2015 (3) TMI 1360 - AT - Income Tax

Tax Tribunal grants assessee relief on multiple grounds, rejects revenue's appeal on investment depreciation.

The Tribunal allowed the assessee's appeal on various grounds, directing re-examination of claims under Sections 36(1)(viia) and 36(1)(viii), and deleting ... Calculation of deduction u/s 36(1)(viia) - as per AR set off of bad debt could be done only against provisions and not vice-versa - HELD THAT:- Similar issue was considered in ING VYSYA BANK LTD. [2014 (9) TMI 44 - ITAT BANGALORE] - All the arguments now raised by the learned DR including the effect of explanation2 to section 36(1)(vii) by Finance Act 2013, were considered in the above order. Accordingly, in the case of assessee also we set aside the orders of the authorities below and direct the AO to examine the claim of the assessee in the light of the discussion of the Tribunal in the case of M/s ING Vysa Bank Ltd (Supra). Ground of the assessee is therefore allowed for statistical purposes. Disallowance u/s 14A - sufficiency of own funds - HELD THAT:- It is not disputed that assessee had interest free funds of ₹ 21,280.59 Crores with it. Against this, investments that could give rise to tax free income was ₹ 1444.02 Crores. This has not been disputed. Assessee had itself made a disallowance of ₹ 52,88,281.90 being 5% of the exempt income for covering the over head expenditure in relation to earning of the exempt income. In assessee’s own case for assessment year 2010-11 a similar issue had come up before this Tribunal wherein as held there can be no dispute that the interest-free funds far exceeded the investment in tax free securities. Therefore, one has to come to a conclusion that investments in tax-free securities was made out of own funds and therefore, no disallowance in terms of Rule 8D(2)(i) or (ii) of the Rules can be made on account of interest expenditure. AO has completely ignored the submissions made by the assessee in this regard and has blindly applied Rule 8D(2)(iii) of the rules and made disallowance u/s.14A Deduction u/s 36(1)(viii) being income earned by it on long term finance - HELD THAT:- Whether assessee had indeed made a further creation of special reserve in the succeeding year and also whether such reserves were created before finalization of the grant of deduction u/s 36(1)(viii) had not been verified by any of the authorities below. We therefore, set aside the orders of the authorities below and remand the issue to the file of the AO for fresh consideration in accordance with law. TDS u/s 194H - payments which were made to National Financial Switch and Cash tree (NFS in short) consortium - Non deduction of tds - Disallowance u/s 40a(ia) - HELD THAT:- We are of the opinion, that the payments made by the assessee to M/s NFS could not be considered as commission or brokerage, in any sense all these terms. Assessee was therefore,not bound to deduct tax on such payments u/s 194H of the Act. Disallowance u/s 40a(ia) of the Act is not warranted. Such disallowance stands deleted. Depreciation on investment portfolio by treating the investment as stock in trade - HELD THAT:- As decided in assessee's own case for assessment year 2010-11 Preparation of the balancesheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. No question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case - method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income-tax purposes. - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 36(1)(viia) of the Income Tax Act, 1961.2. Disallowance under Section 14A of the Income Tax Act, 1961.3. Disallowance under Section 36(1)(viii) of the Income Tax Act, 1961.4. Disallowance under Section 40a(ia) of the Income Tax Act, 1961.5. Depreciation on investment portfolio treated as stock in trade.Detailed Analysis:1. Disallowance under Section 36(1)(viia) of the Income Tax Act, 1961:The assessee, a public sector bank, claimed a deduction of Rs. 423,79,66,948 under Section 36(1)(viia) of the Act. The Assessing Officer (AO) restricted the claim to Rs. 37,44,67,183, the actual provision for rural debts made in the books, citing the decisions in Catholic Syrian Bank Vs CIT and State Bank of Patiala Vs CIT. The CIT(A) upheld the AO's decision. However, the Tribunal, referencing its decision in DCIT Vs ING Vysya Bank Ltd., held that the actual provision made in the books for bad and doubtful debts alone should be considered for the threshold limits and not the breakup thereof. The Tribunal set aside the orders of the authorities below and directed the AO to re-examine the claim in light of this discussion.2. Disallowance under Section 14A of the Income Tax Act, 1961:The assessee claimed exempt dividend income of Rs. 10,93,02,392.50 and had disallowed Rs. 52,88,281.90 as expenditure for earning the exempt income. The AO, applying Rule 8D, made a disallowance of Rs. 10,57,65,638, resulting in an addition of Rs. 10,04,77,356 after deducting the assessee's suomotu disallowance. The CIT(A) upheld the AO's decision. The Tribunal, referencing its decision in the assessee's own case for AY 2010-11, held that since the assessee had substantial interest-free funds exceeding the investments that could give rise to tax-free income, no further disallowance under Rule 8D was warranted. The Tribunal allowed the assessee's ground.3. Disallowance under Section 36(1)(viii) of the Income Tax Act, 1961:The assessee claimed a deduction of Rs. 141.21 Crores under Section 36(1)(viii) but had created special reserves of only Rs. 91.00 Crores. The AO restricted the claim to Rs. 91.00 Crores, a decision upheld by the CIT(A). The Tribunal, referencing the Delhi Bench's decision in M/s Power Finance Corpn. Ltd. Vs JCIT, held that the reserve could be created in a succeeding year and still qualify for the deduction. The Tribunal remanded the issue to the AO for fresh consideration, directing verification of whether the additional reserves were created before finalization of the grant of deduction.4. Disallowance under Section 40a(ia) of the Income Tax Act, 1961:The AO disallowed Rs. 1,35,01,835 under Section 40a(ia) for non-deduction of tax at source on ATM user charges paid to National Financial Switch (NFS) consortium, treating it as commission under Section 194H. The CIT(A) upheld the AO's decision. The Tribunal, referencing the Delhi High Court's decision in CIT Vs JDS Apparels Pvt. Ltd., held that the payments made by the assessee to NFS could not be considered as commission or brokerage and hence were not subject to TDS under Section 194H. The Tribunal deleted the disallowance.5. Depreciation on investment portfolio treated as stock in trade:The revenue challenged the CIT(A)'s decision allowing the assessee's claim of depreciation on its investment portfolio by treating it as stock in trade. The Tribunal, referencing its decision in the assessee's own case for AY 2010-11, upheld the CIT(A)'s decision, affirming that such a claim was allowable.Summary:The Tribunal allowed the assessee's appeal on multiple grounds, directing re-examination of claims under Sections 36(1)(viia) and 36(1)(viii), and deleted disallowances under Sections 14A and 40a(ia). The revenue's appeal was dismissed, upholding the CIT(A)'s decision on depreciation of the investment portfolio.