2024 (8) TMI 732 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - certain shares held as stock in trade - What happens when the shares are held as 'stock-in-trade' and not as ' investment', particularly, by the banks? - HELD THAT - Assessee is a Bank, where shares were held as stock-in-trade and therefore it becomes business activity of assessee as observed by Hon ble Supreme Court in Maxopp Investments 2018 (3) TMI 805 - SUPREME COURT Further Hon ble Karnataka High Court has followed the same view in case of Canara Bank 2023 (1) TMI 243 - KARNATAKA HIGH COURT decision of Hon ble Delhi High Court in case of Punjab National Bank 2022 (6) TMI 85 - DELHI HIGH COURT . Respectfully following the view taken by decisions supra, we allow this ground raised by assessee and hold that these were not made by assessee in order to fall within the ambit of Rule 8D (iii) of Income tax Rules 1963. Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A for exempt income.
2. Whether disallowance under section 14A can be made for securities held as stock-in-trade.
3. Applicability of Rule 8D(2)(iii) for disallowance under section 14A.

Detailed Analysis:
1. The appeal involved a challenge to the disallowance made under section 14A for exempt income of Rs. 1,14,49,500. The CIT(A) had upheld the disallowance, leading to the appeal before the Tribunal.
2. The main contention was whether disallowance under section 14A could be imposed for securities held as stock-in-trade. The appellant argued that no disallowance should be made as no expenditure was incurred to earn the tax-free income.
3. The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of Maxopp Investments vs. CIT, which clarified the distinction between 'stock-in-trade' and 'investment' for banks. The Tribunal also considered a circular by CBDT regarding the treatment of income from securities for banking concerns.
4. The Tribunal analyzed the specific observations made by the Supreme Court in the Maxopp Investments case, emphasizing that when shares are held as stock-in-trade by banks, it becomes a business activity, and the motive behind the purchase determines the treatment of income.
5. The Tribunal noted that the decision relied upon by the Revenue in the appellant's own case did not consider the clear distinction outlined by the Supreme Court in the Maxopp Investments case. The Tribunal found that the principles laid down by the Supreme Court were applicable to the present case, as confirmed by decisions of the Karnataka High Court and Delhi High Court.
6. Ultimately, the Tribunal allowed the appeal, holding that the disallowance under section 14A was not justified as the shares were held as stock-in-trade by the appellant bank and did not fall within the ambit of Rule 8D(2)(iii) of the Income Tax Rules 1963.

In conclusion, the Tribunal allowed the appeal, setting aside the disallowance made under section 14A for the exempt income, based on the specific observations and principles laid down by the Hon'ble Supreme Court in the Maxopp Investments case.