2017 (11) TMI 1854 - AT - Income Tax

Banking entity's securities investments deemed business income, not subject to disallowance under rule 8D.

The appeals were allowed as the Tribunal held that investments in securities by the banking entity were part of its business activities, and income from ... Disallowance under section 14A read with rule 8D - Investments held as stock-in-trade - Business income of banking company - Expenditure 'in relation to' earning exempt income - Application of CBDT Circular No.18/2015Disallowance under section 14A read with rule 8D - Investments held as stock-in-trade - Business income of banking company - Expenditure 'in relation to' earning exempt income - Application of CBDT Circular No.18/2015 - Whether disallowance under section 14A read with rule 8D is exigible where a banking company holds investments in securities as part of its business/stock-in-trade and the income therefrom is attributable to business - HELD THAT: - The Tribunal found as an undisputed fact that the assessee is a banking company and the investments in securities were held in the ordinary course of its banking business as stock-in-trade. Applying the principle that section 14A disallows expenditure incurred 'in relation to' earning exempt income, the Tribunal relied on the Punjab & Haryana High Court's reasoning that where securities constitute stock-in-trade the expenditure is incurred for trading operations and not for earning exempt income; dividend or interest incidentally arising on such securities are not the purpose for which expenditure was incurred and thus do not fall within section 14A. The Tribunal also noted CBDT Circular No.18/2015 which recognises that investments by a banking concern form part of its business and income therefrom is business income. On these bases the Tribunal held that rule 8D (and the disallowance under section 14A) is not applicable to the assessee's case and directed deletion of the disallowance.Disallowance under section 14A read with rule 8D deleted; appeals allowed.Final Conclusion: Both appeals for AY 2008-09 and AY 2009-10 allowed: the disallowance under section 14A read with rule 8D was set aside on the ground that the investments were held as part of the banking business/stock-in-trade and the income therefrom is business income, with reliance on the Punjab & Haryana High Court decision and CBDT Circular No.18/2015. Issues:Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D without recording satisfaction before invoking the provisions of rule 8D.Analysis:The appeals were against the order confirming disallowance made by the AO under section 14A of the Income Tax Act, 1961 read with rule 8D at the rate of 0.5% of average investments. The AO did not record any satisfaction before invoking rule 8D. The assessee, a banking entity, argued that rule 8D was not applicable as investments in securities were part of its business activities. The AR relied on a decision by the Punjab & Haryana High Court that income from securities held as stock-in-trade is attributable to business and not subject to disallowance under rule 8D.The DR contended that from 2008-09, it was mandatory to apply section 14A read with rule 8D, which was correctly applied and upheld by the CIT(A). The Tribunal considered the submissions and case law. It noted that the securities held were part of the banking business, and income from them was business income, not exempt. Referring to the Punjab & Haryana High Court decision, the Tribunal emphasized that expenditure incurred to earn exempt income falls under section 14A. As the securities were stock-in-trade, no expenditure was incurred in relation to the exempt income of dividends and interest.In a circular, the CBDT clarified that investments made by banking concerns are part of their business, and income from such investments is attributable to the business of banking. Consequently, the Tribunal set aside the CIT(A) order and directed the AO to delete the disallowance under section 14A. The appeals were allowed based on the decision and reasoning provided in a similar case in favor of the assessee. Both appeals were allowed, and the disallowance under section 14A was deleted for the assessment years in question.