The Rayat Sevak Co.op Bank Ltd., Satara V. Assistant Commissioner of Income-tax,

ITA 1298/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2022 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-04-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 17-06-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Assessee Lawyers: BAJRANG SAWANT
• Keywords: Business income; Bad and doubtful debts; Revised return; Revenue expenditure; Capital expenditure
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA , A M . / ITA NO. 1 298 /PN/201 4 / ASSESSMENT YEAR : 20 1 0 - 1 1 THE RAYAT SEVAK CO - OPERATIVE BANK LTD., 523, B, ANNASAHEB KA LYANI VIDYALAYA AREA, CAMP, SADAR BAZAAR, SATARA DIST., SATARA 415001 . / APPELLANT PAN: A AAAT0 952H VS. THE DY . COMMISSIONER OF INCOME TAX , SATARA CIRCLE, SATARA . / RESPONDENT / APPELLANT BY : SHRI BAJRANG SAWANT / RESPONDENT BY : SHRI HITENDRA NINAWE / DATE OF HEARI NG : 05 . 0 4 .201 6 / DATE OF PRONOUNCEMENT: 07 . 0 4 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) - III , PUNE , DATED 0 4 . 03 .20 1 4 RELATING TO ASSESSMENT YEAR 20 1 0 - 1 1 AGAINST ORDER PA SSED UNDER SECTION 1 4 3(3) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - III, PU NE WAS NOT JUSTIFIED BOTH IN FACTS AND IN LAW IN: - 1 . CONFIRMING THE ADDITIONS OF RS.26,98,792/ - (RS. TWENTY SIX LACS NINETY EIGHT THOUSAND SEVEN HUNDRED AND NINETY TWO ONLY) MADE BY THE ASSESSING OFFICER WHILE PASSING ORDER U/S.143(3) OF ITA NO. 1298 /PN/20 1 4 THE RAYAT SEVAK CO - OP BANK LTD. 2 THE I.T. ACT, 1961 TOWARDS THE BROKEN PERIOD INTEREST PAID BY THE BANK FOR PURCHASING THE GOVT. SECURITIES. 2 . CONFIRMING THE DISALLOWANCE OF THE GENUINE AND ADMISSIBLE CLAIM OF BAD DEBTS OF RS.10,00,000/ - MADE BY THE ASSESSING OFFICER. 3 . NOT CONSIDERING THE REVISED RETURN FIL ED WITHIN PRESCRIBED TIME BY THE APPELLANT AND TREATING THE RETURN FILED AS NON - EST RETURN BUT COMPLETING THE ASSESSMENT BASED ON INCOME DECLARED IN REVISED RETURN. 4 . THE APPELLANT CRAVES LEAVE TO ADD, ALTER, MODIFY, RESCIND ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL ON OR BEFORE THE FINAL HEARING. 3. THE ISSUE IN GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS AGAINST ADDITION MADE ON ACCOUNT OF BROKEN PERIOD INTEREST PAID BY THE BANK RELATING TO GOVERNMENT SECURITIES AMOUNTING TO RS. 26,98,792/ - . 4. BRIEF LY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS A CO - OPERATIVE BANK CARRYING ON THE BUSINESS OF BANKING AND PROVIDING CREDIT FACILITIES TO ITS MEMBERS, WHO IN TURN, WERE EMPLOYEES OF RAYAT SHIKSHAN SANSTHA. FOR THE YEAR UNDER CONSIDERATION, THE ASS ESSEE HAD CLAIMED THE DEDUCTION ON ACCOUNT OF BROKEN PERIOD INTEREST AMOUNTING TO RS.26,98,792/ - . THE SAID AMOUNT REPRESENT ED THE INTEREST THAT ACCRUED TO THE SELLER OF GOVERNMENT SECURITY, WHERE SUCH SECURITY WAS PURCHASED AFTER CERTAIN TIME GAP FROM THE DATE OF ISSUE. THE ASSESSEE CLAIMED TO HAVE PAID THE INTEREST RELATABLE FOR THE PERIOD STARTING FROM DATE OF ISSUE TO THE DATE OF PURCHASE AND SUCH INTEREST WAS NOT RECOGNIZED BY THE ASSESSEE AS PART OF ITS REVENUE. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE BROKEN PERIOD INTEREST WAS PART OF COMPOSITE COST OF SECURITIES PURCHASED DURING THE PREVIOUS YEAR AND THEREFORE, WAS IN THE NATURE OF CAPITAL EXPENDITURE. THE ASSESSING OFFICER RELIED ON CIRCULAR ISSUED BY CBDT BEING INSTRUCTION NO.17/2008 , DAT ED 26.11.2008 , WHICH CLARIFIED THAT THE PURCHASED SECURITIES WHICH WERE HELD UNDER THE CAPITAL ACCOUNT AT A PRICE ITA NO. 1298 /PN/20 1 4 THE RAYAT SEVAK CO - OP BANK LTD. 3 INCLUSIVE OF ACCRUED INT EREST, RENDERED ENTIRE PURCHASE CONSIDERATION TO BE IN THE NATURE OF CAPITAL OUTLAY. IN THE LIGHT OF THIS, THE ASSESS ING OFFICER DISALLOWED THE BROKEN PERIOD INTEREST IN THE HANDS OF ASSESSEE AS CAPITAL EXPENDITURE. 5. BEFORE THE CIT(A), THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ISSUE STANDS COVERED BY THE HONBLE BOMBAY HIGH COURTS DECISION IN AMERICAN EXPRESS INTERNATIONAL BANKING CO RPORATION VS. CIT REPORTED IN 258 ITR 601 (BOM) . HOWEVER, THE CIT(A) WAS OF THE VIEW THAT IN VIEW OF THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN CIT VS. BANK OF RAJASTHAN LTD. REPORTED IN 316 ITR 39 1 (RAJ) , WHICH IN TURN, HAD FOLLOWED THE DECISION OF APEX COURT IN VIJAYA BANK VS CIT REPORTED IN 187 ITR 541 (SC) AND HAD DISSENTED FROM THE DECISION OF HON BLE BOMBAY HIGH COURT IN AMERICAN EXPRESS INTERNATIONAL BANKING CO RPORATION VS. CIT (SUPRA) , THE ISSUE IS TO BE DECIDED AGAINST THE ASSESSEE IN NOT ALLOWING BROKEN PERIOD INTEREST AS REVENUE EXPENDITURE. 6. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US POINTED OUT THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER S OF HONBLE BOMBA Y HIGH COURT IN AMERICAN EXPRESS INTERNATIONAL BANKING CO RPORATION VS. CIT (SUPRA) AND FURTHER IN CIT VS. HDFC BANK LTD. IN INCOME TAX APPEAL NO.330 OF 2012, JUDGMENT DATED 23.07.2014 . 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PACED RELIA NCE ON THE ORDER OF CIT(A). 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING BEFORE US IS THE TREATMENT OF BROKEN PERIOD INTEREST. THE INTEREST ON ITA NO. 1298 /PN/20 1 4 THE RAYAT SEVAK CO - OP BANK LTD. 4 GOVERNMENT SECURITIES IS NORMALLY PAYABLE HALF YEARLY . W HE N THE GOVERNMEN T SECURITIES ARE TRADED, THE PURCHASE R AS PER MAR KET TREND HAS TO PAY THE SELLER NOT ONLY THE PURCHASE PRICE OF SECURITIES BUT ALSO THE INTEREST ACCRUED ON THE SAID GOVERNMENT SECURITIES FROM THE LAST DUE DATE OF INTEREST TILL THE DATE OF PURCHASE OF SECUR ITIES. SUCH INTEREST IS REFERRED TO AS BROKEN PERIOD INTEREST. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HA D PURCHASED CERTAIN SECURITIES AND HAD DEBITED THE BROKEN PERIOD INTEREST OF RS. 26,98,792/ - AS AN EXPENDITURE SINCE THE SAID INTEREST DID NOT R ELATE TO THE PERIOD FROM WHICH THE ASSESSEE HAD PURCHASED THE SECURITIES. 9. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN AMERICAN EXPRESS INTERNATIONAL BANKING CO RPORATION VS. CIT (SUPRA) , WHICH IN TURN, H AD ALSO TAKEN NOTE OF DECISION OF APEX COURT IN VIJAYA BANK VS CIT (SUPRA) . FURTHER, THE HONBLE BOMBAY HIGH COURT IN CIT VS. HDFC BANK LTD. (SUPRA) HAD FOLLOWED ITS EARLIER DECISION IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CO RPORATION VS. CI T (SUPRA) AND ALLOWED DEDUCTION OF BROKEN PERIOD INTEREST AND HELD THAT T HE INCOME BEING ASSESSED UNDER THE HEA D PROFITS & GAINS OF BUSINESS STAND S O N A DIFFERENT FOOTING AS AGAINST INCOME ASSESSED UNDER THE HEAD INTEREST ON SECURITIES IN THE CASE OF VAJAY A BANK CASE. THE HONBLE BOMBAY HIGH COURT IN AMERICAN EXPRESS INTERNATIONAL BANKING CO RPORATION VS. CIT (SUPRA) HAD HELD AS UNDER: - 9. THE KEY ISSUE WHICH ARISES FOR DETERMINATION IN THIS CASE IS THE CORRECT TREATMENT OF THE BROKEN PERIOD INTEREST UNDER THE INCOME - TAX ACT. ACCORDING TO THE DEPARTMENTS CONTENTION, THE BROKEN PERIOD INTEREST (NET) PAID BY THE ASSESSEE AT THE TIME OF PURCHASE WAS A PART OF THE CAPITAL COST OF THE INVESTMENT AND, THEREFORE, THE PURCHASE PRICE OF THE SECURITIES CANNOT BE BIF URCATED INTO INTEREST ACCRUED UP TO THE DATE OF PURCHASE AND BALANCE OF THE PRICE. CONSEQUENTLY, ACCORDING TO THE DEPARTMENT, PAYMENT FOR THE BROKEN PERIOD INTEREST (NET) CANNOT BE CLAIMED AS REVENUE EXPENDITURE. ON THE OTHER HAND, THE BANKS HAVE BEEN VALU ING THE SECURITIES/INTEREST HELD BY IT AT THE END OF EACH YEAR AND OFFER FOR TAXATION, THE APPRECIATION IN THEIR VALUE BY WAY OF PROFITS/INTEREST EARNED DUE TO EFFLUX OF TIME. THEY ALSO CLAIMED DEDUCTION FOR THE BROKEN PERIOD INTEREST PAYMENT. ACCORDING TO THE ASSESSEE - BANK, ON PURCHASE ITA NO. 1298 /PN/20 1 4 THE RAYAT SEVAK CO - OP BANK LTD. 5 OF DATED GOVERNMENT SECURITY, I.E, FOR EXAMPLE, IN 4 PER CENT. GOVERNMENT OF INDIA LOAN, 1980, F. V. RS. 5 LAKHS FOR A LESSER AMOUNT OF RS. 4,92,000, THE DIFFERENCE OF RS. 8,000 REPRESENTS PROFITS, WHEREAS ACCORDING TO THE DEPARTMENT, AS ARGUED BEFORE THE COURT, THE DIFFERENCE OF RS. 8,000 REPRESENTS INTEREST ON SECURITIES. CONSEQUENTLY, ACCORDING TO THE DEPARTMENT, THE SAID DIFFERENCE MUST BE CHARGED TO TAX UNDER SECTION 18, WHEREAS ACCORDING TO THE ASSESSEE, THE DIFFERENCE SHOULD BE CHARGED UNDER SECTION 28 OF THE INCOME - TAX ACT. IN FACT, IN THIS VERY CASE, ONE OF THE ITEMS OF DEBATE BEFORE THE ASSESSING OFFICER WAS TREASURY BILLS. ACCORDING TO THE ASSESSEE, THE DISCOUNT RELATING TO THE TREASURY BILLS WAS TO BE CONSIDERED A S INCOME FROM INTEREST ON SECURITIES. IT WAS ARGUED THAT THE TREASURY BILLS ARE SECURITIES UNDER THE PUBLIC DEBT ACT AND, THEREFORE, THE DISCOUNT EARNED REPRESENTED INTEREST ON SECURITIES. THIS ARGUMENT WAS REJECTED BY THE ASSESSING OFFICER. IT WAS HELD BY THE ASSESSING OFFICER THAT THE DIFFERENCE BETWEEN THE PURCHASE PRICE (DISCOUNT VALUE) AND THE SALE PRICE (MATURITY VALUE) REPRESENTED BUSINESS PROFITS AND NOT INTEREST ON SECURITIES AND, THEREFORE, THE DIFFERENCE WAS INCLUDED IN THE BUSINESS INCOME OF T HE ASSESSEE. THE POINT WHICH WE WOULD LIKE TO MAKE IN THIS CASE AT THE VERY OUTSET IS WHETHER THE DIFFERENCE IS INTEREST ON SECURITIES OR BUSINESS INCOME WILL DEPEND ON THE FACTS OF EACH CASE. IN THIS CASE, THE ASSESSEE - BANK MAINTAINED A METHOD OF ACCOUNTI NG UNDER WHICH THEY HAVE ACCOUNTED FOR THIS DIFFERENCE AS BUSINESS INCOME. AS HELD BY THE COMMISSIONER OF INCOME - TAX (APPEALS) AND THE TRIBUNAL, THE DEPARTMENT HAS ALSO TREATED THIS DIFFERENCE AS BUSINESS INCOME. HOWEVER, UNDER THE IMPUGNED ADJUSTMENT IN T HE METHOD OF ACCOUNTING OF THE ASSESSEE - BANK, THE ASSESSEE CLAIMED DEDUCTION FOR THE BROKEN PERIOD INTEREST PAYMENT (NET) AT THE TIME OF PURCHASE WHICH WAS DISALLOWED. THE ASSESSEE SOUGHT DEDUCTION FOR THE BROKEN PERIOD INTEREST PAYMENT (NET) ON THE GROUND THAT IT CONSTITUTED REVENUE EXPENDITURE ; THAT IT CONSTITUTED EXPENDITURE TO EARN BUSINESS INCOME BY WAY OF SIX - MONTHLY INTEREST, WHICH THE RESERVE BANK OF INDIA PAID TO HOLDERS OF GOVERNMENT LOANS. THIS ARGUMENT WAS REJECTED BY THE ASSESSING OFFICER. IT IS ARGUED BY THE DEPARTMENT THAT THE BROKEN PERIOD INTEREST PAYMENT (NET) WAS TOWARDS CAPITAL COST OF THE INVESTMENT BROKEN PERIOD INTEREST PAYMENT (NET) WAS TOWARDS CAPITAL COST OF THE INVESTMENT AND CONSEQUENTLY, PROFIT ON SALE OF A SECURITY SHOULD BE TAXED IN THE ACCOUNTING YEAR CORRESPONDING TO THE ASSESSMENT YEAR WHEN THE SECURIT Y IS SOLD/REDEEMED. HOWEVER, WHILE DISALLOWING DEDUCTION FOR THE BROKEN PERIOD INTEREST PAYMENT, THE DEPARTMENT HAS TAXED BROKEN PERIOD INTEREST RECEIPT IN THE HANDS OF THE ASSESSEE - BANK WHEN THE SECURITY WAS SOLD. THIS ANOMALY IS NOT ANSWERED TILL TODAY B Y THE DEPARTMENT. EVEN BEFORE THE TRIBUNAL, LEARNED SENIOR COUNSEL WHO APPEARED FOR THE DEPARTMENT COULD NOT EXPLAIN AS TO ON WHAT BASIS BROKEN PERIOD INTEREST PAYMENT WAS DISALLOWED WHILE BROKEN PERIOD INTEREST RECEIPT WAS TAXED. ACCORDING TO THE DEPARTME NT, THE DIFFERENCE REFERRED TO ABOVE REPRESENTED INTEREST ON SECURITIES. THAT, SUCH DIFFERENCE CAME UNDER SECTION 18 OF THE INCOME - TAX ACT. THIS WAS THE POINT WHICH WAS ARGUED ORALLY BEFORE THE COURT. THIS ARGUMENT IS CONTRARY TO WHAT IS ON RECORD. ON RECO RD, AND AS HELD BY THE TRIBUNAL, THE DEPARTMENT HAS ASSESSED THE ASSESSEE, NOT UNDER SECTION 18 AS IN THE CASE OF VIJAYA BANK LTD. V. CIT (ADDL.) [1991] 187 ITR 541 (SC), BUT THE ASSESSEES INCOME IS BROUGHT TO TAX UNDER SECTION 28 OF THE ACT. THEREFORE, ON THE FACTS, THIS CASE DOES NOT FALL IN LINE WITH VIJAYA BANK LTD.S CASE. 10 . FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT BROKEN PERIOD INTEREST IS TO BE ALLOWED AS REVENUE EXPENDITURE IN THE HANDS OF ASSESSEE . REVERSING THE ORDER OF CIT(A), WE ALLOW THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE. ITA NO. 1298 /PN/20 1 4 THE RAYAT SEVAK CO - OP BANK LTD. 6 1 1 . THE GROUNDS OF APPEAL NO.2 AND 3 RAISED BY THE ASSESSEE ARE NOT PRESSED, HENCE, THE SAME ARE DISMISSED AS NOT PRESSED. THE GROUNDS OF APPEAL RAISED BY THE A SSESSEE ARE THUS, PARTLY ALLOWED. 1 2 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 7 TH DAY OF APRIL , 201 6 . SD/ - SD/ - (PRADIP KUMAR KEDIA) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 7 TH APRIL , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - III , PUNE ; 4. / THE CIT - III, PUNE ; 5. , , / DR B , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE