THE SANGLI BANK LTD., Sangli V. ACIT, Cir.-2, Sangli

ITA 846/PUN/2006

• Counselvise Citation: 84624514 RSA 2006
• Duration Of Justice: 6 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 06-11-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 01-08-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH VERMA
• Assessee Lawyers: M P MACHVE
• Keywords: Depreciation; Earning of tax free income; Cost of acquisition
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE: SHRI G. S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.846/PN/2006 ASSESSMENT YEAR : 2004 - 05 THE SANGLI BANK LTD. RAJWADA CHOWK, SANGLI VS. ACIT, CIRCLE-2 SANGLI (APPELLANT) (RESPONDENT) PAN NO. AAACT6629F APPELLANT BY: SHRI M.P. MACHVE RESPONDENT BY: SHRI MUKESH VERMA DATE OF HEARING : 09-04-2013 DATE OF PRONOUNCEMENT : 30-05-2013 ORDER PER R.S. PADVEKAR, JM:- IN THIS APPEAL THE ASSESSEE HAS CHALLENGED THE IMPUGNED ORDER OF LD. CIT(A), KOLHAPUR DATED 11-05-2006 FOR THE A.Y. 2004-05. IN PLACE OF THE ORIGINAL GROUNDS THE ASSESSEE HAS FILED THE FOLLOWING SUM MARIZED GROUNDS: 1. WHETHER, ON FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE COMMISSIONER OF INCOME TAX (APPEALS) IS JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF THE CLAIM OF DIMINUTION IN THE VALUE OF S ECURITIES OF RS.9.45 CRORES, IN RESPECT OF SECURITIES CLASSIFIED AS HELD TILL MATURITY CATEGORY, MADE BY THE ASSESSING OFFICER. 2. WHETHER, ON FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE ASSESSING OFFICER IS JUSTIFIED IN ESTIMATING RS.2 .70 LACS AS EXPENDITURE PERTAINING TO TAX FREE INCOME U/S. 14A AN D DISALLOWING THE SAME. THE APPELLANT SUBMITS THAT, SINCE THE FACTS ARE SIMILAR , THE SAME BE ALLOWED AS ALLOWED BY TRIBUNAL A BENCH, PUNE IN ITAT NO. 1844/PN/05 A.Y. 2002/03 ORDER DTD. 26THE SEPT. 2008, IN APPELLANTS APPEAL. 3. THE ASSESSING OFFICER HAS ERRED IN DISALLOWING PART OF EXPENSES AS UNDER, AS PERSONAL NATURE ON ESTIMATE BASIS- TELEPHONE EXPENSES RS.17,500/- VEHICLE EXPENSES RS.35,000/- ADVERTISEMENT EXPENSES RS.12,500/- GENERAL EXPENSES RS.12,500/- _______________ RS.77,500/- 2 ITA NO. 846/PN/2006, THE SANGLI BANK LTD.. SANGLI 2. SO FAR AS THE GROUND NO. 1 IS CONCERNED THE FACTS WH ICH ARE REVEALED FROM THE RECORD AS UNDER. THE ASSESSEE HAS C LAIMED THE LOSS ON DIMINUTION IN VALUATION OF THE SECURITIES HELD TILL MATURITY (HT M) TO THE EXTENT OF RS.9.45 CRORES. THE ASSESSEE CONTENDED BEFORE THE ASSESSING OFFICER THAT THE SAID LOSS/DEPRECIATION IS CLAIMED AND DEBITE D TO THE PROFIT AND LOSS ACCOUNT AS PER THE GUIDELINES ISSUED BY TH E RBI. THE ASSESSING OFFICER REFERRED TO THE GUIDELINES ISSUED BY THE RBI DATED 16- 10-2000. THE ASSESSING OFFICER HAS OBSERVED THAT THE IN VESTMENT UNDER THE HTM CATEGORY ARE VALUED AT COST OF ACQUISITION AND ANY PREMIUM PAID ON ACQUISITION IS A AMORTIZATION FOR THE REMAINING MATURITY PERIOD. 3. THE ASSESSING OFFICER DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE IN RESPECT OF THE DEPRECIATION/LOSS OF SECURITIES HELD UNDER THE CATEGORY OF HTM TO THE EXTENT OF RS.9.45 CRORES. THE ASSESSEE CHA LLENGED THE DISALLOWANCE BEFORE LD. CIT(A). THE LD. CIT(A) ACCEPTED T HE ASSESSEES PLEA THAT THERE IS NO ULTIMATE LOSS TO THE RE VENUE OVER A PERIOD OF TIME. HE HAS OBSERVED THAT HOWEVER, THE ISSUE IS THAT OF DEFERMENT OF REVENUE RATHER THAN ACTUAL LOSS OF REVENUE. HE FINALLY H ELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING THE PROVISION FOR DIMINUTION MADE IN RESPECT OF SECURITIES HELD UNDER HTM CATEGORY AN D THE AMOUNT OF PROVISION, WHICH IS REDUCED FROM THE PROFITS ON SALE OF S ECURITIES IN THE COMPUTATION OF INCOME WAS CORRECTLY ADDED BY THE ASSES SING OFFICER. NOW THE ASSESSEE IS IN APPEAL BEFORE US. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. 4. WE FIND THAT THE ASSESSEE HAS CLASSIFIED THE SECURITIES IN THE THREE CATEGORIES (A) HELD TILL MATURITY (HTM), (B) AVAILABLE FOR SALE (AFS ) AND (C) HELD FOR TRADING (HFT). THE ASSESSING OFFICER WAS OF THE OPIN ION THAT THE LOSS ON DIMINUTION OF THE VALUE OF THE SECURITIES CANNOT BE CHARGED TO THE PROFIT AND LOSS ACCOUNT IN THE CASE OF SECURITIES HELD UNDE R THE CATEGORY OF HTM. WE FIND THAT THE ASSESSEE BANK HAS FOLLOWED THE R BI GUIDELINES 3 ITA NO. 846/PN/2006, THE SANGLI BANK LTD.. SANGLI AND AS PER THE RBI GUIDELINES THE ASSESSEE HAS MADE TH E PROVISION OF RS.9.45 CRORES ON ACCOUNT OF DIMINUTION IN VALUE OF SECURITIE S. IN THIS CASE, AN AMOUNT OF RS.1,48,96,027/- BEING AMORTIZATION IN RES PECT OF DIMINUTION IN THE VALUE OF THOSE SECURITIES ATTRIBUTABLE TO FI NANCIAL YEAR 2003-04 WAS ADDED TO THE INCOME IN THE COMPUTATION. TH E PROFIT ON ACTUAL REALIZATION ON SALE OF THE SECURITIES OF RS.23.20 CRORE S HAD BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT AND THIS METHOD IS CONSISTENTLY FOLLOWED BY THE ASSESSEE IN PRECEDING YEARS. 5. WE FURTHER FIND THAT AS PER THE WORKING MADE BY THE ASSESSEE THERE IS NO LOSS OF REVENUE WHICH IS CLEAR FROM THE WORKIN G GIVEN ON PAGE NO. 4 OF THE ORDER OF THE LD. CIT(A). (RS. IN LACS) PROFIT : (III) (ACTUAL) 2746.06 PROFIT : (IV)(ACTUAL) 108.56 ________ 2854.62 LESS : LOSS (VI) (ACTUAL) 425.24 ________ 2429.38 LESS : DIMINUTION IN VALUE (VII) 588.37 ________ 1841.01 ADD : DIMINUTION CLAIM ALLOWED IN OPENING STOCK 900.36 ________ 2741.37 LESS : DIMINUTION IN VALUE IN CLOSING (VIII) STOCK 945.00 ________ NET RS. 1796.37 6. WE FIND THAT THE RESERVATION OF LD. CIT(A) IS THAT THERE IS THE DEFERMENT OF THE REVENUE THAN ACTUAL LOSS OF REVENUE. WE DO NOT AGREE WITH THE OPINION OF LD. CIT(A). ADMITTEDLY THE SAID METHOD IS CONSISTENTLY FOLLOWED BY THE BANK IN THE PRECEDING YEARS AND THE SAME HAS BEEN ACCEPTED WITHOUT RAISING ANY QUESTION. IF AT TH IS JUNCTURE WE GO WITH THE STAND OF THE REVENUE THEN THAT WILL DISTORT THE ENTIRE PICTURE. ADMITTEDLY WHATEVER THE EXPENDITURE IS AMORTIZED THE S AME IS ADDED BACK WHEN THE SECURITIES ARE SOLD. ANOTHER ASPECT WE A RE TO CONSIDER IS 4 ITA NO. 846/PN/2006, THE SANGLI BANK LTD.. SANGLI THAT THE METHOD AND PRACTICE ADOPTED BY THE ASSESSEE WAS NEVER CHANGED BY THE ASSESSING OFFICER IN PAST. 7. SO FAR AS THE SECURITIES HELD UNDER THE HTM CATEGORY THE I.T.A.T., PUNE HAS TAKEN A VIEW IN THE CASE OF LATUR URBAN CO-OP ERATIVE BANK LTD. VS. ACIT ITA NOS. 778 AND 792/PN/2011 ORDER DATED 31- 08-2012 THAT ALL THE SECURITIES HELD BY THE ASSESSEE ARE PART OF THE S TOCK-IN-TRADE IRRESPECTIVE OF THEIR CLASSIFICATION. SO FAR AS THE TREATMENT OF THE ASSESSEE IN CLASSIFYING THE SECURITIES, IN OUR OPINION THE SE CURITIES CLASSIFIED UNDER HTM CATEGORY IS ALSO PART OF THE STOCK-IN- TRADE. THERE IS RBI CIRCULAR AS PER WHICH THE ASSESSEE CAN AMORTIZE THE DEPRECIATION OR LOSS ON THE CONVERSION OF SECURITIES FROM FST CATEGORY T O HTM CATEGORY. WE, THEREFORE, DO NOT AGREE WITH THE VIEW TAKEN BY THE L D. CIT(A) THAT THE SECURITIES HELD UNDER HTM ARE CAPITAL IN NATURE. WE ACC ORDINGLY ALLOW THE GROUND NO. 1 TAKEN BY THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE IN LIGHT OF THE ABOVE DISCUSSION. 8. SO FAR AS THE GROUND NO. 2 IS CONCERNED, THE DISALLOWANC E IS MADE U/S. 14A OUT OF THE EXPENDITURE CLAIMED BY THE ASSESSE E BANK FOR EARNING TAX FREE INCOME. WE HAVE HEARD THE PARTIES. 9. THE LEARNED COUNSEL SUBMITS THAT THE IDENTICAL DISALLOWA NCE WAS MADE IN THE A.Y. 2002-03 BY THE ASSESSING OFFICER AND THE SAME WAS CONFIRMED BY THE LD. CIT(A) BUT THE TRIBUNAL DELETED THE SA ID ADDITION. THE LEARNED COUNSEL ALSO FILED THE COPY OF THE TRIBUNAL. W E HAVE HEARD THE LD. DR. 10. WE FIND THAT THE IDENTICAL ISSUE HAS COME FOR THE CONSID ERATION BEFORE THE TRIBUNAL AND THE TRIBUNAL HAS ACCEPTED THE PLEA OF THE ASSESSEE THAT NO DISALLOWANCE CAN BE MADE AND DELETED T HE ADDITION. THE OPERATIVE PART OF THE TRIBUNAL IS AS UNDER: 5 ITA NO. 846/PN/2006, THE SANGLI BANK LTD.. SANGLI 12. IN THE ASSESSMENT ORDER, IT IS MENTIONED THAT T HE ASSESSEE HAD ADMITTEDLY INVESTED IN BONDS, SHARES, WHICH YIELDED TAX-FREE INCOME OF RS. 34,68,985/-. THE A.O WAS NOT AGREEAB LE TO THE PLEA MADE BY THE ASSESSEE THAT THE ENTIRE INVESTMEN T IN SECURITIES HAD BEEN MADE OUT OF SURPLUS NON-INTEREST BEARING FUNDS, THE A.O ESTIMATED THE PROPORTIONATE EXPENDITURE ATTRIBUTABLE TO INVESTMENT IN TAX FREE SECURITIES AT RS. 32,67,090/ - WHICH IS 94% OF THE TOTAL EXPENSES. HOWEVER, THE DISALLOWAN CE HAS BEEN MADE BY THE A.O AT 10% OF RS. 32,67,090/- I.E. RS. 3,26,700/-. IT WAS CLAIMED THAT THERE IS NO PROV ISION IN THE ACT THAT PROPORTIONATE EXPENSES SHOULD BE DISALLOWED. HOWEVER, THE A.O DID -NOT AGREE WITH THE CONTENTION OF THE A SSESSEE. 13. ON AN APPEAL, THE CIT(A) CONFIRMED THE ACTION O F THE A.O. 14. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 15. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTI ES. U/S 14A PETTY EXPENDITURE WHICH HAS BEEN PROVED TO HAVE BEEN INCU RRED IN RELATION TO EARNING OF TAX FREE INCOME CAN BE DISALLOWED AND SECTION CANNOT BE EXTENDED TO DISALLOW EVEN THE EXPENDITURE IS PERMITTED TO HAVE BEEN INCURRED FOR THE PURPOSES OF EARNING TAX FREE INCOME. IN THE CIRCUMSTANCES, THE DISALLOWANCE CANNOT BE MADE U/S 14A OF THE ACT. THIS GROUND IS THEREFORE, ALLOWED. 11. WE THEREFORE FOLLOWING THE ORDER OF THE TRIBUNAL IN ASS ESSEES OWN CASE FOR THE A.Y. 2002-03 DELETE THE ADDITION MADE BY THE ASSESSING OFFICER BY INVOKING THE PROVISION OF SECTION 14A. ACCORDING LY THE GROUND NO. 2 IS ALLOWED. 12. GROUND NO. 3 IS IN RESPECT OF AD VOC DISALLOWANCES MA DE BY THE ASSESSING OFFICER IN RESPECT OF TELEPHONE EXPENSES, VEHICLE EXPENSES, ADVERTISEMENT EXPENSES AND GENERAL EXPENSES. WE HAVE HEARD THE PARTIES. 13. ADMITTEDLY, THE ASSESSEE IS A BANK AND IT IS NOT INDIV IDUAL WHEREBY THERE CAN BE ANY PERSONAL ELEMENT INVOLVE IN INCURRING T HE EXPENDITURE. IN OUR OPINION THE REASON FOR DISALLOWANCE GIVEN BY BOTH T HE AUTHORITIES BELOW IS NOT CORRECT. WE THEREFORE DELETE THE DISALLOWANC E MADE BY THE ASSESSING OFFICER AND ALLOW THE RESPECTIVE GROUNDS TAKEN B Y THE ASSESSEE. 6 ITA NO. 846/PN/2006, THE SANGLI BANK LTD.. SANGLI 14. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 30-05-2013 SD/- SD/- (G.S. PANNU) (R.S. PADVEKAR) ACCOUNTANT MEMBER JUDICIAL MEMBER RK/PS PUNE, DATED: 30 TH MAY, 2013 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE CIT(A), KOLHAPUR 4 THE CIT - I/II, KOLHAPUR/CIT(CENTRAL), PUNE 5 THE DR, ITAT, A BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE