Ita/97/2010 Of The Commissioner Of Income Tax v. Syndicate Bank

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 1/ DAY OF JANUARY 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE RAVI V.HOSMANL LT.A. NO.97 OF 2010C/WLT.A. NOQ.99 OF 2ZQO LT.A.§ NO.97 OF 2010 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, ATTAVATA> MANGALORE, 2 |THE ASST. COMMISSIONER OF INCOME-T AXCIRCLE-1, UDUPI.CIRCLE-1, UDUPI. ... APPELLANTS (By Sri. K.V. ARAVIND, ADV.) AND: M/S. SYNDICATE BANK|SYNDICATE HOUSEMANIPAL. ... RESPONDENT (By Sri. T. SURYANARAYANA, ADV.) THIS I.7.A. IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 9/10/2009 PASSED IN ITA. No.1282/BANG/2007, FOR THE ASSESSMENT YEAR 2000-2001,|PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE|ORDERSPASSEDBY|THE|LIALBANGALOREIN|LIANO.1282/BANG/2007, DATED 9/10/2009 AND CONFIRM THE}ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE|ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME|TAX, CIRCLE-1, UDUPI, IN THE INTEREST OF JUSTICE ANDEQUITY & ETC.. LT.A.§ NCO.99 OF 201 BETWEEN: 1.THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, ATTAVARA. MANGALORE. 2 |THE ASST. COMMISSIONER OF INCOME-T AX CIRCLE-1, UDUPI. ... APPELLANTS (By Sri.K.V.ARAVIND, ADV.) AND: SYNDICATE BANKHEAD OFFICEACCOUNTS DEPARTMENT|TAX CELL, P.B.NO.1MANIPAL. .. RESPONDENT (By Sri.T.SURYANARAYANA, ADV.) THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 9/10/2009 PASSED IN ITA.No.1282/BANG/2007, FOR THE ASSESSMENT YEAR 2000-2001,PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE.ORDERSPASSEDBY|THE|LIALBANGALOREIN|LIANO.1282/BANG/2007, DATED 9/10/2009 AND CONFIRM THE.ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE.ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME. TAX, CIRCLE-1, UDUPI, IN THE INTEREST OF JUSTICE AND|EQUITY & ETC.. THESE I.T.As. COMING ON FOR HEARING, THIS DAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT These appeals under Section 260-A of the Income|Tax Act, 1961 (nereinafter referred to as the Act, forsnort) nave been filed by tne revenue. ITA No.97/2010was admitted by a bench of this court on the followingsubstantial questions of law: (I)Whether the Tribunal was correct inholdingthat|theestimeationofexpenaitureIn|respect"Of|holdingthat|theestimeationofexpenaitureIn|respect"Of| administrative or financial cost at 5%.of dividend income earned by theAssessing Officer in accordance withSection 14A of the Act cannot be.disallowed?of dividend income earned by theAssessing Officer in accordance withSection 14A of the Act cannot be.disallowed? (iI)Whether the provisions of the Section.14A of the Act r/w Ruie 8D of the.Income Tax Rules should pe mede-applicable to all pending matters as the14A of the Act r/w Ruie 8D of the.Income Tax Rules should pe mede-applicable to all pending matters as the same Is Clarificatory in nature in view.of the consistent stands taken by the.department?| (iI)Whether the Tribunal was correct inholding that the estimated expenditurecannot be treated as book profit underSection 115JA of the Act adespiteExplanation (f) to Section 115JA of the’Act?holding that the estimated expenditurecannot be treated as book profit underSection 115JA of the Act adespiteExplanation (f) to Section 115JA of the’Act? (iI)Whether the provisions of the Section.14A of the Act r/w Ruie 8D of the.Income Tax Rules should pe mede-applicable to all pending matters as the14A of the Act r/w Ruie 8D of the.Income Tax Rules should pe mede-applicable to all pending matters as the same Is Clarificatory in nature in view.of the consistent stands taken by the.department?| (iI)Whether the Tribunal was correct inholding that the estimated expenditurecannot be treated as book profit underSection 115JA of the Act adespiteExplanation (f) to Section 115JA of the’Act?holding that the estimated expenditurecannot be treated as book profit underSection 115JA of the Act adespiteExplanation (f) to Section 115JA of the’Act? (iv)Whether tne Tribunal was correct inholding that the provision towards (I)doubtful debts (ti) standard assets (iii)depreciation on securities (iv) floatingrate notes of London branch (v) DICGC.loans (vi) suits filed accounts (vii)miscellaneous provision cannot be.addedDackKIn|accordancewith Explanation of Section 115JA of the Act.in the light of the judgment of the Apexcourt in H.C.L. Comnet when there [s_diminution in tne value of assets as.contended by the assessee and in view.of the retrospective amendment to.holding that the provision towards (I)doubtful debts (ti) standard assets (iii)depreciation on securities (iv) floatingrate notes of London branch (v) DICGC.loans (vi) suits filed accounts (vii)miscellaneous provision cannot be.addedDackKIn|accordancewith Explanation of Section 115JA of the Act.in the light of the judgment of the Apexcourt in H.C.L. Comnet when there [s_diminution in tne value of assets as.contended by the assessee and in view.of the retrospective amendment to. Explanation (g) to Section 115JA of theAct? (v)Whether the Tribunal was correct inholding that the Assessing Officercannot add the interest on zero couponbonds to chargeable book profits byinvokingexplanationionSection115JA(2) of the Act?holding that the Assessing Officercannot add the interest on zero couponbonds to chargeable book profits byinvokingexplanationionSection115JA(2) of the Act? 2.|ITA No.99/2010 was admitted by a bDencn of this court on the following substantial question of law: (I)Whether the appellate authorities werecorrect in holding that interest on zero|coupen bonds cannot be reduced in|arriving at Book Profit for the purpose ofSection 115JB of the Act, when Section|115JB of the Act (prior to amendment)allows reduction of any income creditedto P & L account, which Is covered by Sections 10, 10A, 10B 11 or 12 of the|Act? 3.On account of similarity of the issues involvedin the substantial questions of law, they were heardanalogously and are being decided by this commonjudgment. For the facility of reference, facts from ITA.No.97/2010 are being referred to. aThe assessee filed a return of Income on28.11.7000|declaring.Qross|total.incomeofRs.2,23,249/-.The.aSS@ ,06,92,53,033/- as book profit under Section 115JAof the Act. The return was processed under Section143(1)oftheAct.resultingIn|refundofRs.10,62,37,618/-. Thereafter a notice was issued underSection 143(2) of the Act. The Assessing Officer by anorder dated 31.17.7002 inter alia held that sinceexempted dividend does not form part of income, theassessee is not entitled to disallowance of proportionateexpenses as required under Section 14A of the Act.Accordingly, an addition of Rs.20,38,002/- was made by.the Assessing Officer. The aforesaid order was upheld in aThe assessee filed a return of Income on28.11.7000|declaring.Qross|total.incomeofRs.2,23,249/-.The.aSS@ ,06,92,53,033/- as book profit under Section 115JAof the Act. The return was processed under Section143(1)oftheAct.resultingIn|refundofRs.10,62,37,618/-. Thereafter a notice was issued underSection 143(2) of the Act. The Assessing Officer by anorder dated 31.17.7002 inter alia held that sinceexempted dividend does not form part of income, theassessee is not entitled to disallowance of proportionateexpenses as required under Section 14A of the Act.Accordingly, an addition of Rs.20,38,002/- was made by.the Assessing Officer. The aforesaid order was upheld in appeal by the Commissioner of Income Tax (Appeals).Being aggrieved, the assessee filed an appeal before theIncome Tax Tribunal. The Tribunal vide impugned orderdated 09.10.2009inter allaheld that since, the business|of the assessee is in the nature of indivisible, theexpenditure cannot be disallowed. Accordingly, theclaim of the appellant under Section 14A(1) of the Actwas allowed. The claim of the assessee for Interest on!zero coupon bonds being purely notional income wasalso excluded form the book profit for the purposes ofcomputationofMinimumAlternativeTax.Beingaggrieved, the revenue nas filed these appeals beforethis court. 5.|Learned counsel for the revenue submittedthat the finding recorded by the Income Tax AppellateTribunal that in the absence of sub-Sections (2) and (3)of the Act, the provisions of Section 14A(1) cannot beapplied is perverse. It is further submitted that theliability to pay the tax arises under the provisions of Section 14A(1) of the Act. It is submitted that sub-Sections (2) & (3) were incorporated in Section 14A byFinanceAct,2006.witheffectfrom01.04.7007. |However, even prior to amendment, the AssessingOfficer nad to assess the total Income on tne basis oTbest judgment assessment. It is pointed out that basicreason for insertion of Section 14A of the Act ts that.certain incomes are includable while computing totalincome as they are exempt under certain provisions ofthe Act. It is further submitted that there is a proximatecause for disallowance, which is in relationship with Taxexempt income under Section 14A of the Act. In supportof aforesaid submissions, reliance has been placed ondecision of the Supreme Court in"COMMISSIONER OFINCOME TAX VS, WALFORT SHARE & STOCK.BROKERS (P) LTD.’, (2010) 326 ITR 1, "GODREJ &BOYCEMANUFACTURINGCOMPANYLTD.YS, DEPUTY COMMISSIONER OF INCOME-TAX‘, (2017)394 ITR 449|and‘MAXOPP INVESTMENT LTD. VS. COMMISSIONER OF INCOME TAX, NEW DELHI’,(2018) 402 ITR 640 (SC).It is fairly submitted by.the learned counsel for the revenue that substantialquestion of law Nos.1 and 3 are interlinked. Whileinviting the attention of this Court to Explanation toSection 115JA of the Act, it is submitted that in theassessee’s appeal with reference, to explanation toSection 115JA(c) of the Act namely ITA No.164/2009dated 04.12.2018, the matter was remitted. Therefore,the issue involved in substantial question of law Nos.4and 5 be remitted for fresh consideration to theCommissioner of Income Tax (Appeals). 6.|On the other hand, learned counsel for theassessee has submitted that In order to attract theapplicability of Section 14A of the Act, there has to beapay out i.e., an assessee Nas to incur expenditure. Whileinviting the attention of this Court to paragraph 1/7 ofthe decision in the case ofWALFORTsupra, it is pointedout that expenditure is a pay out and pay back is not expenditure in the scheme of Section 14A of the Act. Itis further submitted that condition precedent forinvoking Section 14A of the Act is pay out. In theinstant case, since the assessee has not incurred anyexpenditure, therefore, the provisions of Section 14A ofthe Act do not apply to the fact situation of the case. 6.|On the other hand, learned counsel for theassessee has submitted that In order to attract theapplicability of Section 14A of the Act, there has to beapay out i.e., an assessee Nas to incur expenditure. Whileinviting the attention of this Court to paragraph 1/7 ofthe decision in the case ofWALFORTsupra, it is pointedout that expenditure is a pay out and pay back is not expenditure in the scheme of Section 14A of the Act. Itis further submitted that condition precedent forinvoking Section 14A of the Act is pay out. In theinstant case, since the assessee has not incurred anyexpenditure, therefore, the provisions of Section 14A ofthe Act do not apply to the fact situation of the case. J |It is also argued that a division bench ofPunjab|&HaryanaHighCourt|In|‘PRINCIPALCOMMISSION OF INCOME TAX VS. STATE BANK OFPATIALA (2017) 78 TAXMANN.COM 3 (PUNJAB &HARYANA)has held that return of Investment would.not fall within the expression “expenditure incurred”Under Section 14A of the Act. It Is further submittedthat when no expenditure is incurred by the assessee inearning dividend income, no notional expenditure could.be deducted from the income. Learned counsel]! for thaSS@SSCEChasalso|referred CO.theorder|dated16.10.2019 passed by division bench of Delhi High Courtin,PRINCIPAL COMMISSTONER OF INCOME TAX-/7 VS. M/S PUNJAB AND SINDH BANK,wherein by.placing reliance on the decision of the Supreme Court inMAXOPP INVESTMENT PVT LTDsupra, the Delhi HighCourt held that the assessee had earned the revenue onthe shares held as stock in trade only by quirk of fateand held that no substantial question of law is involved.It is further submitted that the Supreme Court hadinitially granted leave to file an appeal against theaforesaid order. However, the appeal preferred by therevenue was subsequently dismissed. Therefore, in viewof law laid down by the Supreme Court in case ofMAXOPP INVESMENT LTD,as well as.WALFORT|SUPIa, the first substantial question of law deserves to be answered in favour of the assessee. It is alSo arguedthat since this court by an order passed on 16.01.2020in ITA No.18/2014 has held that the provisions ofSection 115JA of the Act do not apply to the BankingCompany, therefore, the remaining issues are renderedacademic. 8.|We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take.note of Section 14A of the Act: Section 14A (1)For the purposes ofcomputing the total income under thisChapter, no deduction shall be allowed inrespect of expenditure incurred by theassessee in relation to Income which doesnot form part of the total income under thisAct. (2)The.Assessing|OfficerSha!determinetheamountofexpenditureincurred tn relation to such [Income whichdoes not form part of the total incomeUnder this Act In accordance with suchmethod as may be_ prescribed, if theAssessing Officer, having regard to theaccounts of the assesee, is not satisfiedwith the correctness of the claim of theassessee in respect of such expenditure inrelation to income which does not form partof the total income under this Act. (3) The provisions of sub-Section (2)Snall also apply in relation to a case wnerean assesee claims that no expenditure hasbeen incurred by him in relation to incomewhich does not form part of the _ totaIncome Under this Act. Provided that nothing contained in)this Section shall empower the AssessingOfficer either to reassess Under Section14/7 or pass an order enhancing theassessment or reducing a refund alreadymade or otherwise increasing the liability ofthe assessee under Section 154, for anyassessment year beginning on or beforethe 1[Su]day of April 2001. 9 |From perusal of Section 14A of the Act, it isevident that for the purposes of computing the totalincome under this chapter, no deduction shall be allowedin respect of the expenditure incurred by the assessee inrelation of the income wnhicn does not form part of nistotal income under the Act. The expenditure, the return Provided that nothing contained in)this Section shall empower the AssessingOfficer either to reassess Under Section14/7 or pass an order enhancing theassessment or reducing a refund alreadymade or otherwise increasing the liability ofthe assessee under Section 154, for anyassessment year beginning on or beforethe 1[Su]day of April 2001. 9 |From perusal of Section 14A of the Act, it isevident that for the purposes of computing the totalincome under this chapter, no deduction shall be allowedin respect of the expenditure incurred by the assessee inrelation of the income wnhicn does not form part of nistotal income under the Act. The expenditure, the return of investment and cost of requisition are _ distincconcepts. Therefore the word ‘incurred’ in Section 14A ofthe Act have to be read in the context of the scheme ofthe Act and if so read, it is clear that it disallows certainexpenditures incurred to earn exempt income frombeing deducted from other incomes which is includablein the total income for the purposes of chargeability to.the tax. It is equally well settled that expenditure is apay out. In order to attract applicability of section 14A ofthe Act, there has to be a pay out and return ofinvestment or a pay back is not such a debit item. [See:WALFORT SHARE AND STOCK BROKERS (P) LTDSUPRA as well asMAXOP INVESTMENTS LTDSUPRA=. In the instant case, the assessee has|admittedly not incurred any expenditure. This case.pertains to income on dividend, which by no stretch ofimagination can be treated to be an expenditure to|attract the provisions of Section 14A of the Act. In viewof aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this courtis answered in favour of the assessee and against therevenue. 10. Learned counsel for parties, have fairlyadmitted that in case this court frames a substantial|question of law that whether provisions of Section 115JAapply to the Banking Companies are not the remainingsubstantial questions of law would be reduced otiose. —This court has already framed a substantial question oflaw in this regard today.This|COUTTbyan)order|passed on 16.01.2020 passed in ITA No.18/2014 hasalready held that the provisions of Section 115JA do notapplyCO.thebankingcompanies. Therefore,thesubstantial questions of law Nos.3, 4 and 5 andsubstantial question of law framed in ITA 99/2010 arerendered academic and need not be answered. So far assubstantial question of law No.2 in ITA No.97/2010 isconcerned, the same is squarely covered by the decision Of theSupreme.Court|In=CITVS,ESSAR|TELEHOLDINGS LTD.’,(2018) 401 ITR 445,wherein.it has been held that provisions of Section 114A readwith rule 8D of the Income Tax Rules are prospective innature and can not be applied to any assessment yearprior to Assessment Year 2008-09. Accordingly, the|aforesaid substantial question of law is answered againstthe revenue and in favour of the assessee. In view of preceding analysis, the appeals fail and|are hereby dismissed. SS Sd/-|JUDGE Sd/-|JUDGE