2015 (2) TMI 891 - AT - Income Tax

Depreciation of valuation of investment portfolio - treatment to the investments held by the bank as stock-in-trade by CIT(A)- Held that - As decided in assessee's own case for the assessment year 2004-05 assessee Bank is entitled to value all the investment at cost prices or market value whichever is lower by treating such investment as stock-in-trade, thus depreciation allowed. - Decided in favour of assessee. Disallowance u/s 14A r.w.Rule 8D(2) - addition of expenditure relating to exempt income deleted by CIT(A) - whether Rule 8D is prospective or retrospective? - Held that - As relying on Godrej BoyceManufacturing Co. case 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein held that Rule 8D of IT Rules, 1962 is applicable only prospectively, i.e., from assessment year 2008- 09, thus Rule 8D is only prospective and cannot be applied for the assessment year 2007-08. For quantum of disallowance there is no dispute about the fact that the assessee himself has disallowed 5%, following the earlier decision of the Tribunal in assessee's own case. In such circumstances, we do not find it necessary to interfere with the same as the assessee has accepted the earlier decision of the Tribunal and has not taken it before the High Court, particularly the facts and circumstances remaining the same. - Decided in favour of assessee.

Summary

Issues:
1. Claim of depreciation of valuation of investment portfolio
2. Deletion of addition of expenditure related to exempt income

Claim of Depreciation of Valuation of Investment Portfolio:
The appeal involved the assessment year 2007-08 of a bank, challenging the Commissioner of Income-tax(A)'s decision on two issues. Firstly, whether the depreciation claim on the valuation of the investment portfolio should be allowed when treated as stock-in-trade. The Assessing Officer disallowed a significant amount under the 'investment portfolio' head, citing non-compliance with RBI guidelines on categorization of investments. The bank treated the entire portfolio as stock-in-trade for tax purposes, contrary to RBI's directives. The CBDT Circular No.665 emphasized adherence to RBI guidelines for valuation. The ITAT, following a previous decision in the bank's favor, ruled that the bank was entitled to value investments at cost prices or market value, treating them as stock-in-trade, thereby dismissing the Revenue's appeal.

Deletion of Addition of Expenditure Related to Exempt Income:
The second issue concerned the deletion of an addition of expenditure related to exempt income. The bank had exempt income from tax-free bonds and dividends, and the Assessing Officer applied section 14A(2) r.w.Rule 8D(2) to calculate the expenditure incurred on earning this income. However, the Commissioner of Income-tax(A) overturned this addition, citing precedents from ITAT and the Delhi Bench. The Revenue challenged this decision, presenting various case laws to support Rule 8D's application. The ITAT analyzed the prospective or retrospective application of Rule 8D, referencing decisions from the Bombay and Kerala High Courts. Ultimately, the ITAT upheld the Commissioner's decision, noting the bank's voluntary 5% disallowance and the consistency with previous Tribunal decisions, leading to the dismissal of the Revenue's appeal.

In conclusion, the ITAT upheld the decisions favoring the bank on both issues, emphasizing adherence to RBI guidelines for valuation and the application of section 14A(2) r.w.Rule 8D(2) for calculating expenditure related to exempt income. The judgments were based on precedents and legal interpretations, resulting in the dismissal of the Revenue's appeal in both instances.