2016 (6) TMI 1031 - HC - Income Tax

Amortization of premium on investment - Held that - If the income of the assessee is deductible under section 80P, then whether the income has been reduced by the amortization or not becomes only a question of academic interest which does not involve any effect on the Revenue. There has been no loss of revenue. In such a case, insisting upon refusing to allow the amortization would result in insisting upon following a practice, contrary to the circular issued by the Reserve Bank of India which is not desirable. For the aforesaid reasons, we are of the opinion that the amortization may be permitted so long as the deduction is available to the assessee under section 80P. The question formulated at the time of admission of the appeal, is as follows Whether the Income-tax Appellate Tribunal has substantially erred in law in holding that the amortization of premium on investment of ₹ 5,60,614/- is capital expenditure ? The question is already answered by our discussion made above in favour of the assessee.

Summary

Issues Involved:
1. Interpretation of Section 80P(2)(a)(i) regarding deduction for amortization of investment.
2. Permissibility of amortization under RBI circular and its impact on net profit.
3. Justification for allowing amortization under Section 80P.

Interpretation of Section 80P(2)(a)(i):
The case involved a cooperative bank amortizing the differential amount between face value and market value of securities based on an RBI circular. The Tribunal and CIT(A) held that such amortization was impermissible under Section 80P(2)(a)(i) as it pertains to income from banking or credit facilities, not investment write-offs. The Tribunal emphasized that no provision allowed deduction for investment write-offs, sustaining the CIT(A)'s decision. The court acknowledged the correctness of this legal stance but noted that reducing net profit through amortization did not impact revenue if income was deductible under Section 80P.

Permissibility of Amortization under RBI Circular:
The court recognized that while the Tribunal's view was legally sound, it failed to consider that amortization merely reduced net profit without affecting revenue. Emphasizing that Section 80P allowed deductions for cooperative societies' income from banking, the court justified permitting amortization as long as the deduction was available under Section 80P. Refusing to allow amortization would contradict the RBI circular, leading to an unnecessary practice contrary to regulatory guidelines.

Justification for Allowing Amortization under Section 80P:
The court addressed the formulated question regarding whether amortization of investment premium constituted capital expenditure. By affirming in favor of the assessee, the court concluded that amortization was permissible under Section 80P. The judgment favored the assessee's position, allowing the amortization of the premium on investment. Consequently, the appeal was disposed of in favor of the assessee, endorsing the permissibility of amortization within the framework of Section 80P.