2018 (12) TMI 50 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - Held that - Decisions relied upon by Ld.Sr.DR has been passed prior to decision of Hon ble Supreme Court in the case of Maxopp Investment vs CIT (2018 (3) TMI 805 - SUPREME COURT OF INDIA). Further Hon ble Supreme Court in the case of Maxopp Investment vs CIT (supra) 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. In our opinion specific observation Hon ble Supreme Court in the case of Maxopp Investment vs CIT (supra) reproduced hereinabove are squarely applicable to facts of present case. 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) - Decided against revenue. Claim of leave encashment claimed - Held that - Leave encashment is allowable on payment basis only. We therefore 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. 3 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(2)(iii) and Section 14A of the Income Tax Act.
2. Deduction for provision of leave encashment under Section 43B(f) of the Income Tax Act.
3. Penalty under Section 271(1)(c) related to the disallowance under Section 14A.

Detailed Analysis:

1. Disallowance of Expenditure under Rule 8D(2)(iii) and Section 14A of the Income Tax Act:
The primary issue was the disallowance of Rs. 19,44,14,224/- under Rule 8D(2)(iii) and Section 14A. The Assessing Officer (AO) observed that the assessee had made investments resulting in exempt income and applied Section 14A read with Rule 8D for disallowance. The AO believed the assessee used common resources for earning both taxable and non-taxable income, leading to an addition of Rs. 2,33,38,36,335/-.

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 that shares held as stock-in-trade by banks are part of business activities, and the expenditure incurred in acquiring those shares should be apportioned. The Tribunal concluded that the assessee, being a bank holding shares as stock-in-trade, falls outside the ambit of Rule 8D(iii). Thus, the ground raised by the assessee was allowed.

2. Deduction for Provision of Leave Encashment under Section 43B(f):
The second issue was the disallowance of Rs. 165.26 crores claimed as leave encashment. The AO disallowed the provision under Section 43B(f), which mandates deductions on an actual payment basis. The assessee argued that Section 43B(f) does not cover leave encashment, citing the Calcutta High Court's decision in Exide Industries Ltd vs. Union of India, which declared Section 43B(f) unconstitutional.

However, the Tribunal noted that the Supreme Court had stayed the Calcutta High Court's decision. Therefore, the Tribunal directed the AO to allow the claim in the year of actual payment and disallow it in the year of provision, without levying any interest or penalty. The ground was allowed for statistical purposes.

3. Penalty under Section 271(1)(c) Related to the Disallowance under Section 14A:
The third issue involved the penalty of Rs. 6,30,77,695/- under Section 271(1)(c) related to the disallowance under Section 14A. The CIT(A) deleted the penalty, stating that the disallowance under Section 14A was a debatable issue and there was no case of furnishing inaccurate particulars or concealment of income.

The Tribunal upheld the CIT(A)'s decision, noting that the penalty was not justified as the issue was debatable and the assessee's explanation was satisfactory. Since the Tribunal had already deleted the addition under Section 14A r.w. Rule 8D(iii), the penalty was also not warranted. The revenue's appeal was dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Rule 8D(iii) and Section 14A, directing the AO to allow the leave encashment claim in the year of payment. The Tribunal also upheld the CIT(A)'s decision to delete the penalty under Section 271(1)(c). The revenue's appeal was dismissed.

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