2013 (7) TMI 987 - AT - Income Tax

Tribunal rules on tax case: Forfeited share money, depreciation, and premium amortization.

Bhavani Urban Co-op. Bank Ld. Versus ACIT, Circle-2, Aurangabad

The tribunal ruled in favor of the assessee in a tax case involving the taxability of forfeited share money, depreciation on government securities held ... Addition on account of forfeited shares money - Held that:- The decisions relied on by the Ld.CIT(A) are distinguishable and not applicable to the facts of the present case since in all those cases the advances received were during the course of business whereas in the instant case it is a capital receipt. We find various Benches of the Tribunal, after considering the decision of Hon’ble Supreme Court in the case of T.V. Sundaram Iyenger (1996 (9) TMI 1 - SUPREME Court ) have held that such receipt on account of forfeiture of share money is a capital receipt. Addition on account of depreciation on Government Securities held for trading (valued at lower of cost or net realizable value as at year end date as per Accounting Standards & RBI Directives) - Held that:- The above issue stands decided in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of Latur Urban Cooperative Bank Ltd. [2015 (3) TMI 920 - ITAT PUNE] as held Merely because the Securities are kept under the head till the maturity, the said Security cannot be treated as a purely investment. Law is well settled that the Securities held by the Bank are in the nature of Stock-in- Trade Addition of amortization of premium on Government Securities - Held that:- As in Sree Subramanyeswara Co-operative Bank Ltd [2012 (11) TMI 336 - ITAT, BANGALORE] identical issue in favour of the assessee as held Amortization was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities Issues Involved:1. Taxability of forfeited share money.2. Addition on account of depreciation on government securities held for trading.3. Addition on account of amortization of premium on government securities.Issue-wise Detailed Analysis:1. Taxability of Forfeited Share Money:The primary issue was whether the forfeiture of share application money amounting to Rs. 5,73,100/- should be considered as a capital receipt or revenue income. The assessee, a cooperative bank, forfeited shares when shareholders did not complete the minimum shareholding requirements. The Assessing Officer (AO) added this forfeited amount to the income under Section 41(1) of the Income Tax Act, 1961. The CIT(A) upheld this addition, relying on various judicial decisions, including the Supreme Court's decision in CIT Vs. T.V. Sundaram Iyenger (222 ITR 344) and other High Court rulings, which treated forfeiture of share capital as income.However, the tribunal found that the forfeited share money should be treated as a capital receipt. The tribunal referenced decisions from other benches, such as Brijlaxmi Leasing & Finance Ltd. (118 ITD 546) and Prism Cement Ltd. (101 ITD 103), which held that forfeiture of share money is a capital receipt. The tribunal also cited the Supreme Court decision in Travancore Rubber and Tea Company Ltd. Vs. CIT (243 ITR 158), which held that forfeiture of earnest money and advance by a vendor is a capital receipt. Consequently, the tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this ground.2. Addition on Account of Depreciation on Government Securities Held for Trading:The second issue pertained to the addition of Rs. 15,80,000/- on account of depreciation on government securities held for trading. The AO disallowed this amount, arguing that the reclassification of securities from 'Held to Maturity' to 'Available for Sale' was not done at the beginning of the accounting year as per RBI guidelines. The CIT(A) upheld this disallowance, stating that the securities under 'Held to Maturity' are capital assets and should be valued at cost only.The tribunal, however, referred to a decision by the Pune Bench in the case of Latur Urban Cooperative Bank Ltd. (ITA No.778/PN/2011 and ITA No.792/PN/2011), which allowed the deduction of loss on the sale of securities, treating them as stock-in-trade. The tribunal held that the nomenclature of securities does not determine their nature, and the loss on sale of securities is revenue in nature. Therefore, the tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this ground.3. Addition on Account of Amortization of Premium on Government Securities:The third issue involved the addition of Rs. 1,08,000/- on account of amortization of premium on government securities categorized under 'Held to Maturity' (HTM). The AO disallowed this amount, considering it a capital expenditure. The CIT(A) upheld the disallowance, stating that HTM securities are capital assets and should be valued at cost.The tribunal referred to the CBDT Instruction No.17/2008 dated 26-11-2008, which allows the amortization of premium on HTM securities as per RBI guidelines. The tribunal also cited decisions from the Mumbai Bench in the case of Bank of Rajasthan Ltd. (ITA No.3228/Mum/2010) and the Bangalore Bench in the case of Sri Subramanyeswara Cooperative Bank Ltd. (ITA No.488/Bang/2011), which allowed such amortization. Consequently, the tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this ground.Conclusion:The appeal filed by the assessee was partly allowed, with the tribunal setting aside the CIT(A)'s orders on all three issues and directing the AO to delete the respective additions.