Bank wins section 14A disallowance dispute as dividend from stock-in-trade shares deemed business income under section 10(34)

ITAT Chennai ruled on three issues for a bank assessee. First, regarding section 14A disallowance, the tribunal held that dividend income from shares held as stock-in-trade by banks constitutes business income exempt under section 10(34), following SC precedent in South Indian Bank Ltd. Second, disallowance under section 14A while computing book profit under section 115JB was deleted based on Special Bench decision in Vireet Investments. Third, section 80JJAA deduction claim was remitted back to AO for verification of 30% additional employee costs from previous year 2016-17, considering Finance Act 2017 amendments. The appeal was partly allowed with directions for recomputation excluding stock-in-trade securities from disallowance calculations.

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Issues Involved:
1. Disallowance of expenses related to exempt income under Section 14A read with Rule 8D(ii).
2. Inclusion of disallowance under Section 14A while computing book profit under Section 115JB.
3. Non-grant of deduction under Section 80JJAA.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Related to Exempt Income Under Section 14A Read with Rule 8D(ii):

The primary issue in this appeal concerns the CIT(A)'s confirmation of the Assessing Officer's (AO) action in computing the disallowance of expenses related to exempt income under Section 14A of the Income Tax Act, 1961, read with Rule 8D(ii) of the Income Tax Rules, 1962. The assessee argued that Section 14A read with Rule 8D does not apply to securities held by the bank as stock-in-trade. The AO had noticed that the assessee had claimed exempt income under Section 10(34) and had disallowed expenses directly related to earning this income. However, the AO recomputed the disallowance at Rs. 51.33 crores, leading to an additional disallowance of Rs. 49.48 crores.

Before the CIT(A), the assessee did not raise the issue of excluding securities held as stock-in-trade for computing disallowance. However, before the Tribunal, the assessee cited the Supreme Court's decision in South Indian Bank Ltd Vs. CIT, which held that shares and securities held by a bank as stock-in-trade should be considered business income, and Section 14A would not apply. The Tribunal agreed with this argument, directing the AO to recompute the disallowance by excluding shares and securities held as stock-in-trade. Thus, the first ground raised by the assessee was allowed.

2. Inclusion of Disallowance Under Section 14A While Computing Book Profit Under Section 115JB:

The second issue pertains to the CIT(A)'s upholding of the disallowance under Section 14A read with Rule 8D while computing book profit under Section 115JB. The AO had added expenses related to exempt income while computing book profit. The CIT(A) confirmed this action, misinterpreting the Special Bench decision in ACIT Vs. Vireet Investments Private Ltd., which held that the computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D.

The Tribunal noted that the CIT(A) had misread the decision and directed the AO to delete the addition. Thus, this ground was also allowed in favor of the assessee.

3. Non-Grant of Deduction Under Section 80JJAA:

The third issue involves the non-grant of deduction under Section 80JJAA. The assessee had claimed a deduction of Rs. 2,03,55,313 under this section, which includes wages for eligible employees for AY 2018-19 and deductions claimed in AY 2017-18 to be allowed in AY 2018-19. The CIT(A) partly allowed the claim, restricting the disallowance to Rs. 60,73,202, related to the financial year 2016-17.

The CIT(A) observed that the amendment to Section 80JJAA by the Finance Act 2018, effective from April 1, 2019, was not applicable to AY 2018-19. Therefore, the benefit of the amended provisions was not available for the impugned assessment year. The Tribunal remitted this issue back to the AO for verification of the additional employee cost incurred during the financial year 2016-17 and its allowance in subsequent years as per the amended provisions.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal directed the AO to recompute the disallowance of expenses related to exempt income by excluding shares and securities held as stock-in-trade, delete the addition while computing book profit under Section 115JB, and verify the claim under Section 80JJAA for the financial year 2016-17. The order was pronounced in the open court on August 28, 2024.

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