2025 (3) TMI 354 - AT - Income Tax

Depreciation provision allowed against notional losses based on consistent precedents from previous years

The ITAT PUNE upheld CIT(A)'s decision allowing the assessee's claim for depreciation provision against notional losses. The Tribunal relied on consistent ... Addition of provision for depreciation - provision was claimed against the notional loss/anticipated loss which has not been actually incurred by the assessee - CIT(A) deleted addition - HELD THAT:- We find that the Ld. CIT(A) has allowed the claim of the assessee giving the cogent reasons in his appellate order after considering the assessment order and the factual and legal submissions made by the assessee. Further, perusal of the decision(s) of the coordinate bench of the Pune Tribunal reveals that the impugned issue has been decided in favour of the assessee in AY 2007-08, 2008-09, 2009-10 and 2010-11 in The Karad Urban Co-op Bank Ltd.. [2014 (1) TMI 1691 - ITAT PUNE] wherein the Tribunal has discussed this issue in detail and accordingly gave its verdict in favour of the assessee. The Revenue has not brought on record any material to contradict the findings of the Ld. CIT(A) as well as the Tribunal in the past years. Decided in favour of assessee. Disallowing amount towards amortization of Government Securities (HMT) deleted - assessee was justified in contending for amortization of premium paid in excess of face value of securities held to maturity (HTM) category or period remaining till maturity was found reasonable by the CIT(A). Depreciation on government securities shifted from AFS to HTM Securities at the beginning of the year allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the provision for depreciation of Rs. 34,50,00,000/- claimed by the assessee bank should be disallowed as it represents a notional or anticipated loss rather than an actual incurred loss.2. Whether the reliance on RBI guidelines and CBDT instructions for claiming depreciation on securities is justified under the Income Tax Act, 1961.3. Whether the assessment proceedings were conducted within the scope of the scrutiny as notified to the assessee.ISSUE-WISE DETAILED ANALYSISIssue 1: Provision for Depreciation as Notional LossRelevant Legal Framework and Precedents: The provision for depreciation was disallowed by the Assessing Officer (AO) under Section 37 of the Income Tax Act, 1961, on the grounds that it was a notional loss. The AO relied on the precedent set by the Supreme Court in Southern Technologies Ltd., which held that RBI guidelines do not override the provisions of the Income Tax Act.Court's Interpretation and Reasoning: The Tribunal found that the provision for depreciation was justified based on the RBI guidelines and CBDT instructions. The Tribunal noted that the depreciation was calculated based on the market value of securities as required by RBI norms, which are considered prudent accounting practices for banks.Key Evidence and Findings: The Tribunal considered the past decisions of the Pune Tribunal in the assessee's own case for earlier assessment years, where similar claims were allowed. The Tribunal also noted that the Revenue did not provide any new evidence to challenge these findings.Application of Law to Facts: The Tribunal applied the legal principles established in previous cases and found that the provision for depreciation was a legitimate business expense, as it was based on recognized accounting standards and regulatory guidelines.Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that the provision was a notional loss, emphasizing that the accounting treatment was consistent with regulatory requirements and past judicial decisions.Conclusions: The Tribunal upheld the CIT(A)'s decision to allow the provision for depreciation, finding it to be a legitimate deduction under the Income Tax Act.Issue 2: Reliance on RBI Guidelines and CBDT InstructionsRelevant Legal Framework and Precedents: The Tribunal considered the RBI Circular No. RBI/2015-16/43 and CBDT Instruction No. 17/2008, which provide guidance on the valuation of securities and the treatment of depreciation.Court's Interpretation and Reasoning: The Tribunal found that the reliance on these guidelines was appropriate, as they are designed to ensure accurate financial reporting and compliance with regulatory standards. The Tribunal noted that the CBDT instructions are binding on the Revenue authorities.Key Evidence and Findings: The Tribunal reviewed the RBI and CBDT guidelines and previous case law supporting the assessee's position. The Tribunal found no evidence that these guidelines were misapplied or that they conflicted with the Income Tax Act.Application of Law to Facts: The Tribunal applied the guidelines and instructions to the facts of the case, finding that the assessee's accounting treatment was consistent with both regulatory requirements and judicial precedents.Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that the guidelines could not be used to justify the deduction, emphasizing that the guidelines were intended to ensure prudent financial management and compliance with accounting standards.Conclusions: The Tribunal concluded that the reliance on RBI guidelines and CBDT instructions was justified and supported the allowance of the provision for depreciation.Issue 3: Scope of ScrutinyRelevant Legal Framework and Precedents: The Tribunal considered whether the AO had exceeded the scope of the scrutiny as notified to the assessee. The Tribunal referred to Section 292B of the Income Tax Act, which allows for procedural errors to be overlooked if they do not affect the substance of the proceedings.Court's Interpretation and Reasoning: The Tribunal found that the AO's actions were within the scope of the scrutiny, as the issue of the large refund claimed by the assessee was directly related to the provision for depreciation.Key Evidence and Findings: The Tribunal noted that the AO had issued a show cause notice regarding the provision for depreciation, and the assessee had an opportunity to respond. The Tribunal found no procedural errors that would invalidate the assessment.Application of Law to Facts: The Tribunal applied Section 292B to the facts, finding that any procedural errors did not affect the validity of the assessment.Treatment of Competing Arguments: The Tribunal dismissed the assessee's argument that the AO had exceeded the scope of the scrutiny, finding that the actions taken were consistent with the reasons for the selection of the case for scrutiny.Conclusions: The Tribunal concluded that the assessment was conducted within the scope of the scrutiny and upheld the validity of the proceedings.SIGNIFICANT HOLDINGSCore Principles Established: The Tribunal reaffirmed the principle that provisions for depreciation based on RBI guidelines and CBDT instructions are allowable deductions under the Income Tax Act. The Tribunal also emphasized the binding nature of CBDT instructions on Revenue authorities.Final Determinations on Each Issue: The Tribunal upheld the CIT(A)'s decision to allow the provision for depreciation, finding it to be a legitimate business expense. The Tribunal also confirmed that the assessment proceedings were conducted within the scope of the scrutiny.Verbatim Quotes of Crucial Legal Reasoning: 'After the perusal of the submission of the appellant and after taking into consideration the RBI master Circular No. RBI/2015-16/43 DCBR BPD (PCB) MC No. 4/16.20.000/2015-16 dated July 1, 2015, the Instruction no 17/2008 dated 26.11.2008 of the CBDT and the ratio laid down by the Hon'ble Courts in the various case laws cited by the appellant as discussed above I find that the appellant was justified in claiming the depreciation in value of investment amounting to Rs.34,50,00,000/- as an expenditure.'The Tribunal's decision is consistent with past rulings and reinforces the application of regulatory guidelines in the assessment of banking institutions.