2012 (12) TMI 1045 - AT - Income Tax

Tribunal rulings on leave encashment provision, securities treatment, and premium amortization

M/s Krishna Grameena Bank Versus The Asst. Commissioner of Income-tax, Circle-1,

M/s Krishna Grameena Bank Versus The Asst. Commissioner of Income-tax, Circle-1, - TMI Issues Involved:1. Disallowance of Rs. 79,88,196/- being provision for leave encashment.2. Treatment of investment in securities as stock-in-trade.3. Amortization of premium paid for purchase of a capital asset as revenue expenditure.Detailed Analysis:I. Disallowance of Provision for Leave Encashment (ITA No.117/B/12 - AY 2008-09 - By the Assessee Bank):The assessee-Bank claimed a provision for leave encashment amounting to Rs. 79,88,196/- in its Profit & Loss account. The Assessing Officer (AO) disallowed this provision, treating it as a contingent liability, reasoning that it had not crystallized during the relevant assessment year. The AO's rationale was that the liability was contingent on future events and did not constitute a deductible expenditure under the Income-tax Act.The CIT (A) upheld the AO's decision, distinguishing the case from the Supreme Court ruling in Bharat Earth Movers Ltd. v. CIT, where a fund for leave encashment was created. In contrast, the assessee-Bank had merely made a book entry without creating such a fund.On appeal, the Tribunal referenced its earlier decision in the assessee's own case for the previous assessment year, which had allowed the deduction. The Tribunal reiterated that the provision for leave encashment, based on actuarial valuation, was not a contingent liability and thus was deductible. The Tribunal allowed the assessee's appeal, concluding that the provision was an ascertained liability.II. Treatment of Investment in Securities as Stock-in-Trade (ITA No.232/B/12 - AY 2008-09 - By the Revenue):The AO disallowed the depreciation claimed by the assessee on securities, arguing that the decrease in value was notional and only realized losses on sale should be considered. The CIT (A) reversed this decision, treating the investments as stock-in-trade, supported by various judicial pronouncements, including the Supreme Court's decision in United Commercial Bank v. CIT.The Revenue appealed, arguing that the CIT (A) erred by not considering the securities held under 'Held to Maturity' as capital assets. The Tribunal noted that the Karnataka High Court in CIT v. ING Vysya Bank Ltd. held that not all securities held by banks are stock-in-trade. Since the Supreme Court had admitted an appeal in the ING Vysya Bank case, the Tribunal restored the issue to the AO, directing it to await the Supreme Court's decision.III. Amortization of Premium Paid for Purchase of a Capital Asset as Revenue Expenditure:The AO disallowed the amortization of the premium paid on securities, treating it as a capital expenditure. The CIT (A) allowed the amortization, referencing the Tribunal's decision in the assessee's own case for the previous assessment year, which had permitted such amortization.The Tribunal upheld the CIT (A)'s decision, affirming that the assessee was entitled to amortize the premium on government securities as revenue expenditure.Conclusion:1. The assessee's appeal regarding the provision for leave encashment was allowed, recognizing it as an ascertained liability.2. The Revenue's appeal concerning the treatment of securities as stock-in-trade was partly allowed for statistical purposes, with the issue remanded to the AO pending the Supreme Court's decision in a related case.3. The Tribunal upheld the CIT (A)'s decision on the amortization of the premium on securities, allowing it as a revenue expenditure.Order Pronounced:The assessee's appeal is allowed, and the Revenue's appeal is partly allowed for statistical purposes.