Section 14A disallowance on bank stock-in-trade shares was deleted; interest-free funds presumption also upheld.

For a bank, dividend earned from shares held as stock-in-trade did not justify disallowance under section 14A read with rule 8D in the same manner as investment income, because the dividend was incidental and the apportionment theory was inapplicable on those facts; the disallowance under rule 8D(2)(iii) was deleted. The claim to exclude profits of overseas branches under the applicable treaty framework was rejected as covered against the assessee by the coordinate bench decision in its own case. Where the bank had sufficient own interest-free funds to cover the investments, the presumption that investments came from those funds applied, and deletion of the interest disallowance under rule 8D(2)(ii) was upheld.

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Issues: (i) whether disallowance under section 14A read with rule 8D could be sustained in respect of shares held by a bank as stock-in-trade and dividend earned therefrom, (ii) whether profits of overseas branches were liable to be excluded under the double taxation avoidance arrangement claim, and (iii) whether the interest disallowance under rule 8D(2)(ii) could be deleted where own interest-free funds were sufficient.

Issue (i): whether disallowance under section 14A read with rule 8D could be sustained in respect of shares held by a bank as stock-in-trade and dividend earned therefrom.

Analysis: The settled position relied upon from the Supreme Court and High Court authorities was that where shares are held as stock-in-trade by a bank, dividend income is incidental and the dominant purpose test is irrelevant. Expenditure relating to such exempt dividend income is not to be disallowed in the same manner as investment income, and the theory of apportionment under section 14A does not justify the impugned disallowance on these facts.

Conclusion: The disallowance under section 14A read with rule 8D(2)(iii) was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether profits of overseas branches were liable to be excluded under the double taxation avoidance arrangement claim.

Analysis: The issue was treated as covered against the assessee by the coordinate bench decision in the assessee's own case. The notification dealing with the expression may be taxed under the applicable treaty framework was followed, and the challenge to its use for denying exclusion of overseas branch profits was not accepted.

Conclusion: The claim for exclusion of overseas branch profits was rejected and the issue was decided against the assessee.

Issue (iii): whether the interest disallowance under rule 8D(2)(ii) could be deleted where own interest-free funds were sufficient.

Analysis: It was found that the assessee had sufficient own interest-free funds to cover the investments in shares held as stock-in-trade. In such a mixed-fund situation, the presumption operates that investments are out of interest-free funds, and no infirmity was found in the deletion of the interest disallowance.

Conclusion: The deletion of disallowance under rule 8D(2)(ii) was upheld and the issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the principal issue relating to section 14A, failed on the foreign branch profit exclusion, and the Revenue's challenge to the interest disallowance also failed, resulting in partial relief to the assessee.

Ratio Decidendi: For a bank, dividend income arising incidentally from shares held as stock-in-trade does not justify disallowance under section 14A in the same manner as investment holdings, and where own interest-free funds are sufficient, the presumption is that the investments were made from such funds.

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