2014 (1) TMI 1691 - AT - Income Tax

Disallowance of claim of depreciation on Government Securities shifted from AFS to HTM Securities and claim of Premium Amortization - Held that - Issue decided in favour of assessee as relying on Dy.CIT Vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. 2014 (1) TMI 754 - ITAT PUNE - Decided against Revenue.

Summary

Issues Involved:

1. Applicability of RBI Guidelines vs. Income-tax Act, 1961.
2. Depreciation on Government Securities shifted from AFS to HTM.
3. Premium Amortization.
4. Depreciation on other investments.
5. Broken period interest.
6. Audit fees.
7. Prior period expenses.
8. Disallowance under Section 40(a)(ia).
9. Interest liability under Sections 234B and 234C.

Detailed Analysis:

1. Applicability of RBI Guidelines vs. Income-tax Act, 1961:
The primary issue involves whether the RBI Guidelines can override the mandatory provisions of the Income-tax Act, 1961. The CIT(A) held that the RBI Guidelines do not override the Income-tax Act, despite the Board Circular No. 665 of 1993 and the Kerala High Court decision in CIT v. Lord Krishna Bank Ltd. The Tribunal found in favor of the assessee, referencing the ITAT Pune Bench's decision in the case of Dy.CIT Vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd., which stated that cooperative banks should be assessed as normal banking companies and that deductions should be derived according to ordinary commercial principles.

2. Depreciation on Government Securities shifted from AFS to HTM:
The CIT(A) confirmed the disallowance made by the A.O. of the claim of depreciation on Government Securities shifted from AFS to HTM. The Tribunal, however, followed the precedent set by the ITAT Pune Bench in similar cases and directed the A.O. to allow the claim, noting that the depreciation should be allowed as per the RBI and CBDT guidelines.

3. Premium Amortization:
The CIT(A) confirmed the disallowance of the claim of Premium Amortization, holding that RBI Guidelines could not override the provisions of the Income-tax Act, 1961. The Tribunal, referencing the decision in the case of Catholic Syrian Bank Ltd. Vs. ACIT, held that the amortization of premium paid in excess of face value of securities held to maturity (HTM) is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT instructions.

4. Depreciation on Other Investments:
The CIT(A) confirmed the disallowance of the claim of depreciation on other investments. This issue was not pressed by the assessee during the hearing and was thus dismissed.

5. Broken Period Interest:
The CIT(A) set aside the claim of broken period interest to the file of the A.O. for verification. The Tribunal noted that the CIT(A) should have allowed the claim directly and directed the A.O. to allow the claim based on the provisions of law and judicial precedents.

6. Audit Fees:
The CIT(A) confirmed the disallowance of the claim of audit fees provided. This issue was not pressed by the assessee during the hearing and was thus dismissed.

7. Prior Period Expenses:
The CIT(A) confirmed the disallowance of the claim of prior period expenses, holding that the liabilities were not crystallized during the year under appeal. This issue was not pressed by the assessee during the hearing and was thus dismissed.

8. Disallowance under Section 40(a)(ia):
The CIT(A) confirmed the disallowance of the expenditure invoking the provisions of Section 40(a)(ia). This issue was not pressed by the assessee during the hearing and was thus dismissed.

9. Interest Liability under Sections 234B and 234C:
The issue of interest liability under Sections 234B and 234C was deemed consequential to the outcome of other issues. The Tribunal directed the A.O. to compute the interest liability based on the final outcome of the other issues.

Conclusion:
The Tribunal partly allowed the appeals, directing the A.O. to allow the claims for depreciation on government securities and premium amortization as per the RBI and CBDT guidelines. The issues not pressed by the assessee were dismissed. The interest liability under Sections 234B and 234C was to be computed based on the outcomes of the other issues.