2017 (10) TMI 42 - AT - Income Tax

Claim of loss of transfer of security from available for sale category to held to maturity category by the appellant bank in accordance with direction/ circular of Reserve Bank of India. allowed. We are in agreement with the arguments of assessee and the issue of loss on inter-transfer of securities of decided in favour of Assessee. The issue of depreciation on securities at the close of Financial Year is also decided in favour of assessee Claim of the assessee through revised return which though became belated cannot be denied as assessee was rightly entitled to the allowance in view of the decisions of Hon ble Supreme Court in the case of United Commercial Bank 1999 (9) TMI 4 - SUPREME Court . Broken period interest disallowance allowed. Disallowance of premium paid on account of Key Man Insurance Policy - Held that - What can be sold as a life insurance policy taken by a business entity for its employee former employee or any other person important for business of such an entity is between the insurance regulator and insurance service provider. However once it has been sold as a life insurance policy on the keyman to the business as long as it is in the nature of life insurance policy whether pure life cover or term cover or a growth or guaranteed return policy it is eligible for coverage of Section 10(10D). It is not open to us to infer the words which are not there on the statute and then proceed to give life and effect to the same. We had detailed discussions about this aspect of the matter in paragraph numbers 10 to 15 above and as we have held there such an exercise is not permissible under the scheme of the Act. What IRDA regulates is issuance of life insurance policies by the insurance companies to the policyholders on the lives of its employees former employees and key personnel but once such a policy is issued it cannot but be treated as a keyman insurance cover as it essentially meets the requirement of Section 10(10D) because it is a a life insurance policy taken by a person on the life of another person who is or was the employee of the firstmentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person . The mandate of Section 10(10D) does not put any further tests nor can we infer the same. The issue of Key Man Insurance is also decided in favour of Assesssee.

Summary

Issues Involved:
1. Disallowance of loss on inter-transfer revaluation of investment.
2. Disallowance of depreciation on investment.
3. Disallowance of broken period interest.
4. Penalty under Section 271(1)(c).
5. Disallowance of Keyman Insurance Premium.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Inter-Transfer Revaluation of Investment:
The assessee, a commercial bank, maintained three portfolios of investments: "Held to Maturity," "Held for Trading," and "Available for Sale." The bank claimed losses on inter-transfer of securities among these categories, valuing them at market prices as per RBI guidelines. The Assessing Officer (AO) disallowed these losses, stating they were not incurred at the valuation date but during the year, and were notional rather than actual. The CIT(A) upheld this disallowance but allowed losses on year-end valuation.

The Tribunal found that the inter-transfer of securities within the year is akin to selling stock in the normal course of business, and thus, losses should be allowed. It cited various judicial precedents, including the Bombay High Court in CIT vs. HDFC Bank Ltd. and the ITAT in OBC vs. Addl. CIT, which supported the allowance of such losses. The Tribunal allowed the assessee's claim for losses on inter-transfer of securities.

2. Disallowance of Depreciation on Investment:
The AO disallowed the assessee's claim for depreciation on investments, arguing that the revised return was invalid as it was filed beyond the time limit. The CIT(A) allowed the claim, relying on the Supreme Court decision in United Commercial Bank Ltd. vs. CIT and the CBDT Circular No. 18/2015, which clarified that income from investments by banks is business income.

The Tribunal upheld the CIT(A)'s decision, noting that the revised return was filed in view of the Tribunal's earlier order treating the securities as stock-in-trade. It also referenced the Punjab & Haryana High Court's decision in CIT vs. Ramco International, which allowed claims made during assessment proceedings even if not included in the original return.

3. Disallowance of Broken Period Interest:
The AO disallowed the broken period interest (BPI) paid on the purchase of securities, treating it as capital expenditure. The CIT(A) allowed the claim, following the Bombay High Court's decision in American Express International Banking Corp. vs. CIT, which held that BPI is revenue-neutral and should be allowed as a deduction.

The Tribunal agreed with the CIT(A), noting that the Supreme Court had dismissed the Revenue's SLP against the Bombay High Court's decision in Union Bank of India, which followed the American Express case. Thus, the Tribunal upheld the allowance of BPI as a deductible expense.

4. Penalty Under Section 271(1)(c):
The AO imposed penalties on the assessee for furnishing inaccurate particulars of income related to disallowed claims. The CIT(A) deleted these penalties, relying on the Supreme Court's decision in Reliance Petro Products Ltd., which held that penalties cannot be imposed for claims made in good faith.

The Tribunal upheld the CIT(A)'s decision, noting that the quantum additions had been deleted in the present order, and thus, penalties could not be sustained. Consequently, the Revenue's appeals regarding penalties were dismissed.

5. Disallowance of Keyman Insurance Premium:
The AO disallowed the premium paid on Keyman Insurance Policies, which was confirmed by the CIT(A). The Tribunal found that the issue was covered in favor of the assessee by various decisions of the ITAT Amritsar Bench, including M/s Suri Sons vs. ACIT and M/s F.C. Sondhi & Co. (India) Pvt. Ltd. vs. DCIT.

The Tribunal allowed the assessee's claim for Keyman Insurance Premium, finding that the policies were taken for the benefit of the firm and were thus deductible as business expenses.

Conclusion:
The Tribunal allowed the appeals and cross-objections filed by the assessee, rejecting the Revenue's appeals. The issues of disallowance of loss on inter-transfer of securities, depreciation on investments, broken period interest, and Keyman Insurance Premium were decided in favor of the assessee. Penalties imposed under Section 271(1)(c) were deleted.