The Income Tax Appellate Tribunal ( ITAT ),Mumbai Bench, has recently , in the appeals filed before it, while ruling in favor of SBI, held that dominant purpose of the investment holds no consequence for the applicability of section 14A of the Income Tax Act ,read with rule 8D of of Income-Tax rules, 1962 .
The aforesaid observation was made by the Mumbai ITAT, when cross appeals was filed before it by the assessee, M/S State Bank Of India (SBI) ,as well as the Revenue, as directed against the order dated 30/01/2018, passed by the CIT(Appeals), Mumbai [CIT(A)], for A.Y.2015-16.
The ground of the assessee’s appeal as well as that of the Revenue’s , being related to the disallowance u/s14A of the Income Tax Act, read with Rule 8D(2) of Income-Tax rules, 1962 ,the facts qua the issue in dispute were that during the year under consideration the assessee had earned a dividend income of Rs.2,12,54,282/- from investment in shares and mutual fund.
It was submitted by the assessee that these funds received by way of deposits from customers along with borrowings for specific purposes, have been utilized for advancing money to borrowers in trading and investment in securities, as part of the banking business, out of which some of the items were exempt ,and therefore that the earning of exempt income , being in regular course of the business of the bank and incidental to the overall business Activity of the bank, is indivisible and inseparable from the overall business of the bank.
It was also submitted by the assessee that the total investment portfolio of the bank was Rs.22,465.41 crores, which earned total income of Rs.1824.34 crores, and that out of the total investments, only investment to the extent of Rs.135 crore had been earned exempt income of rupees 2.12 crores. Further ,the assessee also contended that such investment of Rs. 135 crores i.e. shares and mutual funds too results in taxable income as one the profit on sale of such investment are subject to tax under the income from business and profession.
The assessee also contended that,accordingly, as per rule 8D, these investment cannot be considered as the investment whose total income shall not form part of the total income, and that in these circumstances, no disallowance can be made u/s 14A of the Income Tax Act, further that rule 8D(2)(ii) & (iii) are not applicable where shares are held as a stock in trade.
The A.O. however rejected the contention of the assessee, noting that the assessee in the revised return of income filed, had suo moto made disallowance of 0.5% of average investment generating exempt income and thus that the assessee itself had therefore, accepted the provisions of section 14A of the Income Tax Act read with rule 8D of the rules.
Thus, further rejecting the contentions of the assessee and he held that the income from foreign currency though exempted u/s10(15)(iv) of the Income Tax Act on gross basis, the same does not form part of the total income and therefore the corresponding expenditure is liable to be disallowed, and that the claim of the assessee with regard to the interest expense allowable as business expenditure u/s 36(1)(iii) to the Income Tax Act, being shares held as stock in trade and investment made in shares of the subsidiaries, as strategic investment, are contradictory to each other, hence that the strategic investments are liable to disallowance, as the only benefit the assessee derive is dividend income.
The A.O further held that the disallowance u/s 14A needs to be made in respect of the investment of assessee in tax-free bonds, in spite of the claim that interest income received from tax-free bond is incidental to the compliance of SLR norms of Reserve Bank of India and hence that the corresponding expenses are to be disallowed. And based on his holding as mentioned above, the A.O,recording the dissatisfaction on the correctness of the claim of the assessee invoking rule 8D of the rules , thereby computing the disallowance comprising of the disallowance out of interest expenses in terms of rule 8D(2)(ii) at Rs.8,67,70,805/- and under rule 8D(2)(iii) at Rs.3,08,02,935/-, being 0.5% of average value of investment.
Aggrieved by the same, the assessee preferred an appeal before the CIT(A), with it’s main contention that the exemption u/s 10 is allowable on gross basis , the provision of section 14A applies only when expenditure is actually incurred, the disallowance u/s 14A of the Income Tax Act cannot exceed the exempted income, that if the securities are held as a stock, no disallowance can be made, that the investment and loans are only for business purpose to comply with SLR requirements , that only such security should be considered which have yielded exempted income ,that the assessee had sufficient own/interest refunds to cover the investment under consideration, and hence that in such a situation, it has to be presumed that the investment had been made out of own/interest free fund.
The CIT(A) , however following the decision of the Tribunal’s Amritsar Bench in the case of Lally motors India Private Limited , wherein the Tribunal considered the decision of the Supreme Court in the case of Maxopp investment Ltd, rejected the contention of the assessee that the disallowance u/s 14A cannot exceed exempted income and that for the computation of disallowance u/s 14A read with rule 8D, only the investment which have yielded exempted income during the year should be considered.
The CIT(A) also rejected the alternative contention of the assessee that the investments which were strategic in nature, should not be considered for making disallowance u/s 14A of theIncome Tax Act, following the decision of the Supreme Court in the case of Maxopp investment Ltd.,wherein it was held that the dominant purpose of investment is of no consequence for applicability of provisions of section 14A read with rule 8D of rules, while further rejecting the contention of the assessee that the bank holds the securities as a stock in trade and hence that there should not be disallowances u/s 14A of the Income Tax Act, based on the aforementioned precedent of Maxopp investment Ltd.
Hearing the opposing contentions of either sides as was contended by Shri Jeet kamadar & Ninad Patade , on behalf of the assessee, and by Shri Kailash Kanojia on the department’s behalf, the Mumbai ITAT Bench consisting of Kavitha Rajagopal, the Judicial Member, and Om Prakash Kant, the Accountant Member, commented as follows:
“We have heard rival submission of the parties on the issue of disallowance u/s 14A of the Act read with rule 8D(2) of the rules. And in view of the decision of the Hon’ble Supreme Court in the case of Maxoop investment Ltd. ,the expenses incurred towards shares and securities held as stock in trade are also to be considered for disallowance u/s 14A of the Act real with rule 8D of rules, but those expenses has to be apportioned between the taxable income earned from sale or trading of those securities and non-taxable income earned by way of dividend.”
“Since the lower authorities have not carried out any – exercise of apportioning such expenses incurred for earning taxable and non-taxable income from securities, which were held as stock in trade, therefore this issue need to be restored back to the file of the Ld. A.O. for verification and computation of the disallowance accordingly”, the ITAT Bench added.
“As far as the contention of the Ld. counsel that disallowance u/s 14A should not exceed exempted income, we find that Hon’ble Delhi High Court in the case of DCIT v/s m/s ERA infrastructure (I) Ltd. ,in ITA/204/2022, had held that the amendment introduced to section by way finance Act, 2022 14A of the Act for disallowance even if the same exceeds exempted income, is prospective in nature and cannot be applied retrospectively”, further observing, the ITAT panel commented .
Thus, allowing the assessee’s appeal, the Mumbai ITAT ruled:
“The issue of disallowance u/s 14A read with rule 8D(2)(iii) of the rules, is thus restored to the file of the Ld. A.O. for fresh computation in view of the finding of the Hon’ble Supreme Court in the case of Maxopp investment Ltd and decision of the Hon’ble Delhi High Court in the case of Era Infrastructure P. (Ltd.) .”
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
