TaxTMI 
TaxTMI 
2020 (5) TMI 483
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....ee has claimed losses on account of amortization of premium paid at the time of purchase of securities held under the category of HTM. The loss on account of this amortization was claimed at Rs. 212,47,18,151/-. 6.2 It is observed that though the securities are categorized as HTM, the same are not held till maturity but are disposed off by the bank before the period of maturity ends. Therefore, this act cannot be said to be in strict compliance of the RBI guidelines. Further, the assessee has claimed the HTM securities to be stock in trade for the purpose of Income Tax Act. These securities are considered to be long term securities and held for considerably long periods. Therefore, they continue to remain as part of the stock in trade till they are finally sold. Hence, the cost price of these securities does not change merely on the change in the categorization of the securities and booking of losses merely on account of change in the nomenclature does not result in actual losses. Thus, the losses claimed by the assessee on this account are notional in nature. In view of this, the assessee was asked to showcause, in the notice u/s 142(1) of the I. T. Act, 1961 dated 08.03.....
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....amine any claim under the provisions of Income Tax Act for that particular year only and there is no concept of amortization for stock-in-trade under any provisions of the Income Tax Act. As such, the above amortization is only a notional expenditure and it is not an allowable expenditure under the Income Tax Act. 6.6 As the securities have been sold before maturity, the amortization of premium over the remaining life of the securities cannot be worked out correctly as the life of security with assessee is not certain. For working out the amortization, the period for which the assessee is going to hold the securities should be known. However, this is not available in the case of assessee as it is selling the HTM securities before maturity as per its own will. Thus, the loss on account of amortization of premium cannot be treated as provisions for ascertained liability. 6.7 The Hon'ble Supreme Court in the case of Electronics Corporation of India Ltd. Vs UOI & Ors. (Civil appeal No. 1883 of 2011 arising out of SLP of 2009 (SC) has held that PSUs and department would no longer be required to obtain COD approval in case of any litigation. Therefore, filing of further....
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....said principle. Moreover, the Assessee bank has been consistently offering the entire profit on sale of securities as business income and no part of the profits has been offered as capital gain. 1.4 It is submitted that the learned Assessing Officer is not justified is disallowing the claim of the Assessee giving reason that the securities held under HTM category are sold in some cases before maturity. The learned Assessing Officer should have appreciated that RBI guidelines permit sale of the securities under HTM category even before maturity. As the Assessee bank sells certain securities under HTM category before maturity, this is the precise reason that the Assessee bank treats these investments as stock-intrade. Once the investment is treated as stock-intrade, as per generally accepted accounting principle, the same is to be valued at cost or market price whichever is lower. The loss arising on account of such valuation is allowable as legitimate deduction based on various judicial decisions including that of Hon'ble Supreme Court in the case of UCO Bank (240 ITR 355), CIT vs. Bank of Baroda (262 ITR 334 Bom.), CIT vs. Lakshmi Vitas Bank Ltd. (264 ITR 662 Mad.) Mor....
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.... maturity of these securities. According to the appellant bank this method of amortization of premium with regard to the securities held under HTM category had been consistently followed by the bank from the assessment year 2001-02 and the same had been upheld by the CIT(A)s from the Assessment Year 2001-02 onwards. In the appeal order for the assessment year 2008-09, this issue was considered by me and allowed in Appeal No. 145/CIT(A)-XVII/ Del/10-11 dated 29.06.2012 and the relevant portion is as under: "6.4. From the submissions of the appellant, it is dear that the bank is valuing its securities under HTM category at cost which is different from the valuation of securities under AFS and HFT categories which are valued at market price or cost whichever is lower. Though all these securities are 'stock in trade' the valuation of HTM category is different from the other two categories namely AFS and HFT. During the appellant hearing, the appellant bank vide their letter dated 08.06.2012 has made an alternate plea that if securities under HTM category are to be valued like AFS and HFT categories at lower of cost or market price then the diminution in the value of se....
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....e time of purchase of securities under HTM (Held To Maturity) category. Assessee treated the securities under HTM category as a stock in trade. Contention of the assessee was that as per RBI guidelines dated 16 October 2000, investments classified under HTM category need not be market to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized for the period remaining to maturity. 22. On this aspect the Ld. assessing officer had taken the view that the securities were sold before maturity and therefore the amortization of premium over the remaining life of the securities cannot be worked out correctly and for working out the amortization, the period for which the assessee held the securities are to be known, and for the want of such information coupled with the fact that the assessee sold HTM securities as per its will before maturity Ld. Assessing officer to draw the inference that the loss 19 on account of the amortization of the premium could not be treated as provision for ascertained liability. 23. Ld. CIT(A) considered this issue in the light of the precedent in assessee's own case an....
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....nge, as confirmed by both the parties, we hereby delete the addition made by the revenue. 7. The Second ground of the appeal of the revenue pertains to depreciation/loss on investments and on MTM on derivatives. At the outset, it was brought to our notice that the similar issue has been covered in favour of the assessee by the ITAT for assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2011-12. 8. The relevant part of the order of the AO and ld. CIT (A) is as under: "4.1. On this issue, the AO held as under: "7.7 It is seen that in the computation of income, the assessee has claimed deduction on account of depreciation/loss on investment of Rs. 1,06,50,34,039/- and MTM on derivatives of Rs. 5,74,10,270/- on account of depreciation on investment. The above depreciation has been claimed on account of valuation of securities under the category Held for Trading (HFT) and Available for Sale (AFS). Vide order sheet noting dated 08.03.2016, the assessee was asked to explain why its claim on account of depreciation on investment should not be disallowed. Further, vide order sheet noting dated 09.03.2016, the assessee was asked to explain as to why MTM on Deriva....
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....hod adopted by the bank for valuation of securities in different categories, in "Available for Sale" and "Held for Trading" categories, the bank has valued the securities at market price and net depreciation under each category is provided for and the net appreciation is ignored. 7.8 From the method of valuation of investments made in AFS and HFT, it is pertinent to note that first of all, valuation is done scrip wise and depreciation/appreciation is aggregated classification wise in each category but while aggregating, net depreciation is provided for and net appreciation is ignored. For example, the assessee has two securities, both purchased at Rs. 100/- each. Suppose, at the end of the year, the value of both the securities are Rs. 80/- and Rs. 120/- respectively; although the purchase value as well as the market value at the close of the accounting year is the same, but the assessee will book a loss of Rs. 20/- in its books of accounts as under: Security A Rs. 80/- Market Price, being less Cost Price Security B Rs. 100/- Cost Price, being less than Market Price Total Rs. 180/- 7.9. Thus, as per the above accounting policy the assess....
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....e year in which such investments held as Stock- in -trade are sold. However, in the present case, it may be noted in the above mentioned RBI guidelines in both the categories viz. AFS and HFT, individual scrip value is not adjusted by any depreciation charged due to revaluation, which means that such investments are held at the cost of acquisition even after providing the depreciation on it. Thus, corresponding profit in the year is reduced without having any impact on the next years' profits, which is not permitted under the Income Tax Act on account of revaluation of 'Stock- in-trade'. 7.12. For example, if any investment of Rs. 1,000/- is made in AY 2003-04 and a depreciation of Rs. 200/- is booked due to depreciation in its value, the carrying cost in the AY 2004-05 of these assets should be Rs- 800/- -and in that year, if these investments are sold at Rs. 1,500/-, the business profit should be booked at Rs. 700/-. If in this example, the assessee continues to take the carry over amount of the investments at Rs. 1,000/- in AY 2004-05, correct profit of Rs. 700/- cannot be arrived at. In the instant case, since the assessee is not adjusting the individual scrip value by....
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.... 2.2 The learned assessing officer white disallowing the depreciation/loss on investment claimed by the Assessee as per para 7.14 of his Assessment Order has held that though it is correct that Depreciation/Loss is booked in accordance with the Banking Regulation Act and the revaluation is done in accordance with the guidelines of RBI; however the fact remains that these investments have not been shown in the books as "Stock-in-Trade" and its resultant profits on sale are not enhanced by the value of depreciation in subsequent years when these investments are actually sold. 2.3 With regard to the above it is humble submitted that the contention of the learned Assessing Officer is factually incorrect. The effect of valuation of the Investments is very much reflected in the books of accounts of the Assessee Bank and the resultant profits on sale in the subsequent years when these investments are actually sold is computed after considering the depreciated book value of the investments. It is submitted that only the difference between the book value and the market value is claimed as diminution in the value of investment or depreciation since the same method is followe....
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....e of securities as business income and no part of profit has been offered as capital gains. 2.8 This issue has been decided in favour of the Assessee bank by the learned Commissioner of Income Tax (Appeals) in the past when it was held that depreciation/ loss in the value of investments is an allowable expenditure. In the assessment year 2009-10, there was no depreciation/loss in the value of the investments. But there was an appreciation of Rs. 216.34 crore which was offered for taxation. A chart showing decision of CIT(A) in earlier assessment years is submitted below for your kind perusal: Assessment Year Amount (Rs.) Remarks 2012-13 233,19,69,576 Allowed by CIT(A) vide order dated 28.01.2016 2011-12 171,96,42,285 Allowed by CIT(A) vide order dated 27.07.2014 2010-11 68,44,01,950/- Allowed by CIT(A) vide order dated 18.02.2014 2008-09 308,43,16,574/- Allowed by CIT(A) vide order 29.06.2012 2007-08 301,34,13,448/- Allowed by CIT(A)vide orders dated 28.02.2011 para 3.5 paqe no.4 2006-07 247,06,53,905/- ....
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....the difference between the book value and the market value is claimed as diminution in the value of investment or depreciation. Since the same method is followed by all banks there is no reason to presume that profit on sale of investments are not correctly reflected as assumed by the AO. As per the submissions of the appellant, what is claimed as loss in the computation is the incremental depreciation on securities. The depreciation on securities sold during the year is automatically reduced as the entire accumulated depreciation is deducted while computing the incremental depreciation on securities. Therefore, only the correct profit reflected in the P d L A/c and the presumption of the AO that the profits on sale of investments are not correctly reflected is wrong. Moreover, the appellant's bank had been following this accounting policy consistently over a period of time. The appellant bank is consistently offering the interest received on these securities and the profit on sate of these securities as income under the head 'income from business or profession'. As per the AR, the AO without appreciating or understanding the above method followed by the bank concluded ....
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.... the incremental depreciation is debited in the P & L A/c. The appellant bank debits only the incremental depreciation in the P&L A/c which is actually the difference between the total depreciation at the end of the year and the outstanding accumulated depreciation at the beginning of the year. As a result, the accumulated depreciation in respect of any security sold during the year is automatically reduced at the end of the relevant year and therefore only the correct profit is reflected in the P&L A/c when the security is finally sold. It is dear from the above submission that the correct profit only is reflected in the P & L A/c as and when the security is sold and therefore the AO's understanding that profit on the sale or the securities are not correctly reflected in the P & L A/c is not based on facts. The appellant bank also pointed out that the CIT(A)s had been upholding consistently the above mentioned decision of Hon'ble Supreme Court in the case of appellant bank right from the A.Y. 1998-99 onwards. 3.6. In the appeal order for the assessment year 2007-08, the then CIT(A) white giving relief to the appellant Bank had held in his order dated 27/08/2010 in....
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....bank. I find that my learned predecessors have also allowed the relief to the appellant on this issue consistently from AY 1998-99 onwards. 4.3. In view of the above discussions, the disallowance of Rs. 9,04,35,251/- in respect of depreciation on securities is hereby deleted. This ground of appeal is allowed." 3.7. Respectfully following the above decisions of the Hon'ble Supreme Court mentioned in the above CIT(A)'s order, the addition made by the AO of Rs. 282,98,66,388/- is hereby deleted and this ground of appeal number 1 is allowed in favour of the appellant bank." 3.6. The CIT(A)s had been deciding the issue consistently in favour of the appellant right from the A. Y. 1998-99 onwards. Therefore, following my own decision for A. Y. 2008-09, this issue is decided in favour of the appellant and the addition of Rs. 91,47,65,766/- on disallowance of depreciation on securities is deleted. Thus, ground No. 1 is allowed in favour of the appellant. 5.5. I had followed the decision for the A. Y. 2010-11 of the Ld. CIT(A). Since the facts are similar, respectfully following the decision of the Ld. CIT(A) for A. Y.s 2009-10 A 2010-11, the ....
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....ced reliance on the decision of the Hon'ble Kerala High Court in the case of CIT vs. Nedungadi bank Ltd., 264 ITR 545 for the principle that the appreciation/loss in the value of investment was allowable expenditure. 29. Ld. Assessing officer after considering the submissions of the assessee, formed an opinion that though it was correct that the depreciation/loss is booked in accordance with the Banking Regulation Act and the revaluation is done in accordance with the guidelines of the RBI, however, the fact remains that these investments have not been shown in the books as "stock in trade" and its resultant profits on sale are not enhanced by the value of depreciation in subsequent years when these investments are actually sold. 30. In appeal, Ld. CIT(A) considered this issue at length and by following the orders of his predecessor in assessee's own case for the assessment years 2000-01 to 2005-06 decided the issue in favour of the assessee bank in the light of the decision of the Hon'ble Apex Court in the case of UCO Bank vs. CIT 240 ITR 355 (SC). 31. It is the argument of the learned DR that though the assessee has been relying on the orders of the Tri....
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.... their investment in securities as stock in trade; and that if the investments are stock in trade, it should be reflected in the return of income, audit report, profit and loss account and the annual report and the diminution of the value of securities will be embedded in the closing stock and the corresponding figure will become the opening stock in the subsequent assessment years. On this she submitted that when once the assessee reduces the depreciation and reaches a particular figure as the book value of the securities, then naturally when the securities were sold in the subsequent years the profit should be estimated with reference to the reduced value of the Scrips in the earlier years, but however in the case of the assessee, the cost of the security after reducing the same because of the appreciation was not changed or adjusted in the books resulting in the books reflecting the low profit and the resultant offering of less amount to tax. 34. The plea of the assessee, on the other hand, is that the treatment of the profit on sale of securities is a two-fold. Firstly, the profit on sale of securities will be lower due to the non attachment of cost of securities with ....
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....pects argued by the Ld. DR were considered by the Hon'ble Apex Court in the case of UCO Bank vs. CIT 240 ITR 355 (SC) and were held in favour of the assessee. The decision in Southern technologies Ltd (supra) has no application to the facts of the case. 37. There is consistency of the facts on this aspect quite for a long time and all possible arguments have come before the adjudicatory authorities. On a careful consideration of the matter in the light of the submissions on either side, we are of the considered opinion that the question is now fully covered by the orders of the Tribunal in assessee's own case for the earlier years, and while respectfully following the same, we hold the issue in favour of the assessee. Gr. No.3 Loss on shifting of securities from AFS/HFT categories to HTM category 38. The assessee bank, at the beginning of the year had shifted securities worth Rs. 6176 crore from HTM category to AFS/HFT category. RBI guidelines provide that the transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/book value/market value of the date of transfer, whichever is the least and interpret....
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....ce sheet of the NBFC. She further submitted that the NBFCs have to accept the concept of income as evolved by the RBI after deducting the provision against NPA, but such treatment is confined to presentation/disclosure and has nothing to do with the computation of taxable income under the Income tax Act. She placed reliance on the decision of the Hon'ble Apex Court in Southern technologies vs CIT 328 577 in support of her about contentions. 42. In reply, it is submitted by the counsel for the assessee that the assessee in the present appeal is not an NBFC. According to the Ld. AR the decision of the Hon'ble Apex Court in the case of United Commercial Bank versus CIT (1999) 240 ITR 355 (SC) is applicable to the facts of the case. He further submitted that the loss shown in the profit and loss account and claimed in the return is not notional, but real loss as was considered by the Hon'ble apex court in the case of UCO bank Vs. CIT 240 ITR 355. 43. It could be seen from the impugned order that the Ld. CIT(A) considered this aspect at length and found that the facts relating to this issue are similar to those involved in the case of the State Bank of Mysore vs. DCIT ....
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....he assessee bank, even though the same was actually paid and the provisions under section 36(1)(iv) has to be looked into, according to which any sum paid by the assessee to an employer by way of contribution to the Recognized Provident Fund or an approved superannuation fund or any fund of similar nature is allowable as a deduction, subject to condition laid down under Rule 87 and 88 of Income tax Rules, 1962. Ld. AO held that such contribution should not be in the nature of annual contributions of fixing the amounts or annual contributions on some definite basis. 47. Assessee argued before the Ld. CIT(A) that the Banking Companies Undertaking Act of 1970 created PNB also and provides for the creation of a pension trust of which employees of bank will become members and the bank is required to contribute the fund towards pension fund trust as per actual evaluation carried out at the end of the financial year. It was further argued that carrying up banking business and funding the pension trust out of the income of banking are made obligated under the Act and the provisions of pension fund trust regulation makes it amply clear that payment directly attributable, compulsory....
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....tion, it was found that the assessee claimed a deduction u/s 36(1)(viii) of Rs. 98,90,00,000/-. The assessee was asked to give justification for such payment vide order sheet noting dated 08.03.2016. The assessee, vide letters dated 08.03.2016 and 11.02.2016, submitted as under: .............................................................................. 10.2 The submission of the assessee is considered. From the reading of the above section, it is seen that the above deduction is available on fulfillment of certain conditions. The section clearly mentions that deduction is available in respect of any special reserve created and maintained by eligible entities carrying out eligible business for an amount not exceeding 20% of the profits derived from eligible business activities carried to such reserve. As per provisions of Section 36(1)(viii) of the I.T. Act, 1961, only profit derived from eligible business which is from "(a), the business of providing long-term finance for- (A) industrial or agricultural development; (B) development of infrastructure facility in India; or (C) development of housing in India;" is eligible for this deduction. However, in the asse....
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....it derived from eligible business computed under the head Profits & Gains of Business or profession (before making any deductions under this clause) carried to such reserve account. Provided that where the aggregates of the amounts carried to such reserve account from time to time exceeds twice the amount of paid up share capital and of the general reserve of the specified entity, no allowance under this clause shall be made in respect of such excess. The relevant explanations as provided in the aforesaid section are as under: Specified entity means - a banking company. Eligible business means - the business of providing long term finance for industrial Development or Agricultural Development or Development of infrastructure facility in India or Construction or purchases of houses in India for residential purposes. Long term Finance means - any loan and advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period not less than Five years. Banking Company means a company to which the banking Regulation Act, 1949 (10 of 1949) applies and includes any Bank or Ba....
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....6 The Ld. CIT(A) while allowing the ground of the Assessee on the same issue in A.Y. 2009-10 observed as under: 9.1. In the appellant proceedings, the appellant bank had relied on Hon'ble ITAT Delhi's decision in the case of Power Finance Corporation Ltd. Vs. JCIT (2008) 16 DTR (Del) (Trib.) 519 where it was held that there is no time limit for creation of special reserve under Section 36(1)(viii) of IT Act and thus the entire deduction of Rs. 57,45,,97,786/- claimed in the revised return filed on 30.03.2010 is allowed. The relevant portion of the above decision is as under: "Respectfully following the case law (supra) as discussed herein above, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee's claim of deduction made under section 36(l)(viii) of the Act. We further observe that for and from A.Y. 1996-97, a financial corporation engaged in providing long-term finance for development of infrastructure facility in India has also become eligible assessee and for computing deduction under section 36(l)(viii) of the Act in the hands of all e....
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.... "9.1 In the appellant proceedings, the appellant bank had relied on Hon'ble ITA T Delhi's decision in the case of Power Finance Corporation Ltd Vs JCIT (2008) 16 DTR (Del) (Trib) 519 1where it was held that there is no time limit for creation of special reserve under Section 36(1)(viii) of IT Act and thus the entire deduction of Rs. 57,45,97,7867- claimed in the revised return filed on 30.03.2010 is allowable. The relevant portion of the above decision is as follows: "Respectfully following the case law (supra) as discussed herein above, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee's claim of deduction made under section 36(l)(viii) of the Act. We further observe that for and from A.Y. 1996-97, a financial corporation engaged in providing long-term finance for development of infrastructure facility in India has also become eligible assessee and for computing deduction under section 36(1)(viii) of the Act in the hands of all eligible assesses, only the income derived from the business of providing long term finance specified in section 36(1)....
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....eal is ruled in favour of the appellant." 19. The ITAT on the similar issue in ITA No.4722/Del/2012 held as under: "69. This ground relates to the disallowance of Rs. 57,45,97,786/- claimed as deduction under section 36(1)(viii) of the Act. It could be seen from the record that the assessee bank did not make any claim under section 36(1)(viii) of the Act in the original return of income filed on 26/9/2008, but this claim was made only in the revised return filed subsequently. 70. Ld. AO noted that the assessee bank did not create any special reserve in the annual accounts of the company in order to claim deduction under section 36(1)(viii) of the Act and such a fact was not disputed by the assessee bank before the Ld. AO. The fact remains that the special reserve under section 36(1)(viii) of the Act to the tune of Rs. 57,45,97,786/- was created only on 30/3/2010 in the financial year 2009-10 relevant for assessment year 2010-11 that is 2 years thereafter. Ld. AO had taken the view that the assessee bank being a public limited company cannot maintain a special reserve subsequent to the approval of its annual accounts by their AGM and the method followed by the a....
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....l of the Nedungadi Bank has been consistently allowed subsequent to the merger for last many years. The AO may examine the computation part of depreciation on the goodwill from the year of merger and allow the claim of the assessee. 23. The ground No. 4 of the appeal of the revenue and ground no.1 of the appeal of the assessee deals with disallowance under Rule 8D(2). 24. The finding of the AO is as under: "9.1 On examining the annual accounts of the assessee for the A.Y. 2013-14 under consideration, it is seen that the assessee has made investments, the resulting income from which is exempt under the provisions of the Income tax Act. The assessee has also earned exempt income amounting to Rs. 143,35,22,679/-, from dividend and other tax-free income on account of such investments. Thus, the provisions of Section 14A of the I.T. Act, 1961 are applicable in the case of the assessee. 9.2 During assessment proceedings, vide notice u/s 142(1) of the I T Act, 1961 dated 8.03.2016, the assessee was asked to explain why disallowance u/s 14A should not be made. 9.3 The assessee submitted its reply vide its letter dated 08.03.2016 and 03.11.2015. The same are....
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....14A is "in relation to income which does not form part of total income under the Act" and dividend and tax-free bond income are kinds of income which do not form part of total income under the Act, the expenditure incurred in relation to such investment which would result in such income is not liable to be deducted in view of Section 14A of the Income Tax Act, 1961. Section 14A of the Act does not require that it would operate only if the investment yields positive result by way of direct income. Section 14A is applicable whether the exempt income is direct or incidental. That the so called stock in trade in respect of securities is actually investments made basically for long term and not for short term sale. This has been tome and again stressed by the assessee itself. Therefore, the assessee now can't take the stand that these securities are stock in trade. The securities are held as per RBI Guideline. 9.7 The provisions of Section 14A of the Act operates in relation to a subject matter of taxation of income which, in its very inherent nature, does not form part of total income under the Act. The fact that the income is direct or incidental is immaterial and once the ex....
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.... 9.12 Quantum of disallowance As discussed in the preceding paragraphs that assessee is having common infrastructure and common personnel for earning income under various heads, therefore, income/expenditure cannot be separately attributed to one particular activity. Hence, interest expenditure debited in profit and loss account are considered common interest expenditure attributable to all activities of the company. It needs to be apportioned in view of provisions of Act and Rules framed in this regard. In view of above facts, the disallowance as per Rule 8D is worked out as below: S.NO. DETAILS AMOUNT DISALLOWABLE (RS.) (i) The amount of expenditure directly relating to income which does not form part of total income. NIL (ii) A Amount of expenditure by way of interest as per profit and loss account [excluding the amount covered in (i) above] = Rs. 2,70,36,82,41,000/- [A] B Average value of investment, income from which does not or shall not form part of total income I. Value of such investment as appearing in the balance sheet on 1st day of previous year = Rs. 41,03,34,21,....
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....e to draw your kind attention to section 14A which is reproduced below: (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Office Shall Determine the amount of expenditure incurred in relation to such income which does not part of the total income under this act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assesses, is not satisfied with the correctness of the claim of the assesses in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment....
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....Scindia Bahadur of Gwalior & Others (supra). Accordingly, the expression 'in relation to' would mean dominant & immediate connection. This means that disallowance of expenditure u/s. 14A can be made only when there is dominant and immediate connection between the expenditure incurred and the income not forming part of the total income. As a necessary corollary, it would mean that disallowance cannot be made if the connection is not dominant and immediate but is merely incidental, ancillary or remote one. 4.6 Based on above, the next question is how to determine the nature of the connection between the expenditure incurred and the income earned by the assessee. The answer to this question would depend upon the intention/object with which the expenditure was incurred. If the expenditure is incurred with a view to earn the taxable income then it can be said that dominant and immediate connection exists between the expenditure incurred and the taxable income and consequently, no disallowance u/s 14A can be made even where some tax-fee income is received incidentally. On the other hand, if the expenditure incurred mainly with a view to earn the tax-fee income t....
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.... S. NO. Particulars As on 31.03.13 As on 31.03.12 01 Investments towards: a. Dividend Income b. Tax Free Income 3271.05 1769.83 3045.78 1057.56 Total 5040.88 4103.34 02 Average Investment Towards Exempted income (5040.88 +4103.34)/2 4572.11 4.10 From the above facts & facts & figures available on record, it is clearly established that the bank is having average non-interest bearing funds of Rs. 58116.04c.rore against average investment towards the exempted income of Rs. 4572.11 crore which is sufficient proof to establish that no interest expenditure has been incurred by the bank in earning the aforesaid exempted income of Rs. 126.47crore and therefore no disallowance of interest expenditure is warranted under section 14A. It was also held by the Hon'ble High Court of Punjab & Haryana in the case of CIT vs. Hero Cycles Ltd (323 ITR 528) that where the assessee has interest free funds available which exceed the investments made in assets earning tax free income, the presumption is that the investments have come ou....
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....ave invoked rule 8D. 4.15 It is also submitted that it is for the Assessing Officer to establish that the assessee bank has incurred expenditure to earn tax free income and in the assessee bank's case, the Assessing Officer has not established the fact that the assessee bank has incurred any expenditure to earn tax free income. The assessee relies on the decision of ITAT Delhi in the case of DCIT vs. Jindal Photo Ltd. (814/Del/2011) for the assessment year 2008-09 dated 23.09.2011 wherein it was held that "it has not been shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was no the AO to establish any such expenditure. This onus has not been discharged." In the assessee's case also it has not been shown by the AO that any expenditure has been incurred to earn tax free income. 4.16 Without prejudice to the above contention, it is submitted that the issue was partly decided in favour of the assessee Bank by CIT(A) for the AY 2008-09 in appeal no. 145 / CIT(A)-XVII / Del / 10-11 dated 29/06/2012. 4.17 We draw your kind attention t....
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....elhi High Court's decision in the case of M/s Maxopp Investment Ltd. & Others in ITA No. 687/2009 dated 18.11.2011. The relevant portion of the above order is as follows: "9.5. In the case of the appellant, the AO has rejected the claim of the appellant bank that they have not incurred any expenditure to earn tax free income as claimed in their revised return. The AO after being satisfied adopted Rule 8D to calculate the disallowance under 14A of the I.T. Act, 1961 and thereafter disallowed Rs. 80.38 crores in the assessment order. The appellant's plea during the appellate proceedings was that Rule 8D(2)(ii) is not applicable in the case of the appellant bank and therefore the AO's disallowance of Rs. 72.84 Crores is not tenable. The relevant provision of Rule 8D(2)(ii) is as under: "(ii) in case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt." 9.6. According to the appellant bank, the entire interest expenditure incurred is attributable to taxable income only and no portion of the interest expenditure can be attributable to non-taxa....
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....assets earning tax free income. Since the facts are the same and based on my decision in earlier A. V 2008-09 mentioned above, the expenditure incurred by the appellant bank on interest is more or less directly attributable to the income earned by the appellant bank during the year. Moreover, the appellant in both the original return of income and the revised return of income had disallowed Rs. 12.07 crores under Rule 80(2) (Hi) of Income Tax Rules. Taking all these aspects into consideration, I am of the opinion that the disallowance of Rs. 133,16,00,0007- made under Rule 80(2)(ii) is unwarranted and the same is hereby deleted. As a result, the ground No. 5 is allowed." 6.4. The CIT(Appeals) had followed the above decision in the appeals for A. Y. 2010-11 & 2011-12 and had sustained the disallowance computed under Rule 8D(2)(iii) and allowed relief with respect to the disallowance under Rule 8D(2)(ii). As the facts were similar, following the decision of the CIT(Appeals) for A.Y.s 2009-10, 2010-11 & 2011-12, relief was allowed to the appellant for A.Y. 2012-13. Since in the present appeal, there is no change in facts, following the orders of predecessors CIT(Appeals) on t....
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....rofession'. The Board also went to the extent of saying that this would not be limited only to cooperative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38. From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' and 'investment' and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as 'stock-in-trade' and not as 'investment' We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are h....
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....eclared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove." 6.2. On the contrary Ld. Sr. DR placed reliance upon the orders passed by authorities below and following decisions: • Godrej and Boyce Manufacturing Co. Ltd. vs. DCIT reported in (2017) 81 Taxmann.com 111 (SC); • India Bulls Financial Services Ltd. vs. DCIT reported in (2016) 76 Taxmann.com 268 (Del); • Punjab Tractors Ltd. vs. CIT reported in (2017) 78 Taxmann.com 65 (P&H). 7. We have perused the submissions ad....
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....rn. 10.2 In view of the aforesaid development, bank is entitled to make claim of provision for leave encashment as allowable expenditure. 10.3 Despite written submissions to the above facts, the Ld. AO did not allow the claim for leave encashment of Rs. 31.35 crore made as an allowable expenditure. The Assessment order is silent on this issue. 10.4 Your honour is, therefore requested to kindly allow the deduction of leave encashment of Rs. 31.35 crore as business expenditure and allow this ground of appeal." 13.2 I have carefully considered the submissions made by the Ld. AR. Provisions of 43(B)(f) reads as under: "43B. Certain deductions to be only on actual payment- Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- ......................................................................................................... (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assesse....