TaxTMI 
TaxTMI 
2017 (10) TMI 42
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.... the issues raised by the assessee as well as by Revenue in various appeals are summarized as under: S. No. Case No. A.Y Remarks Issued Involved 1. ITA No.209/Asr/2010 2006-07 Assessee's appeal 1. Disallowance of loss Rs. 37,51,000/- on intertransfer revaluation of investment 2. ITA No.233/Asr/2010 2006-07 Revenue appeal A) Disallowance of Rs. 45,75,307/- on a/c of 'depreciation on investment' A) Disallowance of broken period interest Rs. 19,11,491/- 3. ITA No.349/Asr/2012 2006-07 Revenue appeal Against penalty u/s.271(l)(c) 4. CO. 32/Asr/2010 2007-08 Assessee's CO Disallowance of loss of Rs. 76,92,103/- on revaluation of inter- transfer of se6.curities/investments. 2.Disallowance of Rs. 1,50,000/- on 'keyman insurance'. 5. ITA No.402/Asr/2010 2007-08 Revenue's appeal 1. Disallowance of broken period interest Rs.Rs.38,64,067/- 6. ITA No. 521/Asr/2013 2007-08 Revenue appeal Against penalty u/s.271(l)(c) 7. ITA No. 523/Asr/2013 2007-08 'A' appeal Against penalty u/s.271(1)(c) 8. ITA....
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....ipt No.228359 given by the said courier. Having sent the CO by courier, it was believed to have reached the Tribunal in normal course. 5. Thereafter, further appeals and cross objections were filed by Revenue and assessee for Asst. Years 2009-10, 2010-11 and 2011-12, and the whole bunch of cases were simultaneously fixed for hearing on several occasions, but no effective hearing took place on any such date. Since, the whole bunch of cases were fixed on a single date and adjourned as such to another date, one to one appeals fixed for hearing, were not taken particular note of in normal course. It was further submitted that when the appeals were fixed for hearing on 26.08.2014, year-wise list of all the cases fixed for hearing was prepared, to segregate cases having only issue of 'Key Man Insurance' and the others having multiple issues. While preparing this list, it came to notice that our C.O for A.Y:2008-09 was not listed for hearing, though the revenue's appeal did figure in the cause list. Therefore, vide letter dated 03.09.2014, the assessee asked the status of its C.O from the Registrar, ITAT, Amritsar & in reply the assessee received a letter dated 31.03.2015, from t....
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....re to be 'Held to Maturity' 'Held for Trading' or 'Available for sale, at the time of purchase of securities and it was permitted to inter-transfer the securities among the three categories. It was further submitted that as per RBI guidelines the transfer of securities among the categories has to be done at market prices. It was submitted that during these years, the assessee had made certain inter-transfer of securities and while recording the transfer the securities were valued at market prices and therefore, had suffered loss which it had claimed in its P&L Accounts. It was submitted that another type of loss which the assessee had booked in its P&L Accounts related to diminution in the valuation of securities at the close of the year. The Ld. AR submitted that the Ld. CIT(A) has upheld the action of Assessing Officer in disallowing the loss booked by assessee on inter-transfer of securities in between the year whereas he has allowed relief to the assessee which the assessee had booked on account of demunition in the valuation of securities at the close of year. The Ld. AR submitted that the Ld. CIT(A) had held that loss was not incurred on the valuation date i.e. at the close o....
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.... year was not as per IT Act, are untenable qua the fact that once the investments made by bank is accepted as trading activity, and the stocks held representing stock in trade any fluctuation in its rates/valuation whether sold/transferred during or at the year end, has to be allowed as a trading gain/loss. The Ld. AR invited our attention to the CBDT Circular No.18/2005 dated 02.11.2015 wherein in the light of Apex Court decision in CIT vs. Nawashar Central Co-operative Bank Ltd. 289 ITR 6 (SC), it was held that investment made by Banking concern, to which Banking Regulation Act 1949 applies, are part of the business of banking and therefore, income arising from such investments is attributable to the business of banking falling under the head"Profit & Gains of Business & Profession". It was submitted that in par -4 the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed be withdrawn/not pressed for. The Ld. AR submitted that the claim of the assessee is well supported by the following High Court decisions. (i) CIT vs. HDFC Bank Ltd. 368 ITR 377 (Bom). (ii) ITAT 'E' Bench Delhi in IT....
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....d Commercial Bank Ltd. vs. CIT 240 ITR 355 (SC), to allow relief to the assessee. He also relied on ITAT Amritsar Bench decision in assessee's own case for A.Y.2002-03 & 2004-05 supra, holding that assessee's investment in securities was stock in trade. It was submitted that assessee's claim by way of revised return was rightly accepted by Ld. CIT(A) in view of binding decision of Hon'ble P& H High Court in the case of Ramco International (supra), wherein the Hon'ble Apex Court in the case of Goetze (India) Ltd. vs. CIT 284 ITR 323 (SC) was considered and distinguished. Similar view has been taken by Hon'ble Bombay High Court in Bal Mukand Acharaya vs. DCIT (2009) 310 ITR 310 (Bom). It was submitted that Hon'ble Supreme Court in the case of CIT vs. Mahendra Mills (2001), 243 ITR 56 (SC) commenting on the Board circular No.114/(XL- 35) dt.4.4.1955, has held that it was AO's responsibility to draw assessee's attention to claims/relief he was entitled to in the course of assessment proceedings. The Ld. AR submitted that the Apex Court decision in the case of United Commercial Bank Ltd. squarely applies to this case, which the ld. CIT(A) has lucidly discussed and followed to allow t....
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....ories of investments, the assessee had hypotheticaly claimed loss on the investments which was not permissible. The Ld. DR submitted that the Circular No.18/2015 dated 2.11.2015 as relied on by the assessee was not applicable to the facts and circumstances of the case as the issue highlighted in the Circular is that the loss/profit on the sale of investments by banking company has to be taken as business income and not as income from capital gains and this circular would be applicable to the facts and circumstances of the present case had the assessee claimed loss on actual sale of securities and therefore, for this reason the Department cannot withdraw the appeals filed as suggested by Ld. AR. 12. As regards Revenues appeals, the Ld. DR heavily placed his reliance on the orders of Assessing Officer. 13. We have heard the rival parties and have gone through the material placed on record. The issue of disallowance on inter transfer of investments has been raised in various appeals/ cross objections and the decision on this issue will dispose off the issue in various appeals/cross objections. For the sake of convenience, we take up the appeal in ITA No.209(Asr)/2010 for Asst. Y....
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....hat any loss sustained by assessee while valuing the stocks at the close of accounting year is a business loss. The dispute in the assessee's appeals is with respect to loss on inter-transfer of these securities. The Ld. CIT(A) though admitted that the loss incurred by assessee at the close of the year was a business loss and allowed the same against which Revenue is in appeal whereas in the case of intertransfer of securities during the year, the Ld. CIT(A), upheld the action of Assessing Officer. We find that in trading category, the investment was to be disposed of within 90 days and in available for sale category the investment was to be disposed of after 90 days. The two options were either to sell the same in open market, or to go for inter category transfer at the market rates and the shortfall in either category, had to be immediately recouped by infusing fresh investments under the affected category to maintain the requisite CRR/SLR limits. By inter transfer of securities, not only fine balance consistent with the RBI guidelines was maintained, but sustaining of a much bigger loss was saved, when the market value of the said securities in two categories had further deplete....
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....e open market sale would also have been effected at the same rates, at which inter category shifting was done, inasmuch as, in both the situations the shifting or sale had to be done only at market rates. Outside sale would have multiplied third party transactions, alongside execution of avoidable documentation with physical delivery of securities and also movement of funds. Even in local banking, the funds involved at Rs crores, were bound to be held up for a day or two, resulting into substantial interest loss. Still further, in the event of outside sale, the replenishment of stocks under the category 'held to maturity', to the extent of shifting made, was inevitable, by making fresh purchases to maintain the requisite level of SLR. Therefore, third party sale of securities would have been an exercise in sheer futility. Thus by not having done so, and further by having valued the securities as on the close of year i.e.31.3.06, the total loss sustained was Rs. 37,50,796.97 + Rs. 45,75,307/- = Rs. 83,26,103-97. 4. If for a moment, no transfer within the categories had been effected, the scene would have been more tardy. While for non shifting, of course the revaluation los....
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.... d) Half yearly reports sent to RBI on review of investment portfolio of the bank; It is hoped, the information provided hereinabove will be found of interest and in order, for taking a fair and reasonable view in the matter." By way of these explanations the Assessee had tried to explain that if it had not transferred the securities to held to maturity category, it would have claimed more loss in its Profit & Loss Account as in the held to maturity category the securities were valued at cost prices and further depletion in it's value at the time of close of year was not booked. The Ld. CIT(A) has not considered these submissions in the right perspective. The reasoning given by Ld. CIT(A) that any loss on inter-transfer of securities in middle of the year was not allowable is not correct as in the case of Banks action of transfer of the securities in the middle of year is pari materia with the sale of stock in normal course with gain/loss booked in P & L Account. Therefore, charging of such total loss/gain in trading Profit & Loss was not unusual. In fact that loss booked by assessee on inter-transfer of securities and on its actual sale cannot exceed the total ....
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....esh Kumar on behalf of the Appellant/Revenue that any substantial question of law arise in the present case that require our answer. We find that issue raised in this Appeal is squarely covered by a judgment of a Division Bench of this Court in the case of Commissioner of Income Tax v/s Bank of Baroda, reported in (2003) ITR 334 and a judgment of a Division Bench of the Karnataka High Court in the case of Karnataka Bank Ltd. vs. Assistant Commissioner of Income Tax, reported in (2013) 356 ITR 546. We will analyze these two judgments later, after we advert to the facts in the present case. 4. The facts stated briefly are that the Assessee Bank, being a Public Limited Company, filed its return of income for the Assessment Year 2005- 06 on 29th October 2005 declaring a total income of Rs. 9,10,41,00,000/-. The said assessment was selected for scrutiny and after the requisite notices were issued to the Assessee, the Assessing Officer completed the assessment and passed his Assessment Order under section 143(3) on 28th February, 2007 determining the total income of the Assessee at Rs. 12,27,85,00,000/-. 5. Subsequently it was noticed by the Appellant that a sum of Rs. ....
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....TAT was fully justified in setting aside the order of the Appellant dated 23rd March 2009 and allowing the deduction of Rs. 87.11 lakhs, to the Assessee. In this regard, the reliance placed by Mr Mistry, the learned Senior Counsel appearing on behalf of the Respondent - Assessee on the judgment of this Court in the case of Commissioner of Income Tax v/s Bank of Baroda (supra) is well founded. The facts before the Division Bench in the case of CIT v/s Bank of Baroda (supra) were that the Assessee Bank had'in its possession during the relevant assessment year shares and securities worth several crores. The method of valuation followed by the Assessee was to value the investments at cost or market value whichever was lower. During the year of account, depreciation with regard to the securities held by the Assessee Bank was to the tune of Rs. 11,82,35,007/- and therefore, the Assessee Bank claimed a deduction with reference to the said deprecation. This was disallowed by the Income Tax Officer. Being aggrieved, the Assessee Bank went in appeal to the CIT (Appeals) who took the view that the said investments were rightly valued at the end of the year at cost or market value whi....
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....ssessee was Holding securities in different categories as mandated by the RBI Master Circular dated 1st September 2003. The Assessee treated such securities as stockin- trade and claimed depreciation on the book value after valuing the securities at cost or market value whichever was lower. The Revenue refused to accept the Assessee's plea for the deduction and disallowed the same and added back to the total income the said amount. Aggrieved by the said order, the Assessee preferred an Appeal before the CIT (Appeals). The same was dismissed upholding the contention of the Assessing Authority. Aggrieved thereby, the Assessee preferred an Appeal to the TribunaljyTne Tribunal inter alia held that since the securities on which the depreciation had been claimed on the earlier years had not been identified, the issue was restored to the file of the Assessing Officer for consideration' aTresh and partly allowed the Appeal. Being aggrieved by the said order, Karnataka Bank Ltd. preferred an Appeal to the Karnataka High Court under section 260A of the Act. After discussing various judgments of the Supreme Court, the Karnataka High Court held as under:- "From the aforesaid judgm....
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....ent. But consistently for more than two decades it has been shown as stock-in-trade and depreciation is claimed and allowed. Therefore, notwithstanding that in the balance-sheet, it is shown as investment, for the purpose of Income Tax Act, it is shown as stockin- trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year,'while valuing the assets, necessarily the bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deduction sand it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet." We further find that ITAT Delhi Bench 'E' in the case of Oriental Bank of Commerce in ITA No.1937/Del/2011 in its order dated 04.11.2015 has deleted similar disallowance by following the judgment in the case of HDFC Bank Ltd. (supra). The findings of Hon'ble Bench are reproduced below. "10. Ground no.1 & 3 of appeal of the assessee is with respect to disallowance of the claim of loss on account of fall in value of investments held as stock-in-trade amounting to Rs. 205.43 crore....
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.... on prudential norms for classification, valuation and operation of investment portfolio bank dated Is' July, 2006. According to that circular the banks are allowed to transfer securities from one category to another category once every year at the least value of following:- (a)cquisition cost (b)Book value and (c)Market value. It is further provided that if because of such transfer any depreciation arises, it should be fully provided for. The claim of the assessee is that this loss should be allowed as deduction because of transfer of securities from one category to another category. Therefore, the issue in appeal is that whether a banking company claims the loss, based on circulars and instructions of Reserve Bank of India, is allowable because of transfer of security from category of "available for sale" to "held to maturity". This issue now no longer survives in view of two decisions of Hon'ble Karnataka High Court in case of Karnataka Bank Ltd. vs. Assistant Commissioner of Income Tax 356 ITR 549 and CIT vs. Bank of Baroda 262 ITR 334 and a decision of honourable Bombay High Court in case of CIT vs. HDFC Bank Ltd. reported at 368 ITR 377....
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....ntain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of account. It is not decisive or conclusive in the matter. For the purpose of the Income Tax Act whichever method is adopted by the assessee, a true picture of the profits and gains, i.e. real i....
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....of security from 'available for sale' category to 'held to maturity' category by the appellant bank in accordance with direction/ circular of Reserve Bank of India." In view of the facts and circumstances of the present cases and in view of the judicial precedents, we are in agreement with the arguments of assessee and the issue of loss on inter-transfer of securities of decided in favour of Assessee. The issue of depreciation on securities at the close of Financial Year is also decided in favour of assessee in view of the above judicial precedents in the case of Bank of Baroda as relied as relied on in the case of HDFC Bank Ltd. 14. Now coming to the grievance of Revenue that Ld. CIT(A) has wrongly considered the loss claimed by Assessee in the revised return as the return was filed beyond limitation period. We find that Hon'ble Punjab & Haryana High Court in its decision in the case of CIT vs. Ramco International, 332 ITR 306(P&H), has held that the assessee's claim for allowing deduction u/s 80IB during the assessment proceedings was to be considered notwithstanding that such a claim was not made in the return of income. The Hon'ble Punjab & Haryana High Court had disti....
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....balance amount of purchase cost after reducing this interest was taken as investments of stock in trade in balance sheet. The Assessing Officer disallowed such expenditure on the ground that purchase costs of investment could not be split up ordinarily between investment and interest expenditure. While holding that Assessing Officer relied on the decisions of Hon'ble Rajsthan High Court wherein the Rajasthan High Court had applied the case of Vijay Bank Ltd. vs. CIT 187 ITR 541(SC). However, the Hon'ble Bombay High Court in the case of American Express International Banking Corp. vs. CIT 258 ITR 601(Bom) has noted that broken period interest received by the assessee was charged to tax as business income and therefore, the deduction for payment made for broken period at the time of purchase of these securities could not be denied. It was held that having assessed the income from the securities u/s 28, the department ought to have allowed deduction of payment of broken period interest as Revenue expenditure. The Hon'ble Court further held that there was no difference in the amount of tax whether one adopted the assessee's method or department's method since under the other method the....
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....o really adjudicate is as to whether the premium of Rs. 1,49,99,922 paid on the keyman insurance policies can be allowed on the facts of this case. As to what constitutes 'keyman insurance policy', we find guidance from the Explanation below Section 10(10D), as it stood at the relevant point of time, which defined the keyman insurance policy as follows: For the purposes of this clause, "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the firstmentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person 9. Vide Finance Act 2013, the following words have been added to this definition- "and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration". 10. All that is required for an insurance policy to meet the requirements of Section 10(10D), therefore, has to be - (a) it should be a life insurance policy; (b) it should be taken by the assessee on the life of another person who is, or was, an employee of the assessee or is related to the business of....
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.... 10(10D). 13. The requirement of pure insurance policy is something which is not laid down by the statute. Yet, it is this which has been inferred by the authorities below. 14. Even if such an inference is desirable, as long as it does not emerge from the plain words of the statute, it cannot be open to supply the same. The concepts of term policy, pure life policy and the IRDA guidelines find no mention in the statutory provisions. But even if these concepts ought to be incorporated in this statutory provision of the Income Tax Act to make it more meaningful and workable, it cannot be open to any judicial forum to supply these omissions. Relying upon Hon'ble Supreme Court's judgment in the case of Tarulata Shyam Vs CIT [(1977) 108 ITR 245 (SC)], a coordinate bench of this Tribunal, in the case of Tata Tea Limited Vs JCIT [(2003) 87 ITD 351 (Cal)], has explained this principle as follows: 8. Casus omissus, which broadly refers to the principle that a matter which has not been provided in the statute but should have been there, cannot be supplied by us, as, to do so will be clearly beyond the call and scope of our duty which is only to interpret the law as it exists. ....
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....ticular provision makes a consistent enactment of the whole statute". 15. It is also important to bear in mind the fact that the IRDA guidelines, no matter how relevant as these guidelines may be, have no role to play in the interpretation of the statutory provisions. IRDA is a body controlling the insurance companies and its guidance is relevant on how the insurance companies should conduct their business. Beyond this limited role, these guidelines do not affect how the provisions of the Income Tax Act are to be construed. Whenever the provisions of the other statututes are to be taken into account, for interpreting the provisions of the Income Tax Act, the Income Tax Act specifically provides so, such as in the case of Explanation 2 to Section 2 (42A) which provides that "the expression "security" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)]". It cannot, therefore, be open to us to turn to the guidelines of the IRDA to interpret the provisions of the Income tax Act, 1961. In this view of the matter, learned Assessing Officer's observations to the effect that, ""that the policy taken is keyman ....
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....rality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, - (a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; (b) protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; (c) specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; (d) specifying the code of conduct for surveyors and loss assessors; (e) promoting efficiency in the conduct of insurance business; (f) promoting and regulating professional organisations connected with the insurance and re-insurance business; (g) levying fees and other charges for carrying out the purposes of this Act; (h) calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediarie....
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....ll fresh guidelines are issued. 18. A plain look at the above circular shows that it deals with aberrations in sale of keyman insurance policies and it is was a direction to the insurance companies that effect 27th April 2005 only term insurance policies should be issued as keyman insurance cover. That is between the regulatory authority and the insurance companies as to what should be allowed to be marketed as keyman insurance cover. However, it does not alter the requirements of Section 10(10D) which is for 'life insurance policy'. What can be sold as a 'life insurance policy' taken by a business entity for its employee, former employee or any other person important for business of such an entity is between the insurance regulator and insurance service provider. However, once it has been sold as a life insurance policy on the keyman to the business, as long as it is in the nature of life insurance policy, whether pure life cover or term cover or a growth or guaranteed return policy, it is eligible for coverage of Section 10(10D). It is not open to us to infer the words which are not there on the statute and then proceed to give life and effect to the same. We had detailed disc....
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....following reasons in support of this view of ours: (i) The Department has itself allowed the expenditure incurred on the premium paid for keyman insurance policies in previous years as business expenditure under Section 37 of the Act. Right from 1991-92 upto 1993-94 and thereafter even in respect of Assessment Year 1997-98, the expenditure was allowed. Though thereafter, the expenditure was disallowed, but again the claim was accepted for the Assessment Years 2001-02 and 2002-03. Principle of consistency would, therefore, by applicable in such a case. (ii) The Tribunal has rightly referred to and relied upon the CBDT's Circular dated 18.2.1998. This Circular is binding on the Income Tax Department, which categorically stipulates that premium on keyman policy should be allowed as business expenses. The assessee would, naturally, take into consideration such clarifications issued by the CBDT and would act on the basis thereof. When the assessee was given the impression, by means of the aforesaid Circular, that if expenditure is incurred on the keyman policy, it would be treated as business expenditure. There is no reason for the Department to deviate therefrom w....
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....olicy is in respect of the life of an employee. A Keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business." (iv) The argument of Mr. N.P. Sahni, learned counsel for the Revenue that taking such keyman insurance policy every year and thereafter assigning the same to the beneficiaries may be treated as colourable device, may not be correct. Though this argument appears to be attractive when we look into the fact that the assessee had been taking the policies and thereafter assigning the same year after year in favour of the beneficiaries, what cannot be ignored that this course of action is permitted by the Department itself as stated in CBDT's Circular dated 18.2.1998. (v) The expenditure incurred has to be tested on the touchstone of Section 37 of the Act and to see as to whether such expenditure is permissible or not. No doubt, the object of a keyman insurance policy is to enable business o....