE IS THAT IN VIEW OF DECISION IN THE CAS E OF CIT VS 8 ITA NO.682/DEL/2017 RELIANCE UTILITIES AND POWER LTD 313 ITR 340(SC), I F THERE ARE SUFFICIENT INTEREST-FREE FUNDS AVAILABLE, IT CAN BE PRESUMED THAT INVESTMENT HAD BEEN MADE OUT OF FROM SUCH FUNDS AND THUS NO DISALLOWANCE FOR INTEREST IS REQUIRED. SIMILAR FIND ING HAS BEEN GIVEN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS HDFC BANK LTD (SUPRA). THE ASSESSEE HAS CLAIMED THA T SHARES CAPITAL AND RESERVE AND SURPLUS OF THE ASSESSEE AMO UNTING TO 577.64 CRORES IS MORE THAN THE STOCK IN TRADE OF 68.50 CRORES. 3.9 BUT WE HAVE SEEN THAT EXEMPT INCOME IS NOT ONLY FROM THE EQUITY SHARES KEPT AS STOCK-IN-TRADE BUT ALSO FROM INTEREST OF 4,15,80,043/-RECEIVED ON BONDS. THE SAME HAS BEEN I NVESTED IN COMPLIANCE OF THE RESERVE BANK OF INDIA (RBI) RULES . BUT ONCE EXEMPT INCOME IS EARNED, THEN INTEREST FOR CORRESPO NDING BORROWING WOULD BE LIABLE FOR DISALLOWANCE. THUS, T HE ASSESSEE IS REQUIRED TO DEMONSTRATE NOT ONLY INVESTMENT IN SHAR ES HAD BEEN OUT OF INTEREST FREE FUNDS BUT INVESTMENT IN BONDS WAS ALSO MADE OUT INTEREST FREE OWN FUNDS. 3.10 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES O F THE CASE , WE FEEL IT APPROPRIATE TO RESTORE THIS ISSUE TO THE FI LE OF THE LEARNEDASSESSING OFFICER FOR DECIDING A FRESH IN VI EW OF OUR FINDING ABOVE AND IN ACCORDANCE WITH LAW. THE ASSESSEE SHAL L PROVIDE ALL DETAILS OF THE INVESTMENT IN ASSETS YIELDING EXEMPT INCOME AS WELL AS OWN FUNDS AND FUNDS BORROWED. THE ASSESSEE SHALL ALSO PROVIDE DETAILS OF APPORTIONMENT OF INTEREST EXPENS ES IN RELATION TO A STOCK-IN-TRADE TOWARDS EARNING DIVIDEND INCOME AS WELL AS TOWARDS EARNING TRADING PROFIT. IF THE AO FINDS THA T ENTIRE INVESTMENT IN ASSETS YIELDING EXEMPT INCOME HAS BEE N MADE OUT OF THE INTEREST FREE OWN FUNDS , THEN NO DISALLOWAN CE WILL BE CALLED FOR UNDER RULE 8D(2)(II) AND HE WILL NOT BE REQUIRE D TO LOOK INTO THE 9 ITA NO.682/DEL/2017 APPORTIONMENT OF THE EXPENSES TOWARDS DIVIDEND INC OME FORM SHARES HELD AS STOCK IN TRADE. THE GROUND NO. 1 OF THE APPEAL OF THE REVENUE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 4. THE GROUND NO.2 OF THE APPEAL RELATES TO DISALLO WANCE OF 30,61,000/-UNDER SECTION 36(1)(III) OF THE ACT. 4.1 THE ASSESSING OFFICER IS OF THE VIEW THAT INTER EST PAID ON SHORT-TERM BORROWINGS FOR THE EQUITY SHARES HELD AS A STOCK IN TRADE, DIVIDEND INCOME FROM WHICH HAS BEEN CLAIMED AS EXEMPT, IS NOT ALLOWABLE IN TERMS OF SECTION 36(1)(III) OF THE ACT BEING INCURRED NOT FOR BUSINESS PURPOSES. THE ASSESSING O FFICER CONSIDERED THE AMOUNT OF 31.61 LAKHS AS EXCESSIVE INTEREST PAYMENT FOR DISALLOWANCE. THE LD. CIT(A) DELETED TH E DISALLOWANCE FOLLOWING FINDING OF HIS PREDECESSOR IN ASSESSMENT YEAR 2011-12 OBSERVING AS UNDER: THE AO COMPUTED DISALLOWANCE U/S 36(1)(III) OF THE ACT AT RS.30.61 LACS ON THE GROUNDS THAT THE BORROWED FUNDS WERE NO T UTILIZED FOR THE PURPOSE OF BUSINESS. HE WAS OF THE VIEW THAT PAYMEN T OF INTEREST TO THE EXTENT OR BORROWED FUNDS UTILIZED AS INVESTMENT IN INTEREST FREE SECURITIES, DOES NOT QUALIFY FOR ELIGIBLE EXPENSE A S PER SECTION 36(1)(III) OF THE ACT. THE LD. AR HAS CONTENDED THA T THE DISALLOWANCE U/S 36(1)(III) OF THE ACT CAN BE MADE ONLY WHEN THE BORROWED CAPITAL IS NOT UTILIZED FOR BUSINESS PURPOSES. THE AO HAS N OT DENIED THAT THE BORROWED CAPITAL IS USED TO PURCHASE THE SECURITIES HELD AS STOCK IN TRADE BY THE APPELLANT. HIS BASIC PREMISE FOR DISAL LOWING THE INTEREST IS THAT THE APPELLANT ACQUIRED SECURITIES ON WHICH IT EARNED INTEREST WHICH WAS CLAIMED AS EXEMPT AND THEREFORE, EXPENDIT URE ON INTEREST TO THAT EXTENT WAS FOR NON-BUSINESS PURPOSE. THE CO MPANY HAS EARNED TOTAL INTEREST INCOME OF RS.100.39 CRORES OU T OF WHICH INTEREST INCOME OF RS.4.16 CRORES IS TAX FREE. SINCE THE SEC URITIES/BONDS ON WHICH INTEREST INCOME IS EARNED, IS HELD AS STOCK I N TRADE, INTEREST EXPENDITURE IS RELATABLE TO THE BUSINESS OF THE APP ELLANT AND THEREFORE, ALLOWABLE. SIMILAR FINDING IS RECORDED B Y THE LD. CIT(A) IN APPEAL FOR A.Y. 2011-12. SINCE THE FACTS ARE SIMILA R, FOLLOWING THE DECISION OF THE LD. CIT(A), IT IS HELD THAT THE INT EREST EXPENDITURE OF RS.30.61 LACS IS ALLOWABLE AS PER PROVISIONS OF SEC TION 36(1)(III) OF THE ACT. THE ADDITION OF RS.30.61 LACS IS DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS RULED IN FAVOUR OF THE APPELLAN T. 10 ITA NO.682/DEL/2017 4.2 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE. THIS ISSUE HAS BEEN DECIDED IN FAVOUR O F THE ASSESSEE BY THE TRIBUNAL IN ASSESSMENT YEAR 2011-12, BUT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MAXOPP INVESTMENT LTD (SUPRA), THE ISSUE REQUIRES RECONSID ERATION. IT IS UNDISPUTED THAT ANY EXPENDITURE RELATED TO EXEMPTED INCOME CANNOT BE ALLOWED UNDER THE HEAD PROFIT IN GAINS OF THE BUSINESS. UNDER THE HEAD PROFIT IN GAINS OF THE BUSINESS EXPE NSES RELATED TO THE BUSINESS INCOME ARE ONLY TO BE ALLOWED AS PER T HE PROVISIONS OF THE ACT. IN THE INSTANT CASE, THE ASSESSEE HAS C LAIMED DIVIDEND INCOME FROM THE STOCK-IN-TRADE AS EXEMPT BUT PROFIT FROM TRADING OF SUCH STOCK-IN-TRADE IS TAXABLE UNDER THE HEAD PR OFIT IN GAINS OF THE BUSINESS. IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA), THE HONBLE SUPREME COURT HAS DIRECTED TO APPORTION SUC H INTEREST EXPENSES TOWARDS EXEMPTED DIVIDEND INCOME AND TOWAR DS TRADING INCOME. THE ENTIRE INTEREST EXPENDITURE CORRESPONDI NG TO STOCK- IN- TRADE CANNOT BE ALLOWED TO THE ASSESSEE AS BUSI NESS EXPENDITURE. 4.3 THE PORTION OF THE INTEREST EXPEN SES RELATED TO EARNING OF THE EXEMPTED DIVIDEND INCOME HAS TO B E DISALLOWED. SINCE THE ISSUE IN DISPUTE OF APPORTIONMENT OF INTE REST EXPENSES CORRESPONDING TO STOCK-IN-TRADE HAS ALREADY BEEN RE STORED TO THE FILE OF THE ASSESSING OFFICER, WHILE DECIDING THE D ISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE INCOME T AX RULES, THIS ISSUE BEING CONNECTED IS ALSO RESTORED TO THE FILE OF THE LEARNEDASSESSING OFFICER FOR DECIDING A FRESH IN AC CORDANCE WITH LAW. THIS GROUND OF THE APPEAL IS ALSO ALLOWED FOR STATISTICAL PURPOSES. 11 ITA NO.682/DEL/2017 5. THE GROUND NO. 3 RELATES TO DISALLOWANCE OF 6,56,24,600/- ON ACCOUNT OF PROVISION FOR DIMINUTION IN MARKET VA LUE OF STOCK- IN-TRADE. 5.1 THE ASSESSING OFFICER HAS OBSERVED THAT THE ASS ESSEE MADE A PROVISION FOR DIMINUTION IN MARKET VALUE OF THE STO CK AMOUNTING TO 6,56,24,000/-WHICH HAD ALREADY BEEN ADDED BACK WHI LE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF TH E ACT. ACCORDING TO HIM IT IS UNASCERTAINED LIABILITY AND NOT BEING ACTUAL EXPENDITURE INCURRED, AND THUS NEED TO DISALLOWED. THE LD. CIT(A) FOLLOWING THE FINDING OF HIS PREDECESSOR, ALLOWED T HE GROUND OF THE ASSESSEE OBSERVING AS UNDER: 6.3 IT IS NOTED THAT THE ISSUE OF PROVISION/EXPEND ITURE FOR DIMINUTION IN MARKET VALUE STOCK WAS ADJUDICATED IN CASE OF TH E APPELLANT FOR A.Y. 2003-04 AND 2005-06 BY THE THEN CIT(A)-XVII AND REL IEF WAS ALLOWED. OPERATIVE PART OF THE ORDER OF THE LD. CIT(A) IN A. NO. 77/07-08 DATED 22.09.2008 FOR A.Y. 2003-04 IS AS UNDER: 4.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, ORDER OF THE AO AND SUBMISSIONS MADE BY THE LD. AR OF THE APPELLANT COMPANY. FROM THE ASSESSMENT ORDER, IT IS SEEN THAT THE AO HAS DISALLOWED THE AMOUNT OF RS.3684.92 LACS IN A SUMMARY MANNER BY HOLDING THAT THE SAME IS A NOTI ONAL EXPENDITURE. THE AO HAS NOT DISPUTE THE BASIC FACT OF THE CASE THAT THE INVESTMENT ON WHICH DIMINUTION IN THE MARKET OF RS.3684.92 LACS WAS CLAIMED BY THE APPELLANT WAS HELD BY APPELLANT AS STOCK-IN-TRADE. THE AO HAS BRAZENLY DISREGARDED THE GUIDELINES OF THE RBI AS WELL AS TH E DECISION OF VARIOUS HIGH COURTS AND SPECIALLY THE DECISION O F SUPREME COURT IN THE CASE OF UCO BANK(SUPRA). THE GUIDELINE S OF RBI CLEARLY STATES QUOTED CURRENT INVESTMENTS FOR EACH CATEGORY SHALL BE VALUED AT COST OR MARKET VALUE WHICHEVER I S LOWER. 4.2.1 FURTHER, SUPREME COURT IN THE CASE OF SANJEEV WOOLLEN MILLS VERSUS COMMISSIONER OF INCOME TAX, [2005] 279 0434 (SC) HAS HELD THAT THE RECOGNIZED AND SETTLED PRACT ICE OF ACCOUNTING IN RELATION TO CLOSING STOCK WAS TO VALU E IT ON THE COST BASIS OR AT THE MARKET VALUE BASIS IF THE MARK ET VALUE OF THE STOCK WAS LESS THAN THE COST. IN THE CASE OF UC O BANK (SUPRA) ALSO, THE APEX COURT HAS HELD THAT THE CONS ISTENT PRACTICE OF VALUING THE INVESTMENTS BY THE NATIONAL IZED BANKS AT COST OR MARKET VALUE WHICHEVER IS LOWER FO R THE PURPOSE OF INCOME TAX ACT IS JUSTIFIED. IN THE CASE OF NEDUNGADI BANK LIMITED (SUPRA), THE HONBLE KERALA HIGH 12 ITA NO.682/DEL/2017 COURT HAS ALSO HELD THAT IT IS NOW SETTLED BY A SER IES OF DECISIONS OF THE HIGH COURTS AND THE SUPREME COURT THAT THE SECURITIES HELD BY THE BANKS INSTITUTE THERE STOCK IN TRADE FOR INVESTMENT AND CONSEQUENTLY THE LOSS CLAIMED BY TH E BANKS ON THE VALUATION OF THEIR SECURITIES SHOULD BE ALLO WED AS DEDUCTION IN COMPUTING THE TAXABLE PROFITS. 4.2.2 IT IS ALSO A FACT THAT IN CASE OF PUNJAB NATI ONAL BANK MY PREDECESSORS HAVE CONSIDERED SIMILAR ISSUE AND O N THE BASIS OF ABOVE REFERRED JUDGEMENTS, ESPECIALLY THE DECISION OF THE APEX COURT IN THE CASE OF UCO BANK (SUPRA), IT WAS HELD THAT SUCH LAWS ON ACCOUNT OF DIMINUTION OF VALUE OF SECURITIES CANNOT BE DISALLOWED BY THE AO. THE FACTS IN THE IN STANT CASE ARE SIMILAR TO THE FACTS OF PNBS CASE IN APL. NO.6 /CIT(A) XVII/DDEL/06-07 DATED 8/3/2007 AS THE APPELLANT AS WELL AS PNB ARE DEALING WITH THE GOVERNMENT SECURITIES I N A SIMILAR MANNER. THEREFORE, FOLLOWING THE PRINCIPLE OF CONSISTENCY AND THE DECISIONS OF HONBLE HIGH COURT S AND APEX COURT, REFERRED ABOVE, THE CLAIM OF DEDUCTION OF EXPENDITURE ON ACCOUNT OF DIMINUTION IN THE VALUE O F SECURITIES IS CORRECT. ACCORDINGLY, THE ISSUE IS DE CIDED IN FAVOUR OF THE APPELLANT AND THE ADDITION OF RS.36,84,92,000/- IS DELETED. 5.2 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE. THE CORE ISSUE IS WHETHER DIMINUTION OR REDUCTION IN PRICE OF THE STOCK-IN-TRADE CAN BE ALLOWED WHILE CO MPUTING BUSINESS INCOME. IN OUR OPINION, THERE IS NO DISPUT E THAT THE ASSESSEE IS AT LIBERTY TO VALUE ITS STOCK AT COST O R MARKET VALUE, WHICHEVER IS LOWER AS PER CONSISTENT METHOD OF ACCO UNTING, AND SUCH REDUCTION IF ANY , IN VALUE OF THE SHARES HELD AS STOCK-IN- TRADE WILL BE ALLOWED . BUT, IF SUCH A PROVISION IS MADE OUTSIDE THE TRADING ACCOUNT ( ONLY WHILE COMPUTATION OF INCOM E) THEN SAME MAY NOT BE ALLOWABLE. IN THE FACTS OF THE CASE , IT IS NOT CLEAR WHETHER THE PROVISION FOR DIMINUTION IN VALUE OF ST OCK-IN-TRADE HAS BEEN MADE OUT OF THE TRADING ACCOUNT OR WITHIN THE TRADING ACCOUNT , THEREFORE, WE FEEL IT APPROPRIATE TO RES TORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICERFOR VERIFYING THE FACTS FROM THE BOOKS OF ACCOUNTS AND OTHER RECORDS OF THE ASSESSEE AND DECIDE 13 ITA NO.682/DEL/2017 THE ISSUE IN DISPUTE AFRESH IN ACCORDANCE WITH LAW. WE ORDER ACCORDINGLY. THE GROUND OF THE APPEAL IS ACCORDINGL Y ALLOWED FOR STATISTICAL PURPOSE. 6. THE APPEAL OF THE REVENUE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST MAY, 2020. SD/- SD/- (BHAVNESH SAINI) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 01.05.2020. RK/- (D.T.D.S) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI