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TMI Blog2022 (3) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... reet Investment Pvt. Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] wherein the Tribunal had held that for the purpose of computing the disallowance of the administrative expenses under Rule 8D(2)(iii) of the Income-tax Rules, 1962, only those investment have to be considered for computing the average value of investments which had yielded exempt income during the year under consideration - we herein direct the AO to rework out the disallowance of the administrative expenses u/s.14A r.w Rule 8D(2)(iii) by determining the average value of investments after considering only those investments that had yielded exempt income during the year under consideration. The Ground of appeal No.1 is allowed - ITA No. 174/RPR/2016 - - - Dated:- 21-2-2022 - SHRI RAVISH SOOD, JUDICIAL MEMBER AND SHRI JAMLAPPA D BATTULL, ACCOUNTANT MEMBER Assessee by : Shri Amit M Jain, A.R Revenue by : Shri G.N Singh, D.R ORDER PER RAVISH SOOD, JM: The present appeal filed by the assessee is directed against the order passed by the CIT (Appeals)-1, Raipur, dated 01.03.2016, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income-tax Act, 1961 ( in short the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not made out of the borrowed funds, the Assessing Officer declined to accept the aforesaid explanation. Backed by his aforesaid observation, the Assessing Officer worked out the disallowance u/s.14A of the Act by triggering the mechanism provided in Rule 8D of the Income Tax Rules, 1962 at ₹ 9,64,389/-. Accordingly, the Assessing Officer vide his order passed u/s.143(3) of the Act, dated 31.07.2014 assessed the total income of the assessee company at ₹ 2,91,11,549/-. 3. Being aggrieved, the assessee carried the matter before the CIT(Appeals). Observing, that the assessee during the year under consideration had invested in exempt dividend income yielding shares, the CIT(A) was of the view that the disallowance of the expenditure incurred for earning of the exempt income was to be worked out u/s.14A of the Act. In so far the claim of the assessee that investments in the exempt income yielding shares were made from its self-owned/interest free funds was concerned, the CIT(A) observed that as the assessee had failed to place on record its balance sheet in support of its aforesaid claim, therefore, it could not be gathered as to how much of own funds, reserves and cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of interest expenditure was called for u/s.14A r.w Rule 8D (2)(ii) of the Income Tax Rules, 1962. In support of his aforesaid contention the Ld. AR had relied on the judgment of the Hon ble Supreme Court in the case of South Indian Bank Limited Vs. CIT, Civil Appeal Nos. 9606, 9609, 9610, 9611, 9615 of 2011 dated 09.09.2021. It was submitted by the Ld. AR that the Hon ble Apex Court in its aforesaid decision, had observed, that in a situation where interest-free funds available with the assessee were sufficient to meet its investments, then, it was to be presumed that the investments in question were made from such interest-free funds. Backed by his aforesaid contention, it was submitted by the Ld. AR that the disallowance of interest expenses made by the Assessing Officer u/s.14A r.w Rule 8D(2)(ii) could not be sustained and was liable to be vacated. 6. Adverting to the disallowance of the administrative expenses so made by the A.O u/s.14A r.w Rule 8D(2)(iii), it was submitted by the Ld. AR that as per the settled position of law only those investments which had yielded exempt income were to be considered for computing the average value of investment for computing the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited Vs. CIT (supra), wherein it was observed as under : 22. The High Court herein endorsed the proportionate disallowance made by the Assessing Officer under Section 14A of the Income Tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assessee. On this aspect we wanted to know about the law which obligates the assessee to maintain separate accounts. However, the learned ASG could not provide a satisfactory answer and instead relied upon Honda Siel Power Products Ltd. v. DCIT to argue that it is the responsibility of the assessee to fully disclose all material facts. The cited judgment, as can be seen, mainly dealt with re-opening of assessment in view of escapement of income. The contention of department for re-opening was that the assessee had earned tax-free dividend and had claimed various administrative expenses for earning such dividend income and those (though not allowable) was allowed as expenditure and therefore the income had escaped assessment. On this, suffice would be to observe that the action in Honda Siel (supra) related to re-opening of assessment where full disclosure was not mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure only when the business was divisible, as was propounded by the Delhi High Court. Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri: 50. It is to be kept in mind that in those cases where shares are held as stock-in-trade , it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. v. CIT, 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd. wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income. 26. Reverting back to the situation here, the Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no part of interest expenditure was liable to be disallowed in the hands of the assessee company. We, thus, in terms of our aforesaid observations vacate the disallowance of interest expenditure of ₹ 890,454/- made by the Assessing Officer u/s.14A r.w.r.8D(2)(ii) of the Income Tax Rules, 1962. 10. Adverting to the disallowance of the administrative expenses made by the Assessing Officer by triggering the mechanism contemplated under Rule 8D(2)(iii) of the Income-tax Rules, 1962, we are of the considered view, that as stated by the ld. A.R, and rightly so, for the purpose of computing the disallowance of the administrative expenses the average value of investment has to be computed by considering only those investments which had yielded exempt income during the year under consideration. Our aforesaid conviction is fortified by the order of the Income-tax Appellate Tribunal, Special Bench, Delhi in the case of ACIT Vs. Vireet Investment Pvt. Ltd., ITA No.502/Del/2012; dated 16.06.2017, wherein the Tribunal had held that for the purpose of computing the disallowance of the administrative expenses under Rule 8D(2)(iii) of the Income-tax Rules, 1962, only those investme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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