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Punjab National Bank HO: Finance Division HO:5, Sansad Marg New Delhi 110 001 vs. The ACIT, Circle 20(1) C.R. Building I.T.O. New Delhi
November, 28th 2018
           IN THE INCOME TAX APPELLATE TRIBUNAL
               DELHI BENCHES: `F', NEW DELHI

       BEFORE SMT. BEENA A PILLAI, JUDICIAL MEMBER
    AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

                     ITA No. 1519/Del/2016
                          AY: 2012-13
Punjab National Bank             The ACIT, Circle 20(1)
HO: Finance Division             C.R. Building I.T.O.
                             vs.
HO:5, Sansad Marg                New Delhi
New Delhi 110 001

                     ITA No. 7106/Del/2017
                          AY: 2012-13
The ACIT, Circle 20(1)            Punjab National Bank
C.R. Building I.T.O.              HO: Finance Division
                              Vs.
New Delhi                         HO:5, Sansad Marg
                                  New Delhi 110 001
      (Appellant)                               (Respondent)


     Department    by : Smt. Sulekha Verma, CIT, D.R.
     Assessee by : Sh. S. Krishnan, C.A. and
                     Sh. Raj Kumar, Adv.
                    Date of Hearing :        08/11/2018
                   Date of Pronouncement: 28/11/2018
                             ORDER
PER BEENA A PILLAI, JUDICIAL MEMBER


     Present quantum appeal by assessee and penalty appeal by
revenue has been filed     against   order dated 28/01/16 and
09/10/17    respectively passed by Ld.CIT (A)-7, New Delhi for
Assessment Year (A.Y.) 2012-13 on following grounds of appeal:
                                             ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                       A.Y.:2012-13
                                                     Punjab National Bank, New Del.

ITA No. 1519/Del/2016
"1. That the order is against the law and facts of the case.
2. That on the facts and circumstances of the case and provisions of
the law, the Ld.CIT(A) was not justified in sustaining the action of
A.O. in disallowing an expenditure of Rs.19,44,14,224/-to have been
made under rule 8D(2)(iii) and Section 14A of the Act. No expenditure
is attributable to exempt income. It is prayed that the additions being
unwarranted be deleted.
3. That on the facts and circumstances of the case and provisions of
the law, the Ld.CIT(A) was not justified in not allowing the deduction
towards leave encashment of Rs.165,26,00,000/- claimed during the
course of assessment proceedings.          It is prayed to allow the
deduction towards leave encashment.
4. That the above grounds of appeal are independent and without
prejudice to one another.
Your appellant craves leave to add, alter, amend or delete any of
grounds of appeal at the time of hearing."

ITA No.7106/Del/2017
"1. On the facts and under the circumstances of the case, the
ld.CIT(A) has erred in law in deleting the penalty of Rs.6,30,77,695/-
u/s 271(1)(c ) with regard to the addition made u/s 14A of the Act
read with rule 8D(iii) of Rs.19,44,224/- which was also sustained by
Ld.CIT(A).
2. The appellant craves to be allowed to add any fresh grounds of
appeal and/or delete or amend any of the grounds of appeal."


2.   Brief facts of the case are as under:
ITA No. 1519/Del/2016
Assessee filed its return of income on 28/09/12 declaring total
income of Rs.67,35,50,78,613/-. Return was processed under
section 143(1) of the Act and,       case was selected for scrutiny.

                                                                                 2
                                               ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                         A.Y.:2012-13
                                                       Punjab National Bank, New Del.

Accordingly notice under section 143(2) of the Act,              along with a
notice under section 142 (1) of the Act along with              questionnaire
was issued to assessee. In response to                  statutory notices,
representative     of   assessee   appeared   before     Ld.AO       and      filed
necessary details as called for.
2.1. Ld.AO upon verification of annual accounts observed that
assessee   made investments,         resulting in income,           which was
exempt, amounting to Rs.2,52,30,21,627/- as dividend and other
tax free income. Ld.AO was of the opinion that provisions of section
14 A read with Rule 8D was applicable in case of assessee. During
assessment proceedings, assessee was called upon to submit as to
why disallowance under section 14 A should not be made. The
Ld.AO, after considering submissions of assessee was of opinion
that assessee was keeping common and consolidated accounts for
income earning activities. He was of the opinion that assessee was
having common infrastructure and common personnel for earning
income under various heads. Thus              assessee was using its
administrative, managerial and infrastructural setup for earning
income, which does not form part of total income under the Act. He
thus rejected claim of assessee regarding expenditure in relation to
income which does not form part of total income, and made
addition amounting to Rs.2,33,38,36,335/-.
2.2. Another issue observed by Ld.AO was in respect of deduction
for    provision        of   leave    encashment           amounting              to
Rs.1,65,26,00,000/-. Ld.AO was of the opinion that provision was








                                                                                   3
                                           ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                     A.Y.:2012-13
                                                   Punjab National Bank, New Del.

not claimed as expenditure, as per section 43B (f) of the Act and
hence assessee was not entitled to any deduction to that extent.
3.   Aggrieved by order of Ld.AO, assessee preferred appeal before
Ld.CIT (A) who allowed claim of assessee under section 14 A read
with Rule 8D(ii) but confirmed disallowance under Rule 8D(iii). As
regards disallowance under section 36(1)(vii) of the Act, the same
was confirmed by following        decision of his predecessor for
preceding Assessment Years.
4.   Aggrieved by order of Ld. CIT (A), assessee is in appeal before
us now.
5.   Ground No. 1 is general in nature therefore do not require any
adjudication.
6.   Ground No. 2 relates to disallowance conformed by Ld. CIT (A)
under rule 8D (iii) of Income Tax Rules, 1963.
6.1. At the outset, Ld.Counsel submitted that, this issue stands
squarely covered by following observation by Hon'ble Supreme Court
in case of Maxopp      Investments vs CIT reported in (2018) 91
taxman.com 154, in favour of assessee:
"36. There is yet another aspect which still needs to be looked into.
What happens when the shares are held as 'stock-in-trade' and not
as ' investment, particularly, by the banks? On this specific aspect,
CBDT has issued circular No. 18/2015 dated November 02, 2015.
37. This Circular has already been reproduced in Para 19 above.
This Circular takes note of the judgment of this Court
in Nawanshahar case wherein it is held that investment made by
a banking concern are part of the business or banking. Therefore, the
income arises from such investment is attributable to business of
banking falling under the head 'profits and gains of business and
profession'. On that basis, the Circular contains the decision of the

                                                                               4
                                             ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                       A.Y.:2012-13
                                                     Punjab National Bank, New Del.

Board that no appeal would be filed on this ground by the officers of
the Department and if the appeals are already filed, they should be
withdrawn. A reading of this circular would make it clear that the
issue was as to whether income by way of interest on securities shall
be chargeable to income tax under the head 'income from other
sources' or it is to fall under the head 'profits and gains of business
and profession'. The Board, going by the decision of this Court
in Nawanshahar case, clarified that it has to be treated as income
falling under the head 'profits and gains of business and profession'.
The Board also went to the extent of saying that this would not be
limited only to co-operative societies/Banks claiming deduction under
Section 80P(2)(a)(i) of the Act but would also be applicable to all
banks/commercial banks, to which Banking Regulation Act, 1949
applies.
38. From this, Punjab and Haryana High Court pointed out that this
circular carves out a distinction between 'stock-in-trade' and
'investment' and provides that if the motive behind purchase and sale
of shares is to earn profit, then the same would be treated as trading
profit and if the object is to derive income by way of dividend then
the profit would be said to have accrued from investment. To this
extent, the High Court may be correct. At the same time, we do not
agree with the test of dominant intention applied by the Punjab and
Haryana High Court, which we have already discarded. In that
event, the question is as to on what basis those cases are to be
decided where the shares of other companies are purchased by the
assessees as 'stock-in-trade' and not as `investment' We proceed to
discuss this aspect hereinafter.
39. In those cases, where shares are held as stock-in-trade, the
main purpose is to trade in those shares and earn profits therefrom.
However, we are not concerned with those profits which would
naturally be treated as 'income' under the head 'profits and gains
from business and profession'. What happens is that, in the process,
when the shares are held as 'stock-in-trade', certain dividend is also
earned, though incidentally, which is also an income. However, by
virtue of Section 10 (34) of the Act, this dividend income is not to be
included in the total income and is exempt from tax. This triggers the
applicability of Section 14A of the Act which is based on the theory of
apportionment of expenditure between taxable and non-taxable

                                                                                 5
                                             ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                       A.Y.:2012-13
                                                     Punjab National Bank, New Del.

income as held in Walfort Share & Stock Brokers (P.) Ltd. case.
Therefore, to that extent, depending upon the facts of each case, the
expenditure incurred in acquiring those shares will have to be
apportioned.
40. We note from the facts in the State Bank of Patiala cases that
the AO, while passing the assessment order, had already restricted
the disallowance to the amount which was claimed as exempt income
by applying the formula contained in Rule 8D of the Rules and
holding that section 14A of the Act would be applicable. In spite of
this exercise of apportionment of expenditure carried out by the
AO, CIT A) disallowed the entire deduction of expenditure. That view
of the CIT A) was clearly untenable and rightly set aside by the
ITAT. Therefore, on facts, the Punjab and Haryana High Court has
arrived at a correct conclusion by affirming the view of the ITAT,
though we are not subscribing to the theory of dominant intention
applied by the High Court. 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. 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. In the result, the appeals filed
by the Revenue challenging the judgment of the Punjab and Haryana
High Court in State Bank of Patiala also fail, though law in this
respect has been clarified hereinabove."


                                                                                 6
                                               ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                         A.Y.:2012-13
                                                       Punjab National Bank, New Del.

6.2.      On the contrary Ld.Sr.DR placed reliance upon the
orders passed by authorities below and following decisions:
     · Godrej and Boyce manufacturing Co Ltd vs. DCIT reported in
       (2017) 81 Taxmann.com 111 (SC);
     · India Bulls financial services Ltd vs. DCIT reported in (2016)
       76 Taxmann.com 268 (Del);
     · Punjab tractors Ltd vs.           CIT   reported      in     (2017)       78
       Taxmann.com 65 (P&H).
7.      We have perused the submissions advanced by both sides in
the light of records placed before us.

8.     It is observed that decisions relied upon by Ld.Sr.DR has been
passed prior to decision of Hon'ble Supreme Court in the case of
Maxopp Investment vs CIT (supra). Further Hon'ble Supreme Court
in the case of Maxopp Investment vs CIT (supra), has rendered a
clear finding in respect of banking institutions which is peculiar.

Present assessee before us is also a Bank, where shares were held
as stock-in-trade and therefore it becomes business activity of
assessee. In our opinion specific observation Hon'ble Supreme Court
in the case of Maxopp        Investment vs CIT (supra), reproduced
hereinabove are squarely applicable to facts of present case.
Respectfully following the view taken by Hon'ble Supreme Court in
the case of Maxxop Investment vs CIT (supra), we allow this ground
raised by assessee and hold that these were not investments made
by assessee in order to fall within the ambit of Rule 8D (iii) of
Income tax Rules 1963.




                                                                                   7
                                               ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                         A.Y.:2012-13
                                                       Punjab National Bank, New Del.

8.1.   Accordingly     the   ground   raised      by     assessee         stands
allowed.

9.     Ground No. 3 is in respect of claim of leave encashment
claimed by assessee amounting to Rs.165.26 crores during the year
under consideration.

9.1. Ld.Counsel submitted that section 43B (f) of the Act do not
cover any claim regarding leave encashment and therefore no
disallowance could be made.      He submitted that Hon'ble Calcutta
High Court in case of Exide Industries Ltd vs.               Union of India
reported in 292 ITR 470 had struck down constitutional validity of
section 43B (f) of the Act being arbitrary, unconstitutional and de
hors the facts of decision in case of Bharat Earth Movers reported
in 245 ITR 428.

9.2.   On contrary, Ld.Sr.DR placed reliance upon orders passed
by authorities below and submitted that, certain deductions could
be allowed,   only on actual payment. He placed reliance upon
decision of coordinate Bench in the case of Nainital Almora
Kshetriya Bank in ITA No. 4240/Del/2012, ITA No. 5234/Del/2012
and ITA No. 5312/Del/2013 for Assessment Years 2008-09, , 2009-
10 and 2010-11. Further Ld.Sr.DR submitted that decision relied
upon by Ld.Counsel passed by Hon'ble        Calcutta High Court has
been stayed by Hon'ble Supreme Court vide order dated 08/05/09.

10. We have perused          submissions advanced by both sides in
light of records placed before us.


                                                                                   8
                                              ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                        A.Y.:2012-13
                                                      Punjab National Bank, New Del.

11. Controversy of section 43B (f) of the Act is that,                  Hon'ble
Calcutta High Court held constitutional validity of section 43B (f) of
the Act being arbitrary, unconstitutional and de hors                   facts of
decision in case of Bharat Earth Movers reported in 245 ITR 428,
and that    decision of Hon'ble Calcutta    High Court has been now
stayed by Hon'ble Supreme Court vide order dated 08/05/09. Even
otherwise leave encashment is allowable on payment basis only.

12. We therefore direct Ld.AO to allow claim of assessee in the
year in which it has been paid and to disallow in the year of
provision. We accordingly set aside Ground No. 3 back to Ld.AO
with a direction to disallow the claim, in the year of provision and to
allow claim in the year of payment. Ld. AO is directed not to levy
any interest and penalty in the year of disallowance.

12.1.       Accordingly this ground is allowed for statistical
purposes.

13. In the result appeal filed by assessee stands allowed.






ITA No.7106/Del/2017
14. Brief facts of case are as under.
Assessee filed its return of income for A.Y. 2012-13 on 28.09.2012
declaring   total   income    at   Rs.67,35,50,78,613/-          which        was
subsequently revised to Rs.66,44,85,39,460/-. Order u/s 143(3)
was     passed      on       11.3.2015,    assessing             income         at
Rs.81,34,90,00,209/- by making various additions/disallowances.
14.1.       Ld.CIT(A) partly allowed       appeal vide order dated


                                                                                  9
                                              ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                        A.Y.:2012-13
                                                      Punjab National Bank, New Del.

28.01.2016 and restricted disallowance to Rs.19,44,14,224/- u/s
14A of the Act.
14.2.     Subsequently penalty order u/s 271(1)(c ) was passed on
27.03.2017     on   the   said   disallowance,      levying       penalty        of
Rs.6,30,77,695/-.
15.      Aggrieved by penalty order, assessee filed appeal before
Ld.CIT(A) who allowed appeal of assessee.
16. Aggrieved by order of Ld.CIT(A), Revenue is in appeal before
us now.
17.       Ld.Sr.D.R. relied on order of Ld.AO.
17.1.     Ld.Counsel relied on order of Ld.CIT(A).
18.     We have perused submissions advanced by both sides in light
of material placed on record and case laws.
18.1.     It is observed that Ld.CIT(A) deleted penalty by observing as
under:
"The appellant has furnished an explanation which is satisfactory
and bonafides are not under doubt. Disallowance u/s 14A being a
debatable issue, the rigours of provisions of section 271(1)(c ) are not
attracted in the case. There is no case of furnishing of inaccurate
particulars or concealment of income.     Penalty of Rs.6,30,77,695/-
levied by A.O. u/s 271(1)(c )       is, therefore, not justified and is
directed to be deleted. The grounds of appeal are ruled in favour of
appellant."
18.2.    While deciding quantum appeal in foregoing paras, we have
already deleted addition u/s 14A r.w.Rule 8D(iii) of Income Tax



                                                                                 10
                                           ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                     A.Y.:2012-13
                                                   Punjab National Bank, New Del.

Rules, 1963. Further analysis of the issue by Ld.CIT(A) cannot be
found fault with.
18.3.       We therefore, uphold order of Ld.CIT(A).
19. Accordingly grounds raised by Revenue stand dismissed.

20. In the result appeal filed by Revenue stands dismissed.

Order pronounced in the Open Court on 28th November, 2018.
                    Sd/-                                Sd/-

    ( PRASHANT MAHARISHI)                         (BEENA A PILLAI)
     ACCOUNTANT MEMBER                           JUDICIAL MEMBER

Dt. 28th November, 2018

   · gmv
Copy forwarded to: -
1.   Appellant
2.   Respondent
3.   CIT
4.   CIT(A)
5.   DR, ITAT
                  -    TRUE COPY    -

                                              By Order,




                                          ASSISTANT REGISTRAR
                                           ITAT Delhi Benches

                                                                              11
                                            ITA 1519/Del/16 and ITA 7106/Del/2017
                                                                      A.Y.:2012-13
                                                    Punjab National Bank, New Del.




                                 Date
Draft dictated on                19/11/18
                                 and
                                 27/11/18

Draft placed before author       27.11.18
Draft proposed & placed before
the second member
Draft discussed/approved by
Second Member.
Approved Draft comes to the
Sr.PS/PS
Kept for pronouncement on
            &
Order uploaded on :
File sent to the Bench Clerk
Date on which file goes to the
AR
Date on which file goes to the
Head Clerk.
Date of dispatch of Order.




                                                                               12

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