Banking deduction rules allow amortised premium on held-to-maturity securities and limit TDS disallowance where income is already taxed.

Amortised premium on government securities held in the held-to-maturity category is treated as deductible business expenditure for banks, reflecting RBI investment classification and CBDT guidance that such securities are carried at acquisition cost and the premium is amortised over the remaining maturity period. MICR processing charges were also considered in light of the alternative plea that the recipient bank had already included the receipt in taxable income; on that basis, the payer-side disallowance for alleged non-deduction of tax at source could not survive if verified that the amount had been taxed in the recipient's hands. The appeal was therefore allowed on the first issue and granted limited relief on the second, subject to verification.

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Issues: (i) Whether premium paid on investment amortized in respect of government securities held under the held to maturity category was allowable as deduction. (ii) Whether processing charges for MICR were liable to disallowance for non-deduction of tax at source under section 194J, and whether the disallowance could survive if the recipient had already offered the receipt to tax.

Issue (i): Whether premium paid on investment amortized in respect of government securities held under the held to maturity category was allowable as deduction.

Analysis: The claim was examined in the light of the banking business framework, the RBI classification of investment portfolios, and the CBDT instruction recognising that investments in the held to maturity category are carried at acquisition cost and that premium paid over face value is to be amortized over the remaining period of maturity. The issue was also treated as covered by consistent precedent in the assessee's own case and by earlier decisions recognising such amortized premium as a business deduction for banks.

Conclusion: The amortized premium on government securities held as held to maturity was allowable as deduction, and the disallowance was deleted in favour of the assessee.

Issue (ii): Whether processing charges for MICR were liable to disallowance for non-deduction of tax at source under section 194J, and whether the disallowance could survive if the recipient had already offered the receipt to tax.

Analysis: The payment was considered in the context of the alternative plea that the recipient bank had included the MICR charges in its taxable income. On that factual footing, the disallowance at the hands of the payer was treated as unsustainable if the receipt had in fact suffered tax in the recipient's assessment, and verification by the Assessing Officer was directed for that limited purpose.

Conclusion: The issue was decided in favour of the assessee for statistical purposes, subject to verification that the recipient had offered the receipt to tax.

Final Conclusion: The appeal succeeded on the first issue and received limited relief on the second, resulting in a partial allowance of the assessee's appeal.

Ratio Decidendi: For banks, amortized premium on government securities held in the held to maturity category is deductible as business expenditure, and a payer-side disallowance for non-deduction of tax at source cannot be sustained where the corresponding receipt has already been brought to tax in the recipient's hands.

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