M/S.the Karur Vysya Bank Ltd., Central Office, Erode Road Karur v. Commissioner Of Income-Tax-Itiruchirapalli

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HON'BLE MR.JUSTICE R.MAHADEVANAND THE HON'BLE MR.JUSTICE J.SATHYA NARAYANA PRASAD M/s.The Karur Vysya Bank Ltd., Central Office, Erode Road Karur ... Appellant in all T.C.As Versus Commissioner of Income-Tax-ITiruchirapalli ... 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 AppellateTribunal “D” Bench, Chennai, dated 27.05.2009 passed inI.T.A.Nos.1572, 1573 and 1574/Mds/2005, against the order of theCommissioner of Income Tax(Appeals) No.4, Williams Road,Contonment, Tiruchirapalli – 620001, dated 31.03.2005 passed ini) I.T.A. Nos.35/99-2000, 39/00-01, A63/01-02 respectively,against the order of the Joint Commissioner of Income Tax,Special Range, Trichy dated 09.03.1999 and against the order ofthe Additional Commissioner of Income Tax, Special Range,Tiruchirapalli dated 15.03.2000 and 21.03.2001 made inG.I.No.102-T/AAACT/3373 J, 102-A/AAACT/3373/J respectively forthe assessment year 1996-97, 1997-98 & 1998-99. 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 TaxAppellate Tribunal “D” Bench, Chennai, dated 27.05.2009 passedin I.T.A.Nos.1572, 1573 and 1574/Mds/2005, relating to therespective assessment years 1996-97, 1997-98 and 1998-99. 2.By order dated 16.08.2010, this court admitted theseappeals on the following substantial questions of law: (i)Whether on the facts and in the circumstances of thecase, the order of the Tribunal directing the assessing officerto apply Section 14A read with Rule 8D is valid in law,especially when no expenditure was incurred or claimed towardsearning of those exempt incomes? (ii)Whether the Tribunal was justified in law in directingto apply section 14A and Rule 8D for working out theproportionate disallowance when the accounts are maintained inaccordance with the Banking Regulation Act and the correctnessof those accounts are also not disputed? 3.To appreciate the issues involved herein, it is butnecessary to look into the findings of the Tribunal rendered inthe order impugned herein, as regards the issues relating to“disallowance of proportionate expenses” and “disallowance ofdepreciation on tax free securities applying section 14A of theI.T. Act”, which read as under: “10.We have heard the rival submissions andconsidered the facts and material on record. Thelearned D.R. relied on the decision of Special Bench ofthe ITAT, Mumbai Bench in the case of Income TaxOfficer v. Daga Capital Management Pvt Ltd (2009) 312ITR (AT) 1 (Mumbai) (SB) whereby the Tribunal held thatRule 8 is to be followed in disallowing such expensesand the said Rule is retrospective. Hence, he submittedthat the matter may be restored to the file of theAssessing officer to follow the ratio laid down by theSpecial Bench of the Tribunal in the above cited order.We find force in the contention of the learned D.R thatthe point at issue is now governed by the decision ofthe Special Bench of the Tribunal cited surpa andhence, we restore this issue back to the file of theAssessing officer with a direction to follow thedecision of the Special Bench cited supra and decidethe issue afresh according to law, of course, after giving effective opportunity of being heard to theassessee. ...” giving effective opportunity of being heard to theassessee. ...” “23.We have heard the rival submissions andconsidered the facts and material on record. We findsome force in the contention of the learned D.R. thatsection 14A is applicable and hence, the decision ofthe Special Bench cited supra is to be followed by theAssessing Officer. Since the CIT (Appeals) himself hasrestored the matter to the Assessing Officer, we directthe Assessing Officer to consider the decision ofMadras High Court in the assessee's own case reportedin 273 ITR 510 and the decision of Special Bench in thecase cited supra and then decide the issue according tolaw, of course, after giving effective opportunity ofbeing heard to the assessee. The assessee in alsodirected to produce necessary details that may berequired by the Assessing Officer for deciding theissue.” Thus, it is apparent from the above extract that the Tribunalremanded the matter to the Assessing officer for freshconsideration of the issues raised herein, in the light of thedecisions of this court as well as the Special Bench cited supra. 4.At this juncture, the learned counsel appearing for bothsides jointly submitted that the issues involved herein deserveto be answered in favour of the assessee, as per the decision ofthe Supreme Court in South Indian Bank Ltd. v. Commissioner ofIncome-tax [(2021) 130 taxmann.com 178(SC)], wherein, it washeld as follows: “17. In a situation where the assessee has mixedfund (made up partly of interest free funds and partlyof interest- bearing funds) and payment is made out ofthat mixed fund, the investment must be considered tohave been made out of the interest free fund. To putit another way, in respect of payment made out ofmixed fund, it is the assessee who has such right ofappropriation and also the right to assert from whatpart of the fund a particular investment is made andit may not be permissible for the Revenue to make anestimation of a proportionate figure. For acceptingsuch a proposition, it would be helpful to refer tothe decision of the Bombay High Court in Pr. CIT v.Bombay Dyeing and Mfg. Co. Ltd [IT Appeal No.1225 of2015 dated 28-11-2017] where the answer was in favourof the assessee on the question, whether the Tribunalwas justified in deleting the disallowance under Section 80M of the Act on the presumption thatwhen the funds available to the assessee were bothinterest free and loans, the investments made would beout of the interest free funds available with theassessee, provided the interest free funds weresufficient to meet the investments. The resultant SLPof the Revenue challenging the Bombay High Courtjudgment was dismissed both on merit and on delay bythis Court. The merit of the above proposition of lawof the Bombay High Court would now be appreciated inthe following discussion. 18. In the above context, it would be apposite torefer to a similar decision in CIT v. RelianceIndustries Ltd [(2019) 102 taxmann.com 52/261 Taxman165/410 ITR 466 (SC)] where a Division Bench of thisCourt expressly held that where there is finding offact that interest free funds available to assesseewere sufficient to meet its investment it will bepresumed that investments were made from such interestfree funds. 18. In the above context, it would be apposite torefer to a similar decision in CIT v. RelianceIndustries Ltd [(2019) 102 taxmann.com 52/261 Taxman165/410 ITR 466 (SC)] where a Division Bench of thisCourt expressly held that where there is finding offact that interest free funds available to assesseewere sufficient to meet its investment it will bepresumed that investments were made from such interestfree funds. 19. In HDFC Bank Ltd. Vs. Dy CIT [(2016) 67taxmann.com 42 / 383 ITR 529 (Bom.)] the assessee wasa Scheduled Bank and the issue therein also pertainedto disallowance under Section 14A. In this case, theBombay High Court even while remanding the case backto Tribunal for adjudicating afresh observed (relyingon its own previous judgment in same assessee’s casefor a different Assessment Year) that, if assesseepossesses sufficient interest free funds as againstinvestment in tax free securities then, there is apresumption that investment which has been made in taxfree securities, has come out of interest free fundsavailable with assessee. In such situation Section14A of the Act would not be applicable. Similar viewshave been expressed by other High Courts in CIT v.Suzlon Energy Ltd. [(2013) 33 taxmann.com 157/ 215Taxman 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 learnedSenior Counsel while citing these cases from the HighCourts have further pointed out that those judgmentshave attained finality. On reading of these judgments,we are of the considered opinion that the High Courtshave correctly interpreted the scope of Section 14A ofthe Act in their decisions favouring the assessees. 20. Applying the same logic, the disallowancewould be legally impermissible for the investment madeby the assessees in bonds/shares using interest freefunds, under Section 14A of the Act. In other words,if investments in securities is made out of commonfunds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowanceunder Section 14A cannot be made. 21.... 22. The High Court herein endorsed theproportionate disallowance made by the AssessingOfficer under Section 14A of the Income Tax Act to theextentofinvestmentsmadeintax-freebonds/securities primarily because, separate accountwas not maintained by assessee. On this aspect wewanted to know about the law which obligates theassessee to maintain separate accounts. However, thelearned ASG could not provide a satisfactory answerand 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 theresponsibility of the assessee to fully disclose allmaterial facts. The cited judgment, as can be seen,mainly dealt with re-opening of assessment in view ofescapement of income. The contention of department forre-opening was that the assessee had earned tax-freedividend and had claimed various administrativeexpenses for earning such dividend income and those(though not allowable) was allowed as expenditure andtherefore the income had escaped assessment. On this,suffice would be to observe that the action in HondaSiel Power Products Ltd (supra) related to re-openingof assessment where full disclosure was not made. Anassessee definitely has the obligation to provide fullmaterial disclosures at the time of filing of IncomeTax Return but there is no corresponding legalobligation upon the assessee to maintain separateaccounts for different types of funds held by it. Inabsence of any statutory provision which compels theassessee to maintain separate accounts for differenttypes of funds, the judgment cited by the learned ASGwill have no application to support the Revenue’scontention against the assessee. 23. It would now be appropriate to advert in somedetail to Maxopp Investment Ltd. v. CIT [(2018) 91taxmann. 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. Sikrinoted the objective for incorporation of Section14A in the Act in the following words: -“3…………. The purpose behind Section 14-A ofthe Act, by not permitting deduction of theexpenditure incurred in relation to income,which does not form part of total income, isto ensure that the assessee does not getdouble benefit. Once a particular incomeitself is not to be included in the totalincome and is exempted from tax, there is noreasonable basis for giving benefit ofdeduction of the expenditure incurred inearning such an income……..” The following was written explaining the scopeof Section 14-A(1): “41. In the first instance, it needs to berecognised that as per Section 14-A(1) ofthe Act, deduction of that expenditure isnot to be allowed which has been incurred bythe assessee “in relation to income whichdoes not form part of the total income underthis Act”. Axiomatically, it is thatexpenditure alone which has been incurred inrelation to the income which is includiblein total income that has to be disallowed.If an expenditure incurred has no causalconnection with the exempted income, thensuch an expenditure would obviously betreated as not related to the income that isexempted from tax, and such expenditurewould be allowed as business expenditure. Toput it differently, such expenditure wouldthen be considered as incurred in respect ofother income which is to be treated as partof the total income.” Adverting to the law as it stood earlier, this Courtrejected the theory of dominant purpose suggested bythe Punjab & Haryana High Court and accepted theprinciple of apportionment of expenditure only whenthe business was divisible, as was propounded by theDelhi High Court. Finally adjudicating the issue of expenditure onshares held as stock-in-trade, the following keyobservations were made by Justice Sikri: “ 50. It is to be kept in mind that in thosecases where shares are held as “stock-in-trade”, it becomes a business activity ofthe assessee to deal in those shares as abusiness proposition. Whether dividend isearned or not becomes immaterial. In fact,it would be a quirk of fate that when theinvestee company declared dividend, thoseshares are held by the assessee, though theassessee has to ultimately trade thoseshares by selling them to earn profits. Thesituation here is, therefore, different fromthe case like Maxopp Investment Ltd. [MaxoppInvestment Ltd. v. CIT, [2011 SCC OnLine Del4855 : (2012) 347 ITR 272] where theassessee would continue to hold those sharesas it wants to retain control over theinvestee company. In that case, wheneverdividend is declared by the investee companythat would necessarily be earned by theassessee and the assessee alone. Therefore,even at the time of investing into thoseshares, the assessee knows that it maygenerate dividend income as well and as andwhen such dividend income is generated thatwould be earned by the assessee. Incontrast, where the shares are held asstock- in-trade, this may not be necessarilya situation. The main purpose is toliquidate those shares whenever the shareprice goes up in order to earn profits……….” The learned Judge then considered the implication ofRule 8D of the Rules in the context of Section 14-A(2) of the Act and clarified that before applying thetheory of apportionment, the Assessing Officer mustrecord satisfaction on Suo Moto disallowance only inthose cases where, the apportionment was done by theassessee. The following is relevant for the purpose ofthis judgment: The learned Judge then considered the implication ofRule 8D of the Rules in the context of Section 14-A(2) of the Act and clarified that before applying thetheory of apportionment, the Assessing Officer mustrecord satisfaction on Suo Moto disallowance only inthose cases where, the apportionment was done by theassessee. The following is relevant for the purpose ofthis judgment: “51. ……………….It will be in those cases wherethe assessee in his return has himselfapportioned but the AO was not accepting thesaid apportionment. In that eventuality, itwill have to record its satisfaction to thiseffect.………….” 24.Anotherimportantjudgmentdealingwith Section14A disallowancewhichmeritsconsideration is Godrej and Boyce ManufacturingCompany Ltd. V. DCIT [(2017) 1 SCC 421]. Here theassessee had access to adequate interest free funds tomake investments and the issue pertained todisallowance of expenditure incurred to earn dividendincome, which was not forming part of total income ofthe Assessee. Justice Ranjan Gogoi writing the opinionon behalf of the Division Bench observed that fordisallowance of expenditure incurred in earning anincome, it is a condition precedent that such incomeshould not be includible in total income of assessee.This Court accordingly concluded that for attractingprovisions of Section 14A, the proof of fact regardingsuch expenditure being incurred for earning exemptincome is necessary. The relevant portion of JusticeGogoi’s judgment reads as follow: “36. ……… what cannot be denied is that therequirement for attracting the provisionsof Section 14-A (1) of the Act is proof ofthe fact that the expenditure sought to bedisallowed/deductedhadactuallybeenincurred in earning the dividend income………….” 25. Proceeding now to another aspect, it is seenthat the Central Board of Direct Taxes (CBDT) hadissued the Circular no. 18 of 2015 dated 02.11.2015,which had analyzed and then explained that all sharesand securities held by a bank which are not bought tomaintain Statutory Liquidity Ratio (SLR) are itsstock-in-trade and not investments and income arisingout of those is attributable, to business of banking.This Circular came to be issued in the aftermath ofCIT Vs. Nawanshahar Central Cooperative Bank Ltd.[(2007) 160 Taxman 48 / 289 ITR 6 (SC)] wherein thisCourt had held that investments made by a bankingconcern is part of their banking business. Hence theincome earned through such investments would fallunder the head Profits & Gains of business. The Punjaband 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 CBDTCircular, concluded correctly that shares andsecurities held by a bank are stock in trade, and allincome received on such shares and securities must beconsidered to be business income. That is why Section14A would not be attracted to such income. 26. Reverting back to the situation here, theRevenue does not contend that the Assessee Banks hadheld the securities for maintaining the StatutoryLiquidity Ratio (SLR), as mentioned in the circular.In view of this position, when there is no findingthat the investments of the Assessee are of therelated category, tax implication would not ariseagainst the appellants, from the said circular. 27. The aforesaid discussion and the citedjudgments advise this Court to conclude that theproportionate disallowance of interest is notwarranted, under Section 14A of Income Tax Act forinvestments made in tax free bonds/ securities whichyield tax free dividend and interest to Assessee Banksin those situations where, interest free own fundsavailable with the Assessee, exceeded theirinvestments. With this conclusion, we unhesitatinglyagree with the view taken by the learned ITATfavouring the assessees.” 27. The aforesaid discussion and the citedjudgments advise this Court to conclude that theproportionate disallowance of interest is notwarranted, under Section 14A of Income Tax Act forinvestments made in tax free bonds/ securities whichyield tax free dividend and interest to Assessee Banksin those situations where, interest free own fundsavailable with the Assessee, exceeded theirinvestments. With this conclusion, we unhesitatinglyagree with the view taken by the learned ITATfavouring the assessees.” 5.In the light of the aforesaid decision of the SupremeCourt, which applies to the facts of the present case and asagreed by the learned counsel appearing for both sides, weremand the matter to the Assessing Officer to decide the issuesraised herein afresh, taking note of the observations made inthe Supreme Court decision as referred to above and passappropriate orders, within a period of three months from thedate of receipt of a copy of this judgment. It is needless tostate that such an exercise shall be completed by the Assessingofficer, after providing reasonable opportunity to the appellantto place their oral and documentary evidences. 6.All these tax case appeals are disposed of in the aboveterms. No costs. Assistant Registrar(CS-II) //True Copy// kas Sub Assistant Registrar To 1. The Commissioner of Income-Tax-I Tiruchirapalli. Tiruchirapalli. https://hcservices.ecourts.gov.in/hcservices/ 2. Income Tax Appellate Tribunal “D” Bench Chennai, Chennai, 3. The Assistant Commissioner of Income Tax Company circle 1, Trichy. Company circle 1, Trichy. 4. The Joint Commissioner of Income Tax, Special Range, Trichy. Special Range, Trichy. 5. The Additional Commissioner of Income Tax, Circle I, Trichy. Circle I, Trichy. +1cc to M/s.Subbaraya Aiyar Padmanabhan, Advocate, S.R.No.8225 +1cc to Mr.M.Swaminathan, Advocate, S.R.No.7922 T.C.A.Nos.509 to 511 of 2010 NRL(CO)RLP(28/02/2022)