2015 (3) TMI 920 - AT - Income Tax

Deletion of addition made on account of sticky advances - benefit of the circular No. F 201/81/84 ITAII, dtd 9.10.1984 - Non fulfillment of conditions - Disallowance u/s 14A RW Rule 8D - disallowance on account of proportionate expenses in respect of income not forming part of income - Held that - Following decision of Osmanabad Janta Sahakari Bank Ltd. 2015 (3) TMI 886 - ITAT PUNE - CIT(A) has relied on the decision of Hon ble jurisdictional High Court in the case of Godrej & Boyce Manufacturing Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT). The Hon ble High Court has held that Rule -8D is applicable from the A.Y. 2008-09 and it has no retrospective application. We find that the Ld CIT(A) has sustained disallowance at ₹ 25,000/- treating the same as a reasonable one. In our opinion, no interference is called for in the order of the Ld CIT(A) and accordingly, the same is confirmed. The method of valuation followed by the assessee Bank was to value investments at cost or market value whichever was lower. The assessee had claimed the depreciation to the tune of ₹ 11,82,35,007/- and the said depreciation was claimed as a deduction which was disallowed by the A.O, but the assessee Bank succeeded before the CIT(A). The Tribunal confirmed the order of the CIT(A). The Revenue carried the issue before the Hon ble High Court. The core issue was the method of valuation adopted by the assessee Bank for valuing the stock of the Securities. The Hon ble High Court followed the decision of Hon ble Supreme Court in the case of United Commercial Bank (1999 (9) TMI 4 - SUPREME Court). In the case of United Commercial Bank (1999 (9) TMI 4 - SUPREME Court), even the issue of valuation of the stock in trade of the investment was before the Hon ble Supreme Court. In the case of the assessee, the issue is regarding allowability of the loss on the sale of the Securities. Merely because the Securities are kept under the head till the maturity, the said Security cannot be treated as a purely investment. Law is well settled that the Securities held by the Bank are in the nature of Stock-in-Trade. We may like to quote here the decision of the Hon ble High Court of Kerala in the case of CIT Vs. Nedungadi Bank Ltd., 2002 (11) TMI 29 - KERALA High Court . In the said case, the Hon ble High Court has held that the securities held by the Bank are in the nature of stock-in-trade. Both the authorities below has merely gone on the nomenclature of the head under which the Securities are held. In our considered view, nomenclature cannot be decisive for the assessee Bank. We, therefore, hold that the loss on the sale of the Securities is revenue in nature and same is allowable - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of sticky advances/NPA interest.
2. Deletion of disallowance of proportionate expenses under Section 14A read with Rule 8D.
3. Directions for verification of interest on NPA accounts.
4. Disallowance of loss on sale of securities.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Sticky Advances/NPA Interest:
The Revenue challenged the deletion of Rs. 16,13,341/- added by the A.O. for interest on sticky advances/NPA. The A.O. argued that the interest should be included in the income, while the assessee relied on the Supreme Court decision in UCO Bank vs. CIT, which held that interest on doubtful loans not credited to the Profit & Loss Account is not taxable. The CIT(A) deleted the addition, referencing RBI and CBDT circulars and various judicial precedents. The Tribunal upheld the CIT(A)'s decision, citing similar cases, such as Osmanabad Janta Sahakari Bank Ltd., and emphasized that interest on NPA advances does not accrue to the assessee.

2. Deletion of Disallowance of Proportionate Expenses under Section 14A read with Rule 8D:
The A.O. disallowed Rs. 2,00,834/- for expenses related to earning exempt income under Section 14A read with Rule 8D. The CIT(A) partially sustained the disallowance, reducing it to Rs. 25,000/-. The Tribunal confirmed the CIT(A)'s decision, noting that Rule 8D is applicable from A.Y. 2008-09 onwards and the CIT(A) had reasonably restricted the disallowance.

3. Directions for Verification of Interest on NPA Accounts:
The assessee contested the CIT(A)'s directions for verifying whether any interest on NPA accounts was received or adjusted. The Tribunal found the directions appropriate, emphasizing that they were specific and aimed at verifying the receipt or adjustment of interest on NPA accounts. The Tribunal dismissed the assessee's grievance, stating that the directions were necessary for accurate assessment.

4. Disallowance of Loss on Sale of Securities:
The A.O. disallowed Rs. 14,70,000/- claimed as a loss on the sale of securities, treating it as a capital loss. The CIT(A) upheld the disallowance. The Tribunal, however, allowed the assessee's claim, referencing judicial precedents like CIT vs. Bank of Baroda and UCO Bank vs. CIT, which held that securities held by banks are considered stock-in-trade, and losses on their sale are revenue in nature.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, confirming the deletion of the addition on sticky advances/NPA interest, partially sustaining the disallowance under Section 14A, upholding the CIT(A)'s verification directions, and allowing the loss on the sale of securities. The order was pronounced on 31st August 2012.