2021 (2) TMI 1366 - HC - Income Tax

Court Remands Tax Case on Dividend Income Disallowance and Clarifies Banking Companies' Tax Liability u/s 115JA.

CANARA BANK (FOR AMALGAMATED ENTITY SYNDICATE BANK) Versus DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, UDUPI, COMMISSIONER OF INCOME TAX, ATTAVARA

The court remitted the issue concerning the interpretation of Section 14A of the Income Tax Act, 1961, back to the Assessing Officer to determine the ... Disallowance u/s 14A - AO recording of dissatisfaction as regards the disallowance voluntarily made by the Appellant - HELD THAT:- As decided in [2020 (1) TMI 1473 - KARNATAKA HIGH COURT] From perusal of Section 14A of the Act, it is evident that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation of the income which does not form part of his total income under the Act. The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word ‘incurred’ in Section 14A of the Act have to be read in the context of the scheme of the Act and if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the tax. It is equally well settled that expenditure is a pay out. In order to attract applicability of section 14A of the Act, there has to be a pay out and return of investment or a pay back is not such a debit item. [See: WALFORT SHARE AND STOCK BROKERS (P) LTD [2010 (7) TMI 15 - SUPREME COURT] as well as MAXOP INVESTMENTS LTD [2018 (3) TMI 805 - SUPREME COURT]. In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A. MAT applicability - The provisions of Section 115JA do not apply to the banking companies Issues involved:1. Interpretation of Section 14A of the Income Tax Act, 1961 regarding disallowance of expenditure in relation to exempt income.2. Application of Rule 8D(2)(ii) in cases where own funds and non-interest bearing funds exceed the value of investments.3. Whether provisions of Section 115JA apply to Banking Companies.Analysis:Issue 1:The primary issue in this case revolves around the interpretation of Section 14A of the Income Tax Act, 1961, concerning the disallowance of expenditure related to income that does not form part of the total income. The Tribunal's conclusion on whether the Assessing Officer's observations amounted to dissatisfaction with the disallowance voluntarily made by the appellant under Section 14A is challenged. The Tribunal's decision to remit the issue of computation of disallowance back to the Assessing Officer is also under scrutiny. The crux of the matter lies in determining whether the provisions of Section 14A are applicable when no expenditure has been incurred by the appellant in earning exempt income, specifically in the context of dividends.Issue 2:Another significant aspect of this judgment pertains to the application of Rule 8D(2)(ii) when the own funds and non-interest bearing funds of the appellant exceed the value of investments generating exempt income. The Tribunal's decision on whether Rule 8D(2)(ii) is applicable in such a scenario is being challenged. The argument revolves around whether the specific circumstances of the case warrant the application of this rule, considering the substantial difference between own funds and investments giving rise to exempt income.Issue 3:The judgment also delves into the question of whether the provisions of Section 115JA are applicable to Banking Companies. The court's ruling on this matter is crucial for determining the tax implications on Banking Companies and clarifying the scope of Section 115JA in relation to this specific category of entities.In conclusion, the judgment provides detailed insights into the interpretation of key provisions of the Income Tax Act, addressing specific scenarios related to disallowance of expenditure, application of rules concerning fund management, and the applicability of tax provisions to Banking Companies. The analysis presented in the judgment offers clarity on these complex legal issues, providing guidance for future cases and ensuring consistency in the application of tax laws.