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2020 (1) TMI 1135 - AT - Income TaxDisallowance u/s.14A r.w.r. 8D - non recording of satisfaction - investments held as stock in trade in respect of banks - HELD THAT - We find that on the aspect of technical issue i.e. non-recording of objective satisfaction by the ld. AO having regard to the accounts of the assessee, we find that in MAXOPP INVESTMENT LTD. 2018 (3) TMI 805 - SUPREME COURT had categorically held that in the absence of said satisfaction as contemplated in Section 14A(2) / 14A(3) of the Act read with rule 8D(1) of the rules, no disallowance u/s.14A of the Act could be made by adopting the computation mechanism provided in rule 8D(2) of the rules. Moreover, on merits, in the facts of that case, the Hon ble Apex Court in the very same decision had categorically upheld the findings recorded by State Bank of Patiala 2017 (2) TMI 125 - PUNJAB AND HARYANA HIGH COURT with regard to non-applicability of provisions of Section 14A of the Act in respect of investments held as stock in trade in respect of banks as placed reliance on the CBDT Circular No.18/2015 dated 02/11/2015 which decision had been accepted by the Hon ble Apex Court to that limited extent though the predominant purpose theory of making investments was rejected by the Hon ble Supreme Court. Hence, by respectfully following the aforesaid decision of Hon ble Supreme Court, we hold that the disallowance made u/s.14A of the Act in the instant case deserves to be deleted both on technical ground as well as on merits. Claim of loss on value of securities held as stock in trade in Held For Maturity category - HELD THAT - As decided in own case 2018 (6) TMI 520 - ITAT MUMBAI bank valued its investments at cost or market value whichever is less and the difference arising as a result of the valuation has to be allowed to the assessee as a loss. - Decided in favour of assessee. Disallowance made on account of shifting of securities from investments held under Available For Sale (AFS) to HTM category - HELD THAT - We find that as per the RBI Circular dated 01/07/2011, shifting loss incurred at the time of shifting of securities from AFS to HTM category should be debited to profit and loss account as a regular expenditure. We find that the ld. CIT(A) while allowing the additional ground of the assessee had categorically agreed that the assessee had incurred valuation loss / shifting loss to have been incurred pursuant to due compliance of RBI Circular dated 01/07/2011. While that be so, how the assessee could have violated the very same RBI Circular when it comes to enhancement of ₹ 3,43,236/- by way of reversal of shifting loss. Hence, it could be safely concluded that the ld. CIT(A) had taken a contradictory stand in his order with regard to compliance with RBI Circular. In the instant case, the depreciation of investments at the time of shifting from AFS to HTM category had been debited by the assessee as an expenditure in consonance with RBI Circular dated 01/07/2011 referred to supra. The said shifting loss is squarely allowable as deduction. But the assessee had provided the revised workings of the said loss before the ld. CIT(A) which resulted in an enhancement of ₹ 3,42,336/-. We find that the assessee had not provided any evidence before us to counter the said workings given before the ld. CIT(A) and hence we do not deem it fit to interfere in the said enhancement done by the ld. CIT(A) . However, the observations made by the ld. CIT(A) for justifying the addition is not warranted. Disallowance of non-rural bad debts written off u/s.36(1)(vii) - AO disallowed the claim of bad debt pertaining to non-rural branches - HELD THAT - As decided in own case 2018 (7) TMI 2067 - ITAT MUMBAI The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii). Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s). Addition made on account of interest accrued but not due on securities - assessee has accounted interest on securities in its books of account on accrual basis - HELD THAT - As decided in own case 2017 (10) TMI 583 - ITAT MUMBAI the said interest is not liable to tax qua the broken period. The right to receive interest on the Government securities vested in the respondent only on the due date mentioned in the securities. Consequently, interest accrued on the securities only on the due dates and cannot be said to have accrued to the respondent on any date other than the date stipulated therein. The contention that interest accrues for broken periods between two consecutive dates stipulated in the agreement/instrument for payment of interest is without any basis in law. If the respondent held the security upto 31st March, 2001 and sold the same thereafter, but before the date on which interest was payable as stipulated in the security, interest cannot be said to have accrued to the respondent. It is not disputed that in respect of the securities held by the respondent on 31st March, 2001, the due date for payment of interest thereon had not arrived on 31st March, 2001 and that the respondent sold some of such securities prior to the next due date for payment of interest. It is only the holder of the security on such date to whom interest can be said to have accrued. In any event interest did not accrue to the respondent on 31st March, 2001, as admittedly interest was not payable on that date as per the terms of the said securities. The appellate authorities, therefore, rightly deleted the addition Broken period interest paid on purchase of securities - HELD THAT - Since such securities are the stock in trade of the assessee, the broken period interest paid on acquisition is in the nature of revenue expenditure. We find that this issue is covered in favour of the assessee by the decision of Hon ble Jurisdictional High Court in assessee s own case 2018 (7) TMI 2067 - ITAT MUMBAI Applicability of provisions of Section 115JB of the Act to the assessee bank - HELD THAT - As decided in assessee s own case 2018 (7) TMI 2067 - ITAT MUMBAI In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211(1) of the Companies Act. The final accounts of the banking companies are required to he prepared in accordance with the provisions of the Banking Regulation Act. The provisions of Section 115JB cannot thus be applied to the case of a banking company.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D. 2. Claim of loss on value of securities held as 'stock in trade' in the "Held For Maturity" (HTM) category. 3. Disallowance on account of shifting of securities from "Available For Sale" (AFS) to HTM category. 4. Initiation of penalty proceedings under Section 271(1)(c). 5. Disallowance of non-rural bad debts written off under Section 36(1)(vii). 6. Addition on account of interest accrued but not due on securities. 7. Deduction of broken period interest paid on purchase of securities. 8. Applicability of Section 115JB to the assessee bank. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee claimed exempt income of ?23.99 Crores and had incurred ?13,981 Crores as interest expenses. The AO computed disallowance under Rule 8D(2) and made a total disallowance of ?72,06,46,000/-. The CIT(A) deleted the disallowance of interest under Rule 8D(2)(ii) but upheld the disallowance of administrative expenses under Rule 8D(2)(iii). The Tribunal found that the AO did not record objective satisfaction as required under Section 14A(2) / 14A(3) read with Rule 8D(1), and following the Supreme Court decision in Maxopp Investments, held that no disallowance under Section 14A could be made without such satisfaction. The Tribunal also noted that investments held as stock in trade by banks are not subject to disallowance under Section 14A, following the Supreme Court's decision in State Bank of Patiala. Hence, the disallowance under Section 14A was deleted. 2. Claim of Loss on Value of Securities Held as 'Stock in Trade' in HTM Category: The assessee valued investments held in HTM category at the lower of cost or market price as per RBI guidelines and claimed a loss. The AO and CIT(A) disallowed the loss, but the Tribunal, following its earlier decision in the assessee's own case, allowed the claim, noting that the method of valuing investments at cost or market value, whichever is lower, is consistent with accounting principles and supported by judicial precedents. 3. Disallowance on Account of Shifting of Securities from AFS to HTM Category: The assessee claimed a loss of ?159,74,79,854/- on shifting securities from AFS to HTM category as per RBI guidelines. The CIT(A) allowed the claim but enhanced the assessment by ?3,43,236/-. The Tribunal upheld the claim for shifting loss but removed the remarks made by the CIT(A) justifying the enhancement, finding them unwarranted. 4. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal deemed the issue of initiation of penalty proceedings premature for adjudication at this stage. 5. Disallowance of Non-Rural Bad Debts Written Off under Section 36(1)(vii): The AO disallowed the claim of ?181,30,17,950/- for non-rural bad debts written off. The CIT(A) deleted the disallowance, relying on the Supreme Court's decision in Catholic Syrian Bank. The Tribunal upheld the CIT(A)'s decision, following its earlier rulings in the assessee's own case. 6. Addition on Account of Interest Accrued but Not Due on Securities: The AO added ?165,71,10,117/- as interest accrued but not due. The CIT(A) deleted the addition, following tribunal orders in the assessee's own case for earlier years. The Tribunal upheld the CIT(A)'s decision, noting that interest on securities accrues only on due dates and not on a day-to-day basis. 7. Deduction of Broken Period Interest Paid on Purchase of Securities: The assessee claimed ?669,75,70,585/- as broken period interest paid on purchase of securities. The AO disallowed it, but the CIT(A) allowed the claim. The Tribunal upheld the CIT(A)'s decision, following the jurisdictional High Court's ruling in the assessee's own case that broken period interest is allowable as revenue expenditure. 8. Applicability of Section 115JB to the Assessee Bank: The AO applied Section 115JB to the assessee, but the CIT(A) held it inapplicable. The Tribunal upheld the CIT(A)'s decision, following its earlier ruling that MAT provisions do not apply to banking companies, as they prepare accounts under the Banking Regulation Act, not Schedule VI of the Companies Act. Conclusion: The Tribunal allowed the assessee's appeal in part and dismissed the revenue's appeal, providing detailed reasons and following judicial precedents to resolve each issue.
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