2021 (11) TMI 40 - AT - Income Tax

Disallowance u/s.14A r.w.r. 8D - investment was made out of own surplus fund - HELD THAT - As decided in SOUTH INDIAN BANK LTD. VERSUS COMMISSIONER OF INCOME TAX 2021 (9) TMI 566 - SUPREME COURT proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessee. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel 2011 (7) TMI 275 - SC ORDER to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. - Decided in favour of assessee. Disallowance of amortization of premium paid at the time of purchase of securities over the remaining period of securities - HELD THAT - As decided in THE CHANASMA NAGRIK SAHAKARI BANK LTD. AND VICE-VERSA 2017 (10) TMI 478 - ITAT AHMEDABAD at the aforesaid amount represents the excess of acquisition cost over the face value of Government securities taken under HTM category. We find that the issue is squarely covered in favour of assessee by the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Rajkot Dist. Co-op Bank Ltd.. 2014 (3) TMI 110 - GUJARAT HIGH COURT - reliance upon the CBDT Circular No. 17 of 2008 and held that loss on account of premium paid on the face value of the security is required to be amortized for the remaining period of maturity - claim of the assessee towards amortization of security premium requires to be accepted. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act
2. Disallowance of amortization of premium paid at the time of purchase of securities

Issue 1: Disallowance of expenses under section 14A of the Income Tax Act:
The appeal was filed against the order of Ld. CIT(A) regarding disallowance under section 14A of the Act. The Assessing Officer made additions for disallowance of expenses amounting to &8377; 97,84,459 under section 14A, which was sustained by Ld. CIT(A). However, the Tribunal found in favor of the assessee. The Tribunal noted that the investment in shares and securities by a banking company is a regular business activity, and if made out of own surplus funds, disallowance of interest expenditure is not warranted. Referring to judgments, including one by the Hon'ble Supreme Court, the Tribunal directed the Assessing Officer to delete the addition of the disallowed expenses.

Issue 2: Disallowance of amortization of premium paid at the time of purchase of securities:
The appeal contested the disallowance of &8377; 62,06,818 confirmed in respect of amortization of premium paid at the time of purchase of securities. The assessee, a banking company, argued that the premium spread over the period of holding is a revenue expenditure and allowable. The Tribunal referred to a Co-ordinate Bench decision and held that the claim towards amortization of security premium should be accepted. Consequently, the Tribunal directed the Assessing Officer to delete the addition in this regard.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the deletion of the disallowed expenses under section 14A and the amortization of premium paid at the time of purchase of securities. The decision was pronounced on 25th October, 2021, after a Virtual Hearing attended by both parties.