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TMI Blog2020 (5) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... premium paid at the time of purchase of securities held under the category of HTM. The loss on account of this amortization was claimed at Rs. 212,47,18,151/-. 6.2 It is observed that though the securities are categorized as HTM, the same are not held till maturity but are disposed off by the bank before the period of maturity ends. Therefore, this act cannot be said to be in strict compliance of the RBI guidelines. Further, the assessee has claimed the HTM securities to be stock in trade for the purpose of Income Tax Act. These securities are considered to be long term securities and held for considerably long periods. Therefore, they continue to remain as part of the stock in trade till they are finally sold. Hence, the cost price of these securities does not change merely on the change in the categorization of the securities and booking of losses merely on account of change in the nomenclature does not result in actual losses. Thus, the losses claimed by the assessee on this account are notional in nature. In view of this, the assessee was asked to showcause, in the notice u/s 142(1) of the I. T. Act, 1961 dated 08.03.2016, why the notional losses claimed on account of reval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly and there is no concept of amortization for stock-in-trade under any provisions of the Income Tax Act. As such, the above amortization is only a notional expenditure and it is not an allowable expenditure under the Income Tax Act. 6.6 As the securities have been sold before maturity, the amortization of premium over the remaining life of the securities cannot be worked out correctly as the life of security with assessee is not certain. For working out the amortization, the period for which the assessee is going to hold the securities should be known. However, this is not available in the case of assessee as it is selling the HTM securities before maturity as per its own will. Thus, the loss on account of amortization of premium cannot be treated as provisions for ascertained liability. 6.7 The Hon'ble Supreme Court in the case of Electronics Corporation of India Ltd. Vs UOI & Ors. (Civil appeal No. 1883 of 2011 arising out of SLP of 2009 (SC) has held that PSUs and department would no longer be required to obtain COD approval in case of any litigation. Therefore, filing of further appeal would be done purely on the basis of merit. 6.8 In view of above discussions, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and no part of the profits has been offered as capital gain. 1.4 It is submitted that the learned Assessing Officer is not justified is disallowing the claim of the Assessee giving reason that the securities held under HTM category are sold in some cases before maturity. The learned Assessing Officer should have appreciated that RBI guidelines permit sale of the securities under HTM category even before maturity. As the Assessee bank sells certain securities under HTM category before maturity, this is the precise reason that the Assessee bank treats these investments as stock-intrade. Once the investment is treated as stock-intrade, as per generally accepted accounting principle, the same is to be valued at cost or market price whichever is lower. The loss arising on account of such valuation is allowable as legitimate deduction based on various judicial decisions including that of Hon'ble Supreme Court in the case of UCO Bank (240 ITR 355), CIT vs. Bank of Baroda (262 ITR 334 Bom.), CIT vs. Lakshmi Vitas Bank Ltd. (264 ITR 662 Mad.) Moreover, the SPL filed by the Department has also been rejected by the Hon'ble Supreme Court in the case of Federal Bank Ltd. (313 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed by the bank from the assessment year 2001-02 and the same had been upheld by the CIT(A)s from the Assessment Year 2001-02 onwards. In the appeal order for the assessment year 2008-09, this issue was considered by me and allowed in Appeal No. 145/CIT(A)-XVII/ Del/10-11 dated 29.06.2012 and the relevant portion is as under: "6.4. From the submissions of the appellant, it is dear that the bank is valuing its securities under HTM category at cost which is different from the valuation of securities under AFS and HFT categories which are valued at market price or cost whichever is lower. Though all these securities are 'stock in trade' the valuation of HTM category is different from the other two categories namely AFS and HFT. During the appellant hearing, the appellant bank vide their letter dated 08.06.2012 has made an alternate plea that if securities under HTM category are to be valued like AFS and HFT categories at lower of cost or market price then the diminution in the value of securities under HTM category is Rs. 977,75,58,022/- and this should be allowed as a deduction instead of Rs. 308.43 Crores claimed now as amortization of premium paid. 6.5. It is dear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000, investments classified under HTM category need not be market to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized for the period remaining to maturity. 22. On this aspect the Ld. assessing officer had taken the view that the securities were sold before maturity and therefore the amortization of premium over the remaining life of the securities cannot be worked out correctly and for working out the amortization, the period for which the assessee held the securities are to be known, and for the want of such information coupled with the fact that the assessee sold HTM securities as per its will before maturity Ld. Assessing officer to draw the inference that the loss 19 on account of 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 (Kerala), and while following the same, observed that the amortization, which is as good as depreciation, merits the same treatment which is applicable to depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice that the similar issue has been covered in favour of the assessee by the ITAT for assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2011-12. 8. The relevant part of the order of the AO and ld. CIT (A) is as under: "4.1. On this issue, the AO held as under: "7.7 It is seen that in the computation of income, the assessee has claimed deduction on account of depreciation/loss on investment of Rs. 1,06,50,34,039/- and MTM on derivatives of Rs. 5,74,10,270/- on account of depreciation on investment. The above depreciation has been claimed on account of valuation of securities under the category Held for Trading (HFT) and Available for Sale (AFS). Vide order sheet noting dated 08.03.2016, the assessee was asked to explain why its claim on account of depreciation on investment should not be disallowed. Further, vide order sheet noting dated 09.03.2016, the assessee was asked to explain as to why MTM on Derivatives should not be disallowed. 7.2 The assessee submitted the reply vide letter dated 08.03.2016 and 10.12.2015. The relevant portion is reproduced below: ........................................................................................ 7.3 Vide let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made in AFS and HFT, it is pertinent to note that first of all, valuation is done scrip wise and depreciation/appreciation is aggregated classification wise in each category but while aggregating, net depreciation is provided for and net appreciation is ignored. For example, the assessee has two securities, both purchased at Rs. 100/- each. Suppose, at the end of the year, the value of both the securities are Rs. 80/- and Rs. 120/- respectively; although the purchase value as well as the market value at the close of the accounting year is the same, but the assessee will book a loss of Rs. 20/- in its books of accounts as under: Security A Rs. 80/- Market Price, being less Cost Price Security B Rs. 100/- Cost Price, being less than Market Price Total Rs. 180/- 7.9. Thus, as per the above accounting policy the assessee will book loss of Rs. 20/- and claim the same in its P & L Account. However, as per the RBI guidelines, such adjustment of depreciation in the value of investments is not to be made up individual scrip wise, which means that the book value of the individual scrips would remain the same i.e. Rs. 200/- even after the claim of depreciation of Rs. 20/- in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the depreciation on it. Thus, corresponding profit in the year is reduced without having any impact on the next years' profits, which is not permitted under the Income Tax Act on account of revaluation of 'Stock- in-trade'. 7.12. For example, if any investment of Rs. 1,000/- is made in AY 2003-04 and a depreciation of Rs. 200/- is booked due to depreciation in its value, the carrying cost in the AY 2004-05 of these assets should be Rs- 800/- -and in that year, if these investments are sold at Rs. 1,500/-, the business profit should be booked at Rs. 700/-. If in this example, the assessee continues to take the carry over amount of the investments at Rs. 1,000/- in AY 2004-05, correct profit of Rs. 700/- cannot be arrived at. In the instant case, since the assessee is not adjusting the individual scrip value by the depreciation in its value, correct profit cannot be arrived. 7.13. To sum up, the assessee's claim that these current investments are held as Stock-in-trade, should be reflected in the annual accounts as well as the return of income, and the profit should be deduced through such valuation of Opening and Closing Stock, which is not so in the present case. 7.14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the books as "Stock-in-Trade" and its resultant profits on sale are not enhanced by the value of depreciation in subsequent years when these investments are actually sold. 2.3 With regard to the above it is humble submitted that the contention of the learned Assessing Officer is factually incorrect. The effect of valuation of the Investments is very much reflected in the books of accounts of the Assessee Bank and the resultant profits on sale in the subsequent years when these investments are actually sold is computed after considering the depreciated book value of the investments. It is submitted that only the difference between the book value and the market value is claimed as diminution in the value of investment or depreciation since the same method is followed by all banks, there is no reason to presume that profit on sale of investments are not correctly reflected as assumed by the Learned Assessing Officer. It is submitted that what is claimed as loss in the computation of securities sold during the year is automatically reduced as the entire accumulated depreciation is deducted while computing the incremental depreciation on securities. Therefore, only the correct p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 216.34 crore which was offered for taxation. A chart showing decision of CIT(A) in earlier assessment years is submitted below for your kind perusal: Assessment Year Amount (Rs.) Remarks 2012-13 233,19,69,576 Allowed by CIT(A) vide order dated 28.01.2016 2011-12 171,96,42,285 Allowed by CIT(A) vide order dated 27.07.2014 2010-11 68,44,01,950/- Allowed by CIT(A) vide order dated 18.02.2014 2008-09 308,43,16,574/- Allowed by CIT(A) vide order 29.06.2012 2007-08 301,34,13,448/- Allowed by CIT(A)vide orders dated 28.02.2011 para 3.5 paqe no.4 2006-07 247,06,53,905/- Allowed by CIT(A) vide order dated 14.06.2010 para 7.5 paqe no. 19 2005-06 48,82,82,014/- Allowed by CIT(A) vide order dated 08.03.2007 para 7 page no. 16 2004-05 117,79,85,000/- Allowed by CIT(A) vide order dated 27.12.2005 para 4 to 4.4 pages 2-3 2003-04 156,97,52,018/ plus 70,08,24,000/- Allowed by CIT(A) vide order dated 05.10.2004 para 6 to 6.2 pages 7-8. 2002-03 63,32,19,000/- Allowed by CIT(A) vide order dated 29.07.2004 para 6 to 6.1 page 7 2001-02 39,01,79,000/- plus 29,80,88,366/- Allowed by CIT(A) vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the profits on sale of investments are not correctly reflected is wrong. Moreover, the appellant's bank had been following this accounting policy consistently over a period of time. The appellant bank is consistently offering the interest received on these securities and the profit on sate of these securities as income under the head 'income from business or profession'. As per the AR, the AO without appreciating or understanding the above method followed by the bank concluded that the securities held by the appellant bank were not shown as 'stock in trade' in their audited accounts and therefore wrongly disallowed appellant's claim of deduction amounting to Rs. 1,71,96,42,285/- made in their computation statement filed along with the return of income. 11. The ld. CIT(A) on the same issue for A.Y. 2009-10 held as under: "3.5. I have decided the above issue in favour of the appellant in A. X 2008-09 following my predecessor's decision in A.Y. 2007-08 and the relevant portion of the above decision is as follows: "The issue to be decided in this appeal is whether the AO is right in holding that profit on the sale or securities are not correctly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it on the sale or the securities are not correctly reflected in the P & L A/c is not based on facts. The appellant bank also pointed out that the CIT(A)s had been upholding consistently the above mentioned decision of Hon'ble Supreme Court in the case of appellant bank right from the A.Y. 1998-99 onwards. 3.6. In the appeal order for the assessment year 2007-08, the then CIT(A) white giving relief to the appellant Bank had held in his order dated 27/08/2010 in para 4.2 & 4.3 of page 19 and 20 in Appeal No. 155/CIT(A)-XVII/Del/09-10 as under: "4.2. I have carefully considered the facts of the case, order of the AO and submissions made by the Id. AR. I find that the appellant bank is considering all securities as stock in trade for the purpose of income tax irrespective of their category-wise classification in the books. Accordingly, interest received on securities and profit / loss on sale of such securities irrespective of its categorization in the books is consistently offered as business income / loss and the same is also being assessed by the department as business income / loss. It is, therefore, evident that the appellant bank never treated the profit on sale of secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision for A. Y. 2008-09, this issue is decided in favour of the appellant and the addition of Rs. 91,47,65,766/- on disallowance of depreciation on securities is deleted. Thus, ground No. 1 is allowed in favour of the appellant. 5.5. I had followed the decision for the A. Y. 2010-11 of the Ld. CIT(A). Since the facts are similar, respectfully following the decision of the Ld. CIT(A) for A. Y.s 2009-10 A 2010-11, the addition of Rs. 171,96,42,285/- is deleted. The ground of appeal is ruled in favour of the appellant. 4.4. Since the facts are similar, following the decision of the CIT(A) for A. Y. 2008-09 which was followed by my predecessor in the appeal for A. Y.s 2010-11 & 2011-12, the disallowance of Rs. 112,24,44,309/- (Rs. 106,50,34,039/- + Rs. 5,74,10,270/-) made by the AO is deleted. The ground of appeal is ruled in favour of the appellant." 12. Further, the similar matter travelled upto the Tribunal wherein the Co-ordinate Bench for the assessment year 2006-07 in ITA No. 2469/Del/2011 adjudicated the issue against the revenue. The relevant portion of the order is as under: "28. Learned assessing officer found that the assessee had claimed deduction of Rs. 288,11,30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue at length and by following the orders of his predecessor in assessee's own case for the assessment years 2000-01 to 2005-06 decided the issue in favour of the assessee bank in the light of the decision of the Hon'ble Apex Court in the case of UCO Bank vs. CIT 240 ITR 355 (SC). 31. It is the argument of the learned DR that though the assessee has been relying on the orders of the Tribunal for the Assessment Years 2005-06 and 200607, facts involved in those matters are entirely different from the facts involved in this matter inasmuch as in Assessment Year 2005-06 the issue before the Tribunal was regarding the acquisition of broken period interest whereas for the assessment year 2006-07 the assessee debited 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not changed or adjusted in the books resulting in the books reflecting the low profit and the resultant offering of less amount to tax. 34. The plea of the assessee, on the other hand, is that the treatment of the profit on sale of securities is a two-fold. Firstly, the profit on sale of securities will be lower due to the non attachment of cost of securities with deregulated appreciation claimed, but simultaneously at the second stage of the said transaction, claim of depreciation on securities for the year is also reduced to the extent of a community depreciation claimed earlier and resultantly the profit for the year is worked out correctly after taking into account both the folds of the transaction collectively. 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 open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the beginning of the year had shifted securities worth Rs. 6176 crore from HTM category to AFS/HFT category. RBI guidelines provide that the transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/book value/market value of the date of transfer, whichever is the least and interpretation, if any, on such transfer should be fully provided for. On this score the assessee booked the depreciation/loss of Rs. 386,75,73,660/-. 39. Learned Assessing officer, however, disallowed the same by saying that the loss claimed on such transfer is merely notional loss which does not exist. Learned assessing officer had taken the view that the securities under HTM categories have also 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 noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as considered by the Hon'ble apex court in the case of UCO bank Vs. CIT 240 ITR 355. 43. It could be seen from the impugned order that the Ld. CIT(A) considered this aspect at length and found that the facts relating to this issue are similar to those involved in the case of the State Bank of Mysore vs. DCIT of the Bangalore bench of ITAT in ITA No. 647/Bang/2008, wherein vide paragraph number 7.2 to 7.5 it was held that in view of the clear-cut guidelines of the RBI and the order of the Tribunal in ITA No.112/bang/2008 dated 3rd December 2008 in the case of Corporate Bank vs. ACIT and ACIT vs. Vijaya Bank, the claim of the assessee towards provision of deposition on account of shifting of securities from AFS category to HTM category 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 req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial year. It was further argued that carrying up banking business and funding the pension trust out of the income of banking are made obligated under the Act and the provisions of pension fund trust regulation makes it amply clear that payment directly attributable, compulsory and statutory for carrying on business on banking and should be allowed as a deduction. It was further submitted that the liability on account of contribution to pension fund is a recurring liability and not a onetime liability. It was submitted that rule 87 applies to ordinary annual contributions and not to anything other than annual contribution. It was further submitted that keeping in view the actual method of accounting, consistently followed by the bank, the aforesaid expenditure is an allowable business expenditure being incurred wholly and exclusively for the purpose of business and compliance to AS-15, subject to provisions of section 43B. 48. Ld. CIT(A) found that on similar issue in the assessment year 2005-06, the issue was decided in favour of the assessee vide order dated 14 June 2010 vide paragraph number 10.7 and 10.8 wherein it was held that similar expenses were allowed in earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m "(a), the business of providing long-term finance for- (A) industrial or agricultural development; (B) development of infrastructure facility in India; or (C) development of housing in India;" is eligible for this deduction. However, in the assessee's case, the assessee has not provided the exact profit derived from eligible business but it has claimed deduction of the taxable profit in proportion to the funds deployed in eligible business vis-a-vis the total business. However, this is approximate and there is no way of knowing the exact profit from the eligible business. It is theoretically possible for the assessee to have even incurred losses from the eligible business. Moreover, when deduction is claimed by the assessee, the Department should ensure that provisions are strictly adhered to. After ensuring that the provisions have been complied with, then the Department should be liberal in granting deduction. However, in the assessee's case, it has not strictly followed the provisions of the Act for claiming this deduction. Therefore, deduction on approximate basis should not be granted. 10.3 Thus, deduction claimed by the assesses u/s 36(1)(viii) of Rs. 98,90,00,000/- cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f during a period not less than Five years. Banking Company means a company to which the banking Regulation Act, 1949 (10 of 1949) applies and includes any Bank or Banking institution referred to in section 51 of that Act." The bank is granting the long term advances towards eligible business i.e. industrial Development or Agricultural Development or Development of infrastructure facility in India or Construction or purchases of houses in India for residential purposes. Therefore, the bank is entitled for the deduction under section 36(1)(viii) of the Income Tax Act. 5.3 Based on the above Bank claimed the deduction of Rs. 98.90crore and created the special reserve of Rs. 98.90 crore accordingly under section 36(1)(viii) of the Income Tax Act during the assessment year 201314 which is evident from item No.IV-c of Schedule - 2 - Reserve & Surplus at page no.139of annual accounts of the Bank. The working of deduction under section 36(1)(viii) duly certified by the Chartered Accountant. 5.4 We wish to submit that the assessee bank had during the year transferred a sum of Rs. 98.90 crore to Revenue and Other Reserves out of profits during the year. The same was maintained t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso become eligible assessee and for computing deduction under section 36(l)(viii) of the Act in the hands of all eligible assessees, only he income derived from the business of providing long term finance specified in section 36(l)(viii) of the Act has to be taken into account and ah amount not exceeding 40% of the profits from such business is to be carried to such reserve account. This makes out a condition that the amount so transferred to such reserve account should be from such eligible business of providing long-term financing. In view thereof, we hold that the increase in reserve created on 31st March, 1998, i.e. in subsequent year/years is allowable subject to the same being from the profits of eligible business of assessee of the asst, year 1997-98 and not of A.Y. 1998-99." 9.2 In view of the above decision of the Hon'ble jurisdiction ITAT, I have allowed the claim of the appellant in A.Y. 2008-09 in Appeal No. 145/CIT(A)/Del/10-11 dated 29.06.2012. However, since the AO was not satisfied the method followed by the appellant bank that they had not correctly calculated the deduction under Section 36 (1)(viii) of IT act as the AO was of the view that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of providing long term finance specified in section 36(1)(viii) of the Act has to be taken into account and an amount not exceeding 40 per cent of the profits from such business is to be carried to such reserve account. This makes out a condition that the amount so transferred to such reserve account should be from such eligible business of providing long term financing. In view thereof, we hold that the increase in reserve created on 3ff March. 1998, i.e. in subsequent year/years is allowable subject to the same being from the profits of eligible business of the assessee of the asst, year 1997-98 and not of A.Y. 1998-99." 9.2. In view of the above decision of the Hon'ble jurisdictional ITAT, I have allowed the claim of the appellant in A.Y. 2008-09 in Appeal No. 145/CIT(A)/Del/10-11 dated 29.06.2012. However, since the AO was not satisfied the method followed by the appellant bank that they had not correctly calculated the deduction under Section 36(1)(viii) of IT act as the AO was of the view that the appellant bank had computed the eligible profits on proportionate basis based on the total fund deployed method, the appellant bank is hereby directed to furnish the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod followed by the assessee to calculate the direction under section 36(1)(viii) of the Act was not correct as profit derived from eligible business and computed under the head "profits and gains of business or profession" is only entitled for 43 deduction under section 36(1)(viii) of the Act while the assessee had claimed in profit "attributable" eligible business and computed the same on proportionate basis based on the total fund deployed method, as a result of which Ld. AO disallowed the entire deduction claimed under section 36(1)(viii) of the Act. 71. Before Ld. CIT(A) assessee placed reliance on the decision of a coordinate bench of this Tribunal in Power Finance Corporation limited verses JCIT (2008) 16 DTR (Delhi-Trib) 519 where it was held that there is no time limit for creation of special reserve under section 36(1)(viii) of the Act and that the entire direction claimed in the revised return filed on 30th March 2010 was allowable. Ld. CIT(A) held that such decision is binding precedent on the aspect. CIT(A), however, held that inasmuch as the ld. AO was not satisfied with the method followed by the assessee bank that they had not correctly calculated the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der: .................................................................................................. 9.4 The submission of the assessee is duly considered. The assessee is keeping common consolidated accounts for its income earning activities. It is further noted that no separate set of accounts are maintained for the activities, income from which does not form part of the total income under the Act. 9.5 It is pertinent to mention that the assessee is having common infrastructure and common personnel for earning income under various heads. Thus, the company is also using its administrative, managerial and infrastructural set up for earning income which does not form part of total income under the Act. The company is incurring expenditure in quality manpower, both administrative and managerial, which takes the crucial and complicated decisions regarding the investments which have yielded exempt income. It is an act of decision-making and consultancy; it should not be seen in terms of actual physical efforts made in making investment and earning income which does not form part of the total income. It is not only the treasury division which is involved in deciding the inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax-free income, the bar u/s 14A of the Act would operate. 9.8 The other claim of the assessee that the investment which is yielding both taxable and taxfree income cannot be considered under Rule 8D is not logical. There is always possibility of earning dual income from investment - one from its holding and other on its transfer. Thus, even if one of the above income is exempt, then also the expenditure in relation to such investment needs to be worked out under Section 14A read with Rule 8D. The Rule 8D has been designed in such a manner that any variation in value of investment is automatically taken care of, as it takes only the average value of the investment. Thus, if assessee earns income on transfer of investment, the disallowance under Rule 8D automatically gets reduced as the closing value of the investment reduces. If the contention of the assessee is accepted, then there will be no disallowance in cases where dividend is earned on shares and securities held on short-term basis, which cannot be the intention of the statute. 9.9. The Hon'ble ITAT New Delhi,in the case of Cheminvest Ltd. Vs. Income Tax Officer (2009) 317 ITR (A.T.) 0086 has held that if any income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar = Rs. 5,04,08,80,71,333/- III. Average value of such investment (I + l l)/2 =Rs. 45,72,11,14,455/- [B] C Average value of total assets IV. Value of assets as appearing in balance sheet on 1st day of previous year = Rs. 45,81,92,34,72,000/- V. Value of assets as appearing in balance sheet on last day of previous year = Rs. 47,88,77,03,63,000/- VI. Average value of total assets (IV + V)/2 = Rs. 46,85,34,69,17,500/- [C] D Component of interest expenditure attributable to income which does not form part of the total income =A x B/C =2,70,36,82,41,000 X 45,72,11,14,455 46,85,34,69,17,500 =Rs. 2,63,83,39,809/- (iii) Amount equal to one-half per cent of the average value of investment, income from which does not or shall not form part of the total income = 1/2% of [B] = 0.5 X 45,72,11,14,455 100 = Rs. 22,86,05,572/- (iv) Expenditure incurred in relation to income which does not form part of total income. (i) +(i1) + (ii) =Rs. 2,86,69,45,381/- Total disallowance as per Rule 8D of the l.T. Rules, 1962 comes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any expenditure in relation to income not forming part of total income has to be disallowed. Thus, the scope of this section entirely depends upon the meaning of expression "in relation to" used by the legislature in this section. Such expression has not been defined in the Act. However, such expression has been judicially defined by the constitution bench of eleven judges of Hon'ble Supreme Court in the case of H.H Miharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior vs. Union of India (1971) 1 SCC 85. Their lordships held that such expression means "provisions having a dominant and immediate connection"It was also held that it does not mean merely having a reference to. 4.4 It is the settled legal position that if a word or an expression has been judicially defined by the court then it should be presumed that the legislature was well aware of such meaning while enacting an enactment and consequently, such word or expression in the enactment should be understood in the same sense in which it was judicially defined. Reference can be made to the decision of the Hon'ble Supreme Court in the case of Ahmed G.H Ariff vs. CWT 76 ITR 471 (SC) wherein it was ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) 81 CCH 001 (Kar). b. DCIT v. India Advantage Securities Ltd. (ITA No. 6711 (Mum) 2011- (Trib Mumbai ITAT) 4.7 The assessed Bank holds the securities (except investment in joint ventures /subsidiaries) as stock in trade and depreciation / amortization on valuation of securities is allowable expenditure. Accordingly, the dominant and immediate object behind acquisition of securities is to earn profit on sale of securities at the earliest point of time which is chargeable to tax under the Act. Dividend and tax free income is received incidentally. 4.8 During the year, the bank earned the profit on sale of securities of Rs. 591.02 crore which is taxable as business income. The dividend and tax free income of Rs. 126.47 crores has been received which is incidental to trading of securities. Therefore, there was no dominant and immediate connection between the borrowed funds for acquisition of securities held as stock in trade and dividend / tax free income earned there from by the bank. 4.9 Without prejudice to above, it is further stated that bank has not incurred any interest expenditure in earning the aforesaid exempted income as the - noninterest bearing funds are more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or shall form part of total income is to be considered. Therefore, any investment yielding both taxable income as well as exempt income cannot be considered in the value of investment in applying rule 8D. Therefore the provisions of section 14A cannot be made applicable to the assessee bank. This has been so held by Hon'ble ITAT, Jaipur in the case of State Bank of Bikaner & Jaipur vs. ACIT (ITA 578/JP/2003 for the A.Y. 2001-02. Reliance for this view is placed on the decision of ITAT Mumbai in the case of Avshesh Mercantile P. Ltd vs. DCIT (ITA 208/Mum/2009 dated 13/06/2012). 4.12 Out of the investment portfolio of the bank, investment are yielding exempted income in the form of dividend and interest as well as taxable income as profit on sale of securities no the investment is yielding only exempted income to the bank. 4.13 Based on the above, computation of disallowance under section 14A terms of Rule 8D is worked out as under: Particulars Amount Total Interest Expenditure 27036.82 Value of Investment, Income from which do not form part of total income. Nil Average value of Investment, income from which do not form part total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that at the most a reasonable proportion of administrative expenses can only be disallowed which may be attributable to exempt income. The suo motto disallowance made by the Assessee has not been found fault with either by the Assessing Officer or CIT(A) in these or earlier proceedings. Thus AO or CIT(A) in two rounds of proceedings, have no where pointed out that the working offered by the Assessed suo motto is defective or deficit in any respect. The ITAT has held that under these circumstances they are unable to up-hold the order of CIT(A) retaining 10% disallowance of expenses as attributable to earning exempt income on ad hoc basis. The ITAT had accepted the submissions of the assessee bank and had allowed the appeal. 4.18 In view of the above, no disallowance towards the exempted income is called for even as per Rule 8D. Your honour is, therefore requested to kindly delete the addition of Rs. 2,86,69,45,381/- made by the learned Assessing Officer under sectionl4A of the Income Tax Act and allow this ground." 6.3. I have carefully considered the assessment order passed by the AO and the submissions filed by the Ld. AR. The AO invoked provisions of section 14A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As per the appellant bank, investments in assets earning tax free income is only 3-5% of the total interest free funds available with the appellant at any given period. The appellant bank also points out that they always had substantial balances in current accounts which are interest free funds in the current assessment year as well as in all the earlier assessment years. On verifying the earlier appeal order for A.Y. 2007-08 the submissions made before the then CIT (A) for the A.Y. 2007-08 with regard to 14A disallowance indicates that substantial balances were available in current account i.e. demand deposit for the years ending 31.03.2006 d 31.03.2007 when compared to the appellants investment in tax free assets for those years. Therefore, there is substance in the appellant's submissions that the application of Rule 8D(2)(ii) and the disallowance of Rs. 72.84 crores under the above Rule is unjust and unwarranted as the expenditure incurred by way of interest can be more or less directly attributed to income earned by the appellant bank during the year. Moreover, in the case of the appellant bank the tax free income is only Rs. 67.77 crores, while the disallowance made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to disallowance conformed by Ld. CIT (A) under rule 8D (iii) of Income Tax Rules, 1963. 6.1. At the outset, Ld.Counsel submitted that, this issue stands squarely covered by following observation by Hon'ble Supreme Court in case of Maxopp Investments vs CIT reported in (2018) 91 taxman.com 154, in favour of assessee: "36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in-trade' and not as investment, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37. This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investment made by a banking concern are part of the business or banking. Therefore, the income arises from such investment is attributable to business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT A) disallowed the entire deduction of expenditure. That view of the CIT A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Maxopp Investment vs CIT (supra), we allow this ground raised by assessee and hold that these were not investments made by assessee in order to fall within the ambit of Rule 8D (iii) of Income tax Rules 1963." 27. In the result, the ground of appeal of the revenue on Rule 8D(2)(ii) is dismissed and the appeal of the assessee on the issue of Rule 8D(2)(iii) is allowed. 28. Ground No. 2 of the appeal of the assessee deals with addition on account of Leave Encashment. 29. On this ground, the AR stated as under: "10. We have submitted before the Ld. Assessing Officer that "Bank has made the provision towards leave encashment of Rs. 31.35 crore during the assessment year, 2013-14 which was not claimed as business expenditure in terms of provisions of section 43B (f) of Income Tax Act 1961. Accordingly, tax was also paid on this provision of Rs. 31.35crore. In Exide Industries Ltd vs UOI (2007) 292 ITR 470, the Calcutta High Court struck down 43B (f) as being arbitrary, unconscionable and de hors the apex Court decision in the case of Bharat Earth movers vs. CIT 245 ITR 428 on the ground that the objects and reasons were silent as to why the amendment was effected a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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