2022 (9) TMI 448 - AT - Income Tax

Disallowance of depreciation claimed on securities - assessee had claimed depreciation on conversion of securities classified as Held to Maturity (HTM) to those classified as Available for Sale (AFS) - Claim disallowed by the A.O. primarily for the reason that the HTM securities were capital assets and the loss therefore was capital in nature and there was no specific provisions under the Income Tax Act allowing such loss in the case of the assessee - HELD THAT - Having considered the regulatory framework in which the assessee cooperative Bank operates and the position of law with regard to the treatment of their activity of dealing in securities as above, we shall now deal with the facts of the present case in the above background. In the present case the assessee has converted HTM securities to AFS securities which has resulted in depreciation of their value - Clearly this conversion and its valuation is in accordance with the Guidelines issued by the RBI as reproduced above for cooperative Banks. The said guidelines also require full provision to be made for the depreciation so effected. The said valuation is approved by the ICDS issued under the Act which though applicable from AY 2017-18 is still reflective of the position of the Department/Revenue in this regard. The activity of investments by Banks being accepted by the Revenue as its Business activity and the claim of the assessee to depreciation in value on conversion of HTM securities to AFS securities, being in accordance with RBI guidelines in this regard and even the Accounting Standards recommended under the Act, the Ld.CIT(A) we hold ,has rightly held the said claim to be allowable for the purposes of computing its business income. No reason to interfere in the order of the Ld. CIT(A) allowing the claim of depreciation - Ground no. 1 raised by the Revenue is dismissed. Accrual of income - addition on account of accrued interest on NPA account as income - CIT-A deleted the addition - HELD THAT - We find that the assessee has proved with necessary documents that the outstanding interest on bad and doubtful advances pertained to advances given to of Moviya Seva Sahakari Mandali Ltd. and also that the entire interest pertained to the period up to 30th June, 2006 accounted for as interest income of the assessee bank till them and that subsequently no interest income on this account was being accounted for on accrual basis. That it was against the outstanding interest accrued that the assessee had received an amount during the year on the recommendations of the Vaidyanathan Committee. Thus, we find that the assessee had adequately established that the interest received during the year as pertained to interest of those years when the assessee was accounting for the interest on accrual basis. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of claim of depreciation on securities.
2. Addition of interest on Non-Performing Assets (NPA).

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Depreciation on Securities:

The Revenue appealed against the deletion of the disallowance of depreciation claimed on securities amounting to Rs. 9,07,85,000/-. The assessee, a cooperative society engaged in banking, had claimed depreciation on securities converted from Held to Maturity (HTM) to Available for Sale (AFS). The Assessing Officer (AO) disallowed this claim, considering HTM securities as capital assets and the loss as capital in nature, with no specific provisions under the Income Tax Act allowing such loss.

The assessee argued that dealing in securities is part of banking business as per Section 6(1)(a) of the Banking Regulation Act. According to RBI Circular No. RBI/2009-10/79, these securities must be categorized and valued as prescribed, and depreciation on transfer should be fully provided. The Income Computation and Disclosure Standard (ICDS) VIII, applicable from A.Y. 2017-18, also mandates valuation of securities as per RBI guidelines.

The assessee cited the Supreme Court's decision in CIT vs. Nawanshahar Central Cooperative Bank Ltd., which held that investments by banking concerns are part of the business of banking, and income from such investments falls under "Profits and Gains of Business." The CBDT Circular No. 18/2015 supports this view. Additionally, the Supreme Court in United Commercial Bank vs. CIT ruled that consistent valuation methods for stock in trade, even if different for tax and balance sheet purposes, should be accepted.

The CIT(A) found merit in the assessee's contention and allowed the depreciation claim, noting that the conversion and valuation were in line with RBI guidelines and ICDS. The Tribunal upheld this decision, stating that the Revenue accepted the banking activity of investments as business activity and the claim of depreciation was in accordance with RBI guidelines and accounting standards.

2. Addition of Interest on NPA:

The Revenue also appealed against the deletion of the addition of Rs. 29,11,000/- on account of accrued interest on NPA. The AO added this amount, arguing that the assessee failed to prove it was taxed on an accrual basis in earlier years. The assessee contended that the interest pertained to an advance given to Moviya Seva Sahakari Mandali Ltd., classified as NPA since 1992, and was taxed on an accrual basis until 31/03/2006. Post-2006, interest was accounted for on a receipt basis per RBI norms.

The assessee provided ledger accounts and a letter from NABARD confirming the receipt of Rs. 29,11,000/- during the year on the recommendations of the Vaidyanathan Committee for Revival of Credit Cooperatives. The CIT(A) found that the interest received during the year pertained to periods when it was taxed on an accrual basis and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, confirming that the assessee had adequately established that the interest received was from periods when it was accounted for on an accrual basis.

Conclusion:

The appeal filed by the Revenue was dismissed, upholding the CIT(A)'s order allowing the claim of depreciation on securities and deleting the addition of interest on NPA. The Tribunal found no infirmity in the CIT(A)'s decisions, which were based on established facts and legal positions.