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 such investments was business income, not subject to disallowance under rule 8D. The Tribunal cited a decision by the Punjab & Haryana High Court and a CBDT circular to support its ruling. Consequently, the disallowance under section 14A was deleted for the assessment years in question.

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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.

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