2016 (5) TMI 1295 - AT - Income Tax

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

The Cosmos Co-operative Bank Ltd. Versus Addl. CIT, Range-7, Pune

The Cosmos Co-operative Bank Ltd. Versus Addl. CIT, Range-7, Pune - TMI 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.