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2014 (10) TMI 210 - AT - Income TaxMethod of valuation of closing stock of securities - Loss on valuation of closing stock Held that - Assessee asserted that there was no double claim by pointing out that the yearend valuation has been arrived at after considering the reduced cost of the securities shifted from AFS to HTM category - the reduced cost of securities is compared with the market value on the last date of the financial year and the lower of the two is considered as closing stock - Therefore, the year end valuation loss of ₹ 359,24,58,508/- is over and above the shifting depreciation loss of ₹ 213,92,63,435/- and therefore there is no double claim - in any case the deduction on account of shifting depreciation loss will not amount to double deduction for the AY 2005-06 since the assessee bank has changed the method of valuation of closing stock only as on 31.03.2005 these assertions of the assessee have not been assailed by the Revenue - The explanation of the assessee obviates a situation where a double deduction is allowed to the assessee. In the books of account following the RBI guidelines HTM investments are valued at cost and in respect of AFS and HFT investments, the valuation is carried out basket-wise and within the prescribed basket any appreciation in security is adjusted against the depreciation of other any security - the change in the method of valuation has been partly accepted by the Revenue and for the reason that qua the investments classified as AFS and HFT there is no dispute and, the valuation of such closing stock at lower of cost or market value, has been accepted - Relying upon Commissioner Of Income-Tax Versus Corporation Bank Limited 1988 (8) TMI 90 - KARNATAKA High Court - there are no statutory rules for the valuation of closing stock but the ordinarily accepted method of commercial accounting support the valuation of closing stock based on the lower of the cost or market value - the method of valuation of the closing stock adopted by the assessee i.e. cost or market value, whichever is lower is fair and proper and the income-tax authorities have erred in not accepting the same. The stand of the assessee is upheld to value the stock of its investments / securities at lower of cost or market value - By application of such method of valuation of its stock of securities / investments in AY 2005-06 assessee claimed deduction for a loss - The effect of the change in method of valuation on the computation of income for the purposes of income tax is a matter of factual appreciation, which is liable to be verified by the AO appropriately - the AO is directed to consider the stand of the assessee stated and thereafter re-work the income of the assessee accordingly Decided in favour of assessee. Depreciation on plant and machinery Bad debts written off by non-rural branches u/s 36(1)(vii) Held that - As decided in assessee s own case for the earlier assessment year, it has been held that in the case of a banking company, for allowing depreciation in respect of lockers, counters, steel equipment, electrical fittings, etc., their functional utility has to be evaluated - the AO is directed to re-work the claim of the depreciation on the assets so far as bad debts are concerned, following the decision in Catholic Syrian Bank Ltd. Versus Commissioner of Income Tax, Thrissur 2012 (2) TMI 262 - SUPREME COURT OF INDIA , the AO is directed to consider the claim afresh - Decided in favour of assessee. Restriction of claim of deduction u/s 36(1)(viia) - Whether the deduction allowable u/s 36(1)(viia) of the Act is to be restricted to the actual amount of Provision made in the books of account for bad and doubtful debts or to the claim otherwise computed by the assessee in terms of section 36(1)(viia) of the Act Held that - Following the decision in Shri Mahalaxmi Co-op Bank Ltd. Versus ITO, Ward 1 (1), Kolhapur 2014 (1) TMI 1366 - ITAT PUNE Creation of provision for bad and doubtful debts equal to the amount mentioned in section 36(1)(viia) is a must for claiming deduction - As the assessee has not made a Provision for bad and doubtful debts in the books of account equal to the amount of deduction sought to be claimed under Section 36(1)(viia) of the Act, the lower authorities were justified in restricting the deduction, being the amount of Provision actually made in the books of account - Decided against assessee. Applicability of section 115JB MAT provisions Held that - Following the decision in M/s. Canara Bank Versus Commissioner of Income-tax (LTU), Bangalore 2012 (11) TMI 139 - ITAT BANGALORE - section 115JB of the Act is not applicable to a banking company - the amendment does not negate the ratio of the precedents, which hold the field so far as the present AY is concerned - assessee, being a banking company, does not fall within the purview of section 115JB of the Act Decided in favour of assessee. Deduction on amortization of public issue expenses u/s 35D Held that - The alternative plea of the assessee deserves to be considered for the purposes of determining the quantum of amount disallowable with respect to the assessee s claim for amortization of expenditure u/s 35D of the Act thus, the matter is remitted back to the AO to re-compute the net expenditure incurred on public issue carried out by the assessee, and the disallowance shall be limited to such net expenditure Decided in favour of assessee. Invocation of section 14A Held that - As decided in assessee s own case for the earlier assessment year, it has been held that following the decision The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - since the interest-free funds available with the assessee were in excess of the investments which yielded the exempt income - therefore, no interest could be disallowed by invoking section 14A of the Act - the contention of the assessee is accepted that if the investments which have yielded the tax-free income are out of interest-free funds generated or available with it then no part of interest expenditure can be said to have been incurred in relation to earning of such exempt income for the purposes of section 14A of the Act - the quantification of such expenditure done by the assessee is ₹ 3,76,53,360/-, which is the amount disallowed by the CIT(A) u/s 14A of the Act there is no reason to discard the working which the assessee itself furnished and accordingly in so far as the disallowance of ₹ 3,76,53,360/- u/s 14A of the Act made by the CIT(A) is concerned, the same is affirmed Decided partly in favour of assessee. Application of Rule 8D(2)(iii) Held that - There was no justification in the assertions of the assessee that no expenses have been incurred to earn the tax-free incomes - the factum of the Treasury department of the assessee carrying out such activities itself shows that expenses in the nature of salaries, overheads, etc. are being incurred in relation to earning of the exempt incomes - The quantification of such expenditure done by the AO does not require any interference Decided against revenue.
Issues Involved:
1. Depreciation on valuation of securities. 2. Depreciation on items of Plant & Machinery. 3. Claim under Section 36(1)(vii) for Non-Rural Bad Debts. 4. Deduction under Section 36(1)(viia). 5. Exemption under Section 10(23G). 6. Applicability of Section 115JA and 115JB. 7. Provision for frauds. 8. Disallowance under Section 14A. 9. Donations and deductions under Section 37 and 80G. Issue-wise Detailed Analysis: 1. Depreciation on Valuation of Securities: The Tribunal considered the cross-appeals for the assessment year 2005-06, where the assessee bank changed its method of valuation of securities for income-tax purposes to lower of cost or market value. The Tribunal upheld the assessee's method, noting it was consistent with the Supreme Court's approved method. The Tribunal directed the Assessing Officer to re-work the income based on the new method while ensuring no double deduction. 2. Depreciation on Items of Plant & Machinery: The Tribunal referred to its earlier decision for the assessment year 2004-05, directing the Assessing Officer to re-evaluate the depreciation claims on Plant & Machinery items, considering their functional utility and treating them as 'Plant' rather than 'Furniture & Fixtures'. 3. Claim under Section 36(1)(vii) for Non-Rural Bad Debts: The Tribunal directed the Assessing Officer to re-examine the claim of Rs. 68,06,15,000/- for non-rural bad debts written off, following the Supreme Court's decision in the case of Catholic Syrian Bank Ltd. The matter was remitted back for adjudication on merits. 4. Deduction under Section 36(1)(viia): The Tribunal upheld the CIT(A)'s decision to restrict the deduction under Section 36(1)(viia) to the actual amount of provision made in the books of account. The assessee's claim for a higher deduction was dismissed, aligning with the precedent set by the Punjab & Haryana High Court in State Bank of Patiala. 5. Exemption under Section 10(23G): The Tribunal restored the matter to the Assessing Officer to adjudicate the assessee's claim for exemption on interest income under Section 10(23G) on its merits, following the precedent set in the assessee's own case for earlier years. 6. Applicability of Section 115JA and 115JB: The Tribunal held that Section 115JB, relating to Minimum Alternate Tax (MAT), is not applicable to banking companies, aligning with the decisions of various High Courts. The Assessing Officer was directed to consider this legal position while determining the total income. 7. Provision for Frauds: The Tribunal remitted the issue of deduction for provision for frauds amounting to Rs. 13,77,108/- back to the Assessing Officer for consideration on merits, allowing the assessee to present its case. 8. Disallowance under Section 14A: For the assessment year 2007-08, the Tribunal directed the Assessing Officer to verify the assessee's claim that investments yielding tax-free income were made from interest-free funds. The Tribunal upheld the disallowance of operating expenses related to earning exempt income but remitted the interest expenditure component for verification. 9. Donations and Deductions under Section 37 and 80G: The Tribunal upheld the CIT(A)'s decision to allow deductions for certain donations under Section 37, considering them as business expenses, while other donations were allowed under Section 80G. The Tribunal found no reason to interfere with the CIT(A)'s conclusions on this matter. Conclusion: The appeals by the assessee were partly allowed, and the cross-appeals by the Revenue were dismissed. The Tribunal provided detailed directions for re-evaluation and verification by the Assessing Officer on several issues, ensuring adherence to legal precedents and proper consideration of the assessee's claims.
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