2024 (9) TMI 1557 - AT - Income Tax

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

IDFC First Bank Limited, (Earlier known as IDFC Bank Limited) Versus The Deputy Commissioner of Income Tax, Range Corporate Circle-2 (2) Chennai.

ITAT Chennai ruled on three issues for a bank assessee. First, regarding section 14A disallowance, the tribunal held that dividend income from shares held ... Disallowance u/s 14A r.w.r.8D - assessee has earned dividend income and claimed the same as exempt - assessee has also made suo-motu disallowance - whether the assessee has declared this income of dividend as business income or not and in case it has declared as business income whether the assessee was eligible for claim of deduction u/s. 10(34) and consequently, whether any disallowance is to be made by invoking provisions of Rule 8D(2)(ii) r.w.s 14A? HELD THAT:- We have gone through accounts filed by the assessee i.e., the financial statements and noted that this income is declared as income under the head ‘Income from Business or Profession’ in Schedule 13 interest earned - ‘income on investments’ in the profit & loss account. We cannot agree with the arguments made by the Ld.CIT DR that dividend income earned from securities held as stock in trade by the assessee bank is not eligible for exemption u/s. 10(34) and consequent disallowance is to be made, while computing expenses under Rule 8D(2)(ii) r.w.s 14A of the Act. This aspect has clearly explained in the case of South Indian Bank Ltd. [2021 (9) TMI 566 - SUPREME COURT] that the shares and securities held by a bank are stock in trade and all income received on such shares and securities must be considered to be as business income and consequently, provisions of section 14A of the Act would not be attracted to such income. This has been answered clearly by the Hon'ble Supreme Court and the Hon'ble Supreme Court has also approved the decision of State Bank of Patiala [2017 (5) TMI 843 - PUNJAB AND HARYANA HIGH COURT] The decision of the Hon'ble Supreme Court is law of the land and binding for us and hence, by following the same, we direct the Assessing Officer to recompute the disallowance of expenses relatable to exempt income in term of Rule 8D(2)(ii) r.w.s 14A of the Act by excluding shares and securities held by the assessee bank as stock in trade. Thus, the first ground raised by the assessee is allowed. Disallowance of expenses relatable to exempt income by invoking provisions of section 14A r.w.s 8D(2)(ii) of the Rules, while computing book profit u/s. 115JB - Since this issue is covered by the Special Bench decision of this Tribunal in the case of ACIT Vs. Vireet Investments Private Ltd [2017 (6) TMI 1124 - ITAT DELHI] we direct the Assessing Officer to delete the addition and thus, this ground is allowed. Non-grant of deduction u/s 80JJAA - assessee stated that this amount is relating to assessment year 2017-18 is allowable in the assessment year 2018-19 as per amended provisions of section 80JJAA - HELD THAT:- We noted that the facts and details regarding 30% additional employees cost incurred during the financial year 2016- 17 relevant to the assessment year 2017-18 is not available on record, so that the effect of amendment can be given. Hence, this issue is remitted back to the file of the Assessing Officer to first verify 30% of additional employees cost incurred during the previous year 2016-17 relevant to the assessment year 2017-18 which is allowable in subsequent year also, in view of subsequent amendment by Finance Act, 2017. Hence, this issue is remitted back to the file of the AO for verification and his decision according to law. Appeal filed by the assessee is partly allowed. 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.