The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) while granting relief to the Central Bank of India, held that the disallowance of expenditure under Section 14a of the Income Tax Act, 1961 cannot be made when the exempt Income earning securities are held as stock-in-trade.
The assessee is a banking company and the main activity includes the banking and other related activities. The assessee filed its revised return of income declaring a total loss of Rs. 3408.24 crore under normal provisions of the Act.
During the year under consideration, the assessee earned Rs.8,86,91,514, which is exempt under Section 10 of the Income Tax Act.
In response to the show cause notice regarding the computation of disallowance under Section 14A of the Income Tax Act, the assessee submitted that it holds securities in the ordinary course of its banking business and such securities constitute stock in trade of its business.
The assessee further submitted that the profits and gains on sale or maturity or redemption or transfer in any manner of such securities are consistently offered to tax while computing profits and gains from business or profession.
The Assessing Officer held that zero disallowance made by the assessee is not satisfactory and computed the disallowance of Rs.1911.07 crore under Section 14A of the Income Tax Act read with Rule 8D(2)(iii) as expenses incurred for earning the exempt income and inter-alia added the same to the total income of the assessee.
The Authorised Representative submitted that no objective satisfaction was recorded by the Assessing Officer while making the disallowance under Section 14A of the Income Tax Act read with Rule 8D.
It was further submitted that since the exempt income earning securities were held by it in the ordinary course of its banking business and the profit and gains arising therefrom are consistently offered to tax while computing the income under the head “profits and gains from business or profession”, therefore such securities constitutes stock in trade of the banking business.
The Departmental Representative vehemently relied upon the order passed by the lower authorities.
The Two-member bench comprising of G.S. Pannu (President) and Sandeep Singh Karhail (Judicial member) held that the exempt income earning securities are held by the assessee as stock in trade, therefore, disallowance of expenditure under Section 14A of the Income Tax Act cannot be made.
Therefore, the bench directed the Assessing Officer to delete the disallowance made under Section 14A of the Income Tax Act read with Rule 8D. Thus, the appeal of the assessee was partly allowed.
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