Madras High Court
M/S.The Karur Vysya Bank Ltd vs Commissioner Of Income-Tax-I on 8 February, 2022
T.C.A.Nos.509 to 511 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 08.02.2022
CORAM :
THE HON'BLE MR. JUSTICE R. MAHADEVAN
AND
THE HON'BLE MR. JUSTICE J. SATHYA NARAYANA PRASAD
T.C.A.Nos.509 to 511 of 2010
M/s.The Karur Vysya Bank Ltd.,
Central Office, Erode Road
Karur ... Appellant in all T.C.As
Versus
Commissioner of Income-Tax-I
Tiruchirapalli ... Respondent in all T.C.As
Appeals preferred under Section 260-A of the Income Tax Act, 1961
against the common order of the Income Tax Appellate Tribunal “D” Bench,
Chennai, dated 27.05.2009 passed in I.T.A.Nos.1572, 1573 and
1574/Mds/2005
For Appellant in all T.C.As : Mr.Subbaraya Aiyar
For Respondent in all T.C.As : Mr.M.Swaminathan, SSC
and Mrs.V.Pushpa, JSC
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T.C.A.Nos.509 to 511 of 2010
COMMON JUDGMENT
(Judgment of the court was delivered by R.MAHADEVAN, J.)
These tax case appeals have been filed by the appellant / Revenue,
challenging the common order of the Income Tax Appellate Tribunal “D”
Bench, Chennai, dated 27.05.2009 passed in I.T.A.Nos.1572, 1573 and
1574/Mds/2005, relating to the respective assessment years 1996-97,
1997-98 and 1998-99.
2.By order dated 16.08.2010, this court admitted these appeals on the
following substantial questions of law:
(i)Whether on the facts and in the circumstances of the case, the order
of the Tribunal directing the assessing officer to apply Section 14A read with
Rule 8D is valid in law, especially when no expenditure was incurred or
claimed towards earning of those exempt incomes?
(ii)Whether the Tribunal was justified in law in directing to apply
section 14A and Rule 8D for working out the proportionate disallowance
when the accounts are maintained in accordance with the Banking
Regulation Act and the correctness of those accounts are also not disputed?
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3.To appreciate the issues involved herein, it is but necessary to look
into the findings of the Tribunal rendered in the order impugned herein, as
regards the issues relating to “disallowance of proportionate expenses” and
“disallowance of depreciation on tax free securities applying section 14A of
the I.T. Act”, which read as under:
“10.We have heard the rival submissions and considered
the facts and material on record. The learned D.R. relied on the
decision of Special Bench of the ITAT, Mumbai Bench in the
case of Income Tax Officer v. Daga Capital Management Pvt
Ltd (2009) 312 ITR (AT) 1 (Mumbai) (SB) whereby the
Tribunal held that Rule 8 is to be followed in disallowing such
expenses and the said Rule is retrospective. Hence, he
submitted that the matter may be restored to the file of the
Assessing officer to follow the ratio laid down by the Special
Bench of the Tribunal in the above cited order. We find force in
the contention of the learned D.R that the point at issue is now
governed by the decision of the Special Bench of the Tribunal
cited surpa and hence, we restore this issue back to the file of
the Assessing officer with a direction to follow the decision of
the Special Bench cited supra and decide the issue afresh
according to law, of course, after giving effective opportunity
of being heard to the assessee. ...”
“23.We have heard the rival submissions and considered
the facts and material on record. We find some force in the
contention of the learned D.R. that section 14A is applicable
and hence, the decision of the Special Bench cited supra is to
be followed by the Assessing Officer. Since the CIT (Appeals)
himself has restored the matter to the Assessing Officer, we
direct the Assessing Officer to consider the decision of Madras
High Court in the assessee's own case reported in 273 ITR 510
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T.C.A.Nos.509 to 511 of 2010
and the decision of Special Bench in the case cited supra and
then decide the issue according to law, of course, after giving
effective opportunity of being heard to the assessee. The
assessee in also directed to produce necessary details that may
be required by the Assessing Officer for deciding the issue.”
Thus, it is apparent from the above extract that the Tribunal remanded the
matter to the Assessing officer for fresh consideration of the issues raised
herein, in the light of the decisions of this court as well as the Special Bench
cited supra.
4.At this juncture, the learned counsel appearing for both sides jointly
submitted that the issues involved herein deserve to be answered in favour of
the assessee, as per the decision of the Supreme Court in South Indian Bank
Ltd. v. Commissioner of Income-tax [(2021) 130 taxmann.com 178(SC)],
wherein, it was held as follows:
“17. In a situation where the assessee has mixed fund (made up
partly of interest free funds and partly of interest- bearing funds) and
payment is made out of that mixed fund, the investment must be considered
to have been made out of the interest free fund. To put it another way, in
respect of payment made out of mixed fund, it is the assessee who has such
right of appropriation and also the right to assert from what part of the fund
a particular investment is made and it may not be permissible for the
Revenue to make an estimation of a proportionate figure. For accepting
such a proposition, it would be helpful to refer to the decision of the
Bombay High Court in Pr. CIT v. Bombay Dyeing and Mfg. Co. Ltd [IT
Appeal No.1225 of 2015 dated 28-11-2017] where the answer was in
favour of the assessee on the question, whether the Tribunal was justified in
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T.C.A.Nos.509 to 511 of 2010
deleting the disallowance under Section 80M of the Act on the presumption
that when the funds available to the assessee were both interest free and
loans, the investments made would be out of the interest free funds
available with the assessee, provided the interest free funds were sufficient
to meet the investments. The resultant SLP of the Revenue challenging the
Bombay High Court judgment was dismissed both on merit and on delay by
this Court. The merit of the above proposition of law of the Bombay High
Court would now be appreciated in the following discussion.
18. In the above context, it would be apposite to refer to a similar
decision in CIT v. Reliance Industries Ltd [(2019) 102 taxmann.com
52/261 Taxman 165/410 ITR 466 (SC)] where a Division Bench of this
Court expressly held that where there is finding of fact that interest free
funds available to assessee were sufficient to meet its investment it will be
presumed that investments were made from such interest free funds.
19. In HDFC Bank Ltd. Vs. Dy CIT [(2016) 67 taxmann.com 42 /
383 ITR 529 (Bom.)] the assessee was a Scheduled Bank and the issue
therein also pertained to disallowance under Section 14A. In this case, the
Bombay High Court even while remanding the case back to Tribunal for
adjudicating afresh observed (relying on its own previous judgment in same
assessee’s case for a different Assessment Year) that, if assessee possesses
sufficient interest free funds as against investment in tax free securities
then, there is a presumption that investment which has been made in tax
free securities, has come out of interest free funds available with assessee.
In such situation Section 14A of the Act would not be applicable. Similar
views have been expressed by other High Courts in CIT v. Suzlon Energy
Ltd. [(2013) 33 taxmann.com 157/ 215 Taxman 272/ 354 ITR 630 (Guj)],
CIT v. Microlabs Ltd. [(2017) 79 taxmann.com 365 / (2016) 383 ITR 490
(Kar)] and CIT v. Max India Ltd. [(2016) 75 taxmann.com 268 / 388 ITR
81 (Punj & Har.)]. Mr. S Ganesh the learned Senior Counsel while citing
these cases from the High Courts have further pointed out that those
judgments have attained finality. On reading of these judgments, we are of
the considered opinion that the High Courts have correctly interpreted the
scope of Section 14A of the Act in their decisions favouring the assessees.
20. Applying the same logic, the disallowance would be legally
impermissible for the investment made by the assessees in bonds/shares
using interest free funds, under Section 14A of the Act. In other words, if
investments in securities is made out of common funds and the assessee has
available, non-interest-bearing funds larger than the investments made in
tax-free securities then in such cases, disallowance under Section
14A cannot be made.
21....
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T.C.A.Nos.509 to 511 of 2010
22. The High Court herein endorsed the proportionate disallowance
made by the Assessing Officer under Section 14A of the Income Tax Act to
the extent of investments made in tax-free bonds/securities primarily
because, separate account was not maintained by assessee. On this aspect
we wanted to know about the law which obligates the assessee to maintain
separate accounts. However, the learned ASG could not provide a
satisfactory answer and instead relied upon Honda Siel Power Products Ltd.
v. DCIT [(2012) 20 taxmann.com 5/ 206 Taxman 33 (Mag.) / 340 ITR 64
(SC)] to argue that it is the responsibility of the assessee to fully disclose all
material facts. The cited judgment, as can be seen, mainly dealt with re-
opening of assessment in view of escapement of income. The contention of
department for re-opening was that the assessee had earned tax-free
dividend and had claimed various administrative expenses for earning such
dividend income and those (though not allowable) was allowed as
expenditure and therefore the income had escaped assessment. On this,
suffice would be to observe that the action in Honda Siel Power Products
Ltd (supra) related to re-opening of assessment where full disclosure was
not made. An assessee definitely has the obligation to provide full material
disclosures at the time of filing of Income Tax Return but there is no
corresponding legal obligation upon the assessee to maintain separate
accounts for different types of funds held by it. In absence of any statutory
provision which compels the assessee to maintain separate accounts for
different types of funds, the judgment cited by the learned ASG will have
no application to support the Revenue’s contention against the assessee.
23. It would now be appropriate to advert in some detail to Maxopp
Investment Ltd. v. CIT [(2018) 91 taxmann. Com 154 / 254 Taxman 325/
402 ITR 640 (SC)]. This case interestingly is relied by both sides’ counsel.
Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for
incorporation of Section 14A in the Act in the following words: -
“3…………. The purpose behind Section 14-A of the Act, by
not permitting deduction of the expenditure incurred in relation
to income, which does not form part of total income, is to
ensure that the assessee does not get double benefit. Once a
particular income itself is not to be included in the total income
and is exempted from tax, there is no reasonable basis for
giving benefit of deduction of the expenditure incurred in
earning such an income……..”
The following was written explaining the scope of Section 14-A(1):
“41. In the first instance, it needs to be recognised that as
per Section 14-A(1) of the Act, deduction of that expenditure is
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not to be allowed which has been incurred by the assessee “in
relation to income which does not form part of the total income
under this Act”. Axiomatically, it is that expenditure alone
which has been incurred in relation to the income which is
includible in total income that has to be disallowed. If an
expenditure incurred has no causal connection with the
exempted income, then such an expenditure would obviously
be treated as not related to the income that is exempted from
tax, and such expenditure would be allowed as business
expenditure. To put it differently, such expenditure would then
be considered as incurred in respect of other income which is
to be treated as part of the total income.”
Adverting to the law as it stood earlier, this Court rejected the theory of
dominant purpose suggested by the Punjab & Haryana High Court and
accepted the principle of apportionment of expenditure only when the
business was divisible, as was propounded by the Delhi High Court.
Finally adjudicating the issue of expenditure on shares held as stock-in-
trade, the following key observations were made by Justice Sikri:
“ 50. It is to be kept in mind that in those cases where shares
are held as “stock-in-trade”, it becomes a business activity of
the assessee to deal in those shares as a business proposition.
Whether dividend is earned or not becomes immaterial. In fact,
it would be a quirk of fate that when the investee company
declared dividend, those shares are held by the assessee, though
the assessee has to ultimately trade those shares by selling them
to earn profits. The situation here is, therefore, different from
the case like Maxopp Investment Ltd. [Maxopp Investment Ltd.
v. CIT, [2011 SCC OnLine Del 4855 : (2012) 347 ITR 272]
where the assessee would continue to hold those shares as it
wants to retain control over the investee company. In that case,
whenever dividend is declared by the investee company that
would necessarily be earned by the assessee and the assessee
alone. Therefore, even at the time of investing into those
shares, the assessee knows that it may generate dividend
income as well and as and when such dividend income is
generated that would be earned by the assessee. In contrast,
where the shares are held as stock- in-trade, this may not be
necessarily a situation. The main purpose is to liquidate those
shares whenever the share price goes up in order to earn
profits……….”
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The learned Judge then considered the implication of Rule 8D of the
Rules in the context of Section 14-A(2) of the Act and clarified that
before applying the theory of apportionment, the Assessing Officer
must record satisfaction on Suo Moto disallowance only in those cases
where, the apportionment was done by the assessee. The following is
relevant for the purpose of this judgment:
“51. ……………….It will be in those cases where the assessee
in his return has himself apportioned but the AO was not
accepting the said apportionment. In that eventuality, it will
have to record its satisfaction to this effect.………….”
24. Another important judgment dealing with Section
14A disallowance which merits consideration is Godrej and Boyce
Manufacturing Company Ltd. V. DCIT [(2017) 1 SCC 421]. Here the
assessee had access to adequate interest free funds to make investments and
the issue pertained to disallowance of expenditure incurred to earn dividend
income, which was not forming part of total income of the Assessee.
Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench
observed that for disallowance of expenditure incurred in earning an
income, it is a condition precedent that such income should not be
includible in total income of assessee. This Court accordingly concluded
that for attracting provisions of Section 14A, the proof of fact regarding
such expenditure being incurred for earning exempt income is necessary.
The relevant portion of Justice Gogoi’s judgment reads as follow:
“36. ……… what cannot be denied is that the requirement for
attracting the provisions of Section 14-A (1) of the Act is proof
of the fact that the expenditure sought to be disallowed/deducted
had actually been incurred in earning the dividend income……
…….”
25. Proceeding now to another aspect, it is seen that the Central
Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015
dated 02.11.2015, which had analyzed and then explained that all shares
and securities held by a bank which are not bought to maintain Statutory
Liquidity Ratio (SLR) are its stock-in-trade and not investments and
income arising out of those is attributable, to business of banking. This
Circular came to be issued in the aftermath of CIT Vs. Nawanshahar
Central Cooperative Bank Ltd. [(2007) 160 Taxman 48 / 289 ITR 6 (SC)]
wherein this Court had held that investments made by a banking concern is
part of their banking business. Hence the income earned through such
investments would fall under the head Profits & Gains of business. The
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T.C.A.Nos.509 to 511 of 2010
Punjab and Haryana High Court, in the case of Pr. CIT v. State Bank of
Patiala [(2017) 88 taxmann. com 667 / 393 ITR 476 (Punj & Har)] while
adverting to the CBDT Circular, concluded correctly that 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 business income. That is
why Section 14A would not be attracted to such income.
26. Reverting back to the situation here, the Revenue does not
contend that the Assessee Banks had held the securities for maintaining the
Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of
this position, when there is no finding that the investments of the Assessee
are of the related category, tax implication would not arise against the
appellants, from the said circular.
27. The aforesaid discussion and the cited judgments advise this
Court to conclude that the proportionate disallowance of interest is not
warranted, under Section 14A of Income Tax Act for investments made in
tax free bonds/ securities which yield tax free dividend and interest to
Assessee Banks in those situations where, interest free own funds available
with the Assessee, exceeded their investments. With this conclusion, we
unhesitatingly agree with the view taken by the learned ITAT favouring the
assessees.”
5.In the light of the aforesaid decision of the Supreme Court, which
applies to the facts of the present case and as agreed by the learned counsel
appearing for both sides, we remand the matter to the Assessing Officer to
decide the issues raised herein afresh, taking note of the observations made
in the Supreme Court decision as referred to above and pass appropriate
orders, within a period of three months from the date of receipt of a copy of
this judgment. It is needless to state that such an exercise shall be completed
by the Assessing officer, after providing reasonable opportunity to the
appellant to place their oral and documentary evidences.
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6.All these tax case appeals are disposed of in the above terms. No
costs.
(R.M.D., J.) (J.S.N.P., J.)
08.02.2022
kas
Internet : Yes
Index : Yes / No
To
1. Commissioner of Income-Tax-I
Tiruchirapalli
2.Income Tax Appellate Tribunal “D” Bench
Chennai,
3. The Assistant Commissioner of Income Tax
Company circle 1, Trichy.
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T.C.A.Nos.509 to 511 of 2010
R.MAHADEVAN, J.
and
J.SATHYA NARAYANA PRASAD, J.
kas/rk
T.C.A.Nos.509 to 511 of 2010
08.02.2022
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