2016 (4) TMI 429 - AT - Income Tax

Addition made u/s 36(1)(viia) - manner of computation of the amount of deduction - Held that - The amount of deduction is to be calculated with reference to income computed under the head profits and gains of business or profession . The provisions governing the brought forward and set off business loss are not part of the provisions governing the computation of profits under the head profits and gains of business . Hence, we hold that the method of calculation adopted by the AO is in accordance with the provisions of the Act and the reasoning adopted by the CIT(A) is also in consonance with the clear provisions of the Act. Hence, we confirm the addition made by the AO. - Decided against assessee Addition made on account of depreciation in the value of Held to Maturity (HTM) category of investments - Held that - From the reading of the circular No.18/2015 it is clear that investments held by the banking concern are treated as a part of business of the banking company and therefore, the income arising from such investments is treated as part of business income falling under the head profits and gains of business . Though the circular was issued in the provisions of sec.80P of the Act, the said principle was equally made applicable to other banks and commercial banks to which Banking Regulation Act, 1949 applies. Therefore, by virtue of the above said circular, investments made by the banking company should be treated as a business asset of the banking company or stock-in-trade. It is well settled in law that CBDT circulars are binding upon the officers who are entrusted with the responsibility of executing the provisions of the Act. Having regard to the spirit of the circular cited supra and the fact that investments are shown as stock-in-trade in the books of account, loss/depreciation on account of fall in value of securities held by the assessee-bank should be allowed as deduction. Therefore, income arising therefrom should also be treated as business income. The provisions of section 45(2) cannot be applied to the facts of the present case, as in the earlier years, for the purpose of income-tax proceedings, the investments were treated as stock-in-trade. Addition made on account of write off of investments - Held that - The submission of the learned counsel for the assesseebank that securities of M/s Pennar Aluminium Ltd., were acquired during the normal course of business of assessee-bank are not borne out of record. On the other hand, evidence on record clearly shows that these assets are shown as investments up to earlier assessment year and treated it as stock-in-trade during the previous year relevant to assessment year under consideration. Therefore, in such a situation, provisions of section 45(2) shall come into play. The fall in value of securities should be allowed as a capital loss in the year of sale of such securities as supported under the said provisions of the Act. Therefore, it is only a capital loss and cannot be allowed as a deduction. We uphold the order of the ld.CIT(A) and the ground of appeal filed by the assessee is dismissed. Deduction on account of bad debts - Held that - Similar issue had come up before the Hon ble Apex Court in the case of Vijaya Bank vs. CIT (2010 (4) TMI 46 - SUPREME COURT ) wherein it was held that debiting the profit and loss account by an amount of provision for bad debts, reducing provision for bad and doubtful debts from debtors account in balance-sheet amounts to write off. In the present case, it is undisputed fact that provision for bad and doubtful debts was reduced from sundry debtors account in the balance-sheet. Therefore, it satisfies the law laid down by the Hon ble Apex Court in Vijaya Bank (supra). The same reasoning was followed in the decisions cited by the learned counsel for the assessee-bank. The ld.CIT(A) also, after considering the law and the precedents on the issue, had come to the conclusion that it amounts to write off and the claim was allowed. - Decided against revenue Disallowance u/s 14A - Held that - The AO had not given any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn exempt income was incorrect. In the absence of such finding, resort cannot be had to the provisions of sub-rule(2) of rule 8D. a. Furthermore, it is undisputed fact that exempt income is earned from securities which are held as a part of stock-in-trade. The Hon ble Bombay High Court in the case of India Advantage Securities Ltd (2015 (6) TMI 140 - BOMBAY HIGH COURT ) held that provisions of sec.14A have no application in case assets are held as stock-in-trade. Therefore, provisions of sec.14A cannot be applied in the present case. Furthermore, in the assessee s own case, the Hon ble High Court of Karnataka held that no notional expenditure can be attributed to exempt income.Accordingly, we hold that no disallowance can be made u/s 14A of the Act. - Decided in favour of assessee Disallowance of contribution made to Disability Trust - Held that - Undisputedly, impugned contribution was made by the assessee-bank pursuant to the order passed by the Hon ble Supreme Court in the case of Devkala Consultancy Service (2004 (4) TMI 73 - SUPREME Court ). Needless to say, breach of the directions of the Hon ble Supreme Court is not in the business interest of the assesseebank. Furthermore, what is paid in the form of contribution to the trust is only excess interest collected from borrowers and such excess interest was offered to tax in the year in which it was collected. Therefore, the AO, in all fairness, should have allowed the same as deduction.- Decided in favour of assessee Addition made on realization of assets of erstwhile Lakshmi Commercial Bank (LCB) Ltd. - Held that - It is undisputed fact that in the year of merger of LCB with assessee-bank, excess of liabilities over assets was not allowed as deduction while computing profits and gains of business. In such an event, any subsequent realization out of assets of erstwhile LCB cannot be brought to tax. We do not find any fault with the reasoning of the ld.CIT(A) in deleting the addition.- Decided in favour of assessee MAT applicability - Held that - Provisions of sec.115JB are not applicable to the banking company

Summary

Issues Involved:
1. Deduction under Section 36(1)(viia) after adjusting brought forward loss.
2. Depreciation on HTM (Held To Maturity) category investments.
3. Disallowance of public issue expenses under Section 35D.
4. Write-off of investments.
5. Bad debts claim.
6. Expenditure on earning exempt income under Section 14A.
7. Addition to book profits under Section 115JB.
8. Applicability of Section 115JB to banking companies.
9. Contribution to Disability Trust as per Supreme Court directions.
10. Realization of assets from erstwhile Lakshmi Commercial Bank (LCB).

Detailed Analysis:

1. Deduction under Section 36(1)(viia) after adjusting brought forward loss:
The assessee-bank claimed a deduction of ?498,51,70,108 under Section 36(1)(viia) before setting off the brought forward business loss. The AO restricted the deduction to ?476,97,51,958 after adjusting the brought forward loss, resulting in an addition of ?21,54,18,149. The CIT(A) upheld the AO's view. The Tribunal confirmed the addition, holding that the total income for deduction under Section 36(1)(viia) should be computed after setting off brought forward losses, in line with the Supreme Court's interpretation in similar cases.

2. Depreciation on HTM (Held To Maturity) category investments:
The assessee-bank claimed depreciation of ?460,71,28,270 on HTM investments, treating them as stock-in-trade for tax purposes. The AO disallowed the claim, stating that the bank cannot adopt a different method for tax purposes than what is used in the books. The CIT(A) upheld the disallowance. The Tribunal allowed the claim, citing CBDT Circular No. 18/2015 and various judicial precedents, holding that investments made by banking companies should be treated as business assets, and depreciation on such investments is allowable.

3. Disallowance of public issue expenses under Section 35D:
The assessee-bank did not press this ground, and hence, it was dismissed.

4. Write-off of investments:
The assessee-bank claimed a deduction of ?24 lakhs for the write-off of investments in Pennar Aluminium. The AO disallowed the claim, treating it as a capital loss. The CIT(A) upheld the disallowance. The Tribunal confirmed the CIT(A)'s view, holding that the write-off of investments should be treated as a capital loss and not allowed as a revenue deduction.

5. Bad debts claim:
The assessee-bank claimed a deduction of ?903,37,86,609 for bad debts written off. The AO disallowed the claim, stating that the amounts were not written off in the books. The CIT(A) allowed the claim, following the Tribunal's decision in the assessee's own case for earlier years. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in Vijaya Bank's case, which held that debiting the profit and loss account and reducing the provision for bad debts from debtors' accounts amounts to a write-off.

6. Expenditure on earning exempt income under Section 14A:
The AO disallowed ?16,77,57,498 as expenditure on earning exempt income, estimating 5% of the exempt income. The CIT(A) deleted the disallowance, following the jurisdictional High Court's decision that no notional expenditure can be attributed to exempt income. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide any finding on the correctness of the assessee's claim that no expenditure was incurred to earn exempt income.

7. Addition to book profits under Section 115JB:
The CIT(A) held that the disallowance under Section 14A cannot be added to book profits for computing taxable income under Section 115JB, following the Supreme Court's ruling in Apollo Tyres Ltd. The Tribunal found this issue to be academic, given its decision on Section 14A.

8. Applicability of Section 115JB to banking companies:
The assessee-bank contended that Section 115JB does not apply to banking companies as their accounts are drawn up as per the Banking Regulation Act, not Schedule VI of the Companies Act. The Tribunal agreed, following the decisions of co-ordinate benches in similar cases, and held that Section 115JB is not applicable to banking companies.

9. Contribution to Disability Trust as per Supreme Court directions:
The assessee-bank contributed ?2.5 crores to a Disability Trust as directed by the Supreme Court in the case of Devkala Consultancy Services Ltd. The AO disallowed the contribution, treating it as not incurred for business purposes. The CIT(A) upheld the disallowance. The Tribunal allowed the deduction, noting that the contribution was made pursuant to the Supreme Court's order and was in the business interest of the bank.

10. Realization of assets from erstwhile Lakshmi Commercial Bank (LCB):
The AO added ?60,92,288 realized from the assets of LCB, which was merged with the assessee-bank in 1985. The CIT(A) deleted the addition, noting that the excess of liabilities over assets at the time of merger was not allowed as a deduction. The Tribunal upheld the CIT(A)'s decision, holding that subsequent realization from LCB's assets cannot be taxed if the initial loss was not allowed.

Conclusion:
The Tribunal's judgment addressed various issues raised by both the assessee-bank and the revenue, providing detailed reasoning for each decision. The key points included the interpretation of total income for deductions, the treatment of investments as stock-in-trade, the applicability of Section 115JB to banking companies, and the allowability of contributions made pursuant to Supreme Court directions. The Tribunal's decisions were based on judicial precedents, CBDT circulars, and the specific facts of the case.