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2018 (5) TMI 1867 - AT - Income TaxAllowable business expenses - addition of business promotion, members gift, scholarship to children of members and payment to legal heirs of members - HELD THAT - As decided in assessee's own case 2016 (9) TMI 1182 - ITAT AHMEDABAD the volume of earning of the assessee bank are mainly made through its members. These expenses are incurred by the assessee bank to attract the members confidence and loyalty towards the bank in the prevailing competition so that the members place their deposits with the assessee bank and also continue to borrow funds from the assessee bank in order to improve the profit earning and income of the assessee bank. Amount spent on the aforesaid expenditures is very marginal compared to the amount of interest realized on the advances made to the members by the bank and amount of deposit made by the members with the bank. Amount spent on scholarship to the children of members, payment to legal heirs of members and gifts to members could be said to be expenditure incurred wholly and exclusively for the purpose of business since the amount was spent for keeping alive its good image amongst its members and ensuring that goodwill and continuity of business with the members. We allow the aforesaid expenditure as business expenditure under Section 37 . - Decided in favour of assessee. Disallowance on amortized premium - HELD THAT - As per RBI guidelines dated 16th Oct, 2000, the investment portfolio of the bank is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (ATS). Investment classified under HTM category needs to be marked to market and are carried at acquisition cost unless these are more than the face value in which case the premium should be amortized over the remaining period. Allowable of amortized expenses on premium on government securities has been provided u/s. 36(1)(ii) of the act and explained by CBDT vide instruction No. 17 of 2008 dated 26-11-2008. In the case of CIT, Rajkot-II vs. Rajkot Dist. Co-op. Bank Ltd. 2014 (3) TMI 110 - GUJARAT HIGH COURT held that instructions clearly provide for amortization of premium paid on securities when the same are acquired at the rate higher than the face value. Such amortization would have to be for the remaining period of maturity. - Decided in favour of assessee. Disallowance u/s. 14A r.w. Rule 8D of the act incurred towards the exempt income - HELD THAT - CIT(A) has deleted the addition following the decision of his predecessors in the case of the asssessse as the asssessee has more interest free fund available than investment made in securities. We have also noticed that the assessee has its own funds. The assessee has also explained before the assessing officer that investment in central and state Government securities was stock in trade and part of banking business only. After considering the above facts that investment were made out of the interest free funds available with the assessee we do not find any error in the decision of ld. CIT(A) of restricting the disallowance to the extent of administrative expenses of ₹ 9,50000/. The Ld. Counsel has not pressed ground no. 3 of appeal of the assessee. Accordingly, the appeal of the Revenue is dismissed.
Issues involved:
1. Disallowance of certain expenses claimed by the assessee. 2. Disallowance of amortized premium by the assessing officer. 3. Disallowance of expenses under section 14A of the Income Tax Act. Issue 1: Disallowance of certain expenses claimed by the assessee: The assessing officer disallowed expenses claimed by the assessee related to business promotion, members' gifts, scholarship to children of members, and payment to legal heirs of members. The assessing officer considered these expenses as distribution of profit to shareholders. The CIT(A) upheld the disallowance based on precedents. However, the ITAT allowed the appeal of the assessee citing a Co-ordinate Bench decision that expenses for maintaining goodwill among members and attracting business are necessary for business purposes. The ITAT emphasized that such expenses are incurred for promoting business and preserving goodwill, hence allowed the expenses as business expenditure. Issue 2: Disallowance of amortized premium by the assessing officer: The assessing officer disallowed the amortized premium amount claimed by the assessee on government securities, considering it as capital outlay. The CIT(A) deleted the addition based on precedents. The ITAT upheld the CIT(A)'s decision, citing RBI guidelines and legal findings that allow amortization of premium on securities acquired at rates higher than the face value. The ITAT found no error in the CIT(A)'s decision and dismissed the revenue's appeal on this issue. Issue 3: Disallowance of expenses under section 14A of the Income Tax Act: The assessing officer disallowed expenses incurred towards earning exempt income under section 14A r.w. Rule 8D of the act. The CIT(A) deleted a portion of the disallowance based on the availability of interest-free funds compared to investments in securities. The ITAT upheld the CIT(A)'s decision, noting the availability of interest-free funds with the assessee and restricted the disallowance to administrative expenses. The ITAT dismissed the revenue's appeal on this issue. In conclusion, the ITAT partly allowed the assessee's appeal and dismissed the revenue's appeal, emphasizing the necessity of expenses for business promotion and preserving goodwill, the applicability of RBI guidelines for amortized premium, and the adequacy of interest-free funds to support investments in securities for the purpose of exempt income.
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