2019 (6) TMI 1425 - AT - Income Tax

Disallowance on account of Business Promotion Members Gift Scholarship expenses and payment to legal heirs of the members - allowable business expenditure - HELD THAT - As decided in own case 2018 (5) TMI 1867 - ITAT AHMEDABAD expenditure was incurred for the purpose of business to maintain goodwill and continuity of business being provided by important members. It was pointed out that these members had provided for nearly 98% of the bank s business and the expenditure was marginal as compared to the interest realised on advances made to such members by the bank and the amount of deposits made by the members with the bank. The Tribunal held that merely because there was no legal obligation to incur such expenditure would not mean that the same was not allowable business expenditure if it could be pointed out that the expenditure incurred in preserving the business connections and goodwill of business expenditure incurred in preserving the business connections and goodwill of business. Disallowance on account of Amortization of Premium - HELD THAT - As decided in own case 2018 (5) TMI 1867 - ITAT AHMEDABAD the allowability of amortized expenses on premium on Government Securities has been provided u/s. 36(1)(ii) of the provisions have been clarified and explained by CBDT New Delhi vide Instruction No. 17 of 2008 dated 26.11.2008. As per this clarification investments of banks classified under HTM (Held to Maturity) category need not 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 period remaining to maturity. On the basis of this Instruction different Tribunals as mentioned above by assessee have allowed the amortized expenditure. The AO has ignored the provisions of Instruction which is binding on him while discussing the issue and disallowing the expenditure. Since the Instructions and Circulars are binding in nature on AOs and different Tribunals have given decisions against the revenue respectfully following the same ground of appeal of assessee is allowed and addition made by AO is deleted. Disallowance on account of interest accrued on non performing assets u/s. 36(1)(ii) - HELD THAT - Interest accrued on NPA accounts to the tune of 41, 18, 29, 397/- which was shown as overdue interest reserve in the balance sheet of the appellant before us cannot be taxed since the same was not possible to be recovered. The non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown as NPA then the assumption would be it is not yielding any revenue and even the principle repayment is doubtful. Since it is not yielding any revenue the same cannot be brought to tax. We therefore find no infirmity in the order passed by the Learned CIT(A) so as to warrant interference. Thus revenue s appeal is found to be devoid any merit and hence dismissed. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of Business Promotion Members Gift, Scholarship expenses, and payment to legal heirs of the members.
2. Disallowance of Amortization of Premium.
3. Disallowance of interest accrued on non-performing assets.

Detailed Analysis:

1. Disallowance of Business Promotion Members Gift, Scholarship expenses, and payment to legal heirs of the members:
The revenue challenged the deletion of a disallowance amounting to ?31,98,772/- made by the Assessing Officer (AO) on account of business promotion expenses, including gifts to members, scholarships, and payments to legal heirs of members. The AO contended these expenses were not related to business expenditure. The assessee argued that similar expenses had been allowed in previous years, and the disallowance was deleted by the ITAT in earlier assessment years (AY 2008-09 and 2009-10). The CIT(A) followed the precedent set by the ITAT and deleted the disallowance. The ITAT upheld this decision, citing that the expenses were necessary for maintaining goodwill and business continuity with members, who contributed significantly to the bank's income.

2. Disallowance of Amortization of Premium:
The revenue also contested the deletion of a disallowance of ?3,15,81,243/- related to the amortization of premium on Government Securities held under the Held to Maturity (HTM) category. The AO disallowed this expense, arguing it was capital in nature. The assessee contended that the amortization was in line with RBI guidelines and consistent accounting practices. The CIT(A) deleted the disallowance, referencing previous decisions and CBDT instructions that supported the amortization of such premiums. The ITAT upheld the CIT(A)'s decision, noting that the amortization of premium on HTM securities is an allowable expense under Section 36(1)(ii) of the Income Tax Act, as clarified by CBDT Instruction No. 17 of 2008.

3. Disallowance of interest accrued on non-performing assets:
The revenue challenged the deletion of a disallowance of ?41,18,29,397/- related to interest accrued on non-performing assets (NPAs). The AO added this amount to the income, arguing that the interest had accrued and should be taxed, despite RBI guidelines advising against recognizing such interest on NPAs. The assessee argued that as a scheduled bank, it followed RBI guidelines, which mandate not recognizing income on NPAs until actually received. The CIT(A) deleted the disallowance, relying on previous decisions and the fact that the assessee was a scheduled bank. The ITAT upheld this decision, referencing the Gujarat High Court's ruling in PCIT-1, Rajkot vs. Kutch District Central Co-op. Bank Ltd., which supported the non-taxability of interest on NPAs based on RBI guidelines and the principle of taxing real income.

Conclusion:
The ITAT dismissed the revenue's appeal on all grounds, upholding the CIT(A)'s deletions of disallowances related to business promotion expenses, amortization of premium, and interest on NPAs. The decisions were based on precedents, consistent accounting practices, and adherence to RBI guidelines. The ITAT affirmed that these expenses and non-recognition of interest on NPAs were in line with the principles of the Income Tax Act and relevant judicial precedents.