Treatment of bank investments and related expenses upheld; several disallowances deleted and one capital loss remitted for verification.

Disallowance of expenses under the rule for exempt income was held inapplicable where investments are part of banking business and own funds substantially cover exempt investments, therefore no addition to book profit is warranted; amortisation of premium on HTM securities recorded as revenue in banking accounts is allowable and not required to be added back; interest on bona fide perpetual debt instruments characterized and treated as borrowings is deductible as business expenditure; a large claimed capital loss was remitted to the assessing officer for fresh verification with opportunity to the taxpayer; broken period interest in the banking context is deductible as revenue expenditure.

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Issues: (i) Whether the disallowance under section 14A read with Rule 8D amounting to Rs. 8,75,69,605/- should be sustained and/or added to total income and book profit under section 115JB; (ii) Whether amortisation of premium on securities held in HTM category amounting to Rs. 112,88,01,190/- is disallowable; (iii) Whether interest expense of Rs. 1,14,88,28,130/- on Innovative Perpetual Debt Instruments (IPDI) is not deductible under section 36(1)(iii); (iv) Whether the claimed capital loss of Rs. 8,04,15,79,747/- is unsubstantiated and should be disallowed or the matter should be restored for verification; (v) Whether deduction of broken period interest of Rs. 30,56,00,000/- is disallowable as capital in nature.

Issue (i): Whether disallowance under section 14A read with Rule 8D is sustainable and whether any such disallowance can be added for computing book profit under section 115JB.

Analysis: The issue was considered in light of precedents addressing banks and similar financial institutions where investments held in the course of banking business are treated as business assets and income therefrom falls under business head. The tribunal applied coordinate-bench and higher-court decisions holding that where own funds/reserve and surplus substantially cover exempt investments, or where investments are part of banking business, disallowance under section 14A/Rule 8D is not warranted; and that additions under section 14A are not to be added to book profit under section 115JB in the circumstances considered.

Conclusion: In favour of the assessee; the disallowance under section 14A/Rule 8D is deleted and not added for book profit computation.

Issue (ii): Whether amortisation of premium on HTM securities is disallowable and must be added back to income.

Analysis: The tribunal relied on prior coordinate-bench and High Court decisions addressing accounting treatment under RBI guidelines and consistent tribunal precedent that amortisation of premium on HTM securities, treated as revenue item for banking business in earlier years and upheld by the High Court in the bank's case, is allowable in the facts and recorded practice of the assessee.

Conclusion: In favour of the assessee; the amortisation of premium on HTM securities is allowable and the addition is deleted.

Issue (iii): Whether interest on Innovative Perpetual Debt Instruments (IPDI) is not deductible as borrowing and therefore disallowable under section 36(1)(iii).

Analysis: The tribunal examined precedents distinguishing perpetual instruments that are bona fide borrowings from cases where capital provided lacked repayment obligation. Coordinate-bench decisions holding that IPDIs, having fixed coupon, being shown as borrowings, subjected to TDS and having been redeemed in practice, constitute borrowing for business purposes and their interest is deductible were applied.

Conclusion: In favour of the assessee; interest on IPDI is deductible and the disallowance is deleted.

Issue (iv): Whether the claimed capital loss of Rs. 8,04,15,79,747/- is unsubstantiated and should be disallowed or referred back for verification.

Analysis: The tribunal found that the assessing officer had rejected documentation without adequate verification while the first appellate authority accepted the documents filed by the assessee. Given factual contention about verification and documentary submissions filed during assessment, the tribunal directed restoration to the assessing officer for fresh decision after opportunity to the assessee and taking cognizance of documents already filed.

Conclusion: Partly in favour of Revenue for procedural purposes; the matter is restored to the assessing officer for verification and decision (allowed for statistical purposes).

Issue (v): Whether broken period interest constitutes capital layout and is not deductible as revenue expenditure.

Analysis: The tribunal followed coordinate-bench and Supreme Court precedent holding that in the context of banking business and where securities are treated as stock-in-trade or business assets, broken period interest is deductible as revenue expenditure.

Conclusion: In favour of the assessee; broken period interest deduction is allowable and the disallowance is deleted.

Final Conclusion: The appeal by the revenue is partly allowed overall: substantive grounds relating to section 14A/Rule 8D, amortisation of HTM premium, deductibility of interest on IPDI, and broken period interest are decided in favour of the assessee, while the claim of capital loss is remitted to the assessing officer for verification; the collective effect is a partial allowance of the revenue appeal.

Ratio Decidendi: Where investments and related expenses of a banking concern are held to arise in the course of the banking business and own funds sufficiently cover tax-exempt investments, disallowance under section 14A/Rule 8D is not warranted; similarly, amortisation of premium on HTM securities and interest on bona fide perpetual debt instruments characterized and treated as borrowings in the books are allowable for tax purposes; factual claims of capital loss must be verified by the assessing officer before disallowance.

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