2015 (4) TMI 1123 - AT - Income Tax

ITAT affirms CIT (A) decisions on various tax issues, including disallowance of broken period interest

The ITAT upheld the CIT (A)'s decisions on all issues, including disallowance of broken period interest, amortization on government securities, provision ... Disallowance of broken period interest - Held that:- The interest received on due date, without deducting the broken period interest paid, amounts to double taxation. According to AS 13, read with the I.T. Act, 1961, the preacquisition element of interest cannot be included in the cost of investment, as such the broken period interest is to be treated as revenue expenses. As relying on assessee's own case [2014 (3) TMI 724 - ITAT HYDERABAD] broken period of interest is an allowable expense - Decided against revenue Disallowance of amortization provided on Govt. securities - Held that:- As relying on assessee's own case [2014 (3) TMI 724 - ITAT HYDERABAD] HTM category constitutes stock in trade of the assessee bank, the method adopted by the assessee for amortizing the premium is as per the established accounting standards. The securities under HTM category is held by the assessee as stock in trade, the claim for amortization made by the assessee is valid - Decided against revenue Disallowance of contribution to the gratuity fund - Held that:- Section 43B permits a deduction in respect of any payment by way of' contribution to a provident fund or superannuation fund or any other fund for the welfare of employees in the year in which the liability is actually discharged. In the present case the appellant has not made any provision for gratuity U/s.40A(7) as on 31-03-2010 as the total amount has been paid on 31-03-2010 and accordingly the said payment of gratuity of ₹ 5,61,93,000/- is an allowable deduction U/s.43B of the I.T.Act, 1961 - Decided against revenue Disallowance of provision for staff fraud - addition on the ground that provision for frauds cannot be equated with provision for bad and doubtful debts, and frauds were not let off or written off normally and the embezzled money usually recovered - Held that:- As relying on assessee's own case [2014 (3) TMI 724 - ITAT HYDERABAD] staff frauds are similar to embezzlement by an employee and therefore qualifies as an allowable expenditure u/s 37 of the Act. The loss by embezzlement by employees should be treated as incidental to business and the same should be allowed as deduction in the year in which it is discovered - Decided against revenue Addition on account of treating the unrealized interest on NPAs as income - Held that:- Respectfully following the decision of the ITAT Hyderabad, in assessee’s own case [2014 (3) TMI 724 - ITAT HYDERABAD], the CIT (A) had no hesitation in holding that unrealized interest on NPAs constitute income to the assessee on the principle that the RBI directives were only in the context of presentation of NPAs in Balance Sheet and presentation of Balance Sheets have nothing to do with taxable income, which has to be computed as per the provisions of the Income Tax Act.- Decided against revenue Issues Involved:1. Disallowance of broken period interest.2. Disallowance of amortization provided on Government securities.3. Disallowance of provision for gratuity.4. Disallowance of provision for staff frauds.5. Inclusion of unrealized interest on Non-Performing Assets (NPA) as income.Detailed Analysis:1. Disallowance of Broken Period Interest:The Assessing Officer (AO) disallowed the broken period interest of Rs. 5,59,70,000 paid by the assessee in the acquisition of Held to Maturity (HTM) securities, treating it as a capital expense. The AO relied on the Supreme Court decision in Vijaya Bank Ltd. Vs. CIT and RBI and CBDT circulars. The CIT (A) allowed the expense, following the ITAT's decision in ITA No.610/Hyd/2013. The ITAT upheld the CIT (A)'s decision, dismissing the Revenue's appeal.2. Disallowance of Amortization Provided on Government Securities:The AO disallowed Rs. 6,63,76,000 claimed for amortization of premium on government securities, stating there was no provision in the Income Tax Act for such a claim. The CIT (A) allowed the claim based on earlier decisions upheld by the ITAT. The ITAT, following its decision in ITA No.610/Hyd/2013, dismissed the Revenue's appeal.3. Disallowance of Provision for Gratuity:The AO disallowed Rs. 5,61,93,000 contributed to the gratuity fund, citing lack of approval for the fund. The CIT (A) allowed the claim, noting the payment was made to an approved fund by IRDA and was allowable under Section 43B of the Income Tax Act. The ITAT upheld the CIT (A)'s decision, referencing the conflict between sections 40A(7) and 43B and relevant judicial precedents.4. Disallowance of Provision for Staff Frauds:The AO disallowed Rs. 28,68,000 claimed as provision for staff frauds, arguing it was not an allowable provision under the Income Tax Act. The CIT (A) allowed the claim, treating it as an allowable expenditure under Section 37. The ITAT upheld the CIT (A)'s decision, following its earlier ruling in ITA No.610/Hyd/2013.5. Inclusion of Unrealized Interest on Non-Performing Assets (NPA) as Income:The AO included Rs. 1,36,22,000 as income, treating unrealized interest on NPAs as taxable under the mercantile system of accounting. The CIT (A) upheld the AO's decision, referencing the Supreme Court decision in Southern Technologies, which distinguished between RBI directives and taxable income computation under the Income Tax Act. The ITAT upheld the CIT (A)'s decision, despite the assessee's reliance on various judicial precedents, including United Commercial Bank vs. CIT.Conclusion:The ITAT dismissed both the Revenue's and the assessee's appeals, upholding the CIT (A)'s decisions on all issues. The judgments were consistent with prior rulings and relevant judicial precedents, affirming the treatment of broken period interest, amortization of government securities, provision for gratuity, provision for staff frauds, and unrealized interest on NPAs.