2021 (3) TMI 466 - AT - Income Tax

Disallowance of expenses u/s 14A read with Rule 8D - HELD THAT - Interest disallowance u/s 14A r.w.r. 8D(2)(ii) would not be sustainable subject to verification by Ld. AO that assessee s own funds far exceed the investments made by the assessee. The issue of expense disallowance in terms of Rule 8D(2)(iii) would stand restored back to the file of Ld. AO with similar directions. The ground, thus raised before us, stands allowed for statistical purposes. Since this is the only issue in assessee s appeal, the appeal stand allowed for statistical purposes. Broken period interest - Accounting policy to be followed - HELD THAT - We find that this issue is contained in paras-115 to 119 of Tribunal s order in assessee s own case for AY 2008-09, 2020 (2) TMI 1350 - ITAT MUMBAI wherein a finding was rendered that similar issue stood covered in assessee s own case for AYs 1991-92 to 1994-95 which was followed by Tribunal in subsequent years. Further, Hon ble Bombay High Court upheld decision of Tribunal by dismissing revenue s appeal for AY 1996-97 2016 (8) TMI 963 - BOMBAY HIGH COURT . Another fact as noted by Ld. CIT(A) is that the assessee was following same accounting policy, in this regard, for last more than 20 years. Therefore, we find no infirmity in the impugned order in deleting this disallowance. The ground raised by revenue stand dismissed. Interest on Govt. Other Securities on accrual basis instead of due basis - HELD THAT - Tribunal s order in assessee s own case for AY 2008-09, 2020 (2) TMI 1350 - ITAT MUMBAI held this ground of appeal is covered in favour of the assessee vide the aforementioned orders of the Tribunal and Bombay High Court. The right to receive interest on securities arises on due date only, which falls after the accounting year and, accordingly, it cannot be taxed in the accounting year itself. Hence, in view of the above discussion, we decided this issue in favor of assessee. Amortization on securities held under HTM category - HELD THAT - Deduction for amortization of premium paid on purchase of securities under HTM category would be an allowable deduction in assessee own case for AY 2008-09, 2020 (2) TMI 1350 - ITAT MUMBAI . Depreciation on securities under Available for sale (AFS) and Held for Trading (HFT) category - HELD THAT - Assessee did not account for in the financial statement the anticipated/contingent profits from the contracts to the extent not settled as on the last day of the accounting year whereas any loss on such contracts was provided for by a charge in the profit and loss account on the best estimates. The Department brought to tax the profit on such forward exchange contracts and stated that one method for valuation of the entire stock of securities should be followed. This resulted in a situation of taxing appreciation of stock, which goes against the general and settled principle of non-taxation of notional income, as laid by the Supreme Court in the case of Sanjeev Wollen Mills 2005 (11) TMI 26 - SUPREME COURT . Hence, we are of the view that this disallowance of depreciation/ reducing of depreciation on appreciation in the value of securities held as available for sale and held for trading category are allowable. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of expenses under Section 14A read with Rule 8D.
2. Interest on Government and other securities on accrual basis instead of due basis.
3. Amortization of securities held under HTM category.
4. Depreciation on securities under AFS and HFT category.
5. Broken period interest on securities.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A Read with Rule 8D:
- Facts: The assessee earned tax-free income but did not offer any disallowance under Section 14A read with Rule 8D. The Assessing Officer (AO) computed a disallowance of ?1204.31 Lacs, including interest and indirect expenses.
- CIT(A) Decision: Upheld the AO’s disallowance, noting the assessee failed to prove the use of own funds for investments.
- Tribunal’s Decision: Referred to the assessee's case for AY 2008-09, where it was held that no disallowance could be made for interest expenses if the assessee’s own funds exceeded the investments. The issue of administrative expenses was remanded back to the AO for detailed verification. The assessee’s appeal was allowed for statistical purposes.

2. Interest on Government and Other Securities on Accrual Basis Instead of Due Basis:
- Facts: The assessee accounted for interest on an accrual basis but included it in the income on a due basis, leading to a differential amount of ?4247.09 Lacs.
- AO’s Decision: Disallowed the differential amount, stating that income should be computed based on the method of accounting regularly employed.
- CIT(A) Decision: Reversed the AO’s decision, relying on Tribunal orders for previous years where it was held that interest income should be taxed on a due basis.
- Tribunal’s Decision: Affirmed the CIT(A)’s decision, noting that the right to receive interest arises on the due date, not on an accrual basis. The revenue’s appeal was dismissed.

3. Amortization of Securities Held under HTM Category:
- Facts: The assessee claimed ?2722.94 Lacs as amortization for HTM securities as per RBI guidelines.
- AO’s Decision: Disallowed the claim, stating that the total income must be computed as per the Income Tax Act, not RBI guidelines.
- CIT(A) Decision: Allowed the claim, referencing favorable appellate orders for previous years.
- Tribunal’s Decision: Supported the CIT(A)’s decision, citing consistent favorable Tribunal decisions and Bombay High Court’s dismissal of revenue’s appeal on this issue. The revenue’s appeal was dismissed.

4. Depreciation on Securities under AFS and HFT Category:
- Facts: The assessee claimed depreciation of ?650.87 Lacs on AFS securities. The AO disallowed it, suggesting netting off appreciation and depreciation across all categories.
- CIT(A) Decision: Reversed the AO’s decision, relying on Tribunal orders for previous years.
- Tribunal’s Decision: Affirmed the CIT(A)’s decision, noting consistent favorable Tribunal decisions and Bombay High Court’s judgment in Union Bank of India’s case. The revenue’s appeal was dismissed.

5. Broken Period Interest on Securities:
- Facts: The assessee claimed a deduction for broken-period interest of ?64351.48 Lacs, arguing it was part of business expenditure.
- AO’s Decision: Disallowed the deduction, treating the expenditure as capital in nature.
- CIT(A) Decision: Allowed the deduction, citing consistent accounting treatment and favorable High Court decisions in the assessee's own case.
- Tribunal’s Decision: Supported the CIT(A)’s decision, referencing consistent Tribunal decisions and Bombay High Court’s dismissal of revenue’s appeal on this issue. The revenue’s appeal was dismissed.

Conclusion:
- Assessee’s Appeal: Allowed for statistical purposes.
- Revenue’s Appeal: Dismissed.

Order Pronounced on 03rd March, 2021