2013 (4) TMI 702 - AT - Income Tax

Reopening of assessment - addition to income - Held that - In this case the assessment u/s 143(3) has been completed. Of the three issues the COD had not granted permission to the revenue to prosecute one of the issues viz. reversal of interest income recognised earlier in appeal before the ITAT. Eventhough it is now recognised that approval of the COD is not necessary for prosecution of appeal the basis of the requirement of COD approval viz. reduction in litigation among Government Departments is still valid. If the COD had applied their mind and refused permission to the revenue to pursue the appeal in respect of certain issues the revenue is precluded from doing so. It is an inter-se arrangement between the Government departments/ Government owned undertakings. Hence the issue regarding reversal of interest income recognised offered for income no longer survives. Even otherwise all the materials were before the AO and the AO has now sought to disallow the reversed income on the basis of the materials already before him. It is clearly a change of opinion. Broken period interest - Held that - Whenever securities are purchased the purchase price is inclusive of interest upto the date of purchase. As interest earned from the securities are assessed as business income interest for the broken period included in the purchase price of the securities are to be allowed as a deduction. (American Express International Banking Corporation vs. CIT (2002 (9) TMI 96 - BOMBAY High Court) operation has been in s.35D. - Decided against assessee. Disallowance of provisions made on standard assets and claimed as a deduction under section 36(1)(viia) - Held that - Issue under consideration is squarely covered by the decision of the ITAT in its own case for AY 2003-04 and 2004-05 as against assessee wherein held that it is prescribed by the RBI that the provision for standard assets need not be netted out from the gross advances but should be shown separately as contingent provisions against standard assets . The heading itself is indicative of the fact that this provision is contingent in nature whereas the provision for non performing asset is to guard against a loss which is looming large on the bank or for the loss which was already taken place. Therefore the RBI further prescribed that provision 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. - Decided against assessee. Disallowance of depreciation / fall in value of investment held to maturity (HTM) - investment in HTM category cannot be treated as stock in trade as per RBI guidelines and hence no depreciation is to be provided on these investment - Held that - The Apex Court in the case of UCO Bank Ltd Vs CIT 1999 (9) TMI 4 - SUPREME Court 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. Thus we uphold the claim of the assessee and direct the AO to allow depreciation / fall in value of investment in Government Securities including those classified under HTM category. No doubt the value in opening stock in the next year would correspondingly be adjusted. - Decided in favour of assessee. Disallowance of broken period expenses (net) at the time of purchase of HTM Securities - Held that - As held by the Supreme Court in the case of Southern technologies Ltd v JCIT (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) 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 . Thus we direct the Assessing officer to allow a sum of Rs. 5, 07, 02, 515/- being broken period interest (net) included in the purchase value of HTM securities as revenue deduction. - Decided in favour of assessee. Deduction being unrealised interest on NPA which is reduced from the interest income - Held that - Income which was earlier recognised is not to be allowed in the subsequent year in case it is permissible for the assessee to write off such income in concerned assessment year when it was found that it was not recoverable. Thus we direct the AO to allow deduction of Rs. 2.36 crores being unrealised interest offered for tax in the earlier year now reversed by the assessee. - Decided in favour of assessee. Disallowance of provision for leave encashment - Held that - 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. - Decided against assessee. Disallowance u/s 14A - CIT(A) deletion of interest payments which the AO held to be relatable to investment in Tax free securities - Held that - When the Assessee has sufficient interest free funds the investments should be considered to have been made out of those funds and not interest bearing borrowals. It is only with the introduction of Rule 8D interest expenditure was apportioned on the basis of investment even though there was no direct nexus between the borrowals and the investments. Rule 8D is not applicable to the AY under appeal ( Godrej & Boyce Mfg Co Ltd (2010 (8) TMI 77 - BOMBAY HIGH COURT ). However it was held by the Bombay High Court a reasonable amount should be disallowed under 14A. In view of the above we uphold the order of the CIT(A) deleting the disallowance of interest disallowance Disallowance of administrative expenses - CIT(A) upheld the disallowance at 5% of the tax exempt income - Held that - We have held in the appeal by the Assessee that their contention that no expenses were incurred cannot be accepted. The expenditure to be disallowed is to be necessarily to be made on an estimate basis. We find that the Delhi High Court in the case of CIT Vs. Oriental Structural Engineers Pvt. Ltd. 2013 (1) TMI 720 - DELHI HIGH COURT has upheld the disallowance of reasonable amount based on the facts of the case. We follow the said decision of the Delhi High Court and reduce the disallowance to 2% expenditure as relating to earning of the exempted income u/s 14A - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 148.
2. Disallowance of unrealized interest on NPAs.
3. Disallowance of broken period interest on HTM securities.
4. Disallowance of depreciation on HTM securities.
5. Notional profit on sales of investments in trading book.
6. Disallowance of operating expenditure for earning tax-free income.
7. Disallowance of deduction under Section 35D.
8. Disallowance of provision for standard assets under Section 36(1)(viia).
9. Disallowance of provision for leave encashment under Section 43B(f).

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 148:
The Tribunal held that the reassessment proceedings initiated under Section 148 were invalid. The Tribunal noted that the Assessing Officer (AO) did not come into possession of any fresh material that indicated income had escaped assessment. The reassessment was based on a mere change of opinion, which is not permissible under the proviso to Section 147(1). The Tribunal cited the Supreme Court's decision in CIT v. Kelvinator of India Ltd., which requires tangible material for reopening assessments beyond four years.

2. Disallowance of Unrealized Interest on NPAs:
The Tribunal allowed the assessee's claim for disallowing unrealized interest on NPAs. It was noted that the assessee had reversed interest income recognized in earlier years due to accounts becoming NPAs. The Tribunal cited the Delhi High Court's decision in CIT v. Industrial Financial Corporation of India Ltd., which upheld the deduction of such reversed income.

3. Disallowance of Broken Period Interest on HTM Securities:
The Tribunal allowed the deduction of broken period interest on HTM securities, treating them as stock-in-trade. The Tribunal relied on the Supreme Court's decision in UCO Bank Ltd. v. CIT, which held that investments made to comply with SLR requirements constitute stock-in-trade, and depreciation on such investments is an allowable deduction.

4. Disallowance of Depreciation on HTM Securities:
The Tribunal allowed the claim for depreciation on HTM securities, treating them as stock-in-trade. The Tribunal followed the Supreme Court's decision in UCO Bank Ltd. v. CIT, which held that securities held to comply with SLR requirements are stock-in-trade, and depreciation on such securities is allowable.

5. Notional Profit on Sales of Investments in Trading Book:
The Tribunal allowed the assessee's appeal, holding that the notional profit on sales of investments in the trading book should not be taxed. The Tribunal noted that the assessee had consistently followed the same accounting policy, and the AO had not rejected the books of account. The Tribunal relied on the Supreme Court's decision in CIT v. Realest Builders and Services Ltd., which held that the department must prove that the books of account are unreliable before rejecting them.

6. Disallowance of Operating Expenditure for Earning Tax-Free Income:
The Tribunal partly allowed the assessee's appeal, reducing the disallowance of operating expenditure for earning tax-free income to 2% of the dividend earned. The Tribunal followed the Delhi High Court's decision in CIT v. Oriental Structural Engineers Pvt. Ltd., which upheld a reasonable disallowance based on the facts of the case.

7. Disallowance of Deduction under Section 35D:
The Tribunal upheld the disallowance of deduction under Section 35D, following its earlier decision in the assessee's own case. The Tribunal noted that the deduction under Section 35D is available only for industrial undertakings, and the assessee, being a bank, does not qualify as an industrial undertaking.

8. Disallowance of Provision for Standard Assets under Section 36(1)(viia):
The Tribunal upheld the disallowance of provision for standard assets, following its earlier decision in the assessee's own case. The Tribunal noted that the provision for standard assets is contingent in nature and not allowable as a deduction under Section 36(1)(viia).

9. Disallowance of Provision for Leave Encashment under Section 43B(f):
The Tribunal upheld the disallowance of provision for leave encashment, noting that the deduction is allowable only on actual payment as per Section 43B(f). The Tribunal observed that the Calcutta High Court's decision in Exide Industries Ltd. v. Union of India, which struck down Section 43B(f), is applicable only to the parties to the writ petition and not to the assessee in appellate proceedings.

Separate Judgments:
The Tribunal delivered separate judgments for each appeal, addressing the specific issues raised in each case. The appeals being ITA Nos. 95 & 96/Hyd/10 were allowed, while ITA No. 97/Hyd/10 & ITA No. 218/Hyd/10 were partly allowed.