The A.P. Mahesh Co-operative Urban Bank, Hyderabad V. Assistant Commissioner of Income Tax, Circle-5(1), Hyderabad

ITA 1804/Hyd/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7474 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB-B
• Next Hearing Date: 06-12-2018
• Assessment Year: 2014-2015
• Appeal Filed On: 03-11-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NILANJAN DEY
• Assessee Lawyers: B SATYANARAYANA MURTHY
• Keywords: Depreciation; Additional evidence
• Section: 14A; 37; 63; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B ', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN , ACCOUNTANT MEMBER ITA NO. 1804 / HYD/201 7 ASSESSMENT YEAR S : 20 14 - 15 THE AP MAHESH COOPERATIVE URBAN BANK, HYDERABAD. PAN AA BAT 4652 K VS. ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 5(1), HYDERABAD. APPELLANT RESPONDENT ITA NO. 1780 /HYD/201 7 ASSESSMENT YEARS: 2014 - 15 ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 5(1), HYDERABAD. VS. THE AP MAHESH COOPERATIVE URBAN BANK, HYDERABAD. PAN AABAT 4652 K APPELLANT RESPONDENT A SSESSEE BY: S HRI B. SATYANARAYANA MURTHY RE VENUE BY: SHRI NILANJAN DEY DATE OF HEARING: 0 6 / 1 2 / 201 8 DATE OF PRONOUNCEMENT: 09 / 01 /201 9 O R D E R PER S. RIFAUR RAHMAN , AM: THESE ARE CROSS APPEALS BY THE ASSESSEE AS WELL AS REVENUE DIRECTED AGAINST THE ORDER OF CIT(A) 4 , HYDERABAD, DATED, 04 /08/201 7 FOR AY 20 1 4 - 1 5 . 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE COMPANY REGISTERED UNDER COOPERATIVE SOCIETIES ACT, FILED ITS RETURN OF INCOME FOR THE AY 2014 - 15 ON 24/09/2014 DECLARING TOTAL I.T.A. NO. 1804 & 1780 /HYD/1 7 THE AP MAHESH COOPERATIVE URBAN BANK, HYD. 2 INCOME OF RS. 3,05,87,820/ - . THE AO COMPLETED THE ASSESSMENT BY MAKING THE FOLLOWING ADDITIONS AND ASSESSED THE INCOME AT RS. 19,90,92,900/ - .: 1. DISALLOWANCE U/S 14A RS. 11,07,108/ - 2. DISALLOWANCE ON CONTRIBUTION TO EDUCATION FUND RS. 20,48,979/ - 3. DEPRECIATION ON INVESTMENT IN HTM RS. RS. 16,53,49,000/ - 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) . LD. CIT(A) FOLLOWING THE DECISION OF THE COORDINATE BENCH OF ITAT, HYDERABAD IN ASSESSEES OWN CASE , CONFIRMED THE A DDITION MADE TOWARDS CONTRIBUTION TO EDUCATION FUND AND DELETED THE ADDITION MADE TOWARDS DEPRECIATION ON INVESTMENT IN HTM. 4. AGGRIEVED BY THE ORDER OF CIT(A), BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL : 4.1 GROUNDS OF APPEAL BY THE ASSESSEE 1. THE ORDERS OF THE LOWER AUTHORITIES, IN SO FAR AS THEY ARE AGAINST THE APPELLANT - BANK, ARE CONTRARY TO THE FACTS OF THE CASE AND PROVISIONS OF LAW. 2. THE LOWER AUTHORITIES ARE NOT JUSTIFIED IN DISALLOWING THE C LAIM FOR DEDUCTION OF RS.20,48,979/ - BEING THE CONTRIBUTION TO CO - OPERATIVE EDUCATION FUND - NATIONAL CO - OPERATIVE UNION OF INDIA. 3. THE LOWER AUTHORITIES SHOULD HAVE APPRECIATED THAT THIS CONTRIBUTION IS A MANDATORY ONE AS PROVIDED IN MULTI STATE CO - OP ERATIVE SOCIETIES ACT, 2002, WHICH GOVERNS THE APPELLANT - BANK. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS SUBMITTED THAT THE ORDER OF THE LOWER AUTHORITIES BE SET ASIDE OR MODIFIED AS MAY BE DEEMED FIT. 4.2 GROUNDS OF APPEAL BY THE REVENUE 1. THE COMMISSIONE R OF INCOME TAX (A) ERRED IN DELETING THE DISALLOWANCE OF DEPRECIATION ON INVESTMENT IN HTM OF RS 16,53,49,000/ - . I.T.A. NO. 1804 & 1780 /HYD/1 7 THE AP MAHESH COOPERATIVE URBAN BANK, HYD. 3 2. THE COMMISSIONER OF INCOME TAX (A) ERRED IN HOLDING THAT THE VERY NATURE OF THESE INVESTMENTS IS TO TRADE IN THE SECURITIES AND HENCE UND OUBTEDLY, THEY ARE THE STOCK IN TRADE. 3. THE COMMISSIONER OF INCOME TAX (A) ERRED IN NO DISTINCTION BETWEEN THE THREE CATEGORIES OF SECURITIES AND DEPRECIATION CAN BE ALLOWED TO THE ASSESSEE ON ALL THE SECURITIES ON THE SAME FOOTING. 4. THE COMMISSION ER OF INCOME TAX (A) ERRED IN IGNORING THE FACT THAT REVENUE'S APPEAL ON IDENTICAL ISSUE IN ASSESSEE'S OWN CASE FOR THE ASST YEAR 2006 - 07 IS PENDING ADJUDICATION BY THE HON'BLE HIGH COURT. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING. 5. AS REGARDS ASSESSEES GROUNDS OF APPEAL RELATING TO DISALLOWANCE OF CLAIM FOR DEDUCTION OF RS. 20,48,979/ - , THE AO OBSERVED THAT THE ASSESSEE HAD SUBTRACTED AN AMOUNT OF RS. 20,48,979/ - TOWARDS EDUCATION FUND IN THE COMPUTATION OF TAXABLE INCOME. THE AR EXPLAINED THAT AS PER THE MULTI - STATE COOPERATIVE ACT, 2002, THE ASSESSEE IS OBLIGED TO CREDIT 1% OF ITS NET PROFIT TO THE COOPERATIVE EDUCATION FUND MAINTAINED BY THE NATIONAL COOPERATIVE UNION, NEW DELHI AND HENCE IT IS ALLOWABLE EXPENDITURE U/S 37 OF T HE ACT. 5.1 REJECTING THE SUBMISSIONS OF THE ASSESSEE, THE AO OBSERVED THAT THE ASSESSEE DID NOT MAKE ANY EXPENDITURE IN THE NORMAL COURSE OF ITS ACTIVITY. THIS IS NOTHING BUT THE APPROPRIATION OF PROFIT WHICH CANNOT BE MADE FROM THE TAXABLE INCOME. HE O BSERVED THAT T HE SAID AMOUNT HAS ONLY CONTRIBUTED BY THE ASSESSEE TO THE NATIONAL CO - OPERATIVE UNION WHICH CANNOT BE TAKEN AS EXPENDITURE AND E VERY ALLOCATION OF 1% IS AKIN TO TRANSFER OF CERTAIN AMOUNT OF P ROFIT TO THE RESERVES AND IS CLEARLY A 'BELOW THE LINE' ALLOCATION. IT IS NOT A BUSINESS EXPENSE U/S 37 AND HENCE THIS WAS NOT AN I.T.A. NO. 1804 & 1780 /HYD/1 7 THE AP MAHESH COOPERATIVE URBAN BANK, HYD. 4 ALLOWABLE EXPENDITURE U/S 37 OF THE I.T. ACT. SINCE THE EXPENSES WAS NOT ALLOWABLE, THE AMOUNT OF RS. 20,48,979/ - WAS ADDED BACK TO THE INCOME RETURNED OF THE ASSESSEE , BY THE AO. 6. WHEN THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), THE CIT(A) FOLLOWING THE DECISION OF THE ITAT IN ASSESSEES OWN FOR AY 2010 - 11, DATED 31/12/2014, IN ITA NO. 1580/HYD/2013, CONFIRMED THE ADDITION MADE BY THE AO, BY EXTRACTING THE FINDINGS OF ITA T IN HIS ORDER, WHICH ARE AS UNDER: 'THE AMOUNT CONTRIBUTED BY ASSESSEE TO THE NATIONAL COOPERATIVE UNION, NEW DELH I, IS APPROPRIATION FROM THE NET PROFITS. THERE IS A RIGHT TO RECEIVE THE INCOME INDEPENDENT OF ACCRUAL AND RECEIPT OF INCOME BY THE ASSESSEE BEFORE THIRD PARTY COULD LAY CLAIM TO ANY PART OF IT. SINCE INCOME REACHED ASSESSEE BEFORE IT REACHED THIRD PARTY, THERE IS NO DIVERSION. AS ALREADY STATED, THERE IS NO PAYMENT IN THE YEAR OF LOSSES. THEREFORE, PAYMENT U/S 63 (1) (B) IS ONLY AN APPROPRIATION OF PROFIT. MOREOVER, THIS AMOUNT PAID DURING THE YEAR IS ALSO NOT O UT OF THE PROFITS OF THEIR YEAR BUT PROFITS OF EARLIER YE AR. THEREFORE, ON THAT COUNT ALSO AMOUNT CANNOT BE ALLOWED AS DEDUCTION DURING THE YEAR. FOR THESE REASONS, WE UPHOLD THE ORDER OF THE AUTHORITIES AND REJECT ASSESSEES GROUNDS ON THE ISSUE. 7. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AS THE DECISION TAKEN BY HIM IS IN CONSONANCE WITH THE ORDER OF ITAT, HENCE, WE UPHOLD THE ORDER OF CIT(A) ON THIS ISSUE AND DISMISS THE GROUNDS RAISED BY THE ASSESSEE IN THIS REGA RD. 8. AS REGARDS GROUND RAISED BY THE REVENUE RELATING TO DELETION OF DISALLOWANCE OF AN AMOUNT OF RS. 16,53,49,000/ - TOWARDS DEPRECIATION OF HTM SECURITIES, D URING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT I.T.A. NO. 1804 & 1780 /HYD/1 7 THE AP MAHESH COOPERATIVE URBAN BANK, HYD. 5 AS PER COMPUTA TION OF INCOME, THE ASSESSEE HA D DEBITED AN AMOUNT OF RS. 24,41,44,000/ - TOWARDS DEPRECIATION ON ACCOUNT OF REVALUATION OF SECURITIES OF THREE CATEGORIES I.E., HTM, HFT AND AFS. THE AO OBSERVED THAT S INCE THIS IS A NOTIONAL LOSS, THE SAME IS NOT AN ALLOWAB LE EXPENDITURE U/S 37 OF THE L.T. ACT. ACCORDINGLY, A SHOW CAUSE LETTER WAS ISSUED ASKING WHY THIS NOTIONAL LOSS OF HTM SHOULD NOT BE DISALLOWED. THE ASSESSEE REPLIED THAT THE AMOUNT OF RS. 24,41,44,000/ - HAS BEEN CLAIMED AS ALLOWABLE DEDUCTION FOR A Y 2014 - 15 AND RELIED ON THE DECISION OF THE I TAT IN ITS OWN CASE I TA NO.775/HYD/09 FOR A.Y. 2006 - 07 AND IN THE CASE OF STATE BANK OF HYDERABAD IN ITA NO. 1232/HYD/06 WHEREIN IT WAS HELD THAT IT IS NOT NECESSARY THAT SECURITIES MUST BE DEALT WITH DAILY OR OFTEN I N ORDER THAT SECURITIES BECOME STOCK IN TRADE. BY THIS METHOD, THE ASSESSEE CLAIMED NOTIONAL LOSS AND IGNORED NOTIONAL PROFIT WHICH IS NOT PROPER AS PER THE L.T. ACT. 8.1 REJECTING THE SUBMISSIONS OF THE ASSESSEE, THE AO DISALLOWED THE AMOUNT OF RS. 16,53,49,000/ - ON ACCOUNT OF HTM SECURITIES DEPRECIATION . 9. WHEN THE ASSESSEE APPEALED BEFORE THE CIT(A), THE CIT(A) FOLLOWING THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AY 2006 - 07, DELETED THE DISAL LOWANCE MADE ON ACCOUNT HTM SECURITIES DEPRECIATION, BY EXTRACTING THE FINDINGS OF ITAT IN HIS ORDER, WHICH ARE AS UNDER: 'IN THE CASE OF ASSESSEE OTHER THAN BANKS, THE NORMAL APPROACH TO ARRIVE AT A CONCLUSION AS TO WHE TH ER A PARTICULAR INVESTMENTS FOR THE PURPOSE OF INVESTMENT PER SE OR FOR TRADE, IS TO CONSIDER THE INTENTION OF THE ASSESSEE. MOREOVER, AS HELD BY THE SUPREME COURT IN THE CASE OF CIT VS. H. HOLCK LARSEN (160 ITR 67), THE R E AL QUESTION WAS NOT WHETHER THE TRANSACTION OF BU YING AND SELLING THE SHARES LACKS THE ELEMENT OF TRADING, BUT WHETHER THE LATER STAGES OF THE WHOLE OPERATION SHOW I.T.A. NO. 1804 & 1780 /HYD/1 7 THE AP MAHESH COOPERATIVE URBAN BANK, HYD. 6 THAT THE FIRST STEP THE PURCHASE OF SHARES WAS NOT TAKEN AS, OR IN THE COURSE OF, A TRADING TRANSACTION. HOWEVER, THIS PROPOSITION DOES NOT A PPLY TO THE BANKS IN VIEW OF THE PECULIAR NATURE OF THEIR ACTIVITIES. IN THE CASE OF BANKS, SO FAR AS THEIR INVESTMENT IN SECURITIES IS CONCERNED, THEIR INTENTION HAS NO RELEVANCE. THE INVESTMENT IN SECURITIES PER SE IS MEANT FOR TRADING AND IT IS NEVER ME ANT NOR DESIRED THAT THE BANKS KEEP ON HOLDING TO THE SECURITIES FOR A LONG TIME. IN FACT, IN THE ASSESSEE'S OWN CASE REPORT IN 151 ITR 703, THE ANDHRA PRADESH HIGH COURT, WHILE REJECTING THE CLAIM OF THE ASSESSEE THAT PROFIT ON SALE OF SECURITIES WAS CAPI TAL GAIN, HELD THAT IT WAS BUSINESS PROFIT AND OBSERVED THAT IT IS NOT NECESSARY THAT THE ASSESSEE SHOULD BE DEALING IN SECURITIES. IN OTHER WORDS, THE COURT HELD THAT THE INVESTMENTS IN SECURITIES ARE THE BANK'S STOCK - IN - TRADE IRRESPECTIVE OF ITS DEALING IN THEM. SIMILARLY, THE JUDGMENT OF THE KERALA HIGH COURT IN THE CASE OF CIT VS. NEDUNGADI BANK LTD., (264 ITR 545) IS ALSO RELEVANT. IN THAT CASE, THE INVESTMENT IN CERTAIN SECURITIES WAS MADE TO MEET THE REQUIREMENTS OF MAINTAINING THE STATUTORY LIQUID ITY RATIO (SLR). THE CONTENTION OF THE REVENUE WAS THAT SINCE THESE INVESTMENTS ARE SPECIFICALLY TO MEET THE REQUIREMENT OF SLR, THE BANK CANNOT DEAL WITH THEM AND THE INVESTMENT HAS TO BE RETAINED FOR A LONG TIME. THE COURT REJECTED THIS ARGUMENT AND OBSE RVED THAT IT IS NOT NECESSARY THAT THE SECURITIES MUST BE DEALT WITH DAILY OR OFTEN IN ORDER THAT THE SECURITIES BECOME STOCK - IN - TRADE. THE POINT WE ADDITIONAL EVIDENCE TRYING TO EMPHASISE IS THAT BY ITS VERY NATURE, THE INVESTMENT IN SECURITIES BY BANKS IS FOR THE PURPOSE OF TRADE IRRESPECTIVE OF THE PERIOD OF HOLDING OF SUCH SECURITIES. IN FACT, WHILE PRESCRIBING THE CLASSIFICATION OF SECURITIES INTO THREE CATEGORIES AS MENTIONED EARLIER, THE AVOWED POLICY DECLARED WAS THAT 100% OF THE BANKS INVESTMENT SHOULD BE MARKED TO MARKET AND THIS PROCESS SHOULD BE COMPLETED WITHIN THE NEXT THREE YEARS. EVEN IN THE ERSTWHILE POLICY OF CLASSIFYING THE INVESTMENTS INTO PERMANENT AND CURRENT CATEGORIES, THE BANKS HAD THE FLEXIBILITY TO TRANSFER THE SECURITIES FROM ON E CATEGORY TO ANOTHER. THUS, EVEN IF THE SECURITIES HELD AS HTM SECURITIES ARE EXPECTED TO BE HELD TILL MATURITY, THE BANKS ARE NOT PRECLUDED OR PROHIBITED FROM SELLING THEM BEFORE MATURITY. IT HAS BEEN THE INTENTION OF THE RESERVE BANK OF INDIA(RBI) TO EN COURAGE THE BANKS TO TRADE IN THE SECURITIES WHICH MAY EVENTUALLY LEAD TO A DEEPER AND VIBRANT DEBT MARKET. IT IS STATED THAT MARKING TO MARKET THE ENTIRE PORTFOLIO ELIMINATES THE INCENTIVE FOR IMPRUDENT I.T.A. NO. 1804 & 1780 /HYD/1 7 THE AP MAHESH COOPERATIVE URBAN BANK, HYD. 7 FINANCIAL DECISION. IT IS ALSO STATED THAT IT WOULD ENCOURAGE TRADING IN SECURITIES HELD IN HITHERTO CLASSIFIED ' PERMANENT ' CATEGORY. THE OBJECTION OF MAKING A MARKET IN LONG - TERM DEBT WILL THUS BE ACHIEVED IF ALL THE SECURITIES WITHOUT ANY DIFFERENTIATION ARE MARKED TO MARKET. THUS, IT CAN BE SEEN THAT EVE N THE SECURITIES WINCH ARE HELD IN PERMANENT ARE SUPPOSED TO BE DEALT IS TO TRADE IN THE SECURITIES AND HENCE UNDOUBTEDLY, THEY ARE THE STOCK - I N - TRADE FOR THE ASSESSEE, WHEN WE HOLD THAT THERE IS NO DISTINCTION BETWEEN THE THREE CATEGORIES OF SECURITIES, O BVIOUSLY THE ASSESSEE CAN PROVIDE FOR DEPRECIATION IN ALL THE SECURITIES ON THE SAME FOOTING. ACCORDINGLY, THE DISALLOWANCE IS DELETED. 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AS THE DECISION TAKEN BY HIM IS IN CONSONANCE WITH THE ORDER OF ITAT, HENCE, WE UPHOLD THE ORDER OF CIT(A) ON THIS ISSUE AND DISMISS THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD. 10. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE AS WELL AS REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 9 TH JANUARY , 201 9. SD/ - ( P. MADHAVI DEVI ) JUDICIAL MEMBER SD/ - ( S. RIFAUR RAHMAN ) ACCOUNTANT MEMBER HYDERABAD, DATED 9 TH JANUARY , 201 9. KV COPY FORWARDED TO: 1. M/S THE AP MAHESH COOPERATIVE URBAN BANK, C/O VENUGOPAL & CHENOY, CAS., 4 - 1 - 889/16/2, TILAK ROAD, HYDERABAD 001 2 . AC IT, CIRCLE 5(1 ), HYDERABAD . 3 . CIT (A) - 4 , HYDERABAD 4. PR. CIT 4 , HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE