2014 (1) TMI 1696 - AT - Income Tax

Tribunal Grants Partial Appeals on Depreciation & Securities, Dismisses Loss Claims

The Cosmos Co-op Bank Ltd., Versus Dy. Commissioner of Income Tax, Circle 7, Pune.

The Tribunal partly allowed the appeals for assessment years 2007-08 and 2008-09. It allowed the claims for depreciation on intangible assets and ... Entitlement to deprecation on acquisition of an intangible business asset - whether business/ commercial advantages, namely, taking over of huge client base, licenses, operational bank branches in different areas, etc. can be considered to fall within the expression “business or commercial rights of similar nature” contained in section 32(1)(ii)? - Held that:- The acquisition of rights over the assets of the transferor, inclusive of its customers base was held to be an ‘intangible asset’ being ‘business or commercial rights of similar nature’ contemplated in section 32(1)(ii) of the Act and was held eligible for depreciation. Following the aforesaid discussion, in the present case, the business advantages detailed earlier, are liable to be considered as an intangible asset, being ‘business or commercial rights of similar nature’ contemplated u/s 32(1)(ii) of the Act. In our considered opinion, the plea of the assessee for allowance of depreciation in terms of section 32(1)(ii) of the Act cannot be faulted either in law or on facts.The other objection of the CIT(A) to the effect that the amalgamation in question is not by way of purchase but is an amalgamation by merger, in our view, is no ground to deny the claim of the assessee, which is otherwise well founded. - Decided in favour of assessee Securities held under Held to Maturity (HTM) category - whether constitute its stock-in-trade and the consequential loss on valuation of the said securities as on 31.03.2007 on the basis of cost or market value whichever is lower (on the basis of individual scrip) is an allowable deduction? - Held that:- So far as securities held under HTM categories are concerned, the Pune Bench of the Tribunal in the case of Latur Urban Coop. Bank Ltd. (2015 (3) TMI 920 - ITAT PUNE ) held that such securities held by an assessee bank are part of its stock-in-trade. Following the aforesaid decision we are unable to uphold the plea of the Revenue that the securities held by the assessee under the HTM category are capital in nature. Both the authorities below has merely gone on the nomenclature of the head under which the Securities are held. Thus nomenclature cannot be decisive for the assessee Bank. We, therefore, hold that the loss on the sale of the Securities is revenue in nature and same is allowable. - Decided in favour of assessee Provision made by way of debit to Profit and Loss Account under the head ‘contingent provisions against standard asset’ - Held that:- Factually, it is not in dispute that the impugned claim is a contingent Provision made on the basis of a percentage on the value of standard assets. The Provision does not reflect any particular debt which is doubtful or bad and it is only a general and non-specific Provision and it has been rightly classified as a contingent provision by the income-tax authorities. In-fact, the learned counsel for the assessee, at the time of hearing, fairly conceded the contingent nature of the provision and therefore the lower authorities made no mistake in disallowing the same in view of the judgment of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. ( 2010 (1) TMI 5 - SUPREME COURT OF INDIA ).- Decided against assessee Disallowance invoking section 43D - computation of interest in relation to categories of bad and doubtful debts, which in terms of section 43D of the Act is chargeable to tax in the previous year in which such interest is credited or is actually received by the bank, whichever is earlier - Held that:- The guidelines issued by the RBI and the methodology prescribed in rule 6EA of the Rules are at variance and the Revenue has sought to compute the interest income on the basis of methodology contained in rule 6EA of the Rules.Ostensibly, a similar controversy has been considered by the Mumbai Bench of the Tribunal in the case of GIC Housing Finance Ltd. (2011 (2) TMI 40 - ITAT, MUMBAI ) wherein the stand of the Revenue has been upheld. Before us, the learned counsel has not brought out any decision to the contrary either of the Tribunal or of any High Court which would require us to deviate from the decision of Mumbai Bench of the Tribunal in the case of GIC Housing Finance Ltd. (supra).- Decided against assessee Issues Involved:1. Rejection of claim for loss of investment in Apex Urban Cooperative Bank of Maharashtra & Goa.2. Disallowance of claim on account of merged banks' losses.3. Alternative claim for depreciation on intangible assets.4. Classification of Held to Maturity (HTM) securities as stock-in-trade.5. Disallowance of provision for standard assets.6. Alternative claim for premium on securities written off.7. Application of Section 43D for categorization of bad and doubtful debts.Issue-wise Detailed Analysis:1. Rejection of Claim for Loss of Investment in Apex Urban Cooperative Bank of Maharashtra & Goa:The assessee's claim for a loss of Rs. 2,77,90,000 due to the diminution in the value of shares held in Apex Urban Cooperative Bank was disallowed by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] as it was considered a notional loss. The assessee did not press this ground during the hearing, and it was dismissed as 'Not Pressed.'2. Disallowance of Claim on Account of Merged Banks' Losses:The assessee claimed a loss of Rs. 2668.13 lacs due to the takeover of four banks by way of merger, which was disallowed by the AO and CIT(A). This ground was also not pressed during the hearing and was dismissed as 'Not Pressed.'3. Alternative Claim for Depreciation on Intangible Assets:The assessee argued that the excess liabilities over the realizable value of assets taken over during the merger should be considered as an intangible asset under Section 32(1)(ii) of the Income-tax Act, 1961, and depreciation should be allowed. The CIT(A) rejected this claim, stating that the merger was not a purchase but an amalgamation, and no intangible assets were acquired. However, the Tribunal found that the assessee acquired business advantages such as client base, operational branches, and licenses, which are intangible assets eligible for depreciation under Section 32(1)(ii). Thus, the assessee's claim for depreciation was allowed.4. Classification of Held to Maturity (HTM) Securities as Stock-in-Trade:The assessee contended that HTM securities should be treated as stock-in-trade, and the loss on valuation should be allowed as a deduction. The Tribunal referred to precedents such as Latur Urban Coop. Bank Ltd. and The Sangli Bank Ltd., which held that HTM securities are part of stock-in-trade. Consequently, the Tribunal allowed the assessee's claim.5. Disallowance of Provision for Standard Assets:The assessee claimed a provision of Rs. 4,18,90,000 for standard assets as per RBI guidelines, which was disallowed by the AO and CIT(A) as a contingent liability. The Tribunal upheld the disallowance, citing the Supreme Court's judgment in Southern Technologies Ltd., which classifies such provisions as contingent and not allowable.6. Alternative Claim for Premium on Securities Written Off:This ground was an alternative to the classification of HTM securities. Since the main claim was allowed, the alternative claim was dismissed as infructuous.7. Application of Section 43D for Categorization of Bad and Doubtful Debts:For the assessment year 2008-09, the assessee contested the disallowance of Rs. 5,12,75,445 under Section 43D, arguing that the categorization of bad and doubtful debts should follow RBI guidelines rather than Rule 6EA of the Income Tax Rules. The Tribunal upheld the Revenue's position, following the precedent set by the Mumbai Bench of the Tribunal in GIC Housing Finance Ltd.Conclusion:The appeals for assessment years 2007-08 and 2008-09 were partly allowed. The Tribunal allowed the claims related to depreciation on intangible assets and classification of HTM securities as stock-in-trade, while it dismissed the claims for loss of investment, provision for standard assets, and the alternative claim for premium on securities. The Tribunal also upheld the Revenue's stance on the application of Section 43D for bad and doubtful debts.