ACIT, Mangalore V. M/s Corporation Bank, Mangalore

ITA 710/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5581 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-05-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 24-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income

Judgement Text

ITA.710/BANG/2010 PAG E - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE SHRI. N. BHARATHVAJA SANKAR, VICE PRESIDENT AND SHRI. GEORGE GEORGE K. JUDICIAL MEMBER I.T.A NO.710/BANG/2010 (ASSESSMENT YEAR : 2007-08) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 2(1), BANGALORE .. APPELLANT V. M/S. CORPORATION BANK, HO ; PANDESHWAR, MANGALORE PAN AAACC7245E .. RESPONDENT APPELLANT BY : SHRI. HARSHA PRAKASH, COMMISSIONER O F INCOME-TAX-II RESPONDENT BY : SHRI. S. ANANTHAN, CA O R D E R PER N. BHARATHVAJA SANKAR, VICE PRESIDENT : THIS IS AN APPEAL PREFERRED BY THE REVENUE FOR THE ASSESSMENT YEAR 2007-08 IN THE CASE OF M/S. CORPORATION BANK, MANGALORE AGAINST THE APPELLATE ORDER DATED.22.03.2010, OF THE COMMIS SIONER OF INCOME- TAX(A), MANGALURU. THE REVENUE HAS BROUGHT BEFORE US TWO ISSUES FOR ADJUDICATION, VIZ., (I) WHETHER THE COMMISSIONER OF INCOME-TAX(A) ERRED IN ALLOWING THE ASSESSEE'S CLAIM OF DEPRECIAT ION OF VALUATION OF INVESTMENT PORTFOLIO BY TREATING THE INVESTMENTS HE LD BY THE BANK AS STOCK-IN-TRADE, AND (2) WHETHER, THE LEARNED COMMIS SIONER OF INCOME- ITA.710/BANG/2010 PAG E - 2 TAX(A) ERRED IN DELETING THE ADDITION OF ` .31,82,49,475/- BEING EXPENDITURE RELATED TO EXEMPT INCOME. 02. LET US FIRST TAKE UP THE ISSUE RELATING TO CLAI M OF DEPRECIATION OF VALUATION OF INVESTMENT PORTFOLIO. THE RELEVANT GR OUNDS OF APPEAL READ AS UNDER : '2.1. THE LEARNED COMMISSIONER OF INCOME-TAX(A) ERR ED IN ALLOWING THE ASSESSEE'S CLAIM OF DEPRECIATION OF VA LUATION OF INVESTMENT PORTFOLIO BY TREATING THE INVESTMENTS HE LD BY THE BANK AS STOCK-IN-TRADE. 2.3. THE LEARNED COMMISSIONER OF INCOME-TAX(A) HAS FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE BANK HAS F OLLOWED THE RBI GUIDELINES FOR VALUATION OF INVESTMENT PORT FOLIO FOR THE PURPOSE OF BOOKS BUT HAS TREATED THE ENTIRE INV ESTMENTS AS STOCK-IN-TRADE AND VALUED THE SAME AS PER LEAST OF COST OR MARKET VALUES FOR INCOME TAX PURPOSE ONLY THEREBY M AKING A CLAIM FOR A NOTIONAL LOSS. ONLY REAL PROFIT/LOSS C AN BE RECOGNIZED UNDER THE I. T ACT AND NOT THE NOTIONAL LOSS ARRIVED AT BY VALUING INVESTMENT PORTFOLIO AS PER L CM VALUES. 2.4. THE CBDT CIRCULAR NO.665 DIRECTS THE ASSESSING OFFICERS TO APPROACH THE ISSUE OF VALUATION OF INVE STMENT PORTFOLIO HELD BY THE BANKS IN LINE WITH THE RBI GU IDELINES ISSUED FROM TIME-TO-TIME. THE LEARNED COMMISSIONER OF INCOME-TAX(A) HAS NOT CONSIDERED THIS CIRCULAR PROP ERLY. ITA.710/BANG/2010 PAG E - 3 03. THE BRIEF FACTS ARE THAT WHILE FRAMING THE ASSE SSMENT FOR THE ASSESSMENT YEAR 2007-08, THE ASSESSING OFFICER DISA LLOWED AN AMOUNT OF ` .292,77,56,969/- UNDER THE HEAD 'INVESTMENT PORTFOL IO' ON THE GROUND THAT THE BANK WAS NOT ELIGIBLE TO CLAIM DEPR ECIATION ON VALUATION OF INVESTMENTS UNDER THE 'HELD TO MATURIT Y' (HTM) CATEGORY, AS PER RESERVE BANK OF INDIA (RBI) GUIDELINES. THE BANK HAD TREATED ITS ENTIRE INVESTMENT PORTFOLIO AS STOCK-IN-TRADE F OR INCOME-TAX PURPOSES, WHICH WAS NOT IN CONFORMITY WITH SCHEDULE -17 OF THE ANNUAL REPORT FILED. RBI'S MASTER CIRCULAR DATED.0 2.09.2003 STIPULATED THAT THE ENTIRE INVESTMENT PORTFOLIO SHO ULD BE HELD UNDER THREE CATEGORIES, VIZ., 'AVAILABLE FOR SALE' (AFS), 'HELD TO MATURITY' (HTM), AND 'HELD FOR TRADING' (HFT) AND THAT THE WH OLE INVESTMENT PORTFOLIO COULD NOT BE CLASSIFIED AS STOCK-IN-TRADE . ACCORDING TO THE CIRCULAR, WHILE DEPRECIATION WAS NOT AVAILABLE ON F INANCIAL ASSETS IN THE HTM CATEGORY, ONLY NET DEPRECIATION, IF ANY, COULD BE DEBITED TO THE PROFIT AND LOSS ACCOUNT ON ASSETS IN THE AFS AND HF T CATEGORIES. THE ASSESSING OFFICER OBSERVED THAT THE CBDT HAD CLARIF IED, VIDE CIRCULAR NO.665, DATED.05.10.1993, THAT THE ASSESSING OFFICE R SHOULD DETERMINE ON THE FACTS AND CIRCUMSTANCES OF EACH CA SE AS TO WHETHER ANY PARTICULAR SECURITIES CONSTITUTED STOCK-IN-TRAD E OR INVESTMENT, TAKING INTO ACCOUNT THE GUIDELINES ISSUED BY RBI IN THIS REGARD FROM TIME TO TIME. IN VIEW OF THIS CIRCULAR, THE BANK H AD TO ADOPT THE ITA.710/BANG/2010 PAG E - 4 GUIDELINES ISSUED BY RBI WITH RESPECT TO VALUATION OF INVESTMENT PORTFOLIO AND ALSO ACCOUNTING STANDARDS ON INVESTME NTS. THE APPELLANT HAD FOLLOWED THE RBI GUIDELINES FOR THE PURPOSE OF BOOKS OF ACCOUNT, BUT NOT FOR COMPUTATION OF INCOME FOR INCOME-TAX PU RPOSES. THEREFORE, THE ASSESSING OFFICER PROCEEDED TO DISAL LOW THE DEPRECIATION OF ` .2,92,77,66,969/-. AGGRIEVED THE ASSESSEE MOVED TH E MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORI TY. 04. THE COMMISSIONER OF INCOME-TAX(A) FOLLOWING THE ITAT'S DECISION IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2004-05 DELETED THE DISALLOWANCE MADE UNDER THE HEAD 'DEPRECIATION ON INVESTMENT'. NOW THE REVENUE IS AGGRIEVED AND IS IN SECOND APPEA L BEFORE US WITH THE GROUNDS OF APPEAL EXTRACTED ELSEWHERE IN THIS O RDER. 05. AT THE TIME OF HEARING, THOUGH THIS IS REVENUE' S APPEAL, THE LEARNED CHARTERED ACCOUNTANT APPEARING FOR THE ASSE SSEE, PLACED ON RECORD A XEROX COPY OF THE ORDER OF THE TRIBUNAL IN ITA.112/BANG/2008 FOR THE ASSESSMENT YEAR 2004-05 A ND DREW OUR ATTENTION TO PARA NOS.14 TO 16 OF THE SAID ORDER AN D PLEADED THAT THE ISSUE ON HAND IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. WE HAVE ALSO HEARD THE LEARNED DR AND CONSIDERED THE FACTS AND MATERIALS ON RECORD. ITA.710/BANG/2010 PAG E - 5 06. IN OUR CONSIDERED OPINION, THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE IS BINDING ON US, FACTS AND CIRCUMSTANCES BEING THE SAME. IN THE SAID DECISION CITED ABOVE, THE TRIBUNAL IN PARA NOS.14 TO 16 HAS HELD AS UNDER : '14. WE ARE OF THE CONSIDERED VIEW THAT THE DECISIO N OF THE HON'BLE SUPREME COURT IN THE CASE OF UNITED COMMERC IAL BANK V. COMMISSIONER OF INCOME-TAX REPORTED IN 240 ITR 355 IS DIRECTLY APPLICABLE TO THE FACTS OF THE CASE ON HAND. AS PER THE HEAD NOTE OF THE SAID DECISION, THE HON'BLE APE X COURT HAS HELD THAT PREPARATION OF THE BALANCE SHEET IN A CCORDANCE WITH THE STATUTORY PROVISIONS WOULD NOT DISENTITLE THE ASSESSEE IN SUBMITTING THE INCOME-TAX RETURN ON THE REAL TAX ABLE INCOME IN ACCORDANCE WITH THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE CONSISTENTLY AND REGULARLY. FOR THE PURPO SE OF INCOME TAX, WHAT IS TO BE TAXED IS REAL WHICH IS TO BE DEDUCTED ON THE BASIS OF ACCOUNTING SYSTEM REGULARLY MAINTAI NED BY THE ASSESSEE. 15. FURTHER, THE METHOD BY WHICH THE ASSESSEE BANK IS VALUING SECURITIES IS IN ACCORDANCE WITH THE ACCOUN TING PRINCIPLES BY TREATING 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 CAPITAL ASSETS. 16. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US AND RESPECTFULLY FOLLOWING THE DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF UNITED COMMERC IAL BANK V. COMMISSIONER OF INCOME-TAX REFERRED SUPRA, IT IS HELD ITA.710/BANG/2010 PAG E - 6 THAT THE ASSESSEE BANK IS ENTITLED TO VALUE ALL THE INVESTMENT AT COST PRICES OR MARKET VALUE WHICHEVER IS LOWER BY T REATING SUCH INVESTMENT AS STOCK-IN-TRADE. WE, THEREFORE, DELETE THE DISALLOWANCE OF ` .5,21,96,537/- MADE BY THE LEARNED COMMISSIONER OF INCOME-TAX(A). OUR DECISION IS ALS O IN LINE WITH THE DECISION OF THE HON'BLE ITAT, BANGALORE BE NCH 'B' IN ITA NO.253/BANG/2007, DATED24.1.2008 IN THE CASE OF ACIT (LTU), BANGALORE V. VIJAYA BANK.' 07. FOLLOWING OUR ABOVE DECISION, THIS ISSUE IS DEC IDED IN FAVOUR OF THE ASSESSEE BY DISMISSING THE GROUNDS OF APPEAL RA ISED BY THE REVENUE. 08. NOW LET US TURN TO THE NEXT ISSUE RELATING TO D ELETION OF ADDITION OF ` .31,82,49,475/- BEING EXPENDITURE RELATING TO EXEMP T INCOME. THE RELEVANT GROUND OF APPEAL READS AS UNDER : '2.2 THE LEARNED COMMISSIONER OF INCOME-TAX(A) ERRE D IN DELETING THE ADDITION OF ` .31,82,49,475/- BEING EXPENDITURE RELATED TO EXEMPT INCOME. THE LEARNED COMMISSIONER OF INCOME-TAX(A) HAS FAILED TO APPRECIATE THE FACT FOR THIS ASSESSMENT YEAR 2007-08, THE EXPENDITURE ON EXEMPT INCOME WAS NOT WORKED OUT AS AN ESTIMATE BUT IN ACCORDANCE WIT H SECTION 14A(2) OF THE IT ACT, 1961 READ WITH RULE 9D OF THE IT RULES.' 09. THE BRIEF FACTS AS CULLED OUT FROM THE RECORDS ARE THAT THE BANK HAD CLAIMED THAT INCOME AGGREGATING TO ` .32,74,96,281/- WAS EXEMPT FROM TAX. THIS INCOME INCLUDED INTEREST OF ` .18,78,75,389/- EARNED ON ITA.710/BANG/2010 PAG E - 7 TAX-FREE BONDS AND DIVIDEND RECEIVED OF ` .14,96,20,892/-. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD MADE A VOLUNTARY DISALLOWANCE OF 5% FROM ITS EXEMPT INCOME FROM BOTH THE SOURCES. ON THE BASIS OF THE METHOD PRESCRIBED UNDER SECTION 14A(2) R.W.RULE 8D(2), THE AO PROCEEDED TO WORK OUT THE EXPENDITURE INCURRED ON EARNING THE INCOME AT ` .31,82,49,475/- AND ADDED THE SAME TO ASSESSEE'S TOTAL INCOME. AGGRIEVED BY THIS ORDER O F THE ASSESSING OFFICER, THE ASSESSEE FILED APPEAL BEFORE THE COMMI SSIONER OF INCOME- TAX(A). 10. THE COMMISSIONER OF INCOME-TAX(A) FOLLOWING THE DECISIONS OF ITAT IN THE CASE OF KARNATAKA BANK LTD., IN ITA.116 0/BANG/2007, DATED.21.11.2008 FOR THE ASSESSMENT YEAR 2004-05; T HE THIRD MEMBER DECISION OF THE DELHI BENCH IN WIMCO SEEDINGS P. LT D. V. DCIT AND MARUTI UDYOG LTD V. DCIT (2005) 92 ITD 119 (DEL), H ELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE S AID ADDITION. THUS, THE COMMISSIONER OF INCOME-TAX(A) DELETED THE ADDIT ION MADE BY THE ASSESSING OFFICER ON THIS POINT. NOW THE REVENUE IS AGGRIEVED AND IS ON SECOND APPEAL BEFORE US WITH THE GROUND OF APPEA L EXTRACTED ELSEWHERE IN THIS ORDER. ITA.710/BANG/2010 PAG E - 8 11. AT THE TIME OF HEARING, THE LEARNED DR PLACED O N RECORD, COPIES OF THE FOLLOWING DECISIONS : I) PRADEEP KAR V. ACIT (2009) 319 ITR 416 (KAR); II) ITO V. SANATAN TEXTRADE LTD (ITAT-MUM) (2010) 4 ITR (TRIB)593; III) DHARMASINGH M. POPAT V. ACIT (ITAT-MUM) (2010) 2 ITR (TRIB) 586; IV) RENAISSANCE ASSET MANAGEMENT CO. P. LTD V. ASSE SSING OFFICER (ITAT-DEL) (2010) 2 ITR (TRIB) 0765 ; AND V) ITO V. DAGA CAPITAL MANAGEMENT P. LTD., (ITAT-MU M) (2009) 312 ITR (AT) 1 (SB) ; BY PLACING THE ABOVE ORDERS ON RECORD, THE LEARNED DR CONTENDED THAT IT IS CORRECT THAT THE ASSESSING OFFICER FOLLOWED R ULE 8D. HE ALSO PLEADED THAT IT IS FOR THE ASSESSEE TO ESTABLISH WI TH PROOF THAT SO MUCH HAS BEEN INCURRED TOWARDS EXEMPT INCOME. 12. PER CONTRA, THE LEARNED CHARTERED ACCOUNTANT FO R THE ASSESSEE PLACED ON RECORD A COMPILATION COMPRISING OF THE FO LLOWING MATERIALS : I) ITAT BANGALORE DECISION IN CORPORATION BANK V. I ITO IN ITA.1119/MANG/87, DATED.10.09.1991 ; II) ITAT BANGALORE DECISION IN SYNDICATE BANK V. AC IT IN ITA.1282 TO 1284/BANG/2007, DATED.9.10.2009 ; III) SUPREME COURT DECISION IN MUNJAL SALES CORPN V . COMMISSIONER OF INCOME-TAX (2008) 168 TAXMAN 43 ; ITA.710/BANG/2010 PAG E - 9 IV) BOMBAY HIGH COURT DECISION IN COMMISSIONER OF I NCOME- TAX V. RELIANCE UTILITIES & POWER LTD., (2009) 178 TAXMAN 135 (BOM) ; V) THIRD MEMBER DECISION OF THE ITAT, DELHI BENCH A IN MARUTI UDYOG LTD V. DCIT (2009) 92 ITD 119 ; VI) ITAT, MUMBAI DECISION IN M/S. GODREJ INDUSTRIES LTD., V. DCIT IN ITA.1090/MUM/09, DATED.8.10.2010 ; AND VII) CHART SHOWING THE DETAILS OF INVESTMENTS IN TA X FREE SECURITIES AND INTEREST FREE FUNDS. THE CHARTERED ACCOUNTANT HAS ALSO PLACED ON RECORD A SYNOPSIS OF ARGUMENTS ON THIS GROUND. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND CIRCUMSTANCES AND THE MATERIALS ON RECORD INCLU DING THE DECISIONS CITED BY BOTH SIDES. FIRST OF ALL WE HAVE TO DECID E WHETHER RULE 8D IS PROSPECTIVE OR RETROSPECTIVE. WE FIND THAT THE MUM BAI BENCH IN ITA.1090/MUM/2009, FOR THE ASSESSMENT YEAR 2005-06, FOLLOWING THE BOMBAY HIGH COURT DECISION IN GODREJ BOYCE MANUFACT URING CO., IN ITA.626 OF 2010, DATED12.08.2010, HELD THAT RULE 8D OF IT RULES, 1962 IS APPLICABLE ONLY PROSPECTIVELY, I.E., FROM A SSESSMENT YEAR 2008- 09. HOWEVER, WE ALSO FIND THAT THE HON'BLE KERALA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. CATHOLIC SYRI AN BANK AND OTHERS REPORTED IN 237 CTR (KER) 164 HAS HELD IN FA VOUR OF THE ASSESSEE BY HOLDING THAT RULE 8D IS TO BE APPLIED A FTER ITS INSERTION I.E., ITA.710/BANG/2010 PAG E - 10 PROSPECTIVELY. THE DECISIONS RELIED UPON BY THE LE ARNED DR ARE ALL RELATING TO THE PERIODS BEFORE INSERTION OF RULE 8D . HENCE IN OUR OPINION, IN THE ABSENCE OF THE DECISION OF JURISDIC TIONAL HIGH COURT, THE DECISIONS OF TWO OTHER HIGH COURTS ARE STARRING AT US WHILE DECIDING THIS ISSUE. EVEN THOUGH THE DECISIONS OF OTHER HIGH COURTS HAVE PERSUASIVE VALUE ONLY, IN THE ABSENCE OF JURIS DICTIONAL HIGH COURT DECISION, IT WOULD BE FIT AND PROPER FOR US TO FOLL OW THE DECISIONS OF OTHER HIGH COURTS BEING SUPERIOR FORUM. THUS, FOLL OWING THE DECISIONS CITED SUPRA OF BOMBAY AND KERALA HIGH COU RT, WE HOLD THAT RULE 8D IS ONLY PROSPECTIVE AND CANNOT BE APPLIED F OR THE ASSESSMENT YEAR 2007-08. 14. NOW TURNING TO THE QUANTUM OF DISALLOWANCE THER E IS NO DISPUTE ABOUT THE FACT THAT THE ASSESSEE HIMSELF HAS DISALL OWED 5%, FOLLOWING THE EARLIER DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE. IN SUCH CIRCUMSTANCES, WE DO NOT FIND IT NECESSARY TO INTER FERE WITH THE SAME AS THE ASSESSEE HAS ACCEPTED THE EARLIER DECISION O F THE TRIBUNAL AND HAS NOT TAKEN IT BEFORE THE HIGH COURT, PARTICULARL Y THE FACTS AND CIRCUMSTANCES REMAINING THE SAME. IN THIS VIEW OF THE MATTER, WE ARE DISMISSING THIS GROUND OF APPEAL OF THE REVENUE ALS O. ITA.710/BANG/2010 PAG E - 11 15. IN RESULT, THE REVENUE'S APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31.05.2011, AT BANGALORE. SD/- SD/- (GEORGE GEORGE K) (N. BHARATHVAJA SANKAR) JUDICIAL MEMBER VICE PRESIDENT