Asst. CIT, Circle-2, Kolhapur V. The Tatnakar Bank Ltd., Kolhapur

ITA 1079/PUN/2012

• Counselvise Citation: 107924514 RSA 2012
• Duration Of Justice: 1 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-09-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ADARSH KUMAR MODI
• Keywords: Business income; Depreciation; Difference of opinion; Change of opinion

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1079/PN/2012 (ASSESSMENT YEAR 2007-08) ACIT CIRCLE-2, KOLHAPUR .. APPELLANT VS. THE RATNAKAR BANK LTD., 179, E-WARD, MAHAVEER SHAHU MARKET YARD, KOLHAPUR. PAN NO.AABCT 3335M .. RESPONDENT APPELLANT BY : SHRI NIKHIL PATHAK RESPONDENT BY : SHRI ADARSH KUMAR MODI DATE OF HEARING : 03-09-2013 DATE OF PRONOUNCEMENT : 11-09-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 06-03-2012 OF THE CIT(A) KOLHAPUR RELATING TO ASSES SMENT YEAR 2007-08. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS ENGAGED IN THE BUSINESS OF BANKING. DURING THE COURSE OF ASSESSME NT PROCEEDINGS THE ASSESSING OFFICER NOTED FROM THE DETAILS OF PROVISI ONS AND CONTINGENCIES DEBITED TO THE PROFIT AND LOSS AMOUNTING TO RS.6,52 ,73,784/- THAT THE ASSESSEE HAS ADDED BACK PROVISIONS AMOUNTING TO RS. 3,16,03,991/- IN THE COMPUTATION OF INCOME. THE BALANCE RS.3,36,69,793/ - HAD REMAINED TO BE ADDED BACK TO THE TOTAL INCOME. THE ASSESSING OFFI CER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE ABOVE PROVISION SHOULD NOT BE DISALLOWED. IT WAS EXPLAINED BY THE ASSESSEE THAT THIS AMOUNT WAS DEPR ECIATION ON INVESTMENT 2 AND WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT AS P ER RBI GUIDELINES. WITHOUT PREJUDICE TO THE ABOVE IT WAS SUBMITTED THA T IN THE SUBSEQUENT YEARS THE INVESTMENT/PART OF IT WERE SOLD AND THE P ROFIT ON SALE OF THE INVESTMENTS WAS OFFERED TO TAX. THEREFORE, IN CASE OF DISALLOWANCE OF THE PROVISIONS, THE PROFIT ON SALE SHOULD BE EXCLUDED F ROM TAXABLE INCOME. 2.1 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO HI M AS PER THE INCOME TAX ACT, THE DEDUCTION OF EXPENDITURE WHICH IS TOWARDS A LIABILITY IS ALLOWABLE IF IT IS ACTUALLY EXISTING AT THAT TIME. HE HELD THAT PROVISION TOWARDS AMORTIZATION, EVEN IF MERCANTILE SYSTEM OF ACCOUNTI NG IS BEING FOLLOWED, WOULD TANTAMOUNT TO PUTTING ASIDE MONEY FOR AN EVEN T WHICH IS TO HAPPEN IN FUTURE OR CLAIMING A DEDUCTION FOR CONTINGENT LIABI LITIES. REJECTING THE EXPLANATION GIVEN BY THE ASSESSEE AND FOLLOWING HIS REASONINGS GIVEN IN A.Y. 2006-07 THE ASSESSING OFFICER BROUGHT TO TAX A N AMOUNT OF RS.3,19,09,056/- BEING AMORTISATION PROVIDED. 2.2 BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE CLA SSIFICATION, TREATMENT AND VALUATION OF INVESTMENTS MADE ARE IN ACCORDANCE WITH THE RBI GUIDELINES. THE VALUATION OF AN INVESTMENT HELD AS STOCK IN TRADE, IS DONE AT COST OR MARKET VALUE WHICHEVER IS LOWER AND IS AS P ER THE PRUDENTIAL NORMS CONTAINED IN THE RBI'S MASTER CIRCULAR DATED 02/07/ 2007. THIS METHOD WAS CONSISTENTLY FOLLOWED BY THE ASSESSEE. THAT THE DIS ALLOWANCE OF DEPRECIATION IN VALUE OF INVESTMENTS IS A CHANGE OF OPINION AS, IN EARLIER YEARS, THE DEDUCTION HAS CONSISTENTLY BEEN ALLOWED FOR DEPRECI ATION IN THE VALUE OF INVESTMENTS HELD AS 'STOCK IN TRADE'. THE ASSESSEE SUBMITTED THAT THE ASSET IS REQUIRED TO BE CLASSIFIED AND TREATED AS SUCH IN TH E BALANCE SHEET AS PER THE RBI GUIDELINES AND HENCE, THE SAME WAS SHOWN AS 'IN VESTMENT' AND NOT AS 3 'STOCK IN TRADE'. IT WAS ARGUED THAT THE PROFIT ON SALE OF INVESTMENTS WAS SUBJECT TO TAX AND THE SAME WAS ARRIVED AT BY DEDUC TING THE BOOK VALUE OF INVESTMENTS WHICH IS AFTER REDUCING THE DEPRECIATIO N PROVIDED IN THE BOOKS. IN SUPPORT OF ITS CONTENTION THE ASSESSEE PLACED RE LIANCE ON THE DECISION IN THE CASE OF (I) CIT V/S BANK OF BARODA 212 ITR 334 (II) UNITED COMMERCIAL BANK V/S CIT 240 ITR 355 (III) CIT V/S NEDUNGADI BANK LTD. 130 TAXMAN 93. 3. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : (1). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN TREATING THE DEDUCTION CLAIMED BY THE ASSESSEE TOWARDS AMORTIZATION OF EXP ENSES AMOUNTING TO RS.3,19,09,056/- AS CORRECT THEREBY ALLOWING THE APPEAL OF THE ASSESSEE, WHEREAS THE ASSESSING OFFICER HAS RIGHTLY ADDED BACK THE SAME T O THE TOTAL INCOME. (2). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (A) HAS ERRED IN IGNORING THE F ACT THAT THE APPEAL ON THE SAME ISSUE FOR A.Y.2006-07 WAS DISMISSED BY HIS PREDECESSOR BASED ON INSTRUCTION N O. 17 DATED 26.11.2008. (3). THE APPELLANT PRAYS THAT THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), KOLHAPUR BE VACATED AND THAT OF (4). THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEN D, RAISED, ANY OF THE ABOVE, OR ANY OTHER GROUNDS RAIS ED. 4. THE LD. DEPARTMENTAL REPRESENTATIVE WHILE SUPPOR TING THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE DISALLOWAN CE OF RS.3,19,09,056/- WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF AMO RTIZATION IN RESPECT OF GOVERNMENT SECURITIES HELD IN HTM CATEGORY. THES E SECURITIES ARE 4 GOVERNMENT SECURITIES WITHOUT FIXED COUPON RATES AN D HELD BY THE ASSESSEE AS STOCK IN TRADE. HE SUBMITTED THAT THE AMORTIZAT ION IN THE ASSESSEES CASE IS MERELY A PROVISION FOR CONTINGENT LIABILITY WHIC H IS NOT ALLOWABLE UNDER THE PROVISIONS OF THE ACT. HE SUBMITTED THAT THE L D.CIT(A) WAS NOT JUSTIFIED IN DEVIATING FROM THE ORDER GIVEN IN A.Y. 2006-07 IN ASSESSEES OWN CASE. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTO RED. 5. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HA ND SUBMITTED THAT UNDER IDENTICAL FACTS AND CIRCUMSTANCES THE TRIBUNA L HAS ALLOWED THE CLAIM OF THE ASSESSEE DURING A.Y. 2006-07. THEREFORE, TH IS BEING A COVERED MATTER THE ORDER OF THE CIT(A) BE UPHELD AND THE GR OUNDS RAISED BY THE REVENUE BE DISMISSED. 6. AFTER HEARING BOTH THE SIDES, WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 AND THE TRIBUNAL ALLOWED THE APPEAL OF THE ASSESSEE AND DEL ETED THE ADDITION MADE BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) B Y HOLDING AS UNDER : 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE RECORD. THE LD. COUNSEL ARGUED THAT AS PER THE CONSISTENT METHOD FOLLOWED BY THE ASSESSEE, BANK SECURITIES ARE VALUE D AT COST OR MARKET VALUE. HE FURTHER ARGUED THAT IF THE SECURITIES HE LD UNDER AFS ARE TRANSFERRED TO THE HTM, THEN THE VALUATION IS TO BE DONE ON THE DATE OF TRANSFER AND IF THE MARKET VALUE IS LESS THAN THE C OST OF THE SECURITIES THEN THE SAME IS PROVIDED AS A DEPRECIATION. HE VE HEMENTLY ARGUED THAT THE GUIDELINES ISSUED BY THE RBI ARE BINDING ON THE BANK UNDER THE BANKING REGULATION ACT AND ASSESSEE IS MAKING THE P ROVISION OF AMORTIZATION IS MADE TILL THE YEAR OR DATE OF MATUR ITY OF THE SAID SECURITY. THE LD. COUNSEL PLACED HIS RELIANCE ON THE DECISION OF HON'BLE HIGH COURT OF KERALA IN THE CASE OF NIDUNGADI BANK 264 ITR 545 . HE ALSO PLACED HIS RELIANCE ON THE FOLLOWING DECISIONS OF THE KARNATAK A BENCHES STATE BANK OF MYSORE VS. DCIT (2009) 33 SOT 7 (BANG)., LATUR U RBAN CO-OPERATIVE BANK LTD. VS. DCIT 778 & 792/PN/2011 DATED 31.8.201 2. WE HAVE ALSO HEARD THE LD. D.R. 7. THE ISSUE IN CONTROVERSY BEFORE US IS IN NARROW PASS. THE ASSESSEE IS A BANK AND ENGAGED INTO THE BANKING BUS INESS. THE ASSESSEE MADE THE CLASSIFICATION OF THE SECURITIES IN COMPLIANCE WITH THE 5 GUIDELINES OF THE RBI I.E. (1) HELD TO MATURITY (HT M) (2) AVAILABLE FOR SALE (AFS) AND (3) HELD FOR TREATING (HFT). IN THE CASE OF NIDUNGADI BANK LTD. (SUPRA), THE HON'BLE HIGH COURT OF KERALA HELD THAT ALL THE INVESTMENTS ARE IN THE NATURE OF STOCK IN TRADE HEL D BY THE ASSESSEE. SO FAR AS ISSUE BEFORE US IS CONCERNED, IT IS ONLY THE CONVERSION OF THE CLASSIFICATION OF THE SECURITY BY THE BANK. IT IS NOT DISPUTED IN THIS CASE THAT ASSESSEE IS CONSISTENTLY FOLLOWING THE SAID ME THOD AND EVEN IF THE SECURITIES ARE SOLD, FINALLY THE DEPRECIATION/LOSS WILL HAVE THE BEARING WHILE DETERMINING THE PROFIT OR LOSSES WHEN THE SEC URITIES ARE SOLD IN THE OPEN MARKET. THE IDENTICAL ISSUE HAD COME BEFORE T HE ITAT BANGALORE BENCH IN THE CASE OF STATE BANK OF MYSORE (SUPRA) A ND TRIBUNAL HELD AS UNDER: 7.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE HA VE ALSO PERUSED THE RBI MASTER CIRCULAR AND OTHER CASE LAWS ON WHICH THE SENIOR COUNSEL HAS PLACED STRONG RELIANCE. THE HO N'BLE TRIBUNAL, BANGALORE BENCH 'B' IN ITA NO. 253/BANG/2 007, DT. 24TH JAN., 2008 IN THE CASE OF ASSTT. CIT (LTU) VS. VIJAYA BANK HAD AN OCCASION TO DEAL WITH A SIMILAR ISSUE. AFTER CONSIDERING THE RIVAL SUBMISSIONS, ANALYZING THE RBI GUIDELINES AND ALSO EXTENSIVELY QUOTING VARIOUS JUDICIAL PRONOUNCEMENTS ON WHICH BO TH THE PARTIES HAVE PLACED THEIR RELIANCE, THE HON'BLE TRIBUNAL HA S OBSERVED THUS '15. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE IS TREATING THE SECURITIES HELD UNDER THE CATEGORY 'HELD FOR MATURI TY' AS STOCK-IN-TRADE. IF THERE IS APPRECIATION IN THE MARKET VALUE AS COM PARED TO THE MARKET VALUE AT THE OPENING OF THE YEAR AND SUCH APPRECIAT ION IS ALSO ACCOUNTED FOR. IT IS NOT CLAIMING DEPRECIATION ONLY FOR THE YEARS, WHEN THE VALUE HAS GONE DOWN. IF THAT HAD BEEN THE CASE, THE ASSESSEE WOULD NOT HAVE ACCOUNTED FOR ANY APPRECIATION IN 3R D, 4TH AND 5TH YEAR. THE METHOD BY WHICH THE ASSESSEE BANK IS VALU ING SECURITIES IS IN ACCORDANCE WITH THE ACCOUNTING PRINCIPLES BY TRE ATING SUCH SECURITIES AS STOCK-IN-TRADE. MOREOVER, THE REVENUE ITSELF IS TREATING THE PROFIT ON MATURITY OF SUCH SECURITY AS BUSINESS INCOME AND, THEREFORE, SUCH SECURITIES CANNOT BE TREATED AS CAP ITAL ASSETS. 16. SPECIAL BENCH, DELHI IN THE CASE OF NEW INDIA I NDUSTRIES LTD. VS. ASSTT. CIT (2007) 112 TTJ (DEL) (SB) 917 : (2008) 1 DTR (DEL)(SB)(TRIB) 247 : (2007) 18 SOT 51 (DEL)(SB) : 2007-TIOL-389-IT AT-DEL-SB HAD AN OCCASION TO CONSIDER THE BINDING NATURE OF RBI GUID ELINES. THE SPECIAL BENCH HELD THAT RBI GUIDELINES IN RESPECT OF PROVIS ION FOR NPA ARE NOT BINDING IN THE COMPUTATION OF INCOME UNDER THE IT A CT. INCOME IS TO BE ASSESSED AS PER THE PROVISION OF THE IT ACT. THE MA DRAS HIGH COURT IN THE CASE OF T.N. POWER FINANCE & INFRASTRUCTURE DEV ELOPMENT CORPORATION LTD. VS. CIT (2007) 213 CTR (MAD) 610 : (2006) 280 ITR 491 (MAD) : (2006-TIOL-112-HC-MAD-IT HELD THAT PROV ISION FOR NON- PERFORMING THE ASSETS DEBITED TO P&L A/C IS NOT ALL OWABLE, AS DIRECTIVE OF RBI MAY NOT OVERRIDE STATUTORY PROVISION. ONCE THE REVENUE IS ACCEPTING THAT PROFIT ARISING ON THE MATURITY OF INVESTMENT I S BUSINESS INCOME, THEN IT CANNOT TAKE THE STAND THAT IT IS NOT STOCK- IN-TRADE. DURING THE COURSE OF PROCEEDINGS BEFORE US, THE LEARNED AUTHOR ISED REPRESENTATIVE HAS FILED THE ASSESSMENT ORDER IN TH E CASE OF THE ASSESSEE FOR THE ASST. YRS. 2000-01 TO 2002-03. TH E DEPRECIATION CLAIMED IN ALL THESE ASST. YEARS HAS NOT BEEN DISAL LOWED. THUS, THE REVENUE IS CONSISTENTLY ACCEPTING THAT DEPRECIATION IS ALLOWABLE. THIS BENCH IN THE FOLLOWING CASES HAS ALLOWED SUCH DEPRE CIATION ON THE VALUATION OF THE SECURITIES HELD BY THE BANK : (1) KARNATAKA BANK LTD. VS. JT. CIT ITA NO. 50/BANG /1997, DT. 27TH JULY, 2003; (2) ING VYSYA BANK LTD. VS. DY. CIT (2006) 6 SOT 60 6 (BANG). 6 17. CONSIDERING THE ABOVE DISCUSSION, IT IS HELD T HAT THE ASSESSEE IS ENTITLED TO VALUE ALL THE INVESTMENT AT COST PRICES OR MARKET VALUE WHICHEVER IS LOWER BY TREATING SUCH INVESTMENT AS STOCK-IN-TRADE ....' 7.3 THE HON'BLE TRIBUNAL IN ITA NO. 112/BANG/2008, DT. 3RD DEC., 2008 IN THE CASE OF CORPORATION BANK VS. ASSTT. CIT 2009-TIOL-75-ITAT- BANG, BY FOLLOWING THE DECISION OF THE HON'BLE TRIB UNAL IN THE CASE OF ASSTT. CIT (LTU) VS. VIJAYA BANK (SUPRA), HAS HELD THAT '16. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US AND RESPECTFULLY FOLLOWING THE DECISION OF THE HON' BLE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK VS. CIT REFERRED SUPRA, IT IS HELD THAT THE ASSESSEE BANK IS ENTITLED TO VALUE ALL THE INVE STMENT AT COST PRICES OR MARKET VALUE WHICHEVER IS LOWER BY TREATI NG SUCH STOCK-IN- TRADE.........' 7.4 IN RBI'S MASTER CIRCULAR, UNDER THE CAPTION 2 CLASSIFICATION, IT HAS BEEN MENTIONED THUS '(I) THE ENTIRE INVESTMENT PORTFOLIO OF THE BANKS (INCLUDING SLR SECURITIES AND NON-SLR SECURITIES) SHOULD BE CLASSI FIED UNDER THREE CATEGORIES VIZ., 'HELD TO MATURITY', 'AVAILABLE FOR SALE' AND 'HELD FOR TRADING'. HOWEVER, IN THE BALANCE SHEET, THE INVEST MENTS WILL CONTINUE TO BE DISCLOSED AS PER THE EXISTING SIX CLASSIFICATION S VIZ., (A) GOVERNMENT SECURITIES, (B) OTHER APPROVED SECURITIES, (C) SHAR ES, (D) DEBENTURES AND BONDS, (E) SUBSIDIARIES/JOINT VENTURES, AND (F) OTHER (CP MUTUAL FUND UNITS, ETC.). (II) BANKS SHOULD DECIDE THE CATEGORY OF THE INVEST MENT AT THE TIME OF ACQUISITION AND THE DECISION SHOULD BE RECORDED ON THE INVESTMENT PROPOSALS. 2.3 SHIFTING AMONG CATEGORIES : (I) BANKS MAY SHIFT INVESTMENTS TO/FROM HELD TO MAT URITY CATEGORY WITH THE APPROVAL OF THE BOARD OF DIRECTORS ONCE A YEAR. SUCH SHIFTING WILL NORMALLY BE ALLOWED AT THE BEGINNING OF THE ACCOUNT ING YEAR. NO FURTHER SHIFTING TO/FROM THIS CATEGORY WILL BE ALLOWED DURI NG THE REMAINING PART OF THAT ACCOUNTING YEAR.' 7.5 IN VIEW OF THE CLEAR-CUT GUIDELINES OF THE RBI AND RESPECTFULLY FOLLOWING THE FINDINGS OF THE HON'BLE TRIBUNAL REFE RRED SUPRA, THE CLAIM OF THE ASSESSEE TOWARDS PROVISION OF DEPRECIATION OF R S. 1,27,21,17,913 ON ACCOUNT OF TRANSFER OF SECURITIES FROM AFS CATEGORY TO HTM CATEGORY IS ALLOWED. IT IS ORDERED ACCORDINGLY. 8. AS THE ISSUE IS DIRECTLY COVERED IN FAVOUR OF TH E ASSESSEE BY DECISION OF I.T.A.T. BANGALORE BENCH, WE DO NOT FIN D ANY REASON TO TAKE THE DIFFERENT VIEW. WE ACCORDINGLY, ALLOW THE CLAI M OF THE ASSESSEE AND GROUNDS TAKEN BY THE ASSESSEE ARE ALLOWED. 7. SINCE FACTS OF THE IMPUGNED APPEAL IS IDENTICAL TO THE FACTS IN A.Y. 2006-07, THEREFORE, RESPECTFULLY FOLLOWING THE DECI SION OF THE TRIBUNAL IN ASSESSEES OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR 7 NOTICE WE UPHOLD THE ORDER OF THE CIT(A) ON THIS IS SUE AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 11 TH DAY OF SEPTEMBER 2013. SD/- SD/- (R.S. PADVEKAR) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED : 11 TH SEPTEMBER 2013 SATISH COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-KOLHAPUR 4. THE CIT-KOLHAPUR 5. D.R. B BENCH, PUNE 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE