PR COMMISSIONER OF INCOME TAX-4 V. KARNATAKA STATE FINANCIAL CORPORATION LTD

ITA/1004/2017

AI Insights

The case involves an appeal by the Pr. Commissioner of Income Tax-4 and the Assistant Commissioner of Income Tax against the Karnataka State Financial Corporation Ltd. The appeal was based on a dispute regarding the application of Section 14A read with Rule 8D of the Income Tax Act, 1961, concerning the disallowance of expenses related to investments in equity shares. The Tribunal had previously ruled that no disallowance was warranted as the shares were not allotted, nor any dividend income accrued to the assessee during the relevant assessment year. The High Court upheld the Tribunal's decision, referencing two prior judgments that supported the assessee's position.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 727972 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 19-07-2018
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax & Anr. Vs. Microlabs Ltd., M/s.Pragathi Krishna Gramin Bank vs. Joint Commissioner of Income Tax
• Laws Referred To: Income Tax Act 1961, SFC Act, 1951
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: SANMATHI
• Keywords: Exempted income; Income Tax; Investment in Equity Shares; Rule 8D; Section 14A
• Section: 14A; 260A; 8D

Judgement Text

" 1/11 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 19th DAY OF JULY 2018 PRESENT THE HON'BLE Dr.JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA I.T.A.No.1004/2017 BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX-4 BMTC COMPLEX KORMANGALA, BANGALORE 2. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE …APPELLANTS (BY Mr.SANMATHI E.I., ADV.) AND: KARNATAKA STATE FINANCIAL CORPORATION LTD. KSFC BHAVAN, NO.1/1 THIMMAIAH ROAD NEAR CANTONMENT RAILWAY STATION BENGALURU – 560 052 …RESPONDENT THIS I.T.A IS FILED UNDER SECTION 260A OF INCOME TAX ACT 1961 ARISING OUT OF ORDER DATED 28.6.2017 PASSED IN ITA NO.2068/BANG/2016 FOR THE AY 2010-2011 PRAYING TO DECIDE THE FOREGOING QUESITON OF LAW AND Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 2/11 /OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 28.06.2017 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘C’ BENCH, BENGALURU AS SOUGHT FOR IN THE RESPONDENT- ASSESSEE’S CASE IN APPEAL PROCEEDINGS IN ITA NO.2068/BANG/2016 FOR ASSESSMENT YEAR 2010-11 AND GRANT SUCH OTHER RELIEF AS DEEMED FIT IN THE INTEREST OF JUSTICE. THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:- JUDGMENT Mr.Sanmathi E.I., Adv. for Appellants-Revenue This appeal has been filed for raising purported substantial question of law arising from the order passed by the learned Income Tax Appellate Tribunal, Bengaluru Bench ‘C’, Bengaluru in I.T.A.No.2068/Bang/2016 (Asst. Commissioner of Income-tax vs. M/s. Karnataka State Financial Corporation Ltd.) for the assessment year 2010-2011 on 28.06.2017. 2. The Respondent – Assessee is a State Financial Institution governed by SFC Act, 1951. Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 3/11 3. The relevant findings of the learned Tribunal are quoted below for ready reference: “04. Before us it was submitted that the CIT(A) has wrongly applied the order of the Kolkata Tribunal (supra) on which reliance was placed by the assessee and it was submitted that the assessee had applied for investment in equity shares, but the assessee has not incurred the expenses. Therefore, the assessee must have incurred some expenses and accordingly invocation of Rule 8D by the AO was in accordance with law. 05. On the other hand the Ld. AR for the assessee has submitted that in terms of the decision of the Kolkata Tribunal (Tribunal, as referred to by the CIT(A) in para 8 (supra), no disallowance of expenditure is called for. It was further submitted that even otherwise the assessee has invested in equity shares from its own surplus funds provided by the State Government in terms of the agreement entered into between the assessee and the Government of Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 4/11 Karnataka. He has also drawn our attention to pages 14 to 35 of the Memorandum of Understanding between the assessee and the State Government. 06. We have heard the rival contentions and perused the material on record. It is the case of the AO that the assessee has invested in equity shares and therefore the AO has worked out the disallowance u/s.14A. During the course of argument, we enquired whether the shares were allotted and if allotted, any dividend income was accrued to the assessee or not. In response to that, it was submitted by both the parties that neither the shares were allotted during the year under consideration, nor any dividend income had accrued to the assessee against proposed allotment. In our view, there is a finding by the Kolkata Tribunal to the effect that the share application money invested by the assessee was merely in the nature of offer to buy the shares by the assessee and it cannot be aid be concluded contract entered by the assessee and the company. In our view the coordinate bench has taken the correct view in Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 5/11 the decision of LGW Ltd (supra) and the case of the assessee is covered by the said judgment. Therefore we find no merit in the appeal of the Revenue.” 4. The controversy is no longer res integra and this Court has held in the following two judgments that Section 14A read with Rule 8D does not apply to the investments made by the assessee in the purchase of equity shares as it cannot be said to be an expenditure incurred to earn exempted income in the form of dividends. 5. It was also submitted that in the present case the investment so made by the assessee did not even fructify and the application money sent for purchase of share was refunded back and no shares were allotted to the assessee – KSFC in the present case. Therefore, the question of earning the exempted income in the form of dividends could not simply arise and therefore, the Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 6/11 question of applying Section 14A read with Rule 8D in such a case could not even arise. 6. The relevant portions of the following two judgments are quoted below for ready reference:- (i) Commissioner of Income Tax & Anr. Vs. Microlabs Ltd., [2016] 383 ITR 490 (Karn). “39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2. 40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee’s paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income. 41. The Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 7/11 funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon’ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. 42. In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly.” The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd., (ITA No.330/2012 disposed of on 23/7/2014). When the issue is already covered by a decision of the High Court of Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 8/11 Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed. 6. In view of the above observations, the appeal is dismissed.” (ii) In M/s.Pragathi Krishna Gramin Bank vs. Joint Commissioner of Income Tax (ITA Nos.100001/2018 & 100002/2018 decided by the Division Bench of this Court at Dharwad Bench (in which, one of us, J. Vineet Kothari was a party) also, the Court held in favour of the assessee in the following terms:- “13. The manner in which the aforesaid disallowance has been made by the assessing authority and has been upheld by the appellate authorities leaves much to the desired and the same cannot be sustained and therefore the matter deserves to be remanded back to the Assessing Authority. 14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 9/11 earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs.2,48,85,000/- as expenses to earn exempted Dividend income of Rs.1,80,30,965/- is per se absurd and hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of Rs.1,80,30,965/-, the burden was upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to earn such exempted Dividend income. The disallowance under Section 14A cannot be a wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the Act but an enabling provision for assessing authority to compute Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 10/11 the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty in not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand. 15. In this view of the matter, the findings of all the three authorities below for Section 14A of the Act are set aside and the matter is remanded back to the Assessing Authority for re-computing the disallowance of expenditure, if any, under Section 14A of the Act, in accordance with law.” 7. In view of the aforesaid two decisions, we do not find any substantial questions of law arising in the present appeal requiring our further consideration. The order passed by the learned Tribunal in this regard is therefore right in law. Date of Judgment 19-07-2018 I.T.A.No.1004/2017 Pr. Commissioner of Income-Tax-4 & Anr. Vs. Karnataka State Financial Corporation Ltd. 11/11 8. The appeal filed by the Revenue is liable to be dismissed and accordingly, it is dismissed. No costs. Sd/- JUDGE Sd/- JUDGE RV "