2025 (8) TMI 1436 - AT - Income Tax

Most taxpayer claims allowed: s.14A/Rule 8D rejected for stock-in-trade; s.115JB inapplicable; wage provision remand; reclassification loss remanded

Central Bank of India Versus Assistant Commissioner of Income Tax, Circle – 2 (1) (2), Mumbai And Joint Commissioner of Income Tax (OSD), Circle - 2 (1) (2), Mumbai Versus Central Bank of India And Assistant Commissioner of Income Tax, Circle – 2 (1) (2), Mumbai Versus Central Bank of India And Deputy Commissioner of Income Tax, Circle – 2 (1) (2), Mumbai Versus Central Bank of India

Central Bank of India Versus Assistant Commissioner of Income Tax, Circle – 2 (1) (2), Mumbai And Joint Commissioner of Income Tax (OSD), Circle - 2 (1) ... ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D is permissible where tax-exempt income arises from securities held by a bank as stock-in-trade. 2. Whether disallowance under Rule 8D(2)(ii) can be computed by attributing borrowed funds to tax-free investments in absence of objective material showing nexus. 3. Whether provision for wage revision (provisional accrual) is deductible under section 37(1) when based on indicative settlement figures and the agreement crystallises liability in a later year. 4. Whether provisions of section 115JB (MAT on book profits) apply to nationalised/'corresponding new' banks for assessment years from 2013-14 onwards after statutory amendment. 5. Whether (a) shifting loss on transfer of securities from AFS to HTM is allowable as deduction, and (b) whether reversed valuation/enhancement of HTM securities value by comparing book value with market value is permissible. 6. Whether interest accrued but not due on securities (including coupon accruals) is taxable on accrual (mercantile) basis or on due basis for a bank following RBI accounting guidelines. 7. Whether broken-period interest paid on purchase of securities is capital or revenue expenditure when securities are treated as stock-in-trade. 8. Whether segregation of provisions for doubtful debts into rural and non-rural pockets is permissible for set-off under section 36(1)(vii) against specific bad debts written off. 9. Whether penalty under section 271(1)(c) can be sustained where the addition/enhancement that formed basis of penalty is deleted on appeal. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Section 14A and Rule 8D - disallowance for exempt income where securities are stock-in-trade; Rule 8D(2)(ii) attribution Legal framework: Section 14A disallows expenditure attributable to exempt income; Rule 8D prescribes methodology including components in sub-rules (ii) and (iii) for attribution and deemed disallowance. Precedent treatment: Tribunal and High Court authorities (including decisions relied on by the Tribunal) have held that where securities are held as stock-in-trade and dividends/other exempt receipts arise in course of business, section 14A/Rule 8D disallowance may not apply; Supreme Court precedents (Maxopp principle) and coordinate Tribunal/High Court decisions were followed. Interpretation and reasoning: The Court accepted that the securities were held in the ordinary course of banking business as stock-in-trade and that no material was produced to demonstrate use of borrowed funds specifically for acquiring tax-free investments. In absence of objective nexus between borrowings and tax-free investments, Rule 8D(2)(ii) disallowance could not be sustained. For Rule 8D(2)(iii), the limited deemed disallowance was considered in light of precedents but, on facts, Tribunal deleted the Rule 8D disallowance overall by following authoritative rulings. Ratio vs. Obiter: Ratio - where securities are stock-in-trade and no nexus shown between borrowings and tax-free investments, section 14A/Rule 8D(2)(ii) disallowance cannot be applied. Observations regarding wider application of Rule 8D and 0.5% component are explanatory/confirmatory of applied precedents. Conclusion: Disallowance under section 14A read with Rule 8D, including Rule 8D(2)(ii), deleted; related ancillary grounds rendered academic. Issue 3: Provision for wage revision - deductibility vs contingent liability Legal framework: Deduction under section 37(1) for business expenditure; general accounting principles (mercantile system) and requirement that liability be ascertained/quantifiable to be deductible. Precedent treatment: Coordinate Tribunal decisions in similar banks allowed such provisions where facts supported liability; but material supporting crystallisation (e.g., settlement memorandum) must be examined. Interpretation and reasoning: The assessee made a provision based on historical settlement patterns and preliminary negotiations; the final Memorandum of Settlement (executed later) was not examined by lower authorities and constituted fresh/decisive evidence. Given factual contest on ascertainment and quantification, the Tribunal restored the matter to the assessing officer for de novo consideration with direction to afford opportunity to the assessee to produce and have considered the settlement instrument and other evidence. Ratio vs. Obiter: Ratio - where entitlement and quantification remain unresolved in assessment, provisioning for wage revision requires fresh factual adjudication; restoration is appropriate. Observations about mercantile accounting and prior Tribunal decisions are supportive rather than determinative across cases. Conclusion: Issue restored to assessing officer for fresh enquiry into whether provision constituted an allowable deduction; grounds allowed for statistical purposes. Issue 4: Applicability of section 115JB (MAT on book profits) to nationalised/'corresponding new' banks Legal framework: Section 115JB imposes tax on book profits (MAT); legislative amendment introduced clause (b) to sub-section (2) effective 1-4-2013. Precedent treatment: Special Bench decision held that clause (b) is not applicable to banks constituted as 'corresponding new bank' under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; Tribunal followed that Special Bench ruling. Interpretation and reasoning: On authority of the Special Bench ruling, the Tribunal concluded section 115JB provisions (as amended) do not apply to such banks; consequent issues about additions in book profit under section 115JB rendered academic. Ratio vs. Obiter: Ratio - section 115JB (post-2013 amendment) does not apply to banks of the described statutory character; consequent computations under MAT are not to be invoked for such banks. Ancillary arguments on specific add-backs were rendered academic. Conclusion: Provisions of section 115JB held inapplicable to the assessee; related grounds kept open or dismissed as infructuous. Issue 5: Shifting loss on AFS?HTM and enhancement of HTM securities value Legal framework: RBI instructions govern accounting on transfer from AFS to HTM; tax treatment follows allowable business expenditure/loss principles where shifting loss is debited to profit & loss under RBI guidance. Precedent treatment: Jurisdictional High Court and coordinate Tribunal have held shifting loss on AFS?HTM allowable as business loss/deduction; previous Tribunal rulings in assessee's own case confirmed this and corrected earlier enhancements. Interpretation and reasoning: The Tribunal accepted that shifting loss was debited in compliance with RBI circular and is allowable. The CIT(A)'s enhancement of HTM values based on the assessee's without-prejudice computation was erroneous; earlier Tribunal order contained a mistake of record which was corrected by the bench on miscellaneous application. Quantification of corresponding loss on securities sold in the year was remitted to AO for examination, as details were not earlier examined. Ratio vs. Obiter: Ratio - shifting loss incurred on transfer from AFS to HTM in terms of RBI circular is allowable; enhancement made by appellate authority based on without-prejudice workings cannot stand where those workings were produced in compliance with directions. Remand for quantification is procedural and binding on facts. Conclusion: Enhancement deleted; shifting loss allowable; quantification remitted to assessing officer with opportunity to assessee. Issue 6: Interest accrued but not due - accrual vs due basis for banking entities Legal framework: Income recognition under mercantile system; RBI guidelines on interest accounting for banks; taxability depends on rights to income and consistent accounting practice. Precedent treatment: Coordinate Tribunal and jurisdictional High Court decisions (Credit Suisse, earlier tribunal orders) upheld treatment of accrued but not due interest in banks where accounting and RBI practice followed; Supreme Court later decisions on similar issues considered. Interpretation and reasoning: The Tribunal followed coordinate bench precedent where interest accrued but not due was treated in line with RBI instructions and consistent practice and therefore not added back; the AO's addition was deleted as prior decisions in assessee's own case supported the approach. Ratio vs. Obiter: Ratio - where a bank follows RBI guidelines and consistently accounts interest on securities in accordance with such guidelines, interest accrued but not due may be treated in computation as per that accounting and not necessarily added by AO on mercantile grounds. Observations on granular accrual mechanics are contextual. Conclusion: Addition of interest accrued but not due deleted; ground dismissed for Revenue. Issue 7: Broken-period interest - capital or revenue when securities are stock-in-trade Legal framework: Distinction between capital and revenue expenditure; treatment of broken-period interest depends on whether acquisition is capital asset or stock-in-trade; RBI/Supreme Court guidance relevant. Precedent treatment: Jurisdictional High Court and Supreme Court decisions (Bank of Rajasthan etc.) held broken-period interest paid on purchase of securities treated as stock-in-trade is revenue expenditure. Interpretation and reasoning: Following controlling higher court authority, broken-period interest paid was held to be revenue in nature when securities were stock-in-trade; therefore deduction allowable. Ratio vs. Obiter: Ratio - broken-period interest is revenue expenditure where securities are held as stock-in-trade; not capital in such circumstances. Conclusion: Disallowance of broken-period interest rejected; additions deleted. Issue 8: Segregation of provisions for doubtful debts into rural and non-rural for set-off under section 36 Legal framework: Section 36(1)(viia) allows deduction for provisions for bad & doubtful debts; set-off under section 36(1)(vii) for bad debts written off against provisions. Precedent treatment: Supreme Court authority (Catholic Syrian Bank) permits bifurcation/segregation in appropriate factual matrix to allow set-off of specific pools. Interpretation and reasoning: The Tribunal upheld the appellate authority's acceptance of factual segregation and applied the Supreme Court precedent; no infirmity found in allowing set-off of non-rural bad debts against corresponding provisions where legislative/precedential approach permits. Ratio vs. Obiter: Ratio - where provisions are maintained or can be matched to rural/non-rural pockets, corresponding bad debts written off can be set off appropriately in line with Supreme Court authority. Conclusion: Revenue's ground on this issue dismissed; CIT(A) findings upheld. Issue 9: Penalty under section 271(1)(c) where foundational addition deleted Legal framework: Section 271(1)(c) penalises furnishing inaccurate particulars where addition/adjustment is sustained; penalty depends on correctness of underlying assessment action. Precedent treatment: General administrative principle that penalty based on additions deleted on appeal cannot be sustained unless separate culpability established. Interpretation and reasoning: The Tribunal observed that since the enhancement in HTM valuations (basis for penalty) was deleted in the quantum appeal, there remained no basis to sustain penalty; accordingly penalty was quashed. Ratio vs. Obiter: Ratio - penalty under section 271(1)(c) cannot be maintained where the impugned addition that formed the basis of penalty is deleted on appeal and no independent evidence of inaccuracy or concealment remains. Observations on jurisdictional propriety of initiating penalty proceedings are corroborative. Conclusion: Penalty under section 271(1)(c) quashed; assessee's penalty appeal allowed.