2022 (9) TMI 886 - HC - Income Tax

Disallowance u/s 36(1)(viii) - not considering the total receipt of business for the purpose of working out the proportion to be used in calculating the ratio for deduction under the said provision - HELD THAT - The Supreme Court in Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd., 2019 (7) TMI 1449 - SUPREME COURT has held that Courts must promote the interest of certainty in tax litigation. According to the Apex Court, there is a significant value which one must attach to observing the requirement of consistency and certainty. It further held that individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty and to detract from those principles is neither expedient nor desirable. In view thereof, a challenge to the deletion of the disallowance made u/s 36(1)(viii) of the Act is not made out. Disallowance made u/s 14A - CIT(A) issued a notice of enhancement u/s 251 and disallowed the entire expenditure claimed by the assessee therein instead of restricting the disallowance to the amount which was claimed as exempt income - HELD THAT - With respect to the challenge of the deletion of the disallowance made u/s 14A of the Act, this issue is no longer res integra. It is an admitted fact that the exempt income was earned by the assessee from the investment held by it as stock-in-trade. This issue has been conclusively determined in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT - In this matter, the Supreme Court was concerned with a batch of appeals which also included a challenge to the judgment in CIT v. State Bank of Patiala 2017 (5) TMI 843 - PUNJAB AND HARYANA HIGH COURT and the facts of the said case are para materia to the case in hand. In the case of State Bank of Patiala, the AO restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8-D and holding that Section 14A of the Act would be applicable. CIT(A) issued a notice of enhancement under Section 251 of the Act and disallowed the entire expenditure claimed by the assessee therein instead of restricting the disallowance to the amount which was claimed as exempt income. The ITAT set aside the order of the AO as well as CIT(A). The High Court upheld the order of the ITAT and dismissed the appeal filed by the Revenue. The Supreme Court after deliberating on the object and purpose of Section 14A, conclusively held that in cases where shares are held by assessee as stock-in-trade, the dividend earned on the said shares is incidental and would not attract the provisions of Section 14A of the Act. No substantial question of law arises for consideration in the present appeal and accordingly, the same is dismissed.

Summary

Issues:
1. Challenge to the deletion of disallowance under Section 36(1)(viii) of the Income Tax Act, 1961.
2. Challenge to the deletion of disallowance under Section 14A of the Income Tax Act, 1961.

Issue 1: Challenge to the deletion of disallowance under Section 36(1)(viii) of the Income Tax Act, 1961:
The appellant challenged the order of the Income Tax Appellate Tribunal (ITAT) deleting the disallowance made under Section 36(1)(viii) of the Act. The appellant argued that the ITAT erred in not considering the total business receipts for calculating the deduction ratio under the provision. However, the ITAT observed that the methodology adopted by the assessee was consistent for eight years and accepted by the Revenue without objection. The Commissioner of Income Tax (Appeals) also upheld the deduction in previous years. Citing the Supreme Court's decision in a similar case, the High Court emphasized the importance of consistency in tax litigation and dismissed the challenge to the deletion of disallowance.

Issue 2: Challenge to the deletion of disallowance under Section 14A of the Income Tax Act, 1961:
The appellant contested the ITAT's decision to set aside the disallowance made under Section 14A of the Act, arguing that the provision should apply even if the exempt income was earned from investments held as stock-in-trade. However, the High Court referred to the Supreme Court's judgment in a related case, which clarified that when shares are held as stock-in-trade, the dividend earned is considered incidental and does not attract Section 14A. The High Court further cited another Supreme Court judgment affirming that income received on shares held as stock-in-trade should be considered business income, making Section 14A inapplicable. Given the settled law and the nature of the exempt income in the present case, the High Court concluded that no substantial question of law arose and dismissed the appeal.

This detailed analysis of the judgment highlights the key arguments, legal principles, and court decisions involved in each issue raised by the appellant, providing a comprehensive overview of the High Court's decision.