2016 (5) TMI 1295 - AT - Income Tax

Tribunal grants relief on goodwill amortization and HTM securities, dismisses Section 43D claim

The Tribunal partly allowed the appeal, granting relief on the issues of goodwill amortization and HTM securities classification. The claim related to ... Depreciation claim as the difference between Assets acquired and Liabilities taken over represents intangible assets as contemplated under clause (ii) of section 32(1)- Held that:- As relying on assessee's own case in the immediately preceding 2 assessment years 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. - Decided in favour of assessee Loss on valuation of securities as held as stock in trade - Held that:- 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. We may like to quote here the decision of the Hon'ble High Court of Kerala in the case of CIT Vs. Nedungadi Bank Ltd. [2002 (11) TMI 29 - KERALA High Court] wherein held that the securities held by the Bank are in the nature of stock-in-trade. Both the authorities below has merely gone on the nomenclature of the head under which the Securities are held. In our considered view, 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 Applicability of Sec 43D to the appellant bank - Held that:- The above ground has been decided against the assessee by the order of the Tribunal in assessee’s own case. In view of the above submission of the Ld. Counsel for the assessee the above ground is dismissed. - Decided against assessee Disallowance of the payment made to Cosmos Foundation u/s 40 A(2)(b) - Held that:- Provisions of section 40A(2)(b) are not applicable since the assessee is a charitable trust and not an association of persons within the meaning of section 40A(2).- Decided in favour of assessee Issues Involved:1. Deduction of goodwill amortization under Section 32(1)(ii) of the Income Tax Act.2. Classification of Held to Maturity (HTM) securities as stock-in-trade.3. Applicability of Section 43D to the appellant bank.4. Disallowance of payments made to Cosmos Foundation under Section 40A(2)(b) of the Income Tax Act.Issue-wise Detailed Analysis:1. Deduction of Goodwill Amortization under Section 32(1)(ii):The assessee claimed a deduction for goodwill amortization following the takeover of four banks, arguing that the excess of liabilities over assets represents intangible assets under Section 32(1)(ii). The AO disallowed the claim, stating that the Income Tax Act does not provide for such a deduction. The CIT(A) upheld this view, rejecting the alternate claim for depreciation. However, the Tribunal found that in previous years, similar claims had been allowed, recognizing the business advantages acquired as 'business or commercial rights of similar nature' under Section 32(1)(ii). Consequently, the Tribunal allowed the assessee's claim for depreciation on goodwill.2. Classification of HTM Securities as Stock-in-Trade:The assessee argued that HTM securities should be treated as stock-in-trade and that the loss on their valuation should be deductible. The AO disallowed this claim, stating that depreciation is only considered for HFT and AFS categories. The CIT(A) upheld this decision. However, the Tribunal referenced previous decisions where similar claims were allowed, recognizing HTM securities as part of stock-in-trade. Following the precedent, the Tribunal allowed the assessee's claim for the loss on HTM securities.3. Applicability of Section 43D:The assessee contested the application of Section 43D, arguing that as a scheduled bank, RBI directions should identify doubtful debts. The CIT(A) and the Tribunal, referencing earlier decisions, dismissed the assessee's claim, upholding the addition under Section 43D.4. Disallowance of Payments to Cosmos Foundation under Section 40A(2)(b):The AO disallowed 50% of payments made to Cosmos Foundation, considering them unreasonable and suspecting income diversion to a related charitable trust. The CIT(A) upheld this disallowance. The assessee argued that Section 40A(2)(b) was not applicable, citing a Delhi High Court decision that a charitable trust does not fall under 'association of persons' within the meaning of Section 40A(2)(b). The Tribunal agreed, noting that similar expenditures were allowed in previous years and that the trust does not qualify as an 'association of persons.' Consequently, the Tribunal directed the AO to delete the addition.Conclusion:The appeal was partly allowed, with the Tribunal granting relief on the issues of goodwill amortization and HTM securities classification, while dismissing the claim related to Section 43D and allowing the claim regarding payments to Cosmos Foundation.