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2019 (1) TMI 1625 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - HELD THAT - Issue stands squarely covered by following observation by Hon ble Supreme Court in case of Maxopp Investments vs CIT 2018 (3) TMI 805 - SUPREME COURT has rendered a clear finding in respect of banking institutions which is peculiar. Present assessee before us is also a Bank where shares were held as stock-in-trade and therefore it becomes business activity of assessee. We allow this ground raised by assessee and hold that these were not investments made by assessee in order to fall within the ambit of Rule 8D (iii) of Income tax Rules 1963. Disallowance of expenditure being penal in nature - HELD THAT - AR could not establish by way of evidence anything contrary to the view taken by authorities below. Further Ld.AR is also not refuting the fact that the payment is not an expenditure which was penal in nature. Under such circumstances we have no option but to uphold the view of ld.CIT(A) - Decided against assessee. Claim of leave encashment u/s 43B - year of payment - HELD THAT - Direct Ld.AO to allow claim of assessee in the year in which it has been paid and to disallow in the year of provision. We accordingly set aside Ground No. 4 back to Ld.AO with a direction to disallow the claim in the year of provision and to allow claim in the year of payment. Ld. AO is directed not to levy any interest and penalty in the year of disallowance.
Issues Involved:
1. Disallowance of expenditure under Rule 8D(iii) and Section 14A of the Income Tax Act. 2. Disallowance of expenditure on the grounds that it is of penal nature. 3. Disallowance of deduction towards leave encashment claimed during the assessment year. Detailed Analysis: 1. Disallowance of expenditure under Rule 8D(iii) and Section 14A of the Income Tax Act: - The assessee appealed against the disallowance of Rs. 17,18,46,500/- made under Rule 8D(iii) and Section 14A of the Income Tax Act. The Assessing Officer (AO) observed that the assessee made investments resulting in exempt income and applied the provisions of Section 14A read with Rule 8D. The AO disallowed the expenditure, stating that the assessee used common infrastructure and personnel for earning both taxable and exempt income. - The CIT(A) allowed the claim under Rule 8D(ii) but confirmed the disallowance under Rule 8D(iii). - The Tribunal referred to the Supreme Court's decision in Maxopp Investments vs CIT, which clarified the treatment of shares held as stock-in-trade by banks. The Supreme Court ruled that when shares are held as stock-in-trade, the main purpose is to trade, and any dividend earned incidentally is also income. However, by virtue of Section 10(34), this dividend income is exempt, triggering the applicability of Section 14A. - The Tribunal concluded that the specific observation by the Supreme Court in Maxopp Investment vs CIT applies to the present case, as the assessee is a bank holding shares as stock-in-trade. Thus, the disallowance under Rule 8D(iii) was not warranted. - Outcome: The ground raised by the assessee was allowed, and the disallowance under Rule 8D(iii) was deleted. 2. Disallowance of expenditure on the grounds that it is of penal nature: - The AO disallowed Rs. 3,67,157/- as it was considered penal in nature, based on the Tax Audit Report and the absence of any explanation from the assessee. - The CIT(A) sustained the disallowance, agreeing that payments of penal nature cannot be allowed as a deduction. - The Tribunal upheld the view of the CIT(A), as the assessee did not provide any evidence to contradict the penal nature of the expenditure. - Outcome: The ground raised by the assessee was dismissed, and the disallowance of Rs. 3,67,157/- was upheld. 3. Disallowance of deduction towards leave encashment claimed during the assessment year: - The assessee claimed a deduction of Rs. 1,24,61,00,000/- for leave encashment, which was disallowed by the AO under Section 43B(f) of the Act, stating that such deductions are allowable only on actual payment. - The CIT(A) confirmed the disallowance, following the precedent for preceding assessment years. - The Tribunal noted that the Calcutta High Court had struck down the constitutional validity of Section 43B(f), but this decision was stayed by the Supreme Court. Therefore, leave encashment is allowable only on a payment basis. - The Tribunal directed the AO to allow the claim in the year of actual payment and to disallow it in the year of provision, without levying any interest or penalty in the year of disallowance. - Outcome: The ground was partly allowed for statistical purposes, with directions to the AO to adjust the claim based on actual payment. Final Judgment: - The appeal filed by the assessee was partly allowed, with specific directions for each issue. The disallowance under Rule 8D(iii) was deleted, the penal expenditure disallowance was upheld, and the leave encashment claim was to be adjusted based on actual payment.
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