Net' interest expenditure is to be considered for the purposes of disallowance u/s 14A (of Income Tax Act, 1961) and where after setting off interest earned against the interest expenditure no further interest expense remains then disallowance cannot be made u/s 14A (of Income Tax Act, 1961)

The captioned appeal filed by the assessee, pertaining to assessment year 2011-12, is directed against the order passed by the Commissioner of Income Tax (Appeal)-4, Kolkata, in appeal no. 1270/CIT(A)-4/R-12/2014-15, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) (of Income Tax Act, 1961) (in short the “Act”) dated 26/03/2014. 2.Although, in this appeal the assessee has raised multiple grounds of appeal, but at the time of hearing the main grievances of the assessee have been confined to the following issues:

(i).While determining the disallowance under rule 8D(2)(ii) (of Income Tax Rules, 1962), the AO took the gross interest of Rs.3,46,48,556/-, as against the net interest of Rs.83,50,170/- ( gross interest Rs.3,46,48,556 minus interest received Rs.2,62,98,368). That is, AO ought to take net interest for the purpose of computation of disallowance under Rule 8D(2)(ii) (of Income Tax Rules, 1962).

(ii).The Average value of stock-in-trade will not be taken in determining the disallowance under section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962).That is, the value of investment will not include the value of shares held as stock-in-trade.

3. Facts of the case which can be stated quite shortly are as follows: The assessee company is a share-broker. During the assessment year 2011-12, the assessee company has traded on account of its client and also on its own account in shares, futures and options and has also done speculative trading through BSE/NSE. During the assessment year 2011-12, the assessee company has earned income from trading in shares and mutual fund leading to profits under the head business and profession and under the head income from capital gain and also earned interest on debentures.During the assessment proceedings, the Assessing Officer made addition u/s 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962) holding as follows:

“3.4.9 The decision in the case of Dhanuka & Sons vs CIT, 339 ITR 319(CAL) is in the favour of revenue on the issue. The decision of Hon'ble Mumbai High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs Dy. CIT [2010] 328 ITR 81(BOM.)has upheld the constitutional validity of section 14A (of Income Tax Act, 1961). The recent decision of ITAT, Mumbai 'D' Bench in case of Dy. CIT vs Damani Estates & Finance Pvt. Ltd.(ITA No. 3029/MUM/2012) delivered on 17/07/2013 has also held after referring to all the decisions listed by the assessee that the value of investment will include the value of shares held as stock-in-trade as well. In very recent decision delivered on 27/11/2013 by Special Bench, ITAT, Mumbai in the case of D.H. Securities Pvt. Ltd vs Dy. CIT(ITA No. 5724/Mum/2011), it has again been held after considering the entire judicial canvas of extant decisions that the value of investment includes the shares held as stock-in-trade.

3.5 In view of the above discussion, the objections of the assessee are overruled and disallowance under Rule 8D (of Income Tax Rules, 1962) is computed with value of investment including the value of investment held as stock-in-trade as under:

The amount of expenditure incurred in accordance with Rule 8D (of Income Tax Rules, 1962) has been determined in the above Table. As the assessee has itself disallowed a sum of Rs. 24,65,000/-, the balance amount of Rs.1,33,60,903 /

4. Aggrieved by the orde in appeal before the ld. CIT(A) who has deleted the addition observing the followings:

“4.3. I have perused the assessment order and the submissions of the ld. A.R. As pointed out by the Assessing showing a loss of Rs. 2.05 crore while the assessee is showing a dividend of Rs. 7.14 croreon stock in trade and long term capital gains on investments of Rs. 3.07 crore. All these income have claimed to be huge amount of interest and administrative expenditure (Rs. 3.46 crore and Rs. 9.79 crore respectively). The perusal of holding of stock in trade viz Ratnabali Capital Markets Ltd. ITA No. Assessment Year:

The amount of expenditure incurred in accordance with Rule 8D (of Income Tax Rules, 1962) has been determined in the above Table. As the assessee has itself disallowed a sum of Rs. , the balance amount of Rs.1,33,60,903 /- is further disallowed.

4. Aggrieved by the order of the Assessing Officer the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition observing the “4.3. I have perused the assessment order and the submissions of the ld. A.R. As pointed out by the Assessing Officer in the assessment order the assessee is showing a loss of Rs. 2.05 crore while the assessee is showing a dividend of Rs. 7.14 croreon stock in trade and long term capital gains on investments of Rs. 3.07 crore. All these income have claimed to be exempted. The assessee has incurred huge amount of interest and administrative expenditure (Rs. 3.46 crore and Rs. 9.79 crore respectively). The perusal of holding of stock in trade viz Ratnabali Capital Markets Ltd. The amount of expenditure incurred in accordance with Rule 8D (of Income Tax Rules, 1962) has been determined in the above Table. As the assessee has itself disallowed a sum of Rs. is further disallowed.” r of the Assessing Officer the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition observing the “4.3. I have perused the assessment order and the submissions of the ld. A.R. As Officer in the assessment order the assessee is showing a loss of Rs. 2.05 crore while the assessee is showing a dividend of Rs. 7.14 croreon stock in trade and long term capital gains on investments of Rs. 3.07 exempted. The assessee has incurred huge amount of interest and administrative expenditure (Rs. 3.46 crore and Rs. 9.79 crore respectively). The perusal of holding of stock in trade viz-a-viz dividend income / long term capital gain income earned by the as that most of the exempt dividend income has been received on following shares:

It is seen that investment in these three instruments have been made mainly for the purpose of dividend striping although, the transactions have been structured such a way that the same do not get hit by provision of section 94(7) (of Income Tax Act, 1961). In the case of Indian Oil Corporation the shares of Rs. 22.30 crore (Exceptional amount considering assessee’s stock on 26.01.2010 and the assessee sold it within twelve days on 08.09.2010 after receiving a dividend of Rs. 72.99 lakhs. It is apparent that primary purpose of this transaction was to earn dividend and use provision of 94(7). Had there been a loss, the assessee would have sold the shares after primarily liquidated the shares and has earned dividend In the case of Patni Computer the purchase was made on 26.08.2010 and on 08.10.2010 the shares have been sold i.e. after the time period mentioned in 94(7) and the assessee has transaction was structured to earn some tax free dividend. It was not with the intention of trading in these shares.

Similarly, in the case of Sundaram Balance Fund units have been purchased three months and two days prior to the record date to avoid the provisions of 94(7) and immediately after record date (within 3 days) the actual fund / sold enabling the assessee to a dividend of Rs. 5.19 crore and loss of Rs. 5.95 crore which can be set off against other business income of the assessee. While there is a case for disallowing the entire loss incurred in these transactions yet since the assessee has taken care to avoid being hit by 94(7) the entire transaction may be considered as probably permissible. Yet taking these venturesin stock-in- intended to put money in these securities to earn on their trading, was clearly to take advantage of zero tax Dividend. Therefore, corresponding interest has to be excluded in the least in computation In view of the above, the Assessing Officer is directed to include the investment made in these three instruments in the investment for the purpose of calculation of disallowance u/s 14A (of Income Tax Act, 1961) as the nature of these three ventures is clear them in stock-in-trade but to do some tax planning through some smart investmen tax avoidance device.

Ratnabali Capital Markets Ltd.

ITA No. Assessment Year:

dividend income / long term capital gain income earned by the as that most of the exempt dividend income has been received on following shares:

It is seen that investment in these three instruments have been made mainly for the of dividend striping although, the transactions have been structured such a way that the same do not get hit by provision of section 94(7) (of Income Tax Act, 1961).

In the case of Indian Oil Corporation the shares of Rs. 22.30 crore (Exceptional amount considering assessee’s stock-in-holding of other share) were purchased on 26.01.2010 and the assessee sold it within twelve days on 08.09.2010 after d of Rs. 72.99 lakhs. It is apparent that primary purpose of thi transaction was to earn dividend and use provision of 94(7). Had there been a loss, the assessee would have sold the shares after primarily liquidated the shares and has earned dividend income.

In the case of Patni Computer the purchase was made on 26.08.2010 and on 10 the shares have been sold i.e. after the time period mentioned in 94(7) and the assessee has earned the dividend of Rs. 83.79 lakhs. Clearly, the structured to earn some tax free dividend. It was not with the intention of trading in these shares.

Similarly, in the case of Sundaram Balance Fund units have been purchased three months and two days prior to the record date to avoid the provisions of 94(7) and immediately after record date (within 3 days) the actual fund / sold enabling the assessee to a dividend of Rs. 5.19 crore and loss of Rs. 5.95 crore which can be set off against other business income of the assessee. ase for disallowing the entire loss incurred in these transactions since the assessee has taken care to avoid being hit by 94(7) the entire transaction may be considered as probably permissible. Yet taking these -trade to avoid Rule 8D (of Income Tax Rules, 1962) is another story. The assessee never intended to put money in these securities to earn on their trading, was clearly to take advantage of zero tax Dividend. Therefore, corresponding interest has to be excluded in the least in computation of business profit.

In view of the above, the Assessing Officer is directed to include the investment made in these three instruments in the investment for the purpose of calculation of disallowance u/s 14A (of Income Tax Act, 1961) as the nature of these three ventures is clear trade but to do some tax planning through some smart investment / tax avoidance device.

dividend income / long term capital gain income earned by the assessee reveals that most of the exempt dividend income has been received on following shares:

It is seen that investment in these three instruments have been made mainly for the of dividend striping although, the transactions have been structured in such a way that the same do not get hit by provision of section 94(7) (of Income Tax Act, 1961). In the case of Indian Oil Corporation the shares of Rs. 22.30 crore (Exceptional holding of other share) were purchased on 26.01.2010 and the assessee sold it within twelve days on 08.09.2010 after d of Rs. 72.99 lakhs. It is apparent that primary purpose of this transaction was to earn dividend and use provision of 94(7). Had there been a loss, the assessee would have sold the shares after primarily liquidated the shares In the case of Patni Computer the purchase was made on 26.08.2010 and on 10 the shares have been sold i.e. after the time period mentioned in 94(7) the dividend of Rs. 83.79 lakhs. Clearly, the structured to earn some tax free dividend. It was not with the Similarly, in the case of Sundaram Balance Fund units have been purchased three months and two days prior to the record date to avoid the provisions of Section 94(7) (of Income Tax Act, 1961) and immediately after record date (within 3 days) the actual fund / sold enabling the assessee to a dividend of Rs. 5.19 crore and loss of Rs. 5.95 crore which can be set off against other business income of the assessee. ase for disallowing the entire loss incurred in these transactions since the assessee has taken care to avoid being hit by 94(7) the entire transaction may be considered as probably permissible. Yet taking these e 8D is another story. The assessee never intended to put money in these securities to earn on their trading, the intention was clearly to take advantage of zero tax Dividend. Therefore, corresponding of business profit.

In view of the above, the Assessing Officer is directed to include the investment made in these three instruments in the investment for the purpose of calculation of disallowance u/s 14A (of Income Tax Act, 1961) as the nature of these three ventures is clearly not to keep trade but to do some tax planning through some smart investment In the result, Ground Nos. 2,3,4 and 5 are partly allowed.”

5. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.

6. The ld. Counsel for the assessee, Shri Arvind Agarwal begins by pointing out that while determining the disallowing under rule 8D(2)(ii) (of Income Tax Rules, 1962), read with section 14A (of Income Tax Act, 1961), the AO ought to consider net interest. The AO took the gross interest of Rs.3,46,48,556/-, as against the net interest of Rs.83,50,170/- ( gross interest Rs.3,46,48,556 minus interest received Rs.2,62,98,368), which is factually incorrect. He therefore, prayed the Bench that AO may be directed to take net interest for the purpose of computation of disallowance under Rule 8D(2) (of Income Tax Rules, 1962)

(ii) of the Rules. Apart from this, ld Counsel contends that the Average value of stock-in-trade should not be taken in determining the disallowance under section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962). The main business of the assessee is to purchase and sale of shares therefore the value of investment will not include the value of shares held as stock-in-trade, that is, shares held as stock-in-trade should not be taken to compute disallowance u/s 14A (of Income Tax Act, 1961), therefore necessary direction may be given to the assessing officer to exclude stock-in-trade in the value of investment.

7. On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.

8. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. The first issue which needs to be addressed by us is that while determining the disallowance under rule 8D(2)(ii) (of Income Tax Rules, 1962), the AO took the gross interest of Rs.3,46,48,556/-, as against the net interest of Rs.83,50,170/- ( gross interest Rs.3,46,48,556 minus interest received Rs.2,62,98,368). That is, AO ought to take net interest for the purpose of computation of disallowance under Rule 8D(2)(ii) (of Income Tax Rules, 1962). We note that this issue is no longer res integra. There are plethora of precedents wherein it was held that only net interest should be taken for the purpose of computation of mdisallowance under Rule 8D(2)(ii) (of Income Tax Rules, 1962). We note that Coordinate Bench of this Tribunal in the matter of DCIT vs. Universal Industrial Fund Ltd. in ITA No. 299/Kol/2016, order dated 15/12/2017, held as follows:

“7. Having heard the rival submission and perused the material available on record, we note that the interest expense incurred in the business of money lending was Rs.2,0276,317/-. In the course of its business of financing, the assessee borrows and lends monies. The assessee pays interest on the borrowed funds and earns interest on the loans advanced. Therefore, both the interest income and the interest payment are intrinsically linked. There is complete inter lacing of funds and therefore, for ascertaining the tax effect, netting off of interest paid with interest received is necessary. It is for this reason that the net interest is reflected in the profit and loss account. In the circumstances, the Assessing Officer should also have considered the interest on net basis. After setting off interest expense against the interest income, the assessee was let with negative figure of Rs.6,08,163/-which had been suo moto disallowed by the assessee in its entirety. Therefore, we are of the view that in these circumstances no further interest disallowance should be made. Respectfully following the judgment of coordinate Bench Kolkata in the case of DCIT Vs Trade Apartments Limited (ITA No.1277/Kol/2011) for Assessment Year 2008-09 wherein on exactly similar facts and circumstances the coordinate Bench held that the ‘net’ interest expenditure is to be considered for the purposes of disallowance u/s 14A (of Income Tax Act, 1961) and where after setting off interest earned against the interest expenditure no further interest expense remains then disallowance cannot be made u/s 14A (of Income Tax Act, 1961).

Considering the factual position explained above, we do not find any infirmity in the order passed by the ld CIT(A), therefore, we confirm the order passed by the ldCIT(A).”

9. On the identical facts, our view is fortified by the judgment of the Coordinate Bench of ITAT-Mumbai, in the matter of M/s Suhami Power & Finance Corporation vs. ACIT under ITA No. 1844/Mum/2018 dated 24/07/2019 wherein it was held as follows:

“5. Under this issue the assessee has challenged the confirmation of the disallowance made by the AO of Rs.5,72,805/- u/s 14A (of Income Tax Act, 1961) r.w. Rule 8D(2)(ii) (of Income Tax Rules, 1962). The Ld. Representative of the assessee has argued that the assessee received the interest income to the tune of Rs.2,114,950/- which was credit to the profit and loss account as against the interest expenses of Rs.1,332,797/-. It is also argued that while computing the disallowance of interest expenses, the interest should be net off from the interest received. In this regard, the Ld. Representative of the assessee has placed reliance upon the decision of Hon'ble Gujarat High Court in case of PCIT Vs. Nirma Credit & Capital P. Ltd. (Appeal No. 409 & 514 of 2017) and Hon'ble ITAT Delhi in case of ACIT Vs.Keshav Shares & Stock Ltd. (ITA. No.4394/Del/2011 decided on 26.04.2013 Delhi Bench. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. On appraisal of the order passed by the AO, we find that the AO did not consider the interest net off against the interest received while deciding the interest expenditure in view of the provisions ITA No. 1844/M/2018 A.Y.2012-13 u/s 14A (of Income Tax Act, 1961) r.w. Rule 8D(2)(ii) (of Income Tax Rules, 1962) while deciding the interest expenditure. Net off interest is required to be assessed or not has been decided by Hon'ble ITAT Mumbai Bench in case of DCIT Vs. M/s. Jubliant Enterprises P. Ltd. in ITA. No.6364/M/2012 dated 12.03.2014. The relevant finding has been given as under:-

"7. We have carefully considered the rival submissions and perused the orders of the lower authorities. The impugned assessment is A.Y 2008-09 and therefore Rule 8D (of Income Tax Rules, 1962) is very much applicable for computing the disallowance u/s. 14A (of Income Tax Act, 1961). In so far as the interest element is concerned, facts on record show that the assessee has paid interest of Rs. 30,62,021/- and has also received interest at Rs. 66,19,494/-. Thus the interest received by the assessee is more than the interest paid. In the case of Trade Apartment Ltd., in ITA No. 1277/Kol/2011, it was held that the disallowance of interest should be made with reference to the net interest only. A similar view was taken by the Tribunal Mumbai Bench (same combination) in the case of Paresh K. Shah in ITA No. 8214/M/2011. The Ld. CIT(A) has rightly directed the AO to verify the given by the assessee and only net interest may be taken, if any, computation as per Rule 8D (of Income Tax Rules, 1962). We do not find any error or infirmity in this findings of the Ld. CIT(A). The decisions relied upon by the Ld. DR are distinguishable on the facts of the case. In so far as the disallowance in respect of administrative expense is concerned, the Ld. Counsel for the assessee has filed a chart giving details and bifurcation of expenses between head office and division. We find that the total expenditure is at Rs.1,86,18,068/- out of which Rs. 28,91,649/- are directly attributable to the division M/s. Jai Synthetic. The Ld. CIT(A) has directed the AO to re- compute the disallowance on proportionate basis. Considering the details of expenses, we do not find any error in the findings of the Ld. CIT(A). Ground No. 1& 2 are accordingly dismissed."

6. This decision was confirmed by Hon'ble Jurisdictional High Court in IT Appeal No.1512 of 2014 dated 28.02.2017. By following the decision mentioned above, we are of the view that the disallowance of interest expenses should be made after the net off interest only. Accordingly, this issue is decided in favour of the assessee against the revenue in the manner as indicative above. We order accordingly.

Considering the above settled position of law, we direct the assessing officer to compute the disallowance under rule 8D(2)(ii) (of Income Tax Rules, 1962) only after taking net interest ( that is , interest received minus interest paid). The assessee is also directed to furnish the details of interest received/paid, before the assessing officer along with documentary evidence, if any. Therefore, we allow the issue of computation of disallowance under rule 8D(2)(ii) (of Income Tax Rules, 1962) for statistical purposes.

10. Coming to the second issue that the Average value of stock-in-trade will not be taken in determining the disallowance under section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962). The ld Counsel submits that the value of investment will not include the value of shares held as stock-in-trade, as the main object of the assessee is to purchase and sale of shares, therefore, he objects the following directions given by the ld CIT(Appeals) to the assessing officer to include the investment made in these three instruments/shares viz: Indian Oil Corporation, Patni Computer and Sundaram Balance Fund units:

“In view of the above, the Assessing Officer is directed to include the investment made in these three instruments in the investment for the purpose of calculation of disallowance u/s 14A (of Income Tax Act, 1961) as the nature of these three ventures is clearly not to keep them in stock-in-trade but to do some tax planning through some smart investment / tax avoidance device.”

The ld Counsel submits that the assessee company is a share-broker and during the assessment year 2011-12, the assessee company has traded on account of its client and also on its own account in shares, futures and options and has also done speculative trading through BSE/NSE. During the assessment year 2011-12, the assessee company has earned income from trading in shares and mutual fund leading to profits under the head business and profession and under the head capital gain. The ld Counsel submits that the assessee company is engaged in the business of trading in shares and these shares are held as part of its stock in trade and not an investment. The assessee company has shown the shares as ‘stock in trade’ and the primary objective of investing in shares by the assessee company was to sell them to earn profit or loss. The ld Counsel further submitted that dividend income was only incidentally earned by the assessee company and Interest was paid by the assessee company on funds borrowed by it for acquiring its stock in trade and had no direct correlation with the divided income earned by it.

11.We do not accept the submissions of the ld Counsel to the effect that the assessee company has shown the shares in its Balance Sheet as ‘stock in trade’ and the primary objective of investing in shares by the assessee company was to sell them to earn profit or loss, therefore dividend income was only incidentally earned by the assessee, hence section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962) do not apply to the assessee company.

We note that even in the situation when the assessee company has shown the shares in its Balance Sheet as ‘stock in trade’, the provisions of section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962) would be applicable. For that we rely on the judgment of the Hon’ble Supreme Court in the case of Maxopp Investment,402 ITR 640 (SC), wherein it was held that when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also exempt income. However, by virtue of section 10(34) (of Income Tax Act, 1961), 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 Income Tax Act, 1961) which is based on the theory of apportionment of expenditure between taxable and non-taxable income.Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.The findings of theHon`ble Supreme Court, which is applicable to the assessee`s case under consideration, is given below:

“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 Income Tax Act, 1961), 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 Income Tax Act, 1961) which is based on the theory of apportionment of expenditure between taxable and non-taxable 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.”

In the light of the above stated judgment of the Hon`ble Supreme Court in the case of Maxopp Investment (supra) it is abundantly clear that the expenditure incurred in acquiring those shares, which is held in ‘stock-in-trade’ will have to be apportioned. Therefore, section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962) will be applicable in a situation when the assessee keeps shares in ‘stock-in-trade’.

12. We note that ld Counsel for the assessee has also relied on the judgment of the Coordinate Bench of ITAT Delhi, in the case of Nice Bombay Transport (P) Ltd, in ITA No.1331/Del/2012, dated 19.11.2018, for A.Y.2008-09, and contended that shares held in ‘stock-in-trade’ should not be considered for the purpose of disallowance under section 14A (of Income Tax Act, 1961) r.w.r 8D of the Rules. We do not agree with the ld Counsel, since learned Coordinate Bench has not considered the judgment of the Hon`ble Supreme Court of India in the case of Maxopp Investment (supra) in right perspective, as mentioned in para 39 of the judgment of the Hon`ble Supreme Court. We have already quoted the judgment of the Hon`ble Supreme Court of India in the case of Maxopp Investment (supra) in para no. 11 of this order, wherein we noticed that Hon`ble Supreme Court has clearly held in para No.39 of its judgment (quoted above) that shares held in ‘stock-in-trade’ would be subject to disallowance under section 14A (of Income Tax Act, 1961) “based on the theory of apportionment of expenditure”.

The judgment of Hon`ble Supreme Court of India is the law of land binding on all judicial institutions. For this reason, we prefer not to follow the decision of the Coordinate Bench in the case of Nice Bombay Transport (P) Ltd(supra), as it appears to us that Coordinate Bench has not considered theratio decidendi, of the Hon`ble Supreme Court of India in proper perspective and faced with this peculiar situation we find that judgment of the Coordinate Bench in the case of Nice Bombay Transport (P) Ltd(supra) can not be relied upon in assessee`s favour. At nthis juncture, we deem it appropriate to quote the Judgment of Hon`ble High Court of Andhra Pradesh in the case of Commissioner of Income-Tax vs. B.R. Constructions (1993) 202 ITR 222 (AP-HC), wherein the Hon`ble Court held as follows:

“35. The ratio decidendi of a judgment is a binding precedent. The hierarchy of authority nwith regard to binding precedent is summed up in paragraph 28 at page 158 of "Salmond mon Jurisprudence", Twelfth Edition, as follows :

"The general rule is that a court is bound by the decision of all courts higher than itself.

A High Court Judge cannot question a decision of the Court of Appeal, nor can the Court of Appeal refuse to follow judgments of the House of Lords. A corollary of the rule is that the courts are bound only by decisions of higher courts and not by those of lower or equal rank. A High Court judge is not bound by a previous High Court decision, though he will normally follow it on the principle of judicial comity, in order to avoid conflict of authority and to secure certainly and uniformity in the administration of justice. If he refuses to follow it, he cannot overrule it; both decision stand and the resulting antimony must wait for a higher court to settle."

36. The principles applicable to courts in India were laid down by Subba Rao J. (as he then was) in Dr. K. C. Nambiar v. State of Madras, , which were approved by a Full Bench of our High Court in Subbarayudu v. The State, [FB] : [1955] II ALT (Cri) 53. They are as follows (at page 94 of AIR 1955 AP) :

"A single judge is bound by a decision of a Division Bench exercising appellate jurisdiction. If there is a conflict of Bench decisions, he should refer the case to a Bench of two judges who may refer it to a Full Bench. A single judge cannot differ from a Division Bench unless a Full Bench or the Supreme Court overruled that decision specifically or laid down a different law on the same point. But he cannot ignore a Bench decision, as I am asked to do on the ground that some observations of the Supreme Court made in different context might indicate a different line of reasoning. A Division Bench must ordinarily respect another Divisional Bench of co-ordinate jurisdiction but if it differs, the case should be referred to a Full Bench.

This procedure would avoid unnecessary conflict and confusion that otherwise would prevail."

37. The effect of binding precedents in India is that the decisions of the Supreme Court are binding on all the courts. Indeed, article 141 of the Constitution embodies the rule of precedent. All the subordinate courts are bound by the judgments of the High Court. A single judge of a High Court is bound by the judgment of another single judge and a fortiori judgments of Benches consisting of more judges than one. So also, a Division Bench of a High Court is bound by judgments of another Division Bench and Full. A single judge or Benches of High Courts cannot differ from the earlier judgments of co- ordinate jurisdiction merely because they hold a different view on the question of law for the reason that certainty and uniformity in the administration of justice are of paramount importance. But, if the earlier judgment is erroneous or adherence to the rule of precedents results in manifest injustice, differing from the earlier judgment will be permissible. When a Division Bench differs from the judgment of another Division Bench, it has to refer the case to a Full Bench. A single judge cannot differ from a decision of a Division Bench except when that decision or a judgment relied upon in that decision is overruled by a Full Bench or the Supreme Court, or when the law laid down by a Full Bench or the Supreme Court is inconsistent with the decision.

38. It may be noticed that precedent ceases to be a binding precedent -

(i) if it is reversed or overruled by a higher court,

(ii) when it is affirmed or reversed on a different ground,

(iii) when it is inconsistent with the earlier decisions of the same rank,

(iv) when it is sub silentio, and

(v) when it is rendered per incuriam. 39. In paragraph 578 at page 297 of Halsbury's Laws of England, Fourth Edition, the rule of per incuriam is stated as follows :

"A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of co-ordinate jurisdiction which covered the case before it, in which case it must decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force."

40. In Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court , the Supreme Court explained the expression "per incuriam" thus (at page 36 of 77 FJR) :

"The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a pervious decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court."

13. In sum and substance andat the cost of repetition, we would like to express our view in the light of the settled position that the effect of binding precedents in India is that the decisions of the Supreme Court are binding on all the courts.

Indeed, article 141 of the Constitution embodies the rule of precedent. The judgment of Hon`ble Supreme Court of India is a law of land and it must be followed invariably.

As we noticed that Hon`ble Supreme Court, in the case of Maxopp Investment (supra) in para No.39 of its judgment held that shares held in ‘stock-in-trade’ would be subject to disallowance under section 14A (of Income Tax Act, 1961) “based on the theory of apportionment of expenditure”.The Coordinate Bench of ITAT Delhi, in the case of Nice Bombay Transport (P) Ltd, has not considered the said ratio of the judgment of the Hon`ble Supreme Court therefore, it is not binding since as per incuriam.

Now the next question arises that as to whether all shares held in ‘stock-in-trade’ should be considered for disallowance under section 14A (of Income Tax Act, 1961) or only those shares which yielded the dividend income? On this issue we note that Coordinate Bench of ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) (of Income Tax Rules, 1962) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra).

Therefore, respectfully following the judgment of Hon`ble Supreme Court, in the case of Maxopp Investment (supra) and respectfully following the judgment of the Coordinate Bench of Kolkata in the case of REI Agro Ltd(supra),we direct the assessing officer to compute the disallowance under section 14A (of Income Tax Act, 1961) read with rule 8D (of Income Tax Rules, 1962) in respect of shares held in ‘stock-in -trade’ by applying the theory of apportionment of expenditure and taking into account only those shares which yielded dividend income.For statistical purposes, the second issue raised by the assessee is allowed.

14. Before parting, it is noted that the order is being pronounced after the 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JCB Limited in ITA No. 6264/Mum/2018 and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.

15. In the result, the appeal of the assessee is allowed for statistical purposes in above terms.

Order pronounced in the Court on 22.05.2020.

Sd/-

(S.S.GODARA)

Sd/-

(A.L.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Kolkata;

Date: 22/05/2020