TaxTMI 
TaxTMI 
2013 (4) TMI 702
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.... 13,460/ -". Subsequently, notice u/ s. 148 dated 07.03.2008 was issued with prior approval of Hon 'ble CIT, CIT/Hyd-I/ 147/18/2007-08, dated 29.02.2008 as the income has escaped assessment or has been under assessed within the meaning of IT Act as per provisions of section 147 of IT Act. Notice u/s. 148 was issued for the reasons that during the year relevant to A.Y. 2001-02 assessee company has reversed its unrealised interest on NPAs while recognising the interest income for the A.Y. 2001-02 i.e. It has reduced its current years interest income to that extent and same is not allowable as per provisions of IT Act. Further, during the year, the assessee company has claimed interest expended for purchasing/ sale of securities and such broken period interest claimed by the assessee is not an allowable expenditure as per provisions IT Act. Further, during the year assessee company .h as claimed depreciation on securities held under Available for sale/Held for trading category and the same is to be allowable as per the RBI revised guidelines read with CBOT Circular No.665 read with provisions of IT Act as follows. ....
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.... For brevity the brief extracts of provisions u/s. 147 of IT Act is reproduced below: "147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for 811.y assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income 811.d also 811.y other income chargeable to tax which has escaped assessment 811.d which comes to his notice subsequently in the course of the proceedings under this section, or re compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year]: Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to made a return under sect....
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....reduced the interest income which has accrued on account of certain advances made by the appellant, which it classified as NPAs. The appellant had not disclosed the fact that the interest it had credited to its P&L a/c on account of such advances, was reduced, resulting in under statement of its total income. The AO has come to know of such derecognizing of interest income by the appellant subsequent to the completion of assessment u/s 143(3) made by him. Similarly the facts relating to claim of interest on securities purchased and classified as Held to Maturity (HTM) category as revenue expenditure has come to the knowledge of the AO later on, on account of the omission of the appellant in disclosing full facts relating to the it." 7. Aggrieved the Assessee is on appeal before us and has raised the following grounds of appeal: "Ground No. 1 is general in nature. Ground No. 2.a) to 2.c) is directed against the action of the CIT(A) in confirming the action of the AO in making reassessment u/s 143(3) r.w.s. 147 of the IT Act for the assessment year 2001-02 and determining the assessee's income from business a....
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....243 CTR 520 (Bom.) 4. Smt. Raj Rani Gulati, [2010] 329 ITR 370 (All) 5. ICICI Bank Ltd., [2011] 16 Taxmann.com 250 (Bom.) 6. Lok Housing & Construction Ltd., [2012] 348 ITR 335 (Bom.) 11. We have gone through the orders of the authorities below and find that all these issues are common issues in the assessment of all the Banks. These issues are subject of matter appeals before various forums. Therefore it cannot be said that the Assessing officer would not have applied his mind on these issues. 12. When assessment u/s 143(3) has been completed if the assessing officer chooses to reopen the assessment beyond 4 years from the end of the assessment year, then as per proviso to sec 147(1) the income escaping assessment should be due to failure on the part of the Assessee to disclose fully and truly all particulars for making the assessment. Mere change of opinion on the part of the Assessing officer and his belief that the decision on some issues could be different will not give him the jurisdiction to reopen the assessment. Even if on the basis of later judgements, the decision in the regular assessment is found not to be correct will not be sufficient ground to reopen. The AO sh....
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....he part of the Assessing officer. 15. The third issue, viz., depreciation on securities, is also subject matter of numerous decisions in the case of banks. Once the investment in securities are made with a view to comply with statutory requirement of liquidity, the securities constitute stock in trade and valuing them at market or cost whichever is lower is an accepted method of accounting. The Apex Court has upheld the same in the case of United Commercial Bank v. CIT 240 ITR 355 (SC). The AO's attempt to classify them at Held to market or ready for sale etc is merely a change of opinion. There has been no fresh facts or evidence collected by the AO on the basis of which he can be said to have come to conclusion that income has escaped assessment. 16. As regards the issue regarding disallowance of unrealised interest, we find that the same are covered by the decisions of CIT Vs. Industrial Financial Corporation India Ltd., 205 ITR 75 (Del.) and Union Bank of India Vs. ACIT, 16 Taxman.com 304 (Mum.) 17. As regards the issue with respect to deduction u/s 36(1)(vii) in respect of debts written off by the non-rural branches of the asessee's bank, is covered in favour of the a....
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....Baer Shoes (India) Pvt. Ltd 331 ITR 435 Mad. 19. Thus a different legal interpretation of a provision in the subsequent year, on the same set of facts cannot be the basis of reopening for an earlier year, particularly when it is beyond 4 years from the end of the Assessment year. 20. In the circumstances we hold that the reopening is without jurisdiction and hence invalid. As we have held that the assessment is without jurisdiction, we are not dealing with other issues on merits. 21. In the result, the Assessee's appeal being ITA No. 95/H/10 is treated as allowed. ITA 96/H/10 AY 2003-04 22. This is an appeal against the order giving effect to the order of the CIT u/s 263. 23. In this appeal the assessee has raised the following grounds of appeal: Ground No. 1 is general in nature. Ground No. 2.a) to 2.b) is directed against the action of the CIT(A) in confirming the action of the AO in considering Rs. 32.68 crores as alleged notional profit on sales of investments in trading book as income of the assessee for the AY 2003-04 when in fact it is only a notional income and was not earned by the assessee on sale of investments. 24. The AO considered Rs. 32.68 crores representin....
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....ht after the time of sale ignoring the cost in other category where such security is available before sale. According to auditors/ since sale of security cannot be made unless stock of such security is there in anyone of the categories (mostly AFS) profit on sale is to be computed taking into account the sale value of security and average of the cost of security as available in other category (AFS) and purchase value of the security on the day of its sale in trading book. That above two methods of computing profit are illustrated hereunder taking the following values: a. Sale value of security b. Cost of security in AFS before sale c. Purchase value of security on the date of sale as per trading book Method adopted by Bank Method to be followed as Per Auditors Sale Value - Rs.91 Sale Value Rs.91.00 Purchase Value - Rs.90 Average cost in AFS and purchase Value as per trading Book 89.50 Rs. 1 Rs.1.50 Thus/ if the method/ as suggested by the auditors/ is followed/ profit of the bank would have been higher by 32.68 crores. Presuming for a moment that the above view may be correct/ though not conceding/ it would not make any diff....
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....entral Statutory Auditors override the guidelines provided by the RBI in respect of recognization of income on sale of securities. Further, the appellant cannot follow any method other than mercantile system of accounting as per the provisions u/s 145 of the I.T. Act, particularly in regard to the recognization of income on sale of securities. As the appellant, arrived at the profit figures by taking the purchase cost as per the RBI guidelines and not in accordance with the accounting standards, based on which the statutory auditors found that the income computed was short by Rs. 32.68 crores. Further, the appellant was not correct in stating that there would be no difference in the overall profit as the securities in AFS & HTM category are valued at cost or market value, whichever is lower. The fact is that the appellant had valued the HTM securities at cost and this is at variance with the appellant's statement above. For these reasons, the AO was justified in bringing to tax the profits that have been under-reported by the appellant in its accounts. Accordingly, this ground fails." 27. Aggrieved, the assessee is in appeal before us. 28. Before us, in addition to the origi....
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....rmedia Cable Communication (P) Ltd. [2012] 19 Taxmann.com 190 (Pune) 2. DCIT Vs. Associated Petroleum Corporation [2011] 44 SOT 45 (Ahd.) 3. Jai Pulse Mills Vs. ITO, [2010] 39 SOT 312 (Ahd.) 32. We find that the issue is dealt with in the case of ACIT Vs. Intermedia cable communication Pvt. Ltd., 19 taxman.com 190 (Pune) wherein it has been held as follows: "How the AO can resort to estimation of income without rejection of accounts systematically maintained by the assessee for all the years under consideration and also without invoking the provisions of section 145 of the Act after duly complying with the conditions specified in them ? Should we encourage such callous approach of the AO, who did not bother to read the said provisions and conditions specified therein ?. AO's order does not contain a whisper about the provisions of section 145 of the Act, while he proceeded to make best judgment of the assessment. This is not done. Therefore, in our considered opinion the AO made a best judgment assessments in this case assuming jurisdiction u/s 145(3) of the Act invalidly. Such assessments are unsustainable." 33. Fol....
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....- on the ground that it is not an accrued liability but only a contingent liability." 36. In addition to the original grounds of appeal, the assessee filed a petition seeking admission of following additional grounds of appeal: "1. Without prejudice to Ground No. 7 the learned CIT(A) ought to have allowed the unrealized interest of Rs. 236,00,000/- on Non-Performing Assets as deduction u/s 36(1)(vii) of the Act by treating the same as bad debts written off. 2. The appellant submits that it had written off Rs. 31,93,36,727/- as bad debts in respect of its non-rural branches during the assessment year and that the same be allowed as deduction u/s 36(1)(vii) of the IT Act, 1961." 37. The first issue in Assessee's appeal is against the disallowance under 14A being expenditure attributable to earning of exempt income. The AO disallowed Rs. 33,64,10,125/-, being Rs. 30,47,08,129/- interest on borrowed capital utilised in acquiring tax free securities and Rs. 3,17,01,996/- being 5% of the dividend earned of Rs. 63,40,39,912/-. On appeal, the CIT(A) held that the AO erred in disallowing portion of interest expenditure of the Assessee amounting to Rs. 30,47,08,129/- as being related to ....
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....h has been denied to it by the Department. For immediate reference, we reproduce the provision, as it stood at the relevant time, below- "35D.(1) Where an assessee, being an Indian company, Of a person, (other than a company) who is resident in India, lncurs, after the 31 sat day of March, 1970, any expenditure specified in sub- section (2),- (i) before (he commencement of his business, or (ii) after the commencement of his business in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking Is completed or the new industrial unit commences production or operation: Provided that where an assessee incurs after the 31 st day of March 1998, any expenditure specifi....
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....n was to be made available to any kind of business in both the time zones, then the qualification as inserted in clause (ii) would not have been necessary. If clause (ii) is to apply to any business, then it amounts to waste of words by the Parliament, which is expected, nor intended, nor presumed. However, against this the argument of the learned counsel is that the 'industrial undertaking' or 'industrial unit' is to be understood in a broader sense and the restricted meaning as given to it in the 80I group of sections is not to be given. Further, according to him, the,"word 'operation' is used in connection with that broader meaning only. On a very careful consideration of the argument, we are unable to accept the contention. It is true that the expression 'inldustrial undertaking' is not defined in the Act. In that case, tile options available with us is to adopt either the dictionary meaning or- the popular- meaning or the meaning ascribed to it in other statutes or the meaning in which the said expression has beer) Il'~ iJ in the same statute. In our considered view, tile rour appears to the most reasonable to us. It cannot be forgotten we a....
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....roduces an article or thing. Moving further, wherever a deduction is not meant only for an undertaking which manufactures or produces an article or thing, the word 'undertaking' is alone used as is the case in 5.80IA. Therefore, the usage of the expression 'industrial undertaking' in 5.35D has a special significance and it has to be understood in the same meaning as it is understood in other provisions of the Act. It has to be an undertaking which manufactures or produces an article or thing. 9. The next contention of the learned counsel is that the industrial' is removed from the provision with effect from 1.4.2009. According to him, this amendment is meant to remove the hardship and clarify the situation, which always was and hence. it was retrospective in operation. We are unable to accept this argument as well, for the reasons that follow. Earlier, we drew attention to the Government's consciousness about industrialization. When the impugned provision was introduced about four decades back, except in a few areas, the service sector had not developed and its importance was also never realised. It is since last few years that the service sector has spread....
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.... in the Finance Act of the year in which search was initiated or the year in which the search was concluded, or the year in which the block assessment was initiated on the year in which the block assessment order Was passed. There is no such ambiguity in S.35D. Similarly, in the case of Ahmedbhai Umarbhai (supra) and Anglo French Textile Mill (supra), the word 'operation' has been explained in the context of the main activity of production in those cases. It is, no doubt true that the word 'operation' has been explained in the context of the main activity of production in those cases. It is, no doubt, true that the word 'operation' has a broad meaning and can be used with reference to any activity. However, the meaning of the word depends on the company it keeps and in s. 35D, since it is used with reference to industrial undertaking, it has to be understood to be an operation connected with industrial undertaking only and nothing else. There may be certain activities prior to the commencement of actual production and income may accrue from such activities. It is to describe these activities, the word 'operation' has been in s.35D. Therefore, the two judgmen....
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....on on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision for its doubtful or loss assets first proviso to Section 36(1)(viia). We do agree that the bank is bound to follow the RBI guidelines. But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets. Another provision disallowed by the revenue authorities is in respect of border line performing assets. Neither the RBI has given such classification in its guidelines in respect of such assets. The very nomenclature used by the bank suggests that the assets are skill performing, that is, still generating income for the bank through there may be some signs of concern. However, unless such assets are not classified as non performing assets and sub-classified as sub-standard, doubtful or loss assets, no deduction can be permitted. Thus, the disallowance thereof by the revenue authorities is upheld. This issue, as mentioned earlier is in respect of assessment year 2003-04 and 2004-05 only" 44. Aggrieved the assessee ....
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....a revenue deduction. However, the RBI has issued Circular wherein they have classified the investment made to comply with SLR requirement as `Held to maturity' (HTM), `Available for sale' (AFS) and `Held for Trade' (HFT). Based on the RBI Circular lower authorities came to the conclusion that investment in Government Securities which are classified under the head HTM cannot be considered as stock in trade and therefore depreciation in value of such securities cannot be allowed as a deduction. The Apex Court in the case of UCO Bank Ltd Vs CIT reported in 240 ITR 355 has held that value of the securities at cost or market value whichever is less should be accepted for income tax even if the banks in their books do not value on that basis. Therefore, it is an accepted proportion that investment made by the bank to comply with the SLR requirement would constitute their stock in trade and depreciation in value of the same is an allowable deduction. 51. Respectfully following the decisions cited by the learned counsel for the assessee, we uphold the claim of the assessee and direct the AO to allow depreciation / fall in value of investment in Government Securities including those classi....
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....ssification of these assets by the RBI is not binding on the Income tax authorities. Such classification would not alter the characteristic of the investments to comply with SLR requirement as stock in trade. 56. As held by the Supreme Court in the case of Southern technologies Ltd v JCIT (320 ITR577), directions of the RBI are not binding for deciding the issue under the Income tax Act. Securities which are held for comply with SLR has consistently been held to be stock in trade. That being so there can be no further distinction and no part such holding will cease to be stock in trade merely because RBI has classified the same as `held to maturity'. 57. The Bombay High Court in the case of American Express International Ltd Vs CIT reported in 258 ITR 601 (Bom) and the Madras High Court in the case of Karur Vysya Bank Ltd in TC(A) No 2139 of 2009 dated 13.07.2007 has held that the broken period interest included in the purchase price of Government securities held by the banking company to comply with SLR requirement is entitled to deduction. 58. Respectfully following the same, we direct the Assessing officer to allow a sum of Rs. 5,07,02,515/- being broken period interest (net)....
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....how that the assessee has parted with the amount for making payment for the leave encashment. This was merely a provisions made by the assessee. No doubt, the Calcutta High Court in the case of Exide Industries Ltd Vs Union of India (292 ITR 470) held that they have struck down the Section 43B in a writ petition filed. But that decision which is applicable to parties to the writ petition and the same will not be applicable to the assessee in the appellate proceedings. The ITAT which is creature of the Income tax Act is bound by the provisions of the Act and therefore in view of the specific provisions of sub-clause (f) to Section 43B the claim of the assessee for deduction of Rs. 1056911015/- towards provisions for leave encashment cannot be allowed. 64. The appeal of the assessee on this issue is dismissed. 65. The assessee filed an additional ground before the Tribunal regarding deduction under Section 36(1)(viia) in respect of bad debts written off by the rural branch of the assessee bank. As this is a legal issue and the facts are available with the lower authorities, we admit the additional grounds. 66. We find that this issue is covered by the decision of the Apex court Ca....