2015 (8) TMI 836 - AT - Income Tax

Disallowance u/s 14A - CIT(A) deleted the addition - Held that - In assessee s own case for preceding AY, the Tribunal has held that before introduction of Rule 8D, disallowance u/s 14A of the Act has to be made at a reasonable rate. In this context, Tribunal in assessee s own case has held that expenditure incurred towards two months salary for officers and staff in investment division could be considered as disallowance to be made u/s 14A of the Act. As it appears, assessee in terms with the aforesaid direction of Tribunal has disallowed expenditure of ₹ 7,03,500 u/s 14A of the Act. In the aforesaid view of the matter, we do not find any infirmity in the order of ld. CIT(A) in deleting addition made by AO. - Decided against revenue. Disallowance of deduction claimed u/s 36(1)(viia) - Held that - AR fairly conceded that the decision of ld. CIT(A) to restrict the deduction claimed u/s 36(1)(viia) to the extent of provision actually made in the books of account is fair and reasonable. Considering such submissions of ld. AR, we uphold the order of ld. CIT(A) on this issue and dismiss the ground raised. Disallowance of provision for NPAs claimed as deduction u/s 36(1)(vii) - Held that - wWhen the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to non-rural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT 2014 (5) TMI 929 . Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of ₹ 209.94 crore representing actual write off in the books of account of bad debts relating to non-rural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A). - Decided in favour of assessee. Depreciation relating to Held to Maturity (HTM) investments - Held that - On perusal of materials on record, we find that this particular issue has been subject matter of dispute from AY 2003-04 onwards. In AY 2003-04, ITAT while deciding the issue in dispute allowed assessee s claim of depreciation on HTM securities by holding that they are in the nature of stock-in- trade. Also coordinate bench in its latest order passed for AY 2009-10 2013 (12) TMI 70 - ITAT HYDERABAD to hold Main business of the banking company being to accept deposits to advance loans to appropriate persons, money constitutes its stock in trade - The amount required to kept in India as per section 24 of the Banking Regulation Act, 1949 in the form of cash, gold and unencumbered securities is part of stock in trade of the assessee - When there is no distinction between the three categories of securities viz.,HTM, AFS and HFT. The assessee can provide for depreciation in all the securities on the same footing - Decided in favour of assessee. Addition made on account of broken period interest - CIT(A) deleted the addition - Held that - The issue is covered by the decision of ITAT in assessee s own case 2013 (12) TMI 70 - ITAT HYDERABAD wherein held the bank purchased government securities paid towards interest in respect of securities purchased for the broken period from the preceding due date for payment of interest upto the date of purchase - Broken period from the preceding due date for payment of interest upto the date of the sale. The assessee claimed the amount of interest paid for the broken period upto the date of purchase as deduction on the ground that the securities were held stock in trade - The broken period interest is an allowable deduction - Decided against Revenue. Disallowance u/s 14A - CIT(A) deleted addition - Held that - No disallowance u/s 14A can be made as assessee s investments in shares is as per the business needs of assessee, hence, earning of exempt income is incidental to assessee s business. As stated earlier, security held as HTM//AFS/HFT are in the nature of stock-in-trade of assessee. Moreover, holding of such securities is ancillary and incidental to assessee s business. In the aforesaid view of the matter, shares/securities held by assessee cannot be treated as investment so as to attract provisions of section 14A. In the aforesaid view of the matter, we find no infirmity in the order of CIT(A) in deleting the addition made by AO. Accordingly, we uphold the same by dismissing ground raised by department.- Decided against Revenue.

Summary

Issues Involved:
1. Deletion of addition made u/s 14A of the Act by AO for AY 2007-08.
2. Disallowance of deduction claimed u/s 36(1)(viia) for AY 2012-13.
3. Disallowance of deduction claimed u/s 36(1)(vii) for AY 2012-13.
4. Disallowance of depreciation relating to Held to Maturity (HTM) investments for AY 2012-13.
5. Disallowance of broken period interest for AY 2012-13.
6. Disallowance u/s 14A of the Act for AY 2012-13.
7. Allowance of deduction u/s 36(1)(viia) for provision made for bad and doubtful debts for AY 2012-13.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made u/s 14A of the Act by AO for AY 2007-08:
The solitary issue raised by the revenue was the deletion by CIT(A) of the addition made u/s 14A by AO. The assessee, a banking company, had its assessment originally completed u/s 143(3) with a disallowance of Rs. 5,83,68,430 u/s 14A. The CIT(A) directed AO to disallow the expenditure in terms with Rule 8D, but ITAT held Rule 8D was inapplicable for the impugned AY and directed AO to estimate the disallowance reasonably. AO, following ITAT's direction, quantified the disallowance at Rs. 5,83,68,430. CIT(A) deleted the addition, relying on the decision in CCI Ltd Vs. JCIT, holding that no disallowance u/s 14A was warranted other than what the appellant had already made. ITAT upheld CIT(A)'s decision, dismissing the revenue's appeal.

2. Disallowance of Deduction Claimed u/s 36(1)(viia) for AY 2012-13:
The assessee challenged the disallowance of deduction claimed u/s 36(1)(viia) for Rs. 43,95,77,953. AO observed that the assessee claimed a total deduction of Rs. 660,50,77,954 towards provision for bad and doubtful debts, which included Rs. 209,07,50,831 for bad debts written off u/s 36(1)(vii). AO restricted the deduction u/s 36(1)(viia) to Rs. 19.98 crores, the amount actually provided for rural debts, and disallowed the balance. CIT(A) upheld AO's decision, restricting the deduction to the provision made in the books. ITAT upheld CIT(A)'s decision, dismissing the ground raised by the assessee.

3. Disallowance of Deduction Claimed u/s 36(1)(vii) for AY 2012-13:
The assessee claimed a deduction of Rs. 209,07,50,831 u/s 36(1)(vii) for bad debts written off. AO disallowed the claim, holding that the proviso to section 36(1)(vii) would apply. CIT(A) upheld AO's decision. ITAT, however, held that the proviso to section 36(1)(vii) applies only to rural advances and not non-rural advances. ITAT deleted the addition made by AO and confirmed by CIT(A), allowing the assessee's appeal.

4. Disallowance of Depreciation Relating to HTM Investments for AY 2012-13:
AO disallowed the claim of Rs. 249,92,95,750 on HTM securities, treating them as non-stock-in-trade. CIT(A) deleted the addition, following ITAT's decision in the assessee's own case for AY 2003-04 and the Hon'ble AP High Court's decision. ITAT upheld CIT(A)'s decision, dismissing the revenue's appeal.

5. Disallowance of Broken Period Interest for AY 2012-13:
AO disallowed Rs. 263,58,94,093 claimed as broken period interest, treating it as capital expenditure. CIT(A) deleted the addition, following ITAT's decision in the assessee's own case for AY 2007-08. ITAT upheld CIT(A)'s decision, dismissing the revenue's appeal.

6. Disallowance u/s 14A of the Act for AY 2012-13:
AO disallowed Rs. 3,94,73,056 u/s 14A, applying a rate of 77.26% to the exempt income. CIT(A) deleted the addition, holding that no disallowance u/s 14A can be made other than what the assessee had already made. ITAT upheld CIT(A)'s decision, dismissing the revenue's appeal.

7. Allowance of Deduction u/s 36(1)(viia) for Provision Made for Bad and Doubtful Debts for AY 2012-13:
AO restricted the deduction u/s 36(1)(viia) to Rs. 19.98 crores, the amount actually provided for rural debts. CIT(A) allowed the deduction to the extent of Rs. 616.55 crores, the provision actually made in the books. ITAT upheld CIT(A)'s decision, dismissing the revenue's appeal.