2017 (11) TMI 1854 - AT - Income Tax

Disallowance u/s 14A of the Income Tax Act 1961 read with rule 8D of the Income Tax Rules 1962 - average investments - HELD THAT - The undisputed facts of the case are that the assessee is a banking company and is carrying on by Banking business - The ld AR submitted that shares/securities are held in the ordinary course of business as investments in the shares/securities are part of assessee activity. It is only by virtue of investments in the securities held as stock in trade the dividend accrued to the assessee and it is settled law that provisions of section 14A rule 8D are not applicable to such case. In the latest CIRCULAR NO. 18/2015 F.N 0.2 79/Misc./140/20 IS/IT J Government of India Ministry of Finance Directorate of Income-tax Legal Research New Delhi 2nd November 2015 vide para 3 it has been provided that the income arising from such investments is attributable to the business of banking falling under the head Profits and Gains of Business and Profession . T/he AO is directed to delete the disallowance u/s 14A of the Act - appeal of assessee allowed.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D without recording satisfaction before invoking the provisions of rule 8D.

Analysis:
The appeals were against the order confirming disallowance made by the AO under section 14A of the Income Tax Act, 1961 read with rule 8D at the rate of 0.5% of average investments. The AO did not record any satisfaction before invoking rule 8D. The assessee, a banking entity, argued that rule 8D was not applicable as investments in securities were part of its business activities. The AR relied on a decision by the Punjab & Haryana High Court that income from securities held as stock-in-trade is attributable to business and not subject to disallowance under rule 8D.

The DR contended that from 2008-09, it was mandatory to apply section 14A read with rule 8D, which was correctly applied and upheld by the CIT(A). The Tribunal considered the submissions and case law. It noted that the securities held were part of the banking business, and income from them was business income, not exempt. Referring to the Punjab & Haryana High Court decision, the Tribunal emphasized that expenditure incurred to earn exempt income falls under section 14A. As the securities were stock-in-trade, no expenditure was incurred in relation to the exempt income of dividends and interest.

In a circular, the CBDT clarified that investments made by banking concerns are part of their business, and income from such investments is attributable to the business of banking. Consequently, the Tribunal set aside the CIT(A) order and directed the AO to delete the disallowance under section 14A. The appeals were allowed based on the decision and reasoning provided in a similar case in favor of the assessee. Both appeals were allowed, and the disallowance under section 14A was deleted for the assessment years in question.