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TMI Blog2022 (12) TMI 1561X X X X Extracts X X X X X X X X Extracts X X X X ..... e Rs. 6,23,75,372 Rs. 4,79,33,244 Rs. 4,68,60,335 Disallowed u/s. 14A being 0.5% of the average tax free investments - Rs. 97,00,000 Rs. 83,34,000 Amount disallowed by AO invoking Rule 8D Rs. 12,37,89,000 Rs. 11,80,57,000 Rs. 4,68,60,335 4. On appeal by the Assessee, the CIT(A) by orders all dated 23.1.2014, followed decision of the Hon'ble Kerala High Court in the case of CIT Vs. Catholic Syrian Bank (2011) 9 taxmann.com 148 (ker) and directed disallowance to be made u/s. 14A of the Act as per the aforesaid decision. In the aforesaid decision of the Hon'ble Kerala High Court, the issue that was considered by the Hon'ble Kerala High Court was whether proportionate disallowance of interest paid by the Bank is called for under section 14A of the Income-tax Act ('the Act') for the investments made in U.T.I. shares, tax free bonds/securities etc. which yielded tax free dividend and interest. ITA No. 1324 of 2009 being appeal in the case of Dhanalakshmi Bank was also one of the appeals before the Hon'ble Kerala High Court and was part of the aforesaid decision dealing with group of appeals involving similar issue. The Hon'ble Court after explaining the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to be made under section 14A even if assessees do not have separate account showing the expenditure incurred on investments made for earning tax free income. The Court then observed that whether section 14A of the Act prior to the introduction of sub-sections (2) and (3) entitles the department to make disallowance of expenditure incurred for earning tax free income in cases where assessee do not maintain separate accounts for the investments and other expenditure incurred for earning tax free income. The Hon'ble Court was therefore dealing with cases prior to AY 2007-08 and the methodology to be adopted in those prior years when Sec. 14A(2) of the Act and Rule 8D of the Rules. The Hon'ble Court while concluding the said judgment suggested a formula to be followed by AO's for AY prior to AY 2007-08 and concluded as follows: "5. What we have stated above is only a reasonable suggestion for the Assessing Officer to adopt which arises only if assessee is not able to establish more accurately the interest spent on earning tax free income. We, therefore, leave this matter to be decided by the Assessing Officer with reference to the accounts of the assessee-Banks for each year. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. This is the spirit of the judgment of the Hon'ble Kerala High Court. 5. In the orders passed by the CIT(A) she followed the decision of Hon'ble Kerala High Court which suggested a particular formulae for making disallowance u/s. 14A of the Act with reference to AYs prior to AY 2007-08 when Sec. 14A(2) of the Act and Rule 8D of the Rules, were not in the statute book. Without realizing that he was dealing with AY 2008-09 to 2010-11, the CIT(A) applied the formulae given by Hon'ble High Court which was applicable only for AYs prior to 2007-08. The decision of Hon'ble Kerala High Court in so far as AY 2007-08 and subsequent AYs is concerned is very clear and it lays down that the mandate of Sec. 14A(2) of the Act and Rule 8D of the Rules has to be followed. By doing so, the addition made by the AO stood reduced to some in extent in all the AYs. Viz., For AY 200809 it stood reduced from Rs. 8,84,81,948 from Rs. 12,37,89,000. For AY 2009-10 it stood reduced from Rs. 11,80,57,000 to Rs. 9,30,35,062. For AY 2010-11 it stood reduced from Rs. 4,68,60,335 to Rs. 2,16,43,082/-. 6. The Assessee filed appeal against the orders of the CIT(A) before the Tribunal in ITA No. 231 to 283/Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income which does not form part of the total income under the Act is incorrect. Therefore the AO cannot blindly apply Rule 8D of the Rules without first complying with the requirements of Sec. 14A(2) of the Act. This is the spirit of the judgment of the Hon'ble Kerala High Court but in the set aside proceedings the AO applied the formulae suggested by the Hon'ble Kerala High Court for AYs prior to AY 2007-08 without realizing that in so far as AY 2007-08 and subsequent AYs is concerned the said decision of High Court clearly lays down that the mandate of Sec. 14A(2) of the Act and Rule 8D of the Rules has to be followed. 9. It was further contended that in so far as Banks are concerned, the securities held by banks which yield exempt dividend income, though classified as Investments in the books of accounts as per the format of Balance Sheet given in the Banking Regulation Act, 1949 are in fact stock-in-trade of the Assessee. It was contended that the investments were made not with a view to earn tax free exempt dividend income and therefore no disallowance can be made u/s. 14A of the Act. 10. The CIT(A) agreed that the AO while passing order on remand by ITAT failed to follow th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest funds. It was submitted that even where the Assessee had mixed funds made up of own interest free funds and interest bearing funds, payment, if made out of such mixed funds, the investment that yield tax free investments should be presumed to have been made out of interest free funds only. Reference in this regard was made to decision of Hon'ble Supreme Court in the case of South Indian Bank and other Banks 130 Taxmann.com 178 (SC) and UTI bank Ltd. 142 Taxmann.com 136(SC). (iii) It was submitted that the Hon'ble Punjab and Haryana High Court in the case of PCIT v. State Bank of Patiala [2017] 391 ITR 218 where exempt income in the form of dividend was earned by the Bank from securities held by it as its stock in trade, held that the assessee was engaged in the purchase and sale of shares/ securities as a trader with the object of earning profit and not with a view to earn interest or dividend. The assessee did not have an investment portfolio and the dividend and interest earned was from the securities that constituted the assessee's stock-in-trade as per CBDT Circular No. 18, dated 2 November 2015. It was pointed out that the High Court observed that the Circular carves o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reon. It was submitted that the Delhi Bench of the ITAT in the case of Punjab National Bank Ltd. Vs. DCIT ITA No. 1519/Del/2016 for AY: 2012-13 by order dated 28.11.2018 held that in the case of Banks investments were stock in trade and hence no disallowance can be made u/s. 14A read with Rule 8D(2)(ii) of the Rules. The following were the observations of the Tribunal. "6. Ground No. 2 relates to disallowance conformed by Ld. CIT (A) under rule 8D (iii) of Income Tax Rules, 1963. 6.1. At the outset, Ld. Counsel submitted that, this issue stands squarely covered by following observation by Hon'ble Supreme Court in case of Maxopp Investments vs CIT reported in (2018) 91 taxman.com 154, in favour of assessee: "36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in-trade' and not as ' investment, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37. This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investment made by a banking conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT A) disallowed the entire deduction of expenditure. That view of the CIT A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. Respectfully following the view taken by Hon'ble Supreme Court in the case of Maxxop Investment vs CIT (supra), 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) of Income tax Rules 1963. ITA 1519/Del/16 and ITA 7106/Del/2017 A.Y.:2012-13 Punjab National Bank, New Del. 8 8.1. Accordingly the ground raised by assessee stands allowed." Placing reliance on the above judgment, it was submitted that in the case of bank where shares are to be regarded as stock-in-trade no expenditure could be disallowed u/s. 14A of the Act. (iv) It was submitted that when sufficient surplus funds are available, investments made out of such funds and tax free dividend is earned on such investments no disallowance could be made and in this regard relied on decision of Hon'ble Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 272 to 274/Coch/2020 are appeals by the Assessee against the orders all of CIT(A), Kochi-1 dated 5.3.2020 relating to AY 2011-12, dated 6.3.2020 relating to AY 2012-13, dated 6.3.2020 relating to AY 2013-14, dated 5.3.2020 for AY 2014-15. ITA Nos. 309 and 311/Coch/2020 are cross appeals by the Revenue against the orders of CIT(A) for AY 2012-13 and 2014-15. 14. In so far as ground appeals of the Assessee for AY 2011-12 to 14-15 and Revenue for AY 2012-13 and 2014-15 are concerned, one of the common issues in these appeals is with regard to disallowance of expenditure u/s. 14A of the Act. In AY 2011-12, while completing the Assessment u/s. 143(3) of the Act, the AO added the entire exempt income as addition u/s. 14A of the Act by observing that during discussion, the Assessee agreed to such addition. In respect of the other AY 201213 to 2014-15, the AO disallowed expenditure in accordance with Rule 8D of the Rules. On appeal by the Assessee, the CIT(A) for AY 2011-12, 2012-13 and 201415, sustained addition to the extent permitted and by following the formulae suggested by the Hon'ble Kerala High Court in the case of Catholic Syrian Bank (supra) without realizing that for thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortized/depreciated in the books (as per RBI guidelines) in earlier years but not claimed or allowed and offered to tax in those years as the securities were then held as stock-in-trade. Some of the securities were sold during the previous year relevant to AY 2012-13 and the profit as per the books was duly offered to tax as above. The relatable amount amortized/depreciated as above also ought to have been allowed as per the consistent treatment adopted in assessment. Due to error in computation the Assessee had not claimed deduction of deduction of the said amount at Rs. 51,360 instead of the correct amount of Rs. 32,24,413.20/- on sale of such securities during the AYs and the same ought to have been allowed. The Assessee filed an application seeking to raise additional ground of appeal before CIT(A) explaining as to the circumstances under which the above amount was not claimed before the AO along with additional evidence to support the claim made in the additional ground. The CIT(A) omitted to consider the same and did not adjudicate on the said additional ground both on merits as well as its admissibility. 19. In so far as AY 2014-15 is concerned, the Assessee filed a revise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion otherwise than by a revised return, and did not impinge on the power of the Appellate Tribunal under section 254 of the Income-tax Act, 1961". The law by now is well settled that the appellate authority under the Act can entertain a legal claim even though the said claim has not been made by way of a revised return of income. In Jute Corporation of India Ltd. Vs. CIT (1990) 53 taxman 85(SC) it was held that the first appellate authority has wide powers u/s. 251(1)(a) of the Act and can entertain an additional claim. In National Thermal Power Co. Ltd. Vs. CIT 229 ITR 383 (SC) it was held that the purpose of proceedings under the Act is for correct determination of tax liability and examination of claim on the basis of facts already on record should be entertained. In CIT Vs. Pruithivi Brokers & Shareholders (2012) 23 Taxmann.com 23 (Bom) Ramco Cements Ltd. Vs. DCIT (2015) 55 taxmann.com 79 (Mad) Rakesh Singh Vs. ACIT (2012) 26 taxmann.com 240(Bang-ITAT) and Chicago Pneumatic India Ltd. Vs. DCIT (2007) 15 SOT 252 (Mum-ITAT) it was held that appellate authorities have power to entertain a new claim de hors filing revised return of income and that the prohibition laid down by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration is the issue raised by the revenue in its appeal for AY 2012-13 & 2014-15 with regard to deduction u/s. 36(1)(viii) of the Act. The relevant extract of Section 36(1)(viii) of the Act, reads as under:- "(viii) in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding twenty per cent of the profits derived from such business of providing long-term finance (computed under the head "Profits and gains of business or profession" before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital and of the general reserves of the corporation or, as the case may be, the company, no allowance under this clause shall be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doing so, the AO disallowed deduction u/s. 36(1)(viii) of the of a sum of Rs. 10.72 Crores. The CIT(A) rightly upheld the computation of deduction u/s. 36(1)(viii) of the Act as done by the Assessee. The CIT(A) rightly appreciated the position that while computing profits of eligible business only proportionate expenses relatable to the eligible business should be reduced from gross receipts from eligible business to arrive at the profits of the eligible business. Expenses which are not pertaining to eligible business cannot enter into computation of net income from eligible business and this position has rightly been appreciated by the CIT(A) and hence his order on this issue is upheld and the ground of appeal of the revenue is dismissed. 26. In AY 2014-15, the deduction u/s. 36(1)(viii) of the Act was computed by the Assessee in the same manner it was done in AY 2012-13 at Rs. 33.70 crores which was revised to Rs. 38.10 Crores (due to purely arithmetical error) as per the same manner of computation as was done in AY 2012-13. The AO adopted the total income for the purpose of book profits u/s. 115JB of the Act and arrived at expenses to be deducted from gross income from eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. 154 of the Act and that in the event of dispute with regard to the quantum of amount that should have been allowed u/s. 36(1)(viii) of the Act, the AO ought to have filed appeal against the order of CIT(A) dated 23.1.2014 and without doing so ought not to have resorted to proceedings u/s. 154 of the Act. The disallowance made by the AO was accordingly deleted by the CIT(A). Aggrieved by the said order of CIT(A), the revenue has filed the present appeal before the Tribunal. 31. We have heard the rival submissions. We are of the view that the CIT(A) in his order dated 23.1.2014 has upheld the quantification of deduction u/s. 36(1)(viii) of the Act at Rs. 18 Crores as claimed by the Assessee. Therefore, the AO cannot rectify the said quantum in an order u/s. 154 of the Act and that in the event of dispute with regard to the quantum of amount that should have been allowed u/s. 36(1)(viii) of the Act, the AO ought to have filed appeal against the order of CIT(A) dated 23.1.2014 and without doing so ought not to have resorted to proceedings u/s. 154 of the Act. Therefore, we find no merits in this appeal by the revenue and accordingly dismiss the same. 32. In the result, appeals of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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