2020 (12) TMI 529 - HC - Income Tax

Depreciation on valuation of investment portfolio - tribunal allowed claim by treating the investments held by the assessee bank as stock-in-trade once the RBI Master Circular read with CBDT Circular No.665 came into force - Exemption u/s 14A - HELD THAT - Substantial questions of law involved in this appeal have been answered in favour of the assessee by division bench decision of this court in 'KARANTAKA BANK LTD. 2013 (7) TMI 656 - KARNATAKA HIGH COURT decision of the Supreme Court in 'MAXOPP INVESTMENT LTD. 2018 (3) TMI 805 - SUPREME COURT and judgment 2020 (1) TMI 1141 - KARNATAKA HIGH COURT respectively. The aforesaid assertion made by learned counsel for the assessee could not be disputed by learned counsel for the revenue. For the reasons assigned in the aforesaid judgments, the first and second substantial questions of law are answered against the revenue and in favour of the assessee. TDS u/s 194H - payment made towards the service charges rendered by M/s. NFS - HELD THAT - In case the credit card issued by the assessee was used on the swiping machine of another bank, the customer whose credit card was used got access to internet gateway of acquiring bank resulting in realization of the payment. Subsequently, the acquiring bank realize and recover the payment from the bank, which had issued the credit card. The relationship between the assessee and any other bank is not of an agency but that of two independent basis on principal- principal basis. Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, then also it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it. It does not act as an agent for collecting charges. Therefore, we concur with the view taken by the High court of Delhi in JDS APPARELS 2014 (11) TMI 732 - DELHI HIGH COURT and hold that provisions of Section 194H of the Act are not attracted to the fact situation of the case. - Decided in favour of assessee.

Summary

Issues:
1. Depreciation on valuation of investment portfolio.
2. Expenditure relating to earning of exempted income.
3. Payment made towards service charges rendered by M/s. NFS.

Depreciation on valuation of investment portfolio:
The appeal under Section 260A of the Income Tax Act, 1961 was filed by the revenue regarding the allowance of depreciation on the valuation of the investment portfolio held by the assessee bank. The substantial question of law was whether the tribunal was correct in allowing the depreciation by treating the investments as stock-in-trade. The Assessing Officer had made an addition on account of depreciation on the investment portfolio, which was challenged by the assessee. The Commissioner of Income Tax (Appeals) partly allowed the appeal, and the Income Tax Appellate Tribunal dismissed the revenue's appeal. The High Court referred to previous judgments supporting the assessee's position and ruled in favor of the assessee on this issue.

Expenditure relating to earning of exempted income:
Another issue in the case was the disallowance of expenses related to earning exempted income under Section 14A(1) of the Income Tax Act read with Rule 8D. The Assessing Officer had made various disallowances including under Section 14A(1), which was challenged by the assessee. The Commissioner of Income Tax (Appeals) partly allowed the appeal, and the tribunal dismissed the revenue's appeal. The High Court referenced previous judgments and ruled in favor of the assessee on this issue as well.

Payment made towards service charges rendered by M/s. NFS:
The third substantial question of law involved in the case was whether the payment made towards service charges rendered by M/s. NFS attracted TDS under Section 194H of the Income Tax Act. The revenue argued that the provisions of Section 194H applied to the case of the assessee as a third party was collecting charges. However, the assessee contended that the relationship was not on an agency basis but on a principal-principal basis. The High Court analyzed the provisions of Section 194H and the factual matrix of the case. It was concluded that the provisions of Section 194H were not attracted to the case, and the third substantial question of law was answered against the revenue and in favor of the assessee.

In conclusion, the High Court ruled in favor of the assessee on all three substantial questions of law raised in the appeal. The appeal was dismissed, and the court found no merit in the revenue's arguments.