Pr. Commissioner Of Income Tax -7, Delhi v. Punjab National Bank

$~56 *IN THE HIGH COURT OF DELHI AT NEW DELHI+ITA 220/2024 PR. COMMISSIONER OF INCOME TAX -7, DELHI.....AppellantThrough:Mr. Puneet Rai, SSC with Mr.Ashvini Kumar and Mr. RishabhNangia, JSCs. versus PUNJAB NATIONAL BANK.....Respondent Through: CORAM: HON'BLE MR. JUSTICE VIBHU BAKHRUHON'BLE MS. JUSTICE SWARANA KANTA SHARMAO R D E R %22.11.2024 CM APPL. 23124/2024 (Condonation of delay) 1.This is an application filed by the Revenue seeking condonation ofdelay of 1766 days in filing the present appeal. 2.Mr. Puneet Rai, the learned counsel appearing for the Revenuesubmits that the period of delay in filing of the appeal as mentioned in theapplication, is sensu stricto not correct. The appeal was initially filed by theearlier counsel through his ID on 29.05.2019. 3.Concededly, the said filing was also beyond the period as availablefor filing the appeal. According to the Revenue, the impugned order dated09.01.2019 passed by the learned Income Tax Appellate Tribunal (hereafterthe ITAT) was received on 31.01.2019. Thus, the appeal was required to befiled on or before 31.05.2019. 4.There has been an abnormal delay in re-filing the appeal, which theRevenue claims is on account of several reasons including on account ofchange of counsel. 5.Although, the reasons as set out in the application are not persuasive.However, the learned counsel for the parties state that the issue on merits isalso covered and therefore, the appeal may be disposed of, on merits.6.Considering the said contentions, we allow this application andcondone the delay in re-filing. ITA 220/2024 7.The Revenue has filed the present appeal impugning an order dated09.01.2019 passed by the learned ITAT in ITA No. 2469/Del/2014 inrespect of the assessment year (AY) 2010-11. 8.The Revenue has projected the following questions of law: “a)Whether in the facts and circumstances of the case and in law,ITAT erred in deleting the addition of Rs. 171,24,78,793/-made under section 14A of the Act read with rule 8D of the ITRules without appreciating the fact that the assessee earnedexempt income of Rs. 412,83,02,299/- during the previousyear?ITAT erred in deleting the addition of Rs. 171,24,78,793/-made under section 14A of the Act read with rule 8D of the ITRules without appreciating the fact that the assessee earnedexempt income of Rs. 412,83,02,299/- during the previousyear? b)Whether in the facts and circumstances of the case and in law,ITAT erred in holding that section 14A of the IT Act was notapplicable to the assessee?”ITAT erred in holding that section 14A of the IT Act was notapplicable to the assessee?” 9.In the present case, the respondent (hereafter Assessee) had filed itsreturn of income, which was scrutinized and processed under Section 143(3)of the Act. The Assessing Officer (AO) had assessed the Assessee’s incomeat ₹62,73,27,10,417/- and made several additions including disallowance of ₹1,71,24,78,793/- under Section 14A of the Act. 10.The AO found that the Assessee had earned income to the extent of₹4,12,83,02,299/- from dividends and other incomes, which were exempted from tax. Thus, according to the AO, the provisions under Section 14A ofthe Act were applicable. 11.It was the Assessee’s case that no further disallowance under Section14A of the Act could be made as there was no expenditure, which could beheld to be incurred for the purpose of earning exempt income. It was alsocontended by the Assessee that it held the securities as a stock in trade andtherefore, the income earned by it is chargeable to tax under the heads“Income from Business or Profession”. 12.It was also contended that since it held the securities as its stock intrade. It could not be held that the same was for the purposes of earning anyexempted income. 10.The AO found that the Assessee had earned income to the extent of₹4,12,83,02,299/- from dividends and other incomes, which were exempted from tax. Thus, according to the AO, the provisions under Section 14A ofthe Act were applicable. 11.It was the Assessee’s case that no further disallowance under Section14A of the Act could be made as there was no expenditure, which could beheld to be incurred for the purpose of earning exempt income. It was alsocontended by the Assessee that it held the securities as a stock in trade andtherefore, the income earned by it is chargeable to tax under the heads“Income from Business or Profession”. 12.It was also contended that since it held the securities as its stock intrade. It could not be held that the same was for the purposes of earning anyexempted income. 13.However, the AO did not accept the said contention. The AO held thatthe provisions of Section 14A of the Act refers to a category of income,which does not form a part of the total income as declared by the Assessee.The AO held that the allowability of the expenditure did not depend ondirect or incidental receipt of income as the expression used in Section 14Aof the Act is “in relation to income” and it does not distinguish between adirectly earning exempt income or exempt income that is incidental thereto.14.TheAssesseeappealedthesaiddecisionbeforethelearnedCommissioner of Income Tax (Appeals) [hereafter CIT(A)]. The learnedCIT(A) following its earlier decision in respect of the AY 2009-10 sustainedan addition to the extent of ₹16,26,96,795/- under Rule 8D(2)(iii) of the Income Tax Rules, 1962. However, the addition to the extent of₹1,54,97,80,997/- was deleted. 15.The Revenue appealed the said decision before the learned ITAT.However, the learned ITAT did not sustain the said appeal following thedecision of the Supreme Court in Maxopp Investment Ltd. v. CIT: (2018)91 taxman.com 154. The relevant extract of the impugned order is set out below: “8.We have carefully perused the decision in the case ofMaxopp Investment Ltd versus CIT (2018) 91 taxman.com 154(SC) wherein the Hon’ble Apex Court considered two caseswherein the question of predominant intent of investment in shareswas pleaded, though on different facts, on the ground that theobjective of investing in shares was not to earn the dividendincome, but to either retain controlling interest over the company inwhich the investment was made or to earn the profit from trading inshares. The question was whether the disallowance under section14A of the Act could be invoked in the cases where exempt incomewas earned from shares held as “trading assets” or “stock in trade”.The first case relates to Maxopp investment Ltd and the secondcase relates to the case of State Bank of Patiala. In the case ofMaxopp investment Ltd., the assessee company is in the business offinance, investment and was dealing in shares and securities; thatthey held the shares and securities, partly as investments on the“capital account” and partly as “trading assets” for the purpose ofacquiring and retaining control over its group companies, primarilyMax India Ltd.; and that the profits resulting on the sale of sharesheld as trading assets were duly offered to tax as business incomeof the assessee. In the case of State Bank of Patiala the assessee hasexempt income in the form of dividend was earned by the bankfrom securities held by as stock in trade. The Hon’ble SupremeCourt was considering the question that has arisen under variedcircumstances where the shares/stocks were purchased by acompany for the purpose of gaining control over the said companyor as “stock in trade”, though incidentally income is also generatedin the form of dividends as well. 9. It was argued before the Hon’ble Apex Court that thoughincidentally income was also generated in the form of dividends,the dominant intention for purchasing the shares was not to earn thedividend income but to acquire and retain the controlling businessin the company in which shares were invested, or for the purpose oftrading in the shares as business activity. After considering theentire case law on this aspect in the light of the peculiar factsinvolved in both the matters, the Hon’ble Apex Court videparagraph No. 39 and 40 held as follows:- 39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profitstherefrom. However, we are not concerned with those profitswhich would naturally be treated as ‘income’ under the head‘profits and gains from business and profession’. Whathappens is that, in the process, when the shares are held as‘stock-in-trade’, certain dividend is also earned, thoughincidentally, which is also an income. However, by virtue ofSection 10 (34) of the Act, this dividend income is not to beincluded in the total income and is exempt from tax. Thistriggers the applicability of Section 14A of the Act which isbased on the theory of apportionment of expenditurebetween taxable and non-taxable income as held in WalfortShare and Stock Brokers P Ltd. case. Therefore, to thatextent,dependinguponthefactsofeachcase,theexpenditure incurred in acquiring those shares will have tobe apportioned. 40) We note from the facts in the State Bank of Patiala casesthat 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 Actwouldbeapplicable.Inspiteofthisexerciseofapportionment 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 theITAT. Therefore, 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 thetheory of dominant intention applied by the High Court. It isto be kept in mind that in those cases where shares are heldas ‘stock-in-trade’, it becomes a business Activity of theassessee to deal in those shares as a business proposition.Whether dividend is earned or not becomes immaterial. Infact, it would be a quirk of fate that when the investeecompany declared dividend, those shares are held by theassessee, though the assessee has to ultimately trade thoseshares by selling them to earn profits. The situation here is,therefore, different from the case like Maxopp InvestmentLtd. where the assessee would continue to hold those sharesas it wants to retain control over the investee company. Inthat case, whenever dividend is declared by the investee company that would necessarily be earned by the assesseeand the assessee alone. Therefore, even at the time ofinvesting into those shares, the assessee knows that it maygenerate dividend income as well and as and when suchdividend income is generated that would be earned by theassessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The mainpurpose is to liquidate those shares whenever the share pricegoes up in order to earn profits. In the result, the appealsfiled by the Revenue challenging the judgment of the Punjaband Haryana High Court in State Bank of Patiala also fail,though law in this respect has been clarified hereinabove. company that would necessarily be earned by the assesseeand the assessee alone. Therefore, even at the time ofinvesting into those shares, the assessee knows that it maygenerate dividend income as well and as and when suchdividend income is generated that would be earned by theassessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The mainpurpose is to liquidate those shares whenever the share pricegoes up in order to earn profits. In the result, the appealsfiled by the Revenue challenging the judgment of the Punjaband Haryana High Court in State Bank of Patiala also fail,though law in this respect has been clarified hereinabove. 10. It is, therefore, clear from the above observations of theHon’ble Apex Court that depending upon the facts of each case, theexpenditure incurred in acquiring the shares will have to beapportioned. Hon’ble Apex Court held that the Tribunal and theHon’ble High Court of Punjab and Haryana arrived at a correctconclusion by setting aside the disallowance under section 14A ofthe Act in respect of the dividend earned on the shares held as stockin trade, because such shares were held during the business activityof the assessee and it is only by a quirk of fate that when theinvestee company declared dividend, those shares were held by theassessee, though the assessee has to ultimately trade those shares byselling them to earn profits. 11. Hon’ble Apex Court made clear distinction of this case from thecase of Maxopp investment Ltd where the assessee knew thatwhenever dividend would be declared by the investee companysuch dividend would necessarily be earned by the assessee andassessee alone, and it would be in the common knowledge of theassessee that such shares would generate dividend income as wellas and when such dividend income is generated that would beearned by the assessee only. Hon’ble Apex Court in unequivocalterms held that in contrast, where the shares are held as stock intrade, this may not be necessarily a situation and the main purposewas to liquidate those shares whenever the share price goes up inorder to earn profits. Hon’ble Apex Court, therefore, whilerejecting the theory of dominant purpose in making investment inshares- whether it was to acquire and retain controlling interest inthe other company or to make profits out of the trading activity insuch shares - clearly made a clear distinction between the dividend earned in respect of the shares which were acquired by the assesseein their exercise to acquire and retain the controlling interest in theinvestee company, and the shares that were purchased for thepurpose of liquidating those shares whenever the share price goesup, in order to earn profits. It is, therefore, clear that though not thedominant purpose of acquiring the shares is a relevant for thepurpose of invoking the provisions under section 14 A of the Act,the shares held as stock in trade stand on a different pedestal inrelation to the shares that were acquired with an intention to acquireand retain the controlling interest in the investee company. 12. Further, it is brought to our notice that in assessee’s own case inITA No.1519/Del/2016 and 7106/Del/2017 for the assessment year2012-13, a coordinate bench of this Tribunal considered thearguments on either side and reached the conclusion that, insofar asthe assessee bank is concerned section 14A of the Act has noapplication in view of the above law laid down by the Hon’bleApex Court in the case of Maxopp investments Ltd, (supra). 13. We, therefore, while respectfully following the above decision,hold that no addition in case of the assessee under section 14-A issustainable. Hence, ground of appeal of assessee is allowed and theground of appeal of the Revenue is dismissed.” 16.The learned counsel appearing for the Revenue submits that the issueinvolved is also covered by the decision of the Supreme Court in SouthIndian Bank Limited v. CIT : (2021) 10 SCC 153. 17.In view of the above, no substantial question of law arises in thepresent appeal. 13. We, therefore, while respectfully following the above decision,hold that no addition in case of the assessee under section 14-A issustainable. Hence, ground of appeal of assessee is allowed and theground of appeal of the Revenue is dismissed.” 16.The learned counsel appearing for the Revenue submits that the issueinvolved is also covered by the decision of the Supreme Court in SouthIndian Bank Limited v. CIT : (2021) 10 SCC 153. 17.In view of the above, no substantial question of law arises in thepresent appeal. 18.Accordingly, the present appeal is dismissed. VIBHU BAKHRU, J NOVEMBER 22, 2024 ns SWARANA KANTA SHARMA, J Click here to check corrigendum, if any