2017 (5) TMI 1504 - HC - Income Tax

Exemption of income u/s 14A - Disallowance of claim of deduction for advances made by rural branches u/s 36(1) (viia) - Held that - In view of the decision of the Supreme Court in Godrej & Boyce Manufacturing Company Ltd.(2017 (5) TMI 403 - SUPREME COURT OF INDIA it is true that disallowance which are made by the department is required to be rejected and the asseseee will be entitled for the benefits conferred u/s 14A. Thus, the order of the disallowance is reversed and claim which has been made 14A is required to be upheld, therefore, issue is required to be decided in favour of the assessee. However, operative question regarding disallowing the claim of deduction for advances made by Rural Branches U/s 36(1) (viia)/B such order is concerned, in view of the decision in The Commissioner of Income Tax vs. The Catholic Syrian Bank Ltd 2010 (10) TMI 1068 - KERALA HIGH COURT the issue is answered in favour of the assessee to the extent that in view of the observations made by the Supreme Court, no disallowance will be made u/s 14A.

Summary

Issues Involved:
1. Exemption of income under Section 14A of the Income Tax Act, 1961.
2. Disallowance of claim of deduction for advances made by rural branches under Section 36(1)(viia) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Exemption of Income under Section 14A

Tribunal's Decision:
The Tribunal had disallowed the expenditure incurred in earning exempt income under Section 10 of the Income Tax Act, 1961, as per the provisions of Section 14A and directed the Assessing Officer to restrict the disallowance of expenditure under Section 14A as per Rule 8D of the I.T. Rules, 1962.

Appellant's Argument:
The appellant contended that the benefit under Section 14A is required to be granted if the income earned from investments was made without borrowing funds. They relied on several judgments, including:
- Godrej & Boyce Manufacturing Company Ltd. vs. Deputy Commissioner of Income Tax: The Supreme Court held that for the application of Section 14A, there must be proof that the expenditure sought to be disallowed was actually incurred in earning the exempt income.
- Reliance Utilities & Power Ltd.: The Bombay High Court held that if interest-free funds available to an assessee are sufficient to meet the investments, it can be presumed that the investments were made from those interest-free funds.
- Winsome Textile Industries Ltd.: The Punjab and Haryana High Court held that if the assessee has not incurred any expenditure for making investment in shares, no disallowance is warranted under Section 14A.

Respondent's Argument:
The respondent relied on the decision of the Supreme Court in Commissioner of Income Tax, Mumbai vs. Walfort Share and Stock Brokers P. Ltd., which clarified that Section 14A mandates that expenses incurred in relation to exempt income cannot be deducted from taxable income.

Court's Decision:
The court concluded that the disallowance made by the department under Section 14A is required to be rejected, and the assessee is entitled to the benefits conferred under Section 14A. The court emphasized the need for a proximate cause for disallowance, which is its relationship with the tax-exempt income. The court upheld the claim made under Section 14A in favor of the assessee.

Issue 2: Disallowance of Claim of Deduction for Advances Made by Rural Branches under Section 36(1)(viia)

Tribunal's Decision:
The Tribunal confirmed the disallowance of the deduction claimed by the appellant under Section 36(1)(viia) in respect of advances made by the rural branches of the appellant bank.

Appellant's Argument:
The appellant argued that the view taken by the Tribunal should be reversed as the benefit cannot be granted based on the census of 1991 when the final notification was yet to be published. They relied on various judgments, including:
- The Commissioner of Income Tax vs. The Catholic Syrian Bank Ltd.: The Kerala High Court held that disallowance under Section 14A is permissible even if separate accounts are not maintained, and the assessing officer can estimate the disallowance on a rational basis.
- State Bank of Mysore vs. Assistant Commissioner of Income Tax: The Karnataka High Court ruled that the provisional population total published should be considered for determining the rural branch status.

Respondent's Argument:
The respondent argued that the matter should be remitted back to the Assessing Officer for calculation and benefit may be granted in view of the recent decision of the Supreme Court.

Court's Decision:
The court decided that the issue regarding disallowing the claim of deduction for advances made by rural branches under Section 36(1)(viia) should be answered in favor of the department based on the final population totals published. The court upheld the disallowance made by the Assessing Officer, considering the provisional population totals as reflected in the census figures of 2001.

Conclusion:
The appeals were disposed of accordingly, with the court ruling in favor of the assessee on the issue of exemption under Section 14A and in favor of the department on the issue of disallowance of deduction for advances made by rural branches under Section 36(1)(viia).