Bank fixed-deposit interest, SLR/CRR investments and security depreciation claims upheld; s14A/Rule 8D and other disallowances deleted.

Disallowance of interest on fixed deposits was held unsustainable because the assessee produced contemporaneous evidence, including fixed deposit particulars and TDS deduction, establishing genuineness of the interest payment; deletion was upheld. Disallowance under s.14A r.w. Rule 8D was deleted since the investments were held to meet SLR/CRR requirements and treated as stock-in-trade, to which s.14A/Rule 8D was held inapplicable following binding HC/SC precedent; deletion was upheld. Depreciation on temporary wooden structures and allowability of software expenditure were allowed as revenue/eligible depreciation applying judicial consistency from earlier years; disallowances were rejected. Inter-office adjustment provision was allowed as an ascertained/anticipated liability supported by material, applying Bharat Earth Movers; disallowance was rejected. Deduction under s.36(1)(viia) was directed to be allowed on total provision (rural and non-rural). Depreciation on Government securities, HTM premium amortization loss, and provision for non-performing investments were allowed following settled precedent; Revenue's appeal failed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether interest paid on a customer's fixed deposit could be disallowed for want of acknowledgement from the payee, despite documentary evidence including cheque trail and TDS compliance.

(ii) Whether disallowance under section 14A read with Rule 8D could be made where the relevant investments were held as stock-in-trade / for banking regulatory requirements (SLR/CRR) and not as investments yielding exempt income in the contemplated manner.

(iii) Whether higher depreciation claimed on "temporary wooden structures" (treated by the Assessing Officer as fall ceilings/partitions/windows etc.) was allowable as part of the existing block of assets, following prior year treatment.

(iv) Whether a credit balance shown as "Inter-Office Adjustments" representing differences due to incomplete recording of inter-branch/head office transactions could be taxed or disallowed as non-existent/contingent, or whether it constituted a non-taxable internal adjustment and/or an allowable anticipated liability.

(v) Whether software expenditure was allowable as revenue expenditure (and not capital), consistently with earlier year determination on identical facts.

(vi) Whether deduction under section 36(1)(viia) could be denied on the grounds relied upon by the Assessing Officer (census figures timing, branch-wise aggregation, rural/non-rural provision split, and "credit available" in provision account), despite auditor certification and branch classification basis.

(vii) Whether depreciation/provision for diminution in value of investments (including Government securities) was allowable where computed in accordance with the applicable norms discussed (including ICDS VIII and RBI-aligned valuation), and the issue was recurring and already decided in earlier years.

(viii) Whether amortization of premium on held-to-maturity (HTM) securities was allowable as claimed, the issue being covered by an earlier year decision.

(ix) Whether provision for Non-Performing Investments (NPI) was allowable, the issue being covered by earlier binding determination for a prior year.

2. ISSUE-WISE DETAILED ANALYSIS

(i) Interest on fixed deposits-evidentiary sufficiency for allowability

Legal framework: The Court examined the allowability of the interest expense on facts, focusing on whether the assessee discharged the evidentiary burden for the expenditure.

Interpretation and reasoning: The Court accepted that the assessee had placed on record supporting evidence of the fixed deposit transaction and interest payment, including proof of TDS deduction and deposit, and relevant deposit documentation. The Court agreed that the Assessing Officer relied on limited information (including a prior denial by the depositor in another year) but did not pursue further enquiry despite the assessee's documentary trail.

Conclusion: The deletion of the disallowance was upheld; the interest payment was treated as sufficiently proved and allowable on the record.

(ii) Section 14A read with Rule 8D-applicability to investments held for SLR/CRR and as stock-in-trade

Legal framework: The Court addressed section 14A read with Rule 8D in the context of banking investments held for regulatory requirements, and applied the principle that section 14A disallowance does not apply where investments are held as stock-in-trade, as recognized in the reasoning adopted by the Court.

Interpretation and reasoning: The Court recorded that the impugned holdings represented deployment of funds in instruments (government banks/securities/shares/debentures etc.) for maintaining SLR/CRR. Treating the matter as recurring, the Court followed the binding position that section 14A read with Rule 8D does not apply where such holdings are held as stock-in-trade, and therefore the disallowance could not be sustained.

Conclusion: The disallowance under section 14A read with Rule 8D was held inapplicable on these facts and remained deleted.

(iii) Depreciation on temporary wooden structures-rate/eligibility within the block of assets

Legal framework: The Court decided the issue on consistency with prior year adjudication and the concept of the "block of assets" as applied to the same class of assets.

Interpretation and reasoning: The Assessing Officer had characterized the items as having enduring benefit and restricted depreciation. The Court noted the Revenue could not dispute that the same issue had already been decided in favour of the assessee for the immediately preceding year and that the assets formed part of the same block of assets consistently. Judicial consistency was therefore applied to the identical asset class and facts.

Conclusion: The higher depreciation as allowed by the appellate authority was upheld; the Revenue's challenge failed.

(iv) Inter-Office Adjustments-taxability/disallowability of internal branch differences

Legal framework: The Court evaluated whether the credit balance represented taxable profit or a disallowable/non-existent liability, and considered the principle that internal dealings cannot generate profit, and that anticipated liabilities supported by material are allowable.

Interpretation and reasoning: The Court accepted the explanation that "Inter-Office Adjustment (net)" represented differences due to incomplete recording of transactions between branches/head office as at year-end, shown net in the financial statements per banking norms. Taxing the credit balance would amount to taxing non-existent profits from internal transactions, contrary to established taxation principles. The Court further found no demonstrated failure showing the provision lacked cogent support or was not allowable as an anticipated liability.

Conclusion: The deletion of the addition/disallowance on account of inter-office adjustments was upheld.

(v) Software expenditure-revenue vs capital

Legal framework: The Court resolved the characterization primarily through consistency with the earlier year ruling on identical facts and absence of distinguishing material.

Interpretation and reasoning: The Revenue argued enduring benefit and capital nature, but could not point to any factual or legal distinction from the preceding year in which the assessee had succeeded. The Court therefore maintained the treatment as revenue expenditure.

Conclusion: Software expenditure remained allowable as revenue; the Revenue's grounds on this issue were rejected (including the repeated ground).

(vi) Deduction under section 36(1)(viia)-validity of Assessing Officer's objections and reliance on auditor certification

Legal framework: The Court addressed the meaning of "rural branch" as applied in the appellate reasoning, the relevance of the objections raised by the Assessing Officer to section 36(1)(viia), and accepted reliance on prior years' determinations on the same provision.

Interpretation and reasoning: The appellate reasoning adopted by the Court rejected the Assessing Officer's understanding that the census figures must be "published on the first day" of the previous year; instead, the relevant requirement was tied to the last preceding census whose figures had been published before the previous year commenced. The Court also accepted that classification of branches was supported by the basis used and that the deduction computation was supported by an auditor certificate verifying the rural advances computation in the prescribed manner. The Court agreed that the Assessing Officer's demands regarding aggregate provisions for rural/non-rural branches and "credit available" in the provision account were not relevant to computation of deduction under section 36(1)(viia) as dealt with in the adopted reasoning, and that no cogent factual challenge was made to the certified figures. The Court further adopted the co-ordinate bench's approach on the same recurring issue in the assessee's earlier years.

Conclusion: The deletion of the disallowance of the section 36(1)(viia) claim was upheld.

(vii) Depreciation/provision for diminution in value of investments including Government securities-allowability on recurring issue

Legal framework: The Court decided the allowability on the footing that the issue was recurring and already settled in favour of the assessee up to the jurisdictional High Court for an earlier year, and therefore applied consistency.

Interpretation and reasoning: The appellate discussion (accepted by the Court) treated the claim as arising from valuation of securities/investments in accordance with the applicable norms discussed (including ICDS VIII's linkage to RBI guidelines). The Court noted the Revenue could not dispute that the issue stood decided against it in prior binding adjudication, and therefore the disallowance could not be revived. The Government securities provision was treated as identical to the preceding investment depreciation issue.

Conclusion: Depreciation/provision for investments (including Government securities) remained allowable; the Revenue's grounds were rejected.

(viii) Amortization of premium on HTM securities-recurring covered issue

Legal framework: The Court decided the issue through consistency with the Tribunal's decision for the immediately preceding year, noted as covering the matter.

Interpretation and reasoning: Both sides accepted that the issue was already decided in the assessee's favour for the preceding year on identical footing, and no distinguishing factors were shown.

Conclusion: The deletion of the disallowance of amortization on HTM securities was upheld.

(ix) Provision for Non-Performing Investments-recurring covered issue

Legal framework: The Court disposed of the issue by applying the binding earlier year determination up to the jurisdictional High Court level, as recorded.

Interpretation and reasoning: The Court treated the matter as recurring and covered against the department, with no fresh differentiating basis advanced to depart from that position.

Conclusion: The deletion of the disallowance relating to provision for NPI was upheld, and the Revenue's appeal failed on all pressed grounds.

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