The Kalupur Commercial Co.Op. Bank Ltd., Ahmedabad V. The Dy. Commissioner of Income Tax,Circle-7, Ahmedabad

ITA 1234/AHD/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8147 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 10-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH SINGH
• Keywords: Gift; Business income; Depreciation; Business expenditure; Earning of tax free income; Question of law; Cost of acquisition; Commercial expediency
• Section: 14A; 37(1)

Judgement Text

- , - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ./ ITA NO.1234/AHD/2016 / ASSTT. YEAR: 2011-12 THE KALUPUR COMMERCIAL CO-OP BANK LTD. KALUPUR BANK BHAVAN NR. INCOME TAX CIR. ASHRAM ROAD AHMEDABAD 380 009. PAN : AAAAT 9360 R VS. DCIT, CIR.7 AMBAWADI AHMEDABAD 380015. ./ ITA NO.1934/AHD/2016 / ASSTT. YEAR: 2011-12 ACIT, CIR.1(3) AMBAWADI AHMEDABAD 380015. VS. THE KALUPUR COMMERCIAL CO- OP BANK LTD. 1, KALUPUR BANK BHAVAN NR. INCOME TAX CIR. ASHRAM ROAD AHMEDABAD 380 009. / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR, AR REVENUE BY : SHRI SAURABH SINGH, SR.DR ! ' / DATE OF HEARING : 15/03/2018 #$% ! ' / DATE OF PRONOUNCEMENT: 06/06/2018 &' / O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: ASSESSEE AND REVENUE ARE IN CROSS APPEALS AGAINST O RDER OF THE LD.CIT(A)-4, AHMEDABAD DATED 3.5.2016. FIRST WE TAKE APPEAL OF THE ASSESSEE I.E. ITA NO.1234/AHD/2016. ITA NO.1234 AND 1934/AHD/2016 2 2. FIRST GROUND OF APPEAL OF THE ASSESSEE IS GENERA L GROUND OF APPEAL, WHICH DOES NOT CALL FOR SPECIFIC ADJUDICATI ON, HENCE REJECTED. 3. GROUND NO.2: THE ASSESSEE HAS PLEADED THAT THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.1,24 ,39,012/- OUT OF VARIOUS EXPENDITURE DEBITED BY THE ASSESSEE IN T HE PROFIT & LOSS ACCOUNT AND CLAIMED IN THE RETURN OF INCOME. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COOPERATIVE SOCIETY ENGAGED IN THE BUSINESS OF BANKING. IT HAS FILED RETURN OF INCOME ON 23.9.2011 DECLARING TOTAL INCOME AT RS.56 ,03,03,650/-. CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSE SSMENT AND NOTICE UNDER SECTION 143(2) WAS ISSUED AND SERVED U PON THE ASSESSEE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE HAS DEBITED EXPENDITURE UNDER THE HEAD BUSINESS PROMOTION MEMBERS GIFT, PAYMENT TOWARDS SCHOLARSHI P TO CHILDREN OF MEMBERS, AND PAYMENT TO NOMINEE/LEGAL HEIRS OF M EMBERS. HE DIRECTED THE ASSESSEE TO DEFEND ITS CLAIM AS TO HOW THESE EXPENSES BE LINKED WITH THE BUSINESS OF THE ASSESSE E. IN RESPONSE TO THE QUERY OF THE AO, THE ASSESSEE HAS FILED WRIT TEN STATEMENT VIDE LETTER DATED 30.12.2013 AND SUBMITTED AS UNDER: 'WE ARE IN RECEIPT OF YOUR ABOVE SHOW CAUSE NOTICE DTD. 2O/12/2013 ASKING US TO FURNISH OUR EXPLANATION AS TO WHY CLAI M OF FOLLOWING EXPENSES BE NOT DISALLOWED BEING NOT INCURRED FOR B ANKING BUSINESS. (I) BUSINESS PROMOTION MEMBER'S GIFT OF RS.94,86 ,753/- (II) PAYMENT TOWARDS SCHOLARSHIP TO CHILDREN OF MEM BERS RS..5,36,259/- (III) PAYMENT TO NOMINEE/LEGAL HEIRS OF MEMBERS R S.24,70.000/- TOTAL RS.1,24,39,012/- FOR THE CLAIM OF DEDUCTION MADE IN COMPUTING TOTAL TAXABLE INCOME, EXPLANATION FOR THE ABOVE EXPENSES ARE FURNISHED HE REUNDER. (A) BUSINESS PROMOTION OF MEMBERS GIFTS RS.94,86,75 3/- ITA NO.1234 AND 1934/AHD/2016 3 (A) IN THE ABOVE ACCOUNT, GIFTS TO MEMBERS/ SHAREHOLDERS GIVEN TO THE EXTENT OF RS.94,86,756/- IS CHARGED. NORMALLY T O BOOST UP THE CONFIDENCE OF MEMBERS IN THE BANK ALSO TO ATTACT, M ORE MEMBERS/DEPOSITORS IN A SPAN ABOUT TWO TO THREE YEA RS GIFT ARTICLES ARE DISTRIBUTED, DEPENDING UPON THE NUMBER OF COUPONS G IFT ARTICLES VARY AND AS PER THE CHOICE OF MEMBER GIFTS ARE DISTRIBUT ED. DURING THE RELEVANT PREVIOUS YEAR. FOR EXAMPLE GIFT OF DUFFLE BAGS, TIFFIN, SILVER COINS ETC. WERE GIVEN. THE DETAILS OF PAYMENT MA DE TO VARIOUS PARTIES, MODE OF PAYMENT, L, SUPPORTING VOUCHERS , COPY F RESOLUTION ETC. ARE APPENDED. - ANNEXURE A (PAGE NO. 1 TO 24). TO SUM UP, EVERY YEAR BANK IS CREATING RESERVE/FUND FOR TO MEET WITH SUCH EXPENSES. WHEN THE SAID RESERVE/FUND IS CREATE D SAME IS DISALLOWED AND ADDED BACK TO AMOUNT OF NET PROFIT T O DERIVE AT TOTAL TAXABLE INCOME. WHENEVER EXPENDITURE IS INCURRED SAME ARE DEBITED T O RESPECTIVE FUND/RESERVE A/C. AS THE NATURE OF EXPENDITURE IS N OT CAPITAL IN NATURE OR PERSONAL IN NATURE AND SINCE IT IS INCURRED SOLELY ON THE STRENGTH OF BUSINESS EXPEDIENCY WHICH IS DULY SUPPORTED BY BYE LAWS RESOLUTIONS, VOUCHERS, BILLS ETC. ETC. EXPENDITURE INCURRED BEIN G FOR THE PURPOSE OF BUSINESS ONLY SAME MAY KINDLY BE ALLOWED. YOUR ASSE SSEE SHALL BE HAPPY TO FURNISH, FURTHER DETAILS/EXPLANATION IF SO REQUIRED BY YOUR HONOUR. (B) FOR MAKING CLAIM OF EXPENDITURE, THOUGH NOT DIR ECTLY CHARGED TO PROFIT AND LOSS ACCOUNT BUT DEBITED TO RESPECTIVE F UND A/C, WE CLARIFY THAT YOUR ASSESSEE BANK IS REGISTERED UNDER MULTI S TATE CO. OP. SOCIETIES ACT, 1984. THE PROFIT OF THE BANK IS APPO RTIONED TO VARIOUS RESERVES LIKE RESERVE FUND, EDUCATION FUND, CHARITY FUND, MEMBER/CUSTOMER INCENTIVE FUND, BUILDING FUND ETC. AS PER BYE-LAWS OF THE BANK. SINCE THESE AMOUNTS ARE APPROPRIATIONS , THEY CANNOT BE CONSIDERED AS EXPENDITURE FORMING PART OF THE NET P ROFIT OF THE BANK. HOWEVER, WHENEVER EXPENDITURE IS INCURRED IT IS DEB ITED TO RESPECTIVE FUND A/C AND NOT TO PROFIT AND LOSS ACCOUNT. AS IT IS EVIDENT, WHEN AMOUNT IS APPROPRIATED, IT IS NOT CLAIM AS EXPENDIT URE BUT CLAIM IS MADE WHENEVER THEY ARE ACTUALLY INCURRED AND THUS CLAIM OF EXPENDITURE MADE BEING LEGITIMATE AND GENUINE IT MAY PLEASE BE ALLOWED FOR. MOREOVER, UNDER THE PROVISION OF THE INCOME TAX ACT , IN COMPUTING TOTAL INCOME UNDER THE HEAD BUSINESS INCOME, CLAIM OF EXPENDITURE IS ALLOWED ON THE BASIS OF INCURRING OF SAID EXPENDITU RE FOR THE BUSINESS PURPOSE AND NOT ON THE BASIS OF DEBITING THE SAME O R OTHERWISE IN PROFIT AND LOSS ACCOUNT. (C) FOR ALLOWABILITY OF CLAIM FOR PAYMENT IN FORM O F SCHOLARSHIP TO STUDENTS OF THE MEMBERS OF THE BANK, DONATION AND P AYMENT TO LEGAL HEIRS OF MEMBERS UPON HIS DEATH WE CLARIFY THAT DET AILED ACCOUNTS AND PARTICULARS HAVE ALREADY BEEN GIVEN IN OUR EARLIER SUBMISSION. ITA NO.1234 AND 1934/AHD/2016 4 ALMOST ENTIRE INCOME IN FORM OF INTEREST ON ADVANCE S CONSISTS OF INTEREST INCOME FROM MEMBERS TO WHOM ADVANCES WERE MADE. IT BEING MAIN SOURCE OF INCOME, AND YOUR ASSESSEE BEING COMMERCIA L CO. OPERATIVE BANK, EXPENDITURE INCURRED TO HAVE CORDIAL AND LONG RELATIONSHIP WITH MEMBERS SUCH AS SCHOLARSHIP TO THEIR CHILDREN ETC. ARE IN NATURE OF BUSINESS EXPENDITURE AND AS SAME ARE INCURRED FOR T HE BUSINESS PURPOSE ONLY IT MAY KINDLY BE ALLOWED AS CLAIMED FOR. * THE EXPRESSION ' FOR THE PURPOSE OF BUSINESS ' US ED IN SECTION 37(1) IS WIDER IN SCOPE THAN THE EXPRESSION ' FOR THE PURPOS E OF EARNING PROFIT IN ORDER THAT AN EXPENDITURE MAY BE ALLOWED AS DEDUCTI ON U/S.37(L), IT NEED NOT HAVE BEEN INCURRED WITH THE OBJECT OF GAIN ING A DIRECT AND IMMEDIATE BENEFIT: IT WOULD SUFFICE EVEN IF IT WAS INCURRED IN ORDER INDIRECTLY TO FACILITATES THE CARRYING ON OF THE BU SINESS. THE TERM COMMERCIAL EXPEDIENCY IS NOT LIMITED TO EX ISTING PRACTICE PREVAILING IN ANY PARTICULAR TRADE OR BUSINESS. IT MEANS EVERYTHING THAT SERVES TO PROMOTE COMMERCE AND INCLUDES EVERY MEANS SUITABLE TO THAT END. THE COMMERCIAL EXPEDIENCY OF A BUSINESSMAN'S D ECISION TO INCUR EXPENDITURE CANNOT BE TESTED ON THE TOUCH STONE OF STRICT LEGAL LIABILITY TO INCUR SUCH EXPENDITURE. THE BUSINESSMAN IS THE BEST JUDGE TO DETERMINE T HE BUSINESS EXPEDIENCY AND, THEREFORE, EXPENDITURE INCURRED S HOULD BE VIEWED FROM THE VIEW POINT OF BUSINESSMAN. HERE ARE SOME ILLUSTRATIVE CASES WHERE IN FACTS OF THE CASES THE EXPENDITURE INCURRED WAS HELD ALLOWABLE ON THE GROU ND OF COMMERCIAL EXPEDIENCY. (I) INDIAN LEAF TOBACCO DEVELOPMENT CO. LTD. V . C.I. T.( EX-GRATIA PAYMENTS TO THE DEPENDENTS OF FORMER EMPLOYEES ) 137ITR 827 (CAL) (II) CITV. HINDUSTAN MO TORS L TD. (PAYMENT OF PENSION TO THE WIFE OF A DECEASED EMPLO YEES AS ALSO TO A RETIRED EMPLOYEE) 175 ITR 411 (CAT.) (III) CIT V. DEVELOPMENT TRUSTPVT. LTD. (EXPENDITURE INCURRED BY ASSESSEE ON CONSTRUCTION O F A SCHOOL BUILDING IN A COLONY) 198 ITR 766 (ALL.) (IV) CONTRIBUTION MADE BY A CO. OP. SOCIETY TO EDUCATION FUND IN ORDER TO BE ABLE TO PAY A HIGH, DIVIDEND TO ITS MEM BERS IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. MEHSANA D/ST. CO. OP. MILK PRODUCES V. UNION OF IND IA 203 ITR 601 (GUJARAT) CIT V. KAIRA DIST. CO. OP. MILK PRODUCES V. UNION OF INDIA 209 ITR 898 ( GUJARAT) (V) PAYMENT MADE VOLUNTARILY ARE NOT TO BE DISALLOWED ONLY ON ACCOUNT OF THEIR VOLUNTARY CHARA CTER SO LONG AS THERE IS A REASONABLE NEXUS BETWEEN THE EXPENDITURE AND T HE BUSINESS, THE EXPENDITURE WILL BE REGARDED HAVING BEEN INCURRED F OR THE PURPOSE OF THE BUSINESS. THE SUCCESS OF ANY BUSINESS ENTERPRIS E, TO A SUBSTANTIAL ITA NO.1234 AND 1934/AHD/2016 5 DEGREE, IS DEPENDENT ON THE WILLING PERFORMANCE OF THEIR TASKS BY THE EMPLOYEES. PAYMENT MADE TO EMPLOYEES, BY WAY OF GRA TUITY, BONUS, RETRENCHMENT COMPENSATION OR COMPENSATION FOR TERMI NATION OF SERVICE, WHETHER UNDER COMPULSION OF STATUTE OR VOLUNTARILY, CANNOT BE SAID TO BE UNCONNECTED WITH THE BUSINESS, OR AS NOT BEING COMM ERCIALLY EXPEDIENT, SO LONG AS QUANTUM OF PAYMENT IS REASONABLE, HAVING REGARD TO ALL THE CIRCUMSTANCES RELEVANT TO THAT BUSINESS ENTERPRISE. CIT V. CHANDNE W.PVT.L TD. 212 ITR 63 (MADRAS) ATLAS CYCLE INDUS. LTD. V. CIT 129ITR 60 (P A H)' 5. THE LD.AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE, AND HE MADE DISALLOWANCE OF RS.1,24,39,012/-. APPE AL TO THE LD.CIT(A) DID NOT BRING ANY RELIEF TO THE ASSESSEE. 6. IDENTICAL EXPENDITURE HAS BEEN INCURRED IN THE A SSESSMENT YEAR 2008-09, WHICH WAS DELETED BY THE ITAT VIDE ITS ORD ER DATED 17.8.2016 PASSED IN ITA NO.2614/AHD/2011. DISSATISFIED WITH THE ORDER OF THE ITAT, REVENUE WENT IN APPEAL BEFORE THE HONBLE HIG H COURT IN TAX APPEAL NO.596 OF 2017. THE HONBLE HIGH COURT UPHEL D THE ORDER OF THE ITAT. SIMILARLY, ITAT HAS DELETED THE ADDITION IN THE ASSESSMENT YEAR 2009-10 IN ITA NO.2676/AHD/2013. THE LD.COUNSEL FO R THE ASSESSEE PLACED ON RECORD COPIES OF ALL THESE ORDERS AND CON TENDED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE ASS ESSEE. ON THE OTHER HAND, THE LD.DR IS UNABLE TO CONTROVERT THE CONTENT IONS OF THE LD.COUNSEL FOR THE ASSESSEE. 7. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND GO NE THROUGH THE RECORD CAREFULLY. THE ASSESSEE HAS DEBITED EXPENDI TURE UNDER THESE HEADS IN THE ASSESSMENT YEAR 2008-09. WHILE EXAMIN ING THE CORRECTNESS OF THE ITATS ORDER, THE HONBLE HIGH C OURT HAS OBSERVED THAT FOR THE PURPOSE BUSINESS, THE ASSESSEE HAS TO MAINTAIN GOODWILL AND CONTINUITY OF BUSINESS BEING PROVIDED BY IMPORT ANT MEMBERS. THUS, IN ORDER TO BOOST ITS BUSINESS, THE ASSESSEE COULD PLAN FOR PROVIDING CERTAIN INCENTIVES TO THE MEMBERS. FOLLO WING DECISION OF THE ITA NO.1234 AND 1934/AHD/2016 6 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE ASSES SEES OWN CASE, WE ALLOW THIS GROUND OF APPEAL AND DELETE DISALLOWANCE . 8. IN THE NEXT GROUND OF APPEAL GRIEVANCE OF THE AS SESSEE IS THAT THE LD.CIT(A) HAS ERRED IN UPHOLDING ADDITION OF RS.9.5 0 LAKHS WHICH WAS MADE WITH HELP OF SECTION 14A R.W.S RULE 8D OF THE INCOME TAX RULES. THE LD.COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS GROUND OF APPEAL. 9. IN GROUND NO.4, THE ASSESSEE HAS CHALLENGED INIT IATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. TH IS IS PREMATURE AT THIS STAGE. PENALTY IS YET TO BE IMPOSED UPON THE ASSESSEE, HENCE NO SEPARATE ADJUDICATION IS CALLED FOR, HENCE IT IS RE JECTED. 10. GROUND NO.5: THE ASSESSEE HAS CHALLENGED CHARG ING OF INTEREST UNDER SECTION 234/B AND 234/C. HOWEVER, NO ARGUMEN TS WERE ADVANCED, AND IT WAS SUBMITTED THAT IT IS SEQUENTIA L IN NATURE. HENCE, THIS GROUND IS REJECTED. 11. NO OTHER GROUNDS WERE PRESSED BY THE LD.COUNSEL FOR THE ASSESSEE. IN VIEW OF THE ABOVE, APPEAL OF THE ASSE SSEE IS PARTLY ALLOWED. 12. NOW WE TAKE APPEAL OF THE REVENUE I.E. ITA NO.1 934/AHD/2016. 13. IN THE FIRST GROUND OF APPEAL, GRIEVANCE OF THE REVENUE IS THAT THE LD.CIT(A) HAS ERRED IN DELETING DISALLOWANCE OF AMO RTIZED PREMIUM AMOUNTING TO RS.2,80,22,415/-. 14. BRIEF FACTS OF THE CASE ARE THAT ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE HAS WRITTEN OF F GOVERNMENT SECURITY PREMIUM TO THE EXTENT OF RS.2,80,22,415/-. IT IS PERTINENT TO OBSERVE THAT THE ASSESSEE BEING A COOPERATIVE SOCIE TY ENGAGED IN DOING BANKING BUSINESS WAS REQUIRED TO MAINTAIN STATUTORY LIQUIDITY RATIO (SLR). IT USED TO MAKE THREE TYPES OF INVESTMENTS VIZ. (I) HELD TO ITA NO.1234 AND 1934/AHD/2016 7 MATURITY (HTM), (II) HELD FOR TRADING (HFT), AND (I II) AVAILABLE FOR SALE (AFS). INVESTMENT MADE IN THE FIRST CATEGORY, IT H AS TO SOMETIME PURCHASE SECURITY ON PREMIUM. THUS, WHILE FINALISI NG THE ACCOUNTS, IT USED TO AMORTIZE SUCH PREMIUM PAID IN ACQUIRING SEC URITY AS A LOSS AMORTISED OVER THE ENTIRE PERIOD OF SECURITY. IN O THER WORDS, SECURITY IS TO BE RETAINED BY THE ASSESSEE UPTO MATURITY AND IT WAS ACQUIRED AT A VALUE HIGHER THAN THE FACE VALUE. THE QUESTION ARO SE WHETHER THE PREMIUM PAID BY THE ASSESSEE ON ACQUIRING SUCH SECU RITY COULD BE PERMITTED TO BE AMORTISED AND ALLOWED IN PHASED MAN NER. THE LD.AO DISALLOWED THE CLAIM OF THE ASSESSEE WHERE THE LD.C IT(A) ACCEPTED THE CLAIM OF THE ASSESSEE ON THE STRENGTH OF ORDER OF T HE ITAT IN IDENTICAL SITUATIONS. 15. THE LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF RAJKOT DISTRICT CO-OP . BANK LTD., 43 TAXMANN.COM 161 (GUJ). THE LD.DR WAS UNABLE TO CON TROVERT THIS CONTENTION OF THE ASSESSEE. 16. WE FIND ISSUE IS DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE HONBLE JURISDICTIONAL HIGH COURT. THE FINDING RECORDED IN THE CASE OF RAJKOT DISTRICT CO-OP. BANK LTD. (SU PRA) READS AS UNDER: 5. THE LEARNED COUNSEL SHRI P.O. DESAI FOR THE APPE LLANT VEHEMENTLY CONTENDED THAT THE TRIBUNAL COMMITTED SE RIOUS ERROR IN OVERRULING THE DECISION OF THE CIT (APPEALS), WH O HAD GIVEN DETAILED REASONS. HE SUBMITTED THAT THE INVESTMENT WAS IN THE NATURE OF CAPITAL INVESTMENT IN THE HANDS OF THE AS SESSEE AS HELD BY THE CIT (APPEALS). THE CBDT CIRCULAR DATED NOVEM BER 26, 2008 WOULD NOT APPLY. THERE WERE FARTHER INSTRUCTIO NS WHICH WOULD GOVERN THE SITUATION. 6. ON THE OTHER HAND, THE LEARNED COUNSEL SHRI TUSH AR HEMANI FOR THE RESPONDENT PLACED HEAVY RELIANCE ON THE SAID CB DT CIRCULAR DATED NOVEMBER 26, 2008 AND CONTENDED THAT THE BENE FIT OF AMORTISATION HAD TO BE GRANTED. THE ASSESSEE AS A C OOPERATIVE BANK WAS BOUND BY THE RBI DIRECTIVES. AS PER SUCH D IRECTIVES, THE ITA NO.1234 AND 1934/AHD/2016 8 ASSESSEE HAD TO INVEST CERTAIN AMOUNTS IN GOVERNMEN T SECURITIES AND TO HOLD THE SAME TILL MATURITY. IN THE PROCESS OF ACQUISITION, IF THERE WAS ANY PREMIUM PAID ON THE FACE VALUE OF TH E SECURITY, THE LOSS HAD TO BE AMORTISED. PARAGRAPH (VII) OF TH E CBDT CIRCULAR NO.17 OF 2008 DATED NOVEMBER 26, 2008 WOULD APPLY. SUCH INSTRUCTION READS AS UNDER: '(VII) AS PER RBI GUIDELINES DATED 16TH OCTOBER, 20 00, THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED TO BE CLASSIFIED UNDER THREE CATEGORIES VIZ. HELD TO MATURITY (HTM), HELD FOR TRADING (HFT) AND AVAILABLE FOR SALE (AFS). INVESTM ENTS CLASSIFIED UNDER HTM CATEGORY NEED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISITION COST UNLESS T HESE ARE MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTISED OVER THE PERIOD REMAINING TO MATURITY. IN THE CASE OF HFT AND AFT SECURITIES FORMING STOCK-IN-TRA DE OF THE BANK, THE DEPRECIATION/ APPRECIATION IS TO BE AGGRE GATED SCRIP-WISE AND ONLY NET DEPRECIATION, IF ANY, IS RE QUIRED TO BE PROVIDED FOR IN THE ACCOUNTS. THE LATEST GUIDELI NES OF THE RBI MAY BE REFERRED TO FOR ALLOWING ANY SUCH CLAIMS .' 7. THE INSTRUCTIONS CLEARLY PROVIDE FOR AMORTISATIO N OF PREMIUM PAID ON ACQUISITION OF SECURITIES WHEN THE SAME ARE ACQUIRED AT THE RATE HIGHER THAN THE FACE VALUE. SUCH AMORTISAT ION WOULD HAVE TO BE FOR THE REMAINING PERIOD OF MATURITY. THIS PR ECISELY THE TRIBUNAL HAD DIRECTED IN THE IMPUGNED ORDER. THOUGH CONTENDED, NO CONTRARY INSTRUCTIONS OF CBDT ARE BROUGHT TO OUR NOTICE. THE INSTRUCTION IN QUESTION HAVING BEEN ISSUED UNDER SE CTION 119(2) OF THE INCOME-TAX ACT, 1961, WOULD BIND THE REVENUE. N O QUESTION OF LAW, THEREFORE, ARISES. 17. RESPECTFULLY FOLLOWING JUDGMENT OF THE HONBLE GUJARAT HIGH COURT, WE DO NOT FIND ANY MERIT IN THIS GROUND OF A PPEAL. THE ASSESSEE IS ENTITLED FOR AMORTIZATION OF PREMIUM PAID BY IT IN ACQUIRING SCRIP WHICH WERE HELD TILL MATURITY. THE LD.CIT(A) HAS A PPRECIATED THIS CONTROVERSY, AND HENCE THIS GROUND OF APPEAL IS REJ ECTED. 18. IN THE NEXT GROUND, GRIEVANCE OF THE REVENUE IS THAT THE LD.CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE TO RS.9,5 0,000/- AS AGAINST RS.26,35,056/- UNDER SECTION 14A OF THE INCOME TAX ACT. ITA NO.1234 AND 1934/AHD/2016 9 19. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE H AS SHOWN DIVIDEND INCOME OF RS.1,52,00,000/-. INTEREST EARNED ON OTH ER TRUSTEES SECURITIES OF RS.46,12,380/- WERE CLAIMED AS EXEMPT FROM TAX. THE LD.AO HAS DIRECTED THE ASSESSEE TO SHOW INTEREST EX PENDITURE FOR EARNING ITS TAX FREE INCOME, AND WHETHER SUCH EXPEN DITURE HAS BEEN DISALLOWED UNDER SECTION 14A R.W. RULE 8D OF THE IN COME TAX RULES,1962 OR NOT. IN RESPONSE TO THE QUERY OF AO, THE ASSESS EE FILED DETAILED REPLY WHICH HAS BEEN TAKEN INTO CONSIDERATION BY THE AO. THE LD.AO THEREAFTER WORKED OUT THE DISALLOWANCE AS PER RULE 8D AND MADE ADDITION OF RS.26,35,056/-. 20. ON APPEAL, THE LD.CIT(A) RE-APPRECIATED THE CON TENTIONS OF THE ASSESSEE AND OBSERVED THAT AT THE MOST HALF PERCENT OF THE AVERAGE INVESTMENT COULD BE DISALLOWED IN ORDER TO COVER AD MINISTRATIVE EXPENDITURE ALLEGED TO HAVE BEEN INCURRED BY THE AS SESSEE FOR EARNING SUCH EXEMPT INCOME. 21. WITH THE ASSISTANCE OF LD.REPRESENTATIVES, WE H AVE GONE THROUGH THE RECORD. A PERUSAL OF THE RECORD WOULD INDICATE THAT THE ASSESSEE HAS NET INTEREST INCOME OF RS.95.65 CORES. IT HAS CAPITAL OF RS.665.81 CRORES. THUS, THE INVESTMENT COULD BE ALLEGED FROM INTEREST FREE FUNDS. THE ASSESSEE HAS NET INTEREST INCOME. THEREFORE, T HE AO WAS NOT JUSTIFIED IN OBSERVING THAT IT IS QUITE DIFFICULT T O DERIVE EXACT EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING DIVIDEND INCOM E OR INTEREST INCOME ON TRUSTEES FUNDS. THE ASSESSEE HAS DEMONSTRATED T HAT IT WAS HAVING FAR MORE FUNDS THAN THE ALLEGED INVESTMENT. HENCE, A PRESUMPTION COULD BE DRAWN THAT THE ASSESSEE USED INTEREST FREE FUNDS FOR EARNING SUCH INCOME. NO INTEREST COULD BE DISALLOWED AS SU CH. AS FAR AS HALF PERCENT OF AVERAGE INVESTMENT REQUIRED TO BE CONSID ERED FOR MAKING DISALLOWANCE IS CONCERNED, THE LD.CIT(A) HAS ALREAD Y UPHELD DISALLOWANCE UPTO RS.9.50 LAKHS. THE ASSESSEE HAS NOT CHALLENGED CONFIRMATION OF SUCH DISALLOWANCE. IT HAS RAISED G ROUNDS OF APPEAL, BUT ITA NO.1234 AND 1934/AHD/2016 10 DID NOT PRESS AT THE TIME OF HEARING. THEREFORE, A FTER TAKING INTO CONSIDERATION THE FINDING OF THE LD.CIT(A) WE DO NO T FIND ANY REASON TO INTERFERE IN IT. THIS GROUND OF APPEAL IS REJECTED , AND THE APPEAL OF THE REVENUE IS DISMISSED. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D, WHEREAS APPEAL REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 6 TH JUNE, 2018. SD/- SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 06/06/2018