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2015 (1) TMI 1012 - AT - Income TaxDisallowance of loss arose on account of revaluation of securities - Held that - No merit in the action of lower authorities for disallowing loss arose on the year end revaluation of securities as relying on CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT Investment Ltd. Vs. CIT 1970 (4) TMI 15 - SUPREME Court and CIT Vs. Bank of Baroda 2003 (3) TMI 80 - BOMBAY High Court . - Decided in favour of assessee. Disallowance u/s.14A r.w.Rule 8D - assessee-bank has declared dividend income of 17, 86, 785/- and claimed it as exempt u/s10(35) - Held that - The mutual funds under which investments were made were notified under See 10(23D) of the Income Tax Act 1961 and are exempt under Sec 10(35) of the Income Tax Act. The IPO closed on June 21 2005 and shares were allotted on July 5 2005. A part of the capital funds raised from the IPO were invested in mutual funds till allotment of shares. Thus we found that its investments were from interest-free funds and accordingly no interest expenditure can be said to have been incurred in relation to earning the tax-free dividend income and accordingly no disallowance of interest can be made in this regard under section 14A of the Act. The AO is directed to delete the same. - Decided in favour of assessee. Disallowance of expenses other than interest we direct the AO to uphold the disallowance at 5% of exempt income. Disallowance of provision of re-valuation of investments transferred from HTM to AFS category - Held that - Decision of the Hon ble Bombay High Court in the case of CIT v. HDFC Bank (2014 (7) TMI 724 - BOMBAY HIGH COURT) and that of the Bangalore bench of the Tribunal in the case of State Bank of Mysore (2009 (5) TMI 610 - ITAT BANGALORE) are in support of assessee s claim of provision for re-valuation in respect of securities transferred from HTM to AFS category should be allowed as a deduction. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of loss arising on the year-end revaluation of securities. 2. Valuation of securities as per the Master Circular of Reserve Bank of India. 3. Classification of securities into Available for Sale and Held for Trading. 4. Disallowance of provision for revaluation on investment. 5. Disallowance under Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules. 6. Deletion of disallowance of devaluation in respect of HDFC Bonds and debentures held as HFT. Detailed Analysis: 1. Disallowance of Loss Arising on the Year-End Revaluation of Securities: The assessee contested the disallowance of Rs. 7,23,65,168/- arising from the year-end revaluation of securities. The AO disallowed the loss on the basis that the securities were held as investments and not as stock-in-trade, thus needing to be valued at cost. The CIT(A) upheld this disallowance. The Tribunal observed that the investments were classified under three categories: 'Held to Maturity', 'Available for Sale', and 'Held for Trading' as per RBI guidelines. The Tribunal noted that the significant accounting policy stated in the audited accounts indicated that the investments were valued in accordance with RBI guidelines and treated as stock-in-trade. The Tribunal found merit in the assessee's contention that the securities were held as stock-in-trade and not as capital assets. The Tribunal referenced decisions from the Hon'ble Bombay High Court and Supreme Court, concluding that the loss on revaluation of securities should be allowed. The matter was restored to the AO for fresh consideration. 2. Valuation of Securities as per the Master Circular of Reserve Bank of India: The assessee argued that the valuation of securities as of March 31, 2006, should be upheld as per the Master Circular of the Reserve Bank of India. The Tribunal noted that the method of valuation followed by the assessee bank was in line with RBI guidelines, which required marking to market for securities classified as 'Available for Sale' and 'Held for Trading'. The Tribunal directed the AO to consider the valuation as per the RBI guidelines. 3. Classification of Securities into Available for Sale and Held for Trading: The assessee contended that the classification of securities into 'Available for Sale' and 'Held for Trading' should be upheld. The Tribunal observed that the classification was made in accordance with RBI guidelines and that the intention at the time of purchase was relevant. The Tribunal found that the classification made by the assessee should be respected and directed the AO to consider the classification appropriately. 4. Disallowance of Provision for Revaluation on Investment: The assessee contested the disallowance of Rs. 3,85,140/- for the provision of revaluation on investment. The AO disallowed this provision on the grounds that depreciation on mere re-categorization was not allowable. The Tribunal referenced decisions from the Hon'ble Bombay High Court and the Bangalore bench of the Tribunal, which supported the assessee's claim. The Tribunal directed the AO to delete the addition of Rs. 3,85,140/-. 5. Disallowance under Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules: The assessee contested the disallowance of Rs. 60,26,522/- under section 14A towards expenditure purportedly incurred for earning tax-free income. The Tribunal noted that the investment in mutual funds was made from interest-free funds raised through an IPO, and thus, no interest expenditure was incurred in relation to earning the tax-free dividend income. The Tribunal directed the AO to delete the disallowance of interest. For expenses other than interest, the Tribunal upheld a disallowance at 5% of the exempt income. 6. Deletion of Disallowance of Devaluation in Respect of HDFC Bonds and Debentures Held as HFT: The CIT(A) had deleted the disallowance of Rs. 10,50,351/- in respect of HDFC Bonds and debentures held as 'Held for Trading'. The Tribunal found no infirmity in the CIT(A)'s order and upheld the deletion of the disallowance. Conclusion: The appeals of the assessee for both assessment years were allowed in part, and the appeal of the revenue was dismissed. The Tribunal directed the AO to reconsider certain disallowances in light of the observations made in the judgment. The order was pronounced in the open court on January 21, 2015.
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