HDFC BANK LTD, MUMBAI V. ASST. CIT 2(3), MUMBAI

ITA 6941/MUM/2010

• Counselvise Citation: 694119914 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2007-2008
• Appeal Filed On: 05-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: YOGESH A THAR
• Keywords: Earning of tax free income
• Section: 6; 14A

Judgement Text

M/S HDFC BANK LTD 6939 & 6941/MUM/2010 6910 & 6911/MUM/2010 IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI H H H H BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI RAJENDRA SINGH, AM & RAJENDRA SINGH, AM & RAJENDRA SINGH, AM & RAJENDRA SINGH, AM & SHRI VIJAY PAL RAO, JM SHRI VIJAY PAL RAO, JM SHRI VIJAY PAL RAO, JM SHRI VIJAY PAL RAO, JM ITA NO ITA NO ITA NO ITA NO. 6939 & 6941/MUM/2010 . 6939 & 6941/MUM/2010 . 6939 & 6941/MUM/2010 . 6939 & 6941/MUM/2010 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2006 2006 2006 2006- -- -07 0707 07 & 07 & 07 & 07 & 07- -- -08) 08) 08) 08) M/S HDFC BANK LTD (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) HDFC BANK HOUSE, SENAPATI BAPAT MARG LOWER PAREL - MUMBAI 400 018 VS THE DY COMMR OF INCOME TAX 2(3), MUMBAI (APPELLANT (APPELLANT (APPELLANT (APPELLANT/CROSS OBJECTOR /CROSS OBJECTOR /CROSS OBJECTOR /CROSS OBJECTOR) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ITA NO ITA NO ITA NO ITA NO.6910 & 6911/MUM/2010 .6910 & 6911/MUM/2010 .6910 & 6911/MUM/2010 .6910 & 6911/MUM/2010 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2006 2006 2006 2006- -- -07 & 07 07 & 07 07 & 07 07 & 07- -- -08) 08) 08) 08) THE DY COMMR OF INCOME TAX 2(3), MUMBAI VS M/S HDFC BANK LTD (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) (SUCCESSOR OF CENTURION BANK OF PUNJAB LTD) HDFC BANK HOUSE, SENAPATI BAPAT MARG LOWER PAREL - MUMBAI 400 018 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO. PAN NO. PAN NO. PAN NO. PAN NO.AAACC2772 AAACC2772 AAACC2772 AAACC2772R RR R ASSESSEE BY SHRI YOGESH A THAR REVENUE BY SHRI GOLI SRINIWAS RAO DT.OF HEARING 21 ST FEB 2012 DT OF PRONOUNCEMENT 21 ST FEB 2012 ORDER ORDER ORDER ORDER PER PER PER PER BENCH: BENCH: BENCH: BENCH: THESE ARE TWO SETS OF CROSS APPEALS FOR THE ASSESS MENT YEAR 2006-07 AND 2007-08. BOTH THE PARTIES HAVE RAISED COMMON GROUND S IN THE RESPECTIVE APPEALS. 2 THE ASSESSEE HAS RAISED THE ONLY ISSUE AS UNDER: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AO U/ S 14A OF THE I T ACT BEING THE DISALLOWANCE AS PER RULE 8D OF THE I T RU LES, 1962. M/S HDFC BANK LTD 6939 & 6941/MUM/2010 6910 & 6911/MUM/2010 2 3 WE HAVE HEARD THE LD AR AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR OF THE ASSESSEE HAS POINTED OUT THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE TRIBUN AL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 TO 2005-06 VIDE ORD ER DATED 29 TH JUNE 2011. HE HAS FURTHER SUBMITTED THAT THE ASSESSEE IS HAVING I TS OWN FUND COMPRISING SHARE CAPITAL, RESERVES AND SURPLUS, WHICH IS MORE THAN T HE INVESTMENT IN THE TAX FREE SECURITIES. HE HAS FURTHER POINTED OUT THAT FOR TH E AYS UNDER CONSIDERATION, THE INVESTMENT IN SECURITIES ARE REDUCED AND THE CLOSIN G BALANCE IN THE SECURITIES IS LESS THAN THE OPENING BALANCE; THEREFORE, THE INVES TMENT MADE IN THE EARLIER YEARS IS BROUGHT FORWARD AND THE TRIBUNAL HAS ALREA DY DECIDED THE ISSUE IN RESPECT OF THE INVESTMENT ALREADY STANDS IN THE BOO KS OF THE ACCOUNT OF THE ASSESSEE. 3.1 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDERS OF THE LOWER AUTHORITIES. 4 AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HA S BEEN CONSIDERED AND ADJUDICATED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS 2001-02 TO 2005- 06 IN PARAS 4 TO 4.2 AS UNDER: 4 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE POIN T THAT THE ASSESSEES SHARE CAPITAL, PROFIT RESERVES AND SURPLUS AS WELL AS THE BALANCE IN THE CURRENT ACCOUNT IS MORE THAN THE INVESTMENT IN THE TAX FREE SECURITIES. IT IS ALSO AN ACCEPTED NORMS AND BUSINESS PRACTICE THA T A PRUDENT BUSINESSMAN WOULD MAKE THE INVESTMENT OUT OF HIS OW N FUNDS INSTEAD OF BORROWED FUNDS AND THE BORROWED FUNDS ARE UTILIZED FOR BUSINESS/TRADING PURPOSES; HOWEVER, EXCEPTION MAY BE THERE TO THIS G ENERAL PRACTICE. AS PER THE PROVISIONS OF SEC. 14A, THE EXPENDITURE INC URRED TO EARN EXEMPT INCOME CANNOT BE ALLOWED AND THE EXPENDITURE SHALL BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING O F TAXABLE INCOME. IN OTHER WORDS, ONLY NET INCOME IS SUBJECTED TAX AND S IMILARLY EXEMPTION IS ALSO ALLOWED ON THE NET EXEMPTED INCOME. IF AN EXP ENDITURE IS DIRECTLY OR M/S HDFC BANK LTD 6939 & 6941/MUM/2010 6910 & 6911/MUM/2010 3 INDIRECTLY INCURRED FOR EARNING THE EXEMPT INCOME, THEN THE SAME CANNOT BE CLAIMED AS AGAINST THE INCOME, WHICH IS TAXABLE. 4.1 IN ORDER TO DISALLOW THE PROPORTIONATE EXPENDIT URE U/S 14A, THERE SHOULD BE SOME PROXIMATE COURSE AND THE NEXUS OF TH E SAID EXPENDITURE WITH THE TAX EXEMPT INCOME. WHEN IT HAS BEEN BROUGH T ON RECORD THAT NO EXPENDITURE ACTUALLY INCURRED FOR EARNING THE EXEMP T INCOME, THEN THE PROVISIONS OF SEC. 14A CANNOT BE INVOKED. 4.2 IN THE CASE IN HAND, UNDISPUTEDLY, THE ASSESSEE S OWN FUNDS AND NON-INTEREST BEARING FUNDS ARE MORE THAN THE INVEST MENT IN THE TAX FREE SECURITIES THEN THERE IS NO BASIS FOR DEEMING THAT THE ASSESSEE HAS USED THE BORROWED FUNDS FOR INVESTMENT IN TAX FREE SECUR ITIES. ACCORDINGLY, ON THIS FACTUAL ASPECT, WE DO NOT FIND ANY MERIT IN TH E CONTENTION OF THE LD DR. FURTHER, IT IS TO BE NOTED THAT IT IS NOT THE CASE OF INVESTMENT IN TAX FREE SECURITIES EVERY YEAR; BUT THE INVESTMENT IN THE EA RLIER YEARS HAS BEEN CARRIED FORWARD AS IT IS EVIDENT FROM THE PARTICULA RS WHERE THE BALANCE AT THE END OF THE YEAR SHOWS THAT THE INVESTMENT IS APPEARING IN ALL THE EARLIER YEARS. THEREFORE, WE DO NOT FIND ANY ERROR OR ILLEGIBILITY IN THE ORDER OF THE CIT(A), QUA, THE ISSUE OF DISALLOWANCE OF IN TEREST U/S 14A. 5 ACCORDINGLY, FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, IN PRINCIPLE, WE DECIDE THE ISSUE OF DISALLOWANCE OF I NTEREST EXPENDITURE IN FAVOUR OF THE ASSESSEE SUBJECT TO THE FACT THAT THE ASSESSEE IS HAVING NON INTEREST BEARING FUNDS MORE THAN THE INVESTMENT IN TAX FREE SECURITIES. 5.1 THE LD AR HAS FILED A COPY OF THE BALANCE SHEET /ANNUAL ACCOUNT IN SUPPORT OF THE CLAIM OF THE ASSESSEE THAT THE OWN FUND OF T HE ASSESSEE IS MORE THAN THE INVESTMENT IN THE TAX FREE SECURITIES. THEREFORE, T HE ASSESSING OFFICER IS DIRECTED TO VERIFY THE FACTUAL POSITION AND ALLOW THE CLAIM OF THE ASSESSEE, IF THE ASSESSEES OWN FUNDS ARE MORE THAN THE INVESTMENT IN TAX FREE SECURITIES. 6 THE REVENUE HAS RAISED THE COMMON GROUND AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD CIT(A) ERRED IN ALLOWING LOSS ON ACCOUNT OF YEAR EN D VALUATION OF CURRENT ASSETS WITHOUT APPRECIATING THAT THE LOSS WAS NOTIO NAL AND WAS NOT ACTUALLY INCOME DURING THE PREVIOUS YEAR. M/S HDFC BANK LTD 6939 & 6941/MUM/2010 6910 & 6911/MUM/2010 4 7 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF T HE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS 2001-02 TO 2005-06 (SUPRA) IN PARAS 11 TO 11.2 AS UNDER: 11 NEXT ISSUE IN THE APPEAL OF THE REVENUE FOR AY 2001-02 IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF LOSS DUE TO DIMINUTION IN THE VALUE OF THE CURRENT INVESTMENT AND AMORTIZATION OF PREMIUM ON INVESTMEN TS HELD TO MATURITY. 11 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR HAS POINTED OUT THAT THIS ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE TRIBUNAL IN THE CASE OF M/S LORD KRISHNA BANK LTD IN ITA NO.118/COC H/2007 FOR AY 1999-00 VIDE ORDER DATED 27.4.2011. THE CIT(A) HAS DECIDED THE ISSUE IN PARA 10 AS UNDER: 10. RESPECTFULLY FOLLOWING THE HONBL BOMBAY HIGH COURT DECISION IN THE CASE OF CIT VS BANK OF BARODA (262 ITR 334) WHEREIN THE HONBLE COURT HELD THAT LOSS DEBITED TO PROFIT & LO SS ACCOUNT DUE TO DECREASE IN VALUE OF SECURITIES IS ALLOWABLE AS DED UCTION AND THE HONBLE SUPREME COURT IN THE CASE OF UNITED COMMER CIAL BANK VS VIT 240 ITR 355 WHERE THE HONBLE COURT REVERSING T HE DECISION OF THE HIGH COURT HELD THAT NATIONALISED BANK GOVERNED BY BANKING REGULATION ACT. BANK IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BOTH FOR BOOK KEEPING AS WELL AS TAX PURPOSES. BANK IS VALUING STOCK IN TRADE (INVESTMENTS) AT COST IN BALANCE SHEET I N ACCORDANCE WITH BANKING REGULATION ACT AND VALUING VERY SAME INVEST MENTS AT COST OR MARKET VALUE WHICHEVER WAS LOWER FOR INCOME TA X PURPOSES. METHOD FOLLOWED CONSISTENTLY WAS VALID AND COULD NO T BE REJECTED. IN THE PRESENT CASE THE FACTS BEING SIMILAR TO THE FAC TS REPORTED IN UCO BANK, THE ASSESSING OFFICER IS DIRECTED TO ALLOW TH E REVALUATION OF SECURITIES. HOWEVER, FOR THE COMPUTATION OF DEPRECI ATION ALLOWABLE, THE ASSESSING OFFICER IS ALSO DIRECTED TO REVALUE T HE SECURITIES IN THE SAME MANNER IN THE BEGINNING OF THE YEAR ALSO. 11.1 WE FIND THE TRIBUNAL IN THE CASE OF LORD KRISH NA BANK LTD (SUPRA) HAS CONSIDERED AND ADJUDICATED THE ISSUE IN PARA 3 & 4 AS UNDER: 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED A.R. HAS R ELIED ON CIRCULAR DBOD.NO.BP.BC.29/21.04.048/98 DATED 11 TH APRIL, 1998 ISSUED BY THE RESERVE BANK OF INDIA PRESCRIBING THE METHOD TO BE FOLLOWED FOR VALUATION OF GOVERNMENT AND OTHER SECURITIES. THE L EARNED A.R. INVITED OUR ATTENTION TOWARDS PAGE 4 OF THE PAPER B OOK, WHICH IS THE METHOD SUGGESTED BY THE RBI TO BE ADOPTED BY TH E BANKS IN RESPECT OF PERMANENT INVESTMENTS. CLAUSE (II) OF P OINT NO.1 OF THIS, BEING VALUATION OF PERMANENT INVESTMENTS, WHICH HA S BEEN PRESSED INTO SERVICE BY THE LD. AR, READS AS UNDER:- M/S HDFC BANK LTD 6939 & 6941/MUM/2010 6910 & 6911/MUM/2010 5 PERMANENT INVESTMENTS SHOULD BE VALUED AT COST AND IN CASE COST PRICE IS HIGHER THAN THE FACE VALU E, THE PREMIUM SHOULD BE AMORTISED OVER THE REMAINING PERIOD OF MATURITY OF THE SECURITY. ON THE OTHER HA ND, WHERE THE COST PRICE IS LESS THAN THE FACE VALUE, T HE DIFFERENCE SHOULD BE IGNORED AND SHOULD NOT BE AMORTISED OR TAKEN TO INCOME ACCOUNT SINCE THE AMOUNT REPRESENTS UNREALIZED GAIN. 4. WHEN WE VIEW THE ABOVE METHOD OF VALUATION , IT COMES TO NOTICE THAT THE PERMANENT INVESTMENT SHOULD BE VALU ED AT COST AND WHERE SUCH COST PRICE IS HIGHER THAN THE FACE VALUE , THE PREMIUM SHOULD BE AMORTIZED FOR THE REMAINING PERIOD OF MAT URITY OF THE SECURITY. FROM THE ABOVE IT IS CLEAR THAT THE PRE MIUM HAS TO BE AMORTIZED FOR THE REMAINING PERIOD OF MATURITY OF T HE SECURITY. THE LEARNED A.R. FAIRLY CONCEDED THAT DETAILS OF SUCH PREMIUM SPLITTING OVER THE REMAINING PERIOD OF THE MATURITY WAS NOT R EADILY AVAILABLE AND HENCE THE MATTER BE REMITTED TO THE FILE OF A.O . FOR DECIDING IT AS PER THE ABOVE PART OF THE CIRCULAR. NO SERIOUS O BJECTION WAS TAKEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. I N VIEW OF THESE FACTS WE SET ASIDE THE IMPUGNED ORDER AND RESTORE T HE MATTER TO THE FILE OF A.O. FOR DECIDING THIS POINT IN ACCORDANCE WITH THE ABOVE NOTED METHOD. 11.2 THEREFORE, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE AND CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. 8 ACCORDINGLY, WE FOLLOW THE IMPUGNED ORDER OF THE TRIBUNAL AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REV ENUE. 9 IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSE WHEREAS THE APPEALS FILED BY THE REVENUE AR E DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF H EARING I.E. ON 21 ST FEB 2012 SD/ SD/ SD/ SD/ SD/ SD/ SD/ SD/ ( (( ( RAJENDRA SINGH RAJENDRA SINGH RAJENDRA SINGH RAJENDRA SINGH ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 21 ST FEB 2012 RAJ* RAJ* RAJ* RAJ* M/S HDFC BANK LTD 6939 & 6941/MUM/2010 6910 & 6911/MUM/2010 6 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI