1989 (12) TMI 80 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of interest on sticky loans.
2. Disallowance of interest on purchase of securities.
3. Availability and quantification of weighted deduction under Section 35B.
4. Depreciation in the value of investments.

Issue-wise Detailed Analysis:

1. Accrual of Interest on Sticky Loans:
The first ground of appeal by the Department challenges the CIT(A)'s decision that interest need not be accounted for on an accrued basis for sticky loans. The assessee, a nationalized bank, follows a mercantile system of accounting but did not account for interest on doubtful loans. The Assessing Officer estimated an interest accrual of Rs. 50 lakhs on such loans and added this amount to the assessee's income. The CIT(A) deleted this addition, noting that the bank's practice of not charging interest on sticky loans was consistent and under strict scrutiny by the Reserve Bank of India. The Department relied on the Supreme Court decision in State Bank of Travancore vs. CIT, but the Tribunal distinguished this case, emphasizing that the interest on sticky loans was not accounted for in any manner in the assessee's books. The Tribunal upheld the CIT(A)'s decision, rejecting the Department's appeal.

2. Disallowance of Interest on Purchase of Securities:
The second ground of appeal pertains to the disallowance of Rs. 92,17,225, representing the difference between interest paid on the purchase of securities and interest received on their sale. The Assessing Officer treated the interest paid for the broken period as a capital expenditure. The CIT(A) upheld the assessee's claim, citing the ITAT decision in the case of American Express. The Tribunal found that the ITAT's Special Bench had ruled in favor of the assessee in similar cases, treating such interest as a revenue expenditure. Consequently, the Tribunal upheld the CIT(A)'s decision and rejected the Department's appeal.

3. Availability and Quantification of Weighted Deduction under Section 35B:
The third ground of appeal involves the availability and quantification of weighted deduction under Section 35B. The Assessing Officer had rejected the assessee's claim for export market development allowance, despite the Tribunal's favorable decisions in earlier years. The CIT(A) accepted the assessee's claim in principle but directed the Assessing Officer to quantify the allowance. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's claim had been consistently accepted in previous years. However, the Tribunal restored the matter of quantification to the Assessing Officer, directing him to ascertain which items of expenditure qualified for relief under Section 35B.

4. Depreciation in the Value of Investments:
The fourth ground of appeal concerns the disallowance of Rs. 11,82,35,007 claimed by the assessee as depreciation in the value of investments. The Assessing Officer added this amount back, while the CIT(A) allowed the claim, noting that such depreciation had always been allowed in the past. The Department argued that the securities were not stock-in-trade and should not be valued at market price. The assessee contended that the securities were held as business assets and relied on various court decisions supporting the practice of valuing closing stock at cost or market price, whichever is lower. The Tribunal upheld the CIT(A)'s decision, emphasizing that the securities were treated as stock-in-trade and the Department had not challenged this practice in previous years.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on all grounds, rejecting the Department's appeals. The appeal was treated as partly allowed for statistical purposes due to the modification and elaboration of directions regarding the weighted deduction under Section 35B.