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TMI Blog2019 (1) TMI 689X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Years between 2006-07 to 2010-11 the assessee bank filed their returns of income and while framing the assessment, Ld. Assessing Officer made certain additions. In the 1st appeal preferred by the assessee in respect of all these years, Ld. CIT(A) deleted certain additions and sustained certain additions. Aggrieved by the findings where the additions were sustained by the Ld. CIT(A), assessee preferred ITA Nos.4253 & 2236/Del/2011, ITA Nos. 1788 & 4722/Del/2012, ITA Nos.2406/Del/2013 & 2469/Del/2014 and whereas challenging the deletion of the additions, revenue preferred ITA No.2469/Del/2011, ITA No. 4718/Del/2012, ITA No.2966/Del/2013. We shall proceed to deal with the issues involved in each of these appeals hereunder. Asstt. Year 2007-08 (ITA 2236/2011 and ITA 2469/Del/2011) 3. In respect of this AY, assessee preferred ITA 2236/Del/2011 and revenue preferred ITA 2469/Del/2011. There are four grounds of appeal in 2236 /Del/2011 and nine grounds in ITA No. 2469 /Del/ 2011. Grounds number 1 and 4 in ITA 2236 /Del/ 2011 and Ground number 9 in ITA 2469 /Del/2011 are general in nature and do not require any adjudication. While other grounds are dealt with separately appeal wise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment Ltd vs. CIT (2018) 402 ITR 640 (SC), holding of the investment becomes a business activity of the assessee as a business proposition and whether the dividend is earned or not becomes immaterial. He further brought to our notice the observations of the Hon'ble Apex Court to the effect that in case where the bank holds the securities or shares as stock in trade it would be a quirk of fate that when the investee company declared a dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. He, therefore, submits that inasmuch as the Hon'ble Apex Court made a clear distinction between the proposition laid down in the case of Maxopp investments Ltd vs. CIT (2011) 15 taxman.com 390 (Delhi) and the proposition laid down in the case of PCIT vs. State Bank of Patiala (2017) 78 taxmann.com 3. He submitted that though the Hon'ble Apex Court rejected the theory of dominant intention, did not laid down the proposition that irrespective of the fact whether or not the shares held by the bank are stock in trade, every investment made by the bank would trigger the applicability tea of section 14 A of the Act bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any or as "stock in trade", though incidentally income is also generated in the form of dividends as well. 9. It was argued before the Hon'ble Apex Court that though incidentally income was also generated in the form of dividends, the dominant intention for purchasing the shares was not to earn the dividend income but to acquire and retain the controlling business in the company in which shares were invested, or for the purpose of trading in the shares as business activity. After considering the entire case law on this aspect in the light of the peculiar facts involved in both the matters, the Hon'ble Apex Court vide paragraph No. 39 and 40 held as follows:- 39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 10. It is, therefore, clear from the above observations of the Hon'ble Apex Court that depending upon the facts of each case, the expenditure incurred in acquiring the shares will have to be apportioned. Hon'ble Apex Court held that the Tribunal and the Hon'ble High Court of Punjab and Haryana arrived at a correct conclusion by setting aside the disallowance under section 14A of the Act in respect of the dividend earned on the shares held as stock in trade, because such shares were held during the business activity of the assessee and it is only by a quirk of fate that when the investee company declared dividend, those shares were held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. 11. Hon'ble Apex Court made clear distinction of this case from the case of Maxopp investment Ltd where the assessee knew that whenever dividend would be declared by the investee company such dividend would necessarily be earned by the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferred from old block account in profit and loss account" and submitted that it has been following a credit or generating system in respect of inter-branch transactions wherein credit entries are generated first, which can be set off only by a corresponding debit entry and the said credit entries depict basically a credit to the concerned branch for debit to be discharged by such branch later. It was further submitted that the entry making office as well as the branch to which the credit is given are both the part of the same legal entity and the credit surplus relates to entries, in respect of monies deposited in one branch for issuing drafts payable in another branch of the bank and which are not matched by the debit entries from the other branch. 15. Ld. AO treated the amount transferred as income in its profit and loss account as miscellaneous income, whereas the assessee bank treated them as income in its profit and loss account and appropriated to its general reserve, but this appropriation is below the line, as such, the assessee had initially treated the amount as its income, but latter reduced it from its computation of income. It has been the augment on behalf of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of whom should be outside the branch concerned, preferably from the controlling/head office if the amount exceeds Rupees One Lakh. In pursuance of the above directions contained in the Circular dated 28th February, 1991 and 27th July, 1998, the assessee bank has undertaken its exercise as is clear from its letter dated 19th December, 2003 to the Reserve Bank of India. The assessee has explained the balance outstanding and movement therein year-wise in the blocked accounts as is clear from the letter extracted earlier. While seeking permission to transfer the amount lying in the blocked account, the legal opinion and the opinion of the Chartered Accountant were obtained including the opinion of Shri Kanwarjit Singh, retired Commissioner of Income Tax on the subject issue. Based on the above opinions, the audit committee of the Board and the Board of Directors of the bank sought approval of the Reserve Bank of India for transfer of `387.07 crores lying in the blocked account to the general account and retaining the amount of `25 crores in the blocked account to be utilized for further claims. The Reserve Bank of India permitted the transfer of `387.07 crores to general reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emains the same that it has no character of income in any of these transactions either when the transaction arose for the first time or was dealt with by the different branches. It is difficult to say that these unreconciled inter branch transactions should be automatically be treated as income of the bank arising in the course of its business Activity. It is nobody's case that these transactions arose out of revenue transactions of any of the branches involved. These are mainly inter branch transactions which remained unreconciled. In a way as the bank has pleaded, it is a transaction of its own money with different branches. The Reserve Bank of India, while giving permission to close these inter branch differences, has clearly stipulated that the amount so transferred shall not be treated as available for distribution of dividends, meaning thereby the Reserve Bank of India has not permitted the bank to treat it as an income once and for all and it has always stipulated certain conditions and prescribed certain procedures and formalities to safeguard the interest of the bank as a whole but that does not take away the basic nature of the amounts in question. It cannot in any wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire transaction, in our view, appears to be pure accounting lapses on the part of the bank or its branches to properly reconcile the transactions. In fact, it is always understood that all these accounts must have cancelled each other. It did not take place that way due to human errors or lack of advice forthcoming as regards the closure of the accounts. In any case, any imbalance in the inter branch accounts, in our considered view, cannot give rise to a taxable income under the Income-tax Act. The Assessing Officer as well as CIT-DR has heavily relied upon the decision of the Hon'ble Supreme Court in the case of T.V.Sundaram Iyengar & Sons Ltd. - 222 ITR 344. In that case, the assessee received the deposits from customers in the course of its business and transferred the amounts which were not claimed by the customers to its profit & loss account. The Assessing Officer was of the view that the sums in question have become the income of the assessee because of the expiry of limitation period or other statutory or contractual rights. The amounts had the character of income and therefore, assessable to tax. The Hon'ble Supreme Court held that although the amounts received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of CIT Vs. Rajasthan Golden Transport Co.(P) Ltd. - 249 ITR 723 are applicable to the facts of the case. In fact, the Hon'ble Delhi High Court in the case of Rajasthan Golden Transport Co.(P) Ltd. (supra) was concerned with the amounts received in the course of trade transactions. In the decision of the Hon'ble Delhi High Court, the amounts in question were held to be taxable under Section 41(1) of the Act. As regards the applicability of Section 41(1), we may again state that such provisions of Section 41(1) cannot be invoked to bring these amounts in question to be taxed as a part of the receipt in the aforesaid provision. The Revenue has to first establish that the sum in question which is now being brought to tax has once been allowed in the past as a deduction while computing the income of the bank. It is not the case of the Revenue or at least the Revenue has not brought any material to show that the sum in question forming part of the so-called inter branch transactions were once allowed by the Revenue as a deduction in the computation of profits and gains of business. When that primary requirement is absent, the question of bringing the sums in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amortization of the premium could not be treated as provision for ascertained liability. 23. Ld. CIT(A) considered this issue in the light of the precedent in assessee's own case and also in the case of CIT vs. Nedungadi bank Ltd (2003) 264 ITR 545 (Kerela), and while following the same, observed that the amortization, which is as good as depreciation, merits the same treatment which is applicable to depreciation and thereby Ld. CIT(A) held the issue in favour of the assessee. 24. It is the submission of Ld. AR that the issue in question has squarely been covered by the orders of a coordinate bench of this Tribunal in assessee's own case in Assessment Year 2006-07 in ITA No.4241/Del/2010 dated 16/03/2018. 25. Per contra, it is the argument of Ld. DR that during the course of assessment proceedings, the assessee had given the submission that the they have been claiming the amortization of premium of HTM securities in the light of the RBI guidelines and master circular; that the assessing officer did not accept the claim of the assessee as securities were purchased from market at market value and the investment was shown at a lower price by writing off the premium paid which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quite for a long time. We, therefore, respectfully following the decisions above find that there is no reason to interfere with the findings of the Ld. CIT(A) on this aspect and the same needs to be upheld. We therefore do not find any merits in the appeal of the revenue on this ground and the same is accordingly dismissed. Gr. No.2 Depreciation on investment held in AFS and HFT categories 28. Learned assessing officer found that the assessee had claimed deduction of Rs. 288,11,30,000/- on account of depreciation on investment on account of valuation of securities under the category held for trading (HFT) and available for sale (AFS). Assessee banked upon the RBI guidelines and submitted that the investment portfolio of the banks is required to be classified under 3 categories, namely, held to maturity (HTM), held for trading (HFT) and available for sale (AFS); that in the investments classified under HTM category need not be market to market and are carried at an acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity; that in case of HFT and AFS, the depreciation/appreciation is to be aggre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the securities and stock in trade and claimed deduction of loss on the valuation of securities at the year-end on the basis of cost or market price, whichever is lower and confirmed by the orders of the 1st appellate authority. It is the submission of the Ld. DR that in the present appeal the fact is that the revenue is challenging the deduction on the ground that the assessee on one hand is taking benefit of deduction on diminution of the value of securities in the closing stock and on the other hand not carrying forward the impact of this claim of diminution on the value of securities in the opening stock. Ld. DR placed reliance on the decision of the Hon'ble Apex Court in the case of Southern technologies Vs. ACIT [2010] 187 Taxman 346 (SC). 32. We have perused the record and the case law relied upon by both the sides. It is an admitted fact that the assessee being a Nationalized Bank is governed by the Banking Regulation Act, 1949; that they are following mercantile system of accounting both for book keeping purpose as well as for tax purposes; that they have been valuing the stock-in-trade (investments) "at cost" in the balance sheet whereas for the same period of time the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively. 35. On a careful consideration of the matter, we are of the considered opinion that it's not the case of the Ld. assessing officer that in this particular year in respect of any particular security such a thing had happened. It's not the case of the Ld. assessing officer that with reference to any particular scrip there was depreciation claimed in the earlier years, the loss was claimed as deduction but without showing the reduced value of the scrip as the opening value of the stock and thereby on the sale of the scrip the cost price but not the reduced price was taken as the cost of acquisition and thereby any less amount was offered to tax. The entire edifice of the case of revenue is based on the theoretical suspicion of the Ld. assessing officer that inasmuch as the assessee has not been showing in the balance sheet not the reduced value of the scrip but the cost price of the scrip as the value of the scrip, when the securities were sold it is the cost price of the scrip but not the reduced value of the scrip that was taken to estimate the profits and as a consequence of which the less amount has been offered to tax. It is a verifiable fact with reference to the sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso sold before maturity, and therefore they would not enjoy the special status in the books of accounts of the assessee as emphasized by the RBI guidelines; that the chain of securities from one category to another category does not amount to any financial transaction and so the loss claimed is not an allowable expenditure; that the assessee had tried to club such loss with a loss on actual sale of HTM securities which is not correct since there is only a notional loss; and therefore the shifting of the securities from one category to another category under RBI guidelines should not call for any variation in profit under the provisions of the Act inasmuch as the nature and character of the security remains the same being stock in trade. 40. It is the submission of the Ld. AR that this question is now fully covered by the decision of a coordinate bench of this Tribunal in assessee's own case for the Assessment Year 2005-06 in ITA No.2873/Del/07 dated 25 October 2011 and Assessment Year 2006-07 in ITA number 4241/Del/2010 dated 16 March 2018. 41. Per contra, it is the argument of Ld. DR that the facts involved in this case for this year are entirely different from the facts involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry was allowable deduction. 44. It is not the case of the revenue that the facts of this case are not similar to the facts of the case for any earlier years. It shall be kept in mind that the bank will never hold the assets merely for dividends or further appreciation of the value of the asset and all the three types of assets namely, held to maturity, available for sale and held for trading of the investments to maintain the statutory liquidity requirement. We therefore do not find any difference of facts on this score and hold that the decision of the Bangalore Tribunal in the case of State Bank of Mysore (supra) is very much applicable to the facts of this case also. While respectfully following the directions referred to above, we are of the considered opinion that the loss arising on shifting of securities from AFS/HFT categories to HTM category is allowable. Ground of appeal is dismissed. Gr. No.4 PNB Employees Pension Fund Trust 45. This ground relates to the disallowance of contribution made to PNB Employees Pension Fund Trust of Rs. 215,56,00,000/- which the assessee claims to be its legitimate business expenditure. 46. According to the Ld. AO, this is not a contributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anbaxy laboratories Ltd (2009) 124 TTJ (Delhi) 771 wherein the allowability of expenses towards provision for Pension Fund were held to be allowable expenses and section 43B has no application, is applicable. The fact that the assessee had actually contributed/paid the amount to pension fund makes the case of the assessee even stronger. Following the above orders, Ld. CIT(A) held that the addition of Rs. 215.56 crores has to be deleted. 49. We do not find any difference in the facts of the case from their earlier years to render the binding precedents followed by the Ld. CIT(A) inapplicable to the case on hand. In the absence of any change of facts and circumstances, we find it difficult to take a different view. In these circumstances, while respectfully following the above line of decisions, we dismiss this ground of appeal of the Revenue. Gr. No. 6: Depreciation on goodwill 50. Assessee claimed depreciation on goodwill at Rs. 4,59,28,688/-. Ld. AO disallowed the depreciation on goodwill stating that the goodwill cannot be considered as business or commercial right within the meaning of Section 32 (1) of the Act read with appendix 1 of the Rules. Ld. AO further noted that whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justed the same against the income declared under various other heads, namely, house property and business income etc.. Assessee also declared capital gain on venture capital fund on which tax was shown as payable at special rates of 10% and 20% depending upon long-term and short-term capital gains and also upon with STT are without STT. Further the assessee claimed LTCG on VCF with STT amounting to Rs. 9,70,57,421/- as exempt. According to the Ld. AO, if any loss had arisen to the assessee on account of VCF, the same should be adjusted against the profits of the same head and only net income be charged to tax in that particular head, but since LTCG on VCF with STT described as exempt, any loss arising out of such VCF is also exempt and not allowed to be set off against the other heads of income. Ld. AO therefore, disallowed the claim in respect of loss from venture capital fund under the head "other sources" to the tune of Rs. 2,64,66,898/-. 56. It was argued by the assessee before the Ld. CIT(A) that the assessee bank, in the return of income, offered for tax the income received from VCF in accordance with section 115U of the Act,i.e. the amount which was capital gain in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -06 assessee earned tax free income of Rs. 213.23 crores and the ld. AO disallowed a sum of Rs. 116.58 crores whereas the assessee disallowed a sum of Rs. 2,07,994/-in their computation of income. In the appeal initially CIT(A) upheld the disallowance, resulting in the assessee filing ITA No.4253/Del/2011. However, subsequently pursuant to the decision of the Hon'ble jurisdictional High Court in the case of Maxopp investment Ltd vs. CIT (2012) 347 ITR 272 holding that Rule 8D was not applicable to assessment years earlier than 2008-09, an application for rectification was filed. CIT(A) accepted the contention advanced on behalf of the assessee bank that Rule 8D cannot be invoked in the years earlier to 2008-09 and in the place of the earlier disallowance of Rs. 119.58 crores, he disallowed 10% of the expenses claimed by the assessee bank which came to Rs. 25,43,29,633/-. Assessee challenges this in ITA 1788/Del/2012. 56. Ground No. 1 and 4 in both the appeals are general in nature that do not require any adjudication. Now we shall advert to the question of permissibility of disallowance under section 14A of the Act in respect of the tax-free income earned by the assessee bank. 57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.4722/12 and Ground No.6 in ITA No.4718/12 relating to the issue of applicability of Section 14-A and Rule 8D of the Rules are dealt with together. Ground No.2 (ITA No.4722/12) and Ground No.6 (ITA No.4718/12): 62. During the year assessee earn the tax free income of Rs. 67,77,69,486/- and disallowed a sum of Rs. 5,47,59,010/- initially and subsequently, by way of revised return withdrawn the same. Learned AO made a disallowance of Rs. 80.38 crores by invoking the provisions u/s 14A of the Act in terms of Rule 8D(2)(ii) and (iii) of the Rules. However, learned CIT(A) deleted the addition made under Rule 8D(2)(ii) to the extent of Rs. 72.84 crores and sustained the addition of Rs. 7.54 crores made under Rule 8D(2)(iii) of the Rules. Challenging the deleted part, revenue preferred Ground no.6 in ITA No.4718/Del/2012 whereas challenging the sustained part, assessee preferred Ground No.2 in ITA No.4722/Del/2012. Since this issue was directly and substantially dealt with as Gr. No.2 in ITA 2236/2011 and Gr. No. 5 of ITA 2469/Del/2011 (supra) for the Asstt. Year 2007-08, we dismiss the ground raised by the revenue and allow the ground of the assesssee. ITA No.4718/12 Ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly dismiss this ground of appeal. Ground No.7: 67. This ground relates to disallowance of depreciation of goodwill amounting to Rs. 3,45,00,000/- which the assessee claimed in respect of the goodwill of the erstwhile Nedungadi Bank Ltd., which merged with the assessee in the Assessment Year 2003-04. This issue is dealt with as Ground No.6 in ITA No.2469/Del/2011. For the reasons recorded therein, we uphold the order of the ld. CIT(A) and accordingly dismiss this ground of appeal. 68. Ground No. 8 is general in nature and does not require any adjudication. ITA 4722/Del/2012 Ground No. 3: 69. This ground relates to the disallowance of Rs. 57,45,97,786/- claimed as deduction under section 36(1)(viii) of the Act. It could be seen from the record that the assessee bank did not make any claim under section 36(1)(viii) of the Act in the original return of income filed on 26/9/2008, but this claim was made only in the revised return filed subsequently. 70. Ld. AO noted that the assessee bank did not create any special reserve in the annual accounts of the company in order to claim deduction under section 36(1)(viii) of the Act and such a fact was not disputed by the assessee bank be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold the directions of the Ld. CIT(A) and dismiss this ground of appeal. Ground No. 4: Profit on sale of NPAs 73. This ground is in respect of profit on sale of NPAs to the tune of Rs. 7,40,74,586/-. During the year the assessee bank sold four non-performing assets for Rs. 7,42,00,000/-, the book value of which was found to be Rs. 1,25,414/- and thereby had earned a profit of Rs. 7,40,74,586/-, but without offering such an amount to tax on the ground that this gain was to be utilized for adjusting against future loss on sale of other non-performing assets as per RBI guidelines. Ld. AO found that during the relevant assessment year the assessee bank had recovered Rs. 83,16,87,004/- from written off non-performing assets and after setting off the same against the provision for bad debts of Rs. 67,15,59,994/- and the balance amount of Rs. 16,01,27,010/- was offered to tax. Ld. AO, therefore, by applying the provisions under section 41(4) of the Act brought the excess amount received on sale of NPAs to tax. 74. Ld. CIT(A) recorded that it was not clear from the assessee submissions the method of accounting followed by the assessee for claiming Loss/gain on sale of non-performing ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a sum of Rs. 12.07 crores under Rule 8D(2)(iii) of the Rules. Learned AO added a sum of Rs. 133.16 crores under Rule 8D(2)(ii). Learned CIT(A), however, deleted the addition of Rs. 133.16 crores made under Rule 8D(2)(ii) but sustained the disallowance of Rs. 12.07 crores under Rule 8D(2)(iii) of the Rules on the ground that the assesssee in both the original return and the revised return of income disallowed the same. Grievance of the assessee is that when the disallowance of expenditure of Rs. 12.07 crores under Rule 8D(2)(iii) is not maintainable and no expenditure is attributable to the exempt income as laid down by the Hon'ble Apex court in the case of Maxopp Investment Ltd. Vs CIT (2018) 402 ITR 640(SC), the CIT(A) should not have sustained the same merely because the assessee disallowed in their return of income. 80. This issue is directly and substantially the same, which was dealt with by us at length vide Ground No.1 in ITA No.2236./Del/2011 for the Asstt. year 2007-08 in assesseee's own case. Whereas Ground No.5 of revenue's appeal is dismissed, Ground No.2 in assessee's appeal is allowed deleting the disallowance of Rs. 12.07 crores. ITA No.2406/Del/2013: 81. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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