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2017 Supreme(P&H) 104
IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH
S.J. VAZIFDAR & DEEPAK SIBAL, JJ.
The Pr. Commissioner of Income Tax, Patiala - Appellant
Versus
State Bank of Patiala - Respondent
Income Tax Appeal No.244 of 2016 (O&M)
Decided On : 30-01-2017
For the Appellant :Mr. Zora Singh Klar, Advocate.
For the Respondent:Mr. Sanjay Bansal, Senior Advocate with Mr. B.M. Monga, Advocate, Mr. Amit Parsad, Advocate and Mr. Rohit Kaura, Advocate.
The main legal point established in the judgment is that section 14A of the Income Tax Act is inapplicable to income arising from the stock-in-trade, and therefore, no expenditure was incurred in relation to the exempt income of dividend and interest.
Headnote:
Income Tax Act - Section 14A - Summary of Acts and Sections: The court discussed the provisions of section 14A of the Income Tax Act and its applicability to exempt income such as dividend or interest earned from securities held by the assessee as its stock-in-trade. The court highlighted the distinction between stock-in-trade and investment, and emphasized that section 14A applies to expenditure incurred in relation to income not includible in total income. The court also referred to CBDT Circular No.18/2015 and the judgment of the Supreme Court in Commissioner of Income-tax v. Nawanshahar Central Co-operative Bank Ltd., [2007] 289 ITR 6 (SC) to support its decision. The court concluded that section 14A is inapplicable to income arising from the stock-in-trade, and therefore, no expenditure was incurred in relation to the exempt income of dividend and interest.
Fact of the Case:
The appeal pertains to the Assessment Year 2008-09 and involves the applicability of section 14A of the Income Tax Act to the exempt income such as dividend or interest earned from securities held by the assessee as its stock-in-trade. The respondent filed a return declaring an income of about Rs.670 crores, which included dividend income exempt under section 10(34) and (35) and net interest income exempt under section 10(15)(iv)(h). The Assessing Officer disallowed the expenditure under section 14A, which was contested by the assessee.
Finding of the Court:
The court found that section 14A is inapplicable to income arising from the stock-in-trade, and therefore, no expenditure was incurred in relation to the exempt income of dividend and interest. As a result, the appeal was dismissed.
Issues: The main issue was whether the provisions of section 14A of the Income Tax Act apply where the exempt income such as dividend or interest is earned from securities held by the assessee as its stock-in-trade. The court also highlighted the contention regarding the obligation to maintain the securities and the applicability of rule 8D for determining the expenditure to be disallowed as per section 14A.
Ratio Decidendi: The court held that section 14A is inapplicable to income arising from the stock-in-trade, and therefore, no expenditure was incurred in relation to the exempt income of dividend and interest. The court emphasized the distinction between stock-in-trade and investment, and referred to CBDT Circular No.18/2015 and the judgment of the Supreme Court in Commissioner of Income-tax v. Nawanshahar Central Co-operative Bank Ltd., [2007] 289 ITR 6 (SC) to support its decision.
Final Decision: The court dismissed the appeal, concluding that section 14A is inapplicable to income arising from the stock-in-trade, and therefore, no expenditure was incurred in relation to the exempt income of dividend and interest.
S.J. VAZIFDAR, J.
This is an appeal against the order of the Income Tax Appellate Tribunal allowing the respondent/assessee’s appeal against the order of the Commissioner of Income Tax (Appeals). The appeal pertains to the Assessment Year 2008-09.
2. The appeal is admitted on the following substantial question of law:-
“Whether in the facts and circumstances of the case, the Hon’ble ITAT is right in law in deleting the addition made on account of disallowance under section 14A of the Income Tax Act, 1961?”
The question really is whether the provisions of section 14A of the Income Tax Act (for short – ‘the Act’) apply where the exempt income such as dividend or interest is earned from securities held by the assessee as its stock-in-trade. The assessee had raised other issues as well. The Tribunal having decided the above question in favour of the assessee did not decide the other issues.
3. As we have also decided the question in favour of the assessee, it follows that section 14A is inapplicable altogether. The appeal must, therefore, be dismissed. Had we decided the issue against the assessee, we would have remanded the matter to the Tribunal for its decision on the other aspects, such as, whether the investments and securities yielding exempt income were from interest free funds/assessee’s own funds or from interest bearing funds as the Tribunal had not decided the same.
4. The respondent filed a return declaring an income of about Rs.670 crores which was selected for scrutiny. The return showed dividend income exempt under section 10(34) and (35) of about Rs.11.07 crores and net interest income exempt under section 10(15)(iv)(h) of about Rs.1.12 crores. The total exempt income claimed in the return was, therefore, Rs.12,19,78,015/-.
The assessee while claiming the exemption contended that the investment in shares, bonds, etc. constituted its stock-in-trade; that the investment had not been made only for earning tax free income; that the tax free income was only incidental to the assessee’s main business of sale and purchase of securities and, therefore, no expenditure had been incurred for earning such exempt income; the expenditure would have remained the same even if no dividend or interest income had been earned by the assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income. The assessee also contended that in any event it had acquired the securities from its own funds and, therefore, section 14A was not applicable.
5. The Assessing Officer restricted the disallowance to the amount which was claimed as exempt income and added the same to the assessee’s income by applying section 14A. The Assessing Officer accordingly applied rule 8D for determining the expenditure to be disallowed as per section 14A. He computed the exempt income as claimed by the assessee, namely, about Rs.12.20 crores. The Assessing Officer found the total expenses allocated against exempt income to be Rs.40.72 crores, but held that the same should not exceed the exempted income and, therefore, he restricted the expenses to the extent of exempt income claimed by the assessee i.e. about Rs.12.20 crores and added the same to the assessee’s income.
6. The CIT (Appeals) by the said notice for enhancement under section 251 enquired of the assessee its obligation to maintain the securities. The assessee replied that the investment in shares and bonds was not made under any obligation under the Banking Regulation Act, 1949, but that it was dealing in shares and bonds as a trader which was permitted by section 6 of the Banking Regulation Act, 1949. The CIT (Appeals) held as follows: In view of section 14A the assessee was not to be allowed any deduction in respect of income which is not chargeable to tax. The assessee had incurred interest expenditure and administrative expenditure for earning its income both exempt and non exempt. The Assessing Officer had wrongly restricted the disallowance t
