2017 (10) TMI 42 - AT - Income Tax

Assessee wins appeals, disallowance issues decided in their favor, penalties deleted.

M/s. Capital Local Area Bank Ltd. Versus Addl. CIT-III, Dy. CIT-III, DCIT, Range-III, Dy CIT, Range-III, Dy CIT, Range-III, And ACIT, Circle-3, Jalandhar

M/s. Capital Local Area Bank Ltd. Versus Addl. CIT-III, Dy. CIT-III, DCIT, Range-III, Dy CIT, Range-III, Dy CIT, Range-III, And ACIT, Circle-3, Jalandhar ... Issues Involved:1. Disallowance of loss on inter-transfer revaluation of investment.2. Disallowance of depreciation on investment.3. Disallowance of broken period interest.4. Penalty under Section 271(1)(c).5. Disallowance of Keyman Insurance Premium.Issue-wise Detailed Analysis:1. Disallowance of Loss on Inter-Transfer Revaluation of Investment:The assessee, a commercial bank, maintained three portfolios of investments: 'Held to Maturity,' 'Held for Trading,' and 'Available for Sale.' The bank claimed losses on inter-transfer of securities among these categories, valuing them at market prices as per RBI guidelines. The Assessing Officer (AO) disallowed these losses, stating they were not incurred at the valuation date but during the year, and were notional rather than actual. The CIT(A) upheld this disallowance but allowed losses on year-end valuation.The Tribunal found that the inter-transfer of securities within the year is akin to selling stock in the normal course of business, and thus, losses should be allowed. It cited various judicial precedents, including the Bombay High Court in CIT vs. HDFC Bank Ltd. and the ITAT in OBC vs. Addl. CIT, which supported the allowance of such losses. The Tribunal allowed the assessee's claim for losses on inter-transfer of securities.2. Disallowance of Depreciation on Investment:The AO disallowed the assessee's claim for depreciation on investments, arguing that the revised return was invalid as it was filed beyond the time limit. The CIT(A) allowed the claim, relying on the Supreme Court decision in United Commercial Bank Ltd. vs. CIT and the CBDT Circular No. 18/2015, which clarified that income from investments by banks is business income.The Tribunal upheld the CIT(A)'s decision, noting that the revised return was filed in view of the Tribunal's earlier order treating the securities as stock-in-trade. It also referenced the Punjab & Haryana High Court's decision in CIT vs. Ramco International, which allowed claims made during assessment proceedings even if not included in the original return.3. Disallowance of Broken Period Interest:The AO disallowed the broken period interest (BPI) paid on the purchase of securities, treating it as capital expenditure. The CIT(A) allowed the claim, following the Bombay High Court's decision in American Express International Banking Corp. vs. CIT, which held that BPI is revenue-neutral and should be allowed as a deduction.The Tribunal agreed with the CIT(A), noting that the Supreme Court had dismissed the Revenue's SLP against the Bombay High Court's decision in Union Bank of India, which followed the American Express case. Thus, the Tribunal upheld the allowance of BPI as a deductible expense.4. Penalty Under Section 271(1)(c):The AO imposed penalties on the assessee for furnishing inaccurate particulars of income related to disallowed claims. The CIT(A) deleted these penalties, relying on the Supreme Court's decision in Reliance Petro Products Ltd., which held that penalties cannot be imposed for claims made in good faith.The Tribunal upheld the CIT(A)'s decision, noting that the quantum additions had been deleted in the present order, and thus, penalties could not be sustained. Consequently, the Revenue's appeals regarding penalties were dismissed.5. Disallowance of Keyman Insurance Premium:The AO disallowed the premium paid on Keyman Insurance Policies, which was confirmed by the CIT(A). The Tribunal found that the issue was covered in favor of the assessee by various decisions of the ITAT Amritsar Bench, including M/s Suri Sons vs. ACIT and M/s F.C. Sondhi & Co. (India) Pvt. Ltd. vs. DCIT.The Tribunal allowed the assessee's claim for Keyman Insurance Premium, finding that the policies were taken for the benefit of the firm and were thus deductible as business expenses.Conclusion:The Tribunal allowed the appeals and cross-objections filed by the assessee, rejecting the Revenue's appeals. The issues of disallowance of loss on inter-transfer of securities, depreciation on investments, broken period interest, and Keyman Insurance Premium were decided in favor of the assessee. Penalties imposed under Section 271(1)(c) were deleted.