Further, The Supreme Court In Maxopp Investment Ltd v. Commissioner Of Income Tax, New Delhi, 2018(402) Itr 640 Held As 4)2'

ITA No. 436 of 20191] IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH ITA No. 436 of 2019Date of decision: 15.1.2020 Pr. Commissioner of Income Tax-1, Ludhiana .. Appellant Vv M/s Rico Auto Industries Ltd. .. Respondent CORAM:HON'BLE MR. JUSTICE AJAY TEWARIHON'BLE MR. JUSTICE AVNEBEESH JHING Present:Mr. Rajesh Katoch, Senior Standing Counsel andMs. Pridhi Jaswinder Sandhu, Junior Standing Counselfor the appellant.Ms. Pridhi Jaswinder Sandhu, Junior Standing Counselfor the appellant. AVNEESH JHINGAN, J. The revenue is in appeal under Section 260A of the Income TaxAct, 1961 (for short, 'the Act’) against the order dated 2.5.2019 passed bythe Income Tax Appellate Tribunal, Chandigarh (for short, ‘the Tribunal’).Following substantial questions of law have been claimed: “(1) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in giving directions tothe A.O. to compute the disallowance only on thoseinvestments which have yielded exempt income, ignoringthe clear mandate of Rule 8D 2(111) which unambiguouslycomputes disallowance u/s 14A equal to one half percentof the average value of investment, income from whichdoes not or shall not form part of total income.the A.O. to compute the disallowance only on thoseinvestments which have yielded exempt income, ignoringthe clear mandate of Rule 8D 2(111) which unambiguouslycomputes disallowance u/s 14A equal to one half percentof the average value of investment, income from whichdoes not or shall not form part of total income. (141) Whether on the facts and circumstances of the case and i ITA No. 436 of 2019|2]| law, the Hon'ble ITAT was justified in giving directions tothe A.O. to compute the disallowance only on thoseinvestments which have yielded exempt income, ignoringthe clear mandate of Rule 8D 2(11) which unambiguouslycomputes disallowance u/s 14A by taking the average ofvalue of investment, income from which does not or shallnot form part of total income as appearing in the balanceSheet of the assessee, on the first day and the last day of theprevlous year?’ The facts relevant for the present appeal are that the assessmentyear involved is 2013-14. The assessee made investments in the equity ofdomestic group companies, some of which yielded exempt dividends. Theassessee had significant borrowed funds which were almost equal to non-interest bearing funds. The assessee itself computed disallowance ofL3,35,66,806/- under Section 14A of the Act read with Rule 8D of theIncome Tax Rules, 1962 (for short, 'the Rules’). During the assessmentproceedings, the assessee contended that disallowance was inadvertentmistake, as the investments were made out of non-interest bearing funds andregular cash profit of the company. The Assessing Officer refusedwithdrawal of voluntary disallowance. The assessment was framed videorder dated 25.11.2016. The Commissioner of Income Tax (Appeals) [forShort, ‘CIT (A)'] vide order dated 23.3.2018 allowed the appeal of theassessee with regard to withdrawal of voluntary disallowance. Further, itwas directed that disallowance under Section 14A of the Act read with Rule8D of the Rules be made as per the amendment made w.e.f. 2.6.2016. Therevenue preferred an appeal, the Tribunal vide order dated 2.5.2019 partly ITA No. 436 of 2019}3]] allowed the appeal and held that the amended Section 14A of the Act andRule 8D of the Rules would not be applicable for the relevant assessmentyear aS the amendment was prospective. However, the Assessing Officerwas directed to compute disallowance on the investments which yieldedexempt income. The relevant portion of the order of the Tribunal isreproduced below: ITA No. 436 of 2019}3]] allowed the appeal and held that the amended Section 14A of the Act andRule 8D of the Rules would not be applicable for the relevant assessmentyear aS the amendment was prospective. However, the Assessing Officerwas directed to compute disallowance on the investments which yieldedexempt income. The relevant portion of the order of the Tribunal isreproduced below: “Regarding the ruling that the Assessing Officer shallaccount on those investments which have yielded exemptincome, we find strength by the orders of the special Benchoft ITAT in the case of Vreet Investment Pvt. Ltd. 188 TTJOO1 (Del-Trib.) and also the order in the case of PrimeProperty Development Corp Pvt. Ltd. in ITA No.7402/Mum/2016 dated 16.11.2017. We direct the AssessingOfficer to compute the disallowance accordingly.” The present appeal is filed raising a grievance against thedirection of the Tribunal. Learned counsel for the revenue argued that the Tribunal erredin directing to compute disallowance only considering the investmentswhich yielded exempt income. However, he was not in a position to disputethat this Court in number of cases held that the amount of disallowanceunder Section 14A of the Act is to be restricted to the amount of exemptincome only and not at a higher figure. Further, the Supreme Court in|Maxopp Investment Ltd. v.Commissioner of Income Tax, New Delhi, 2018(402) ITR 640held as4)2'& “AG.We note from the facts in the State Bank of Patiala cases ITA No. 436 of 20194] that the AO, while passing the assessment order, had alreadyrestricted the disallowance to the amount which was claimedaS exempt income by applying the formula contained in Rule8D of the Rules and holding that section 14A of the Actwould be applicable. In spite of this exercise ofapportionment of expenditure carried out by the AO, CIT(A)disallowed the entire deduction of expenditure. That view ofthe CIT(A) was clearly untenable and rightly set aside by theITATTherefore, on facts, the Punjab and Haryana HighCourt has arrived at a correct conclusion by affirming theview of the ITAT, though we are not subscribing to the theoryof dominant intention applied by the High Court. It is to bekept in mind that in those cases where shares are held as*stock-in-trade’, it becomes a business activity of the assesseeto deal in those shares as a business proposition. Whetherdividend is earned or not becomes immaterial. In fact, itwould be a quirk of fate that when the investee companydeclared dividend, those shares are held by the assessee,though the assessee has to ultimately trade those shares byselling them to earn profits. The situation here is, therefore,different from the case like Maxopp Investment Ltd. wherethe assessee would continue to hold those shares as it wantsto retain control over the investee company. In that case,whenever dividend is declared by the investee company thatwould necessarily be earned by the assessee and the assesseealone. Therefore, even at the time of investing into those ITA No. 436 of 20195 ]| ITA No. 436 of 20195 ]| Shares, the assessee knows that it may generate dividendincome as well and as and when such dividend income isgenerated that would be earned by the assessee. In contrast,where the shares are held as stock-in-trade, this may not benecessarily a situation. The main purpose is to liquidate thoseShares whenever the share price goes up in order to earnprofits. In the result, the appeals filed by the Revenuechallenging the judgment of the Punjab and Haryana HighCourt in State Bank of Patiala also fail, though law in thisrespect has been clarified hereinabove.” income as well and as and when such dividend income isgenerated that would be earned by the assessee. In contrast,where the shares are held as stock-in-trade, this may not benecessarily a situation. The main purpose is to liquidate thoseShares whenever the share price goes up in order to earnprofits. In the result, the appeals filed by the Revenuechallenging the judgment of the Punjab and Haryana HighCourt in State Bank of Patiala also fail, though law in thisrespect has been clarified hereinabove.” /Emphasis supplied] There is no dispute raised that computation of disallowanceunder Section 14A of the Act and Rule 8D of the Rules would be only withregard to the amount of exempt income. In such circumstances, the directionof the Tribunal calls for no interference as it only tantamounts to remand thematter to the Assessing Officer to compute disallowance as per the law andin view of the rules applicable in the relevant year, The appeal is dismissed. (AVNEESH JHINGAN) (AJAY TEWARIT)JUDGE JUDGE 15.1.20209D Whether speaking/reasoned:Yes/NoWhether reportable:Yes/No