2013 (5) TMI 875 - AT - Income Tax

Disallowance of diminution in the value of securities - securities classified as Held till maturity category - Held that - So far as the securities held under the HTM category the I.T.A.T. Pune has taken a view in the case of Latur Urban Co-operative Bank Ltd. Vs. ACIT 2015 (3) TMI 920 - ITAT PUNE that all the securities held by the assessee are part of the stock-in-trade irrespective of their classification. So far as the treatment of the assessee in classifying the securities in our opinion the securities classified under HTM category is also part of the stock-in-trade. There is RBI circular as per which the assessee can amortize the depreciation or loss on the conversion of securities from FST category to HTM category. We therefore do not agree with the view taken by the Ld. CIT(A) that the securities held under HTM are capital in nature. We accordingly allow the Ground no. 1 taken by the assessee and direct the Assessing Officer to allow the claim of the assessee in light of the above discussion. U/s 14A petty expenditure which has been proved to have been incurred in relation to earning of tax free income can be disallowed and section cannot be extended to disallow even the expenditure is permitted to have been incurred for the purposes of earning tax free income. In the circumstances the disallowance cannot be made u/s 14A of the Act. This ground is therefore allowed in favour of assessee Adhoc disallowances of Telephone expenses Vehicle expenses Advertisement expenses and General expenses - Held that - Admittedly the assessee is a bank and it is not individual whereby there can be any personal element involve in incurring the expenditure. In our opinion the reason for disallowance given by both the authorities below is not correct. We therefore delete the disallowance made by the Assessing Officer and allow the respective grounds taken by the assessee.

Summary

Issues:
1. Disallowance of claim of diminution in the value of securities under 'Held till maturity' category.
2. Disallowance of expenditure pertaining to tax-free income under Section 14A.
3. Disallowance of expenses classified as 'personal nature' on an estimate basis.

Analysis:

Issue 1: Disallowance of claim of diminution in the value of securities under 'Held till maturity' category
The assessee challenged the disallowance of the claim of diminution in the value of securities held under the 'Held till Maturity' (HTM) category. The Assessing Officer disallowed the deduction claimed by the assessee, citing RBI guidelines that investments under HTM are valued at cost of acquisition. The Ld. CIT(A) upheld the disallowance, stating it deferred revenue rather than causing actual loss. However, the ITAT Pune disagreed, noting the consistent method followed by the assessee and allowed the claim, emphasizing that securities under HTM are part of the stock-in-trade.

Issue 2: Disallowance of expenditure pertaining to tax-free income under Section 14A
The disallowance under Section 14A for expenditure related to tax-free income was challenged. The Tribunal referred to a previous case where a similar disallowance was deleted. It was held that proportionate expenses attributable to tax-free securities cannot be disallowed under Section 14A. Following precedent, the Tribunal deleted the addition made by the Assessing Officer, allowing the appeal on this ground.

Issue 3: Disallowance of expenses classified as 'personal nature' on an estimate basis
The Assessing Officer disallowed certain expenses like telephone, vehicle, advertisement, and general expenses, citing them as 'personal nature' on an estimate basis. The Tribunal disagreed, stating that as the assessee was a bank, there was no personal element involved in the expenses. The disallowance was deleted, and the grounds taken by the assessee were allowed.

In conclusion, the ITAT Pune allowed the appeal, overturning the disallowances related to diminution in securities value under HTM category, expenditure for tax-free income under Section 14A, and expenses classified as 'personal nature'. The judgment emphasized adherence to RBI guidelines, consistency in accounting practices, and the inapplicability of disallowances in the given circumstances.