The Income Tax Appellate Tribunal (ITAT) of Chennai Bench deleted the additions made towards disallowance of proportionate expenses relatable to exempt income.
The assessee, Karur Vysya Bank Ltd. is a banking company filed return of income under Section 139(1) of the Income Tax Act, 1961. After completing the assessment under Section 143(3) of the Income Tax Act, the Assessing Officer (AO) has made proportionate disallowance towards expenditure incurred for exempt income.
Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals)(CIT)(A). After reviewing the appeal, the CIT(A) issued an order, directing the Assessing Officer (AO) to estimate 2% of the exempt income for disallowance of expenses linked to the exempt income.
The assessee further carried the matter before the tribunal. The tribunal affirmed the order issued by the CIT(A). Subsequently, the assessee filed an appeal with the Madras High Court challenging the decision. The Madras High Court, however, remanded the matter back to the tribunal for a fresh examination and reconsideration.
Before the tribunal, the counsel for the assessee submitted that the provisions of Section 14A of the Income Tax Act read with Rule8D of the Income Tax Rules, 1962, is not applicable in the case of banking companies, where the exempt income has been offered as business income.
The department representative argued that even if in a case of investments held as stock in trade, the moment assessee earns exempt income proportionate expenses relatable to exempt income and taxable income needs to be apportioned
Further, the counsel for the department relied upon the decision of the Maxopp Investment Ltd. v.CIT held that proportionate expenses need to be disallowed.
Moreover, even in case of banking companies, provisions of Section 14A of the Income Tax Act, are applicable and expenses relatable to exempt income need to be disallowed.
Upon examining the facts and arguments presented by both parties, and taking into account the Supreme Court’s ruling in the case of South Indian Bank Ltd. v. CIT, the tribunal concluded that shares and securities held by the bank or guarantor, along with the income derived from such shares and securities, should be classified as business income. As a result, the provisions of Section 14A of the Act, which pertain to disallowance of expenditure related to exempt income, would not be applicable to such income.
Hence, the tribunal concluded that for banking companies that hold shares and securities as part of their stock in trade, the dividend income derived from such holdings should be treated as business income. Therefore, the tribunal ruled that the provisions of Section 14A of the Income Tax Act, which pertain to the disallowance of expenditure related to exempt income, could not be applied in such cases.
The bench, consisting of Manjunatha G (Accountant Member) and Manomohan Das (Judicial Member), instructed the Assessing Officer (AO) to eliminate the additions made for the disallowance of proportionate expenses linked to exempt income for all assessment years.
S. Ananthan, the legal representative, represented the assessee, while A.R. Sreenivasan, the legal representative, appeared on behalf of the department.
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