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2013 (4) TMI 702 - AT - Income TaxReopening of assessment - addition to income - Held that:- In this case the assessment u/s 143(3) has been completed. Of the three issues, the COD had not granted permission to the revenue to prosecute one of the issues viz., reversal of interest income recognised earlier, in appeal before the ITAT. Eventhough it is now recognised that approval of the COD is not necessary for prosecution of appeal, the basis of the requirement of COD approval, viz., reduction in litigation among Government Departments is still valid. If the COD had applied their mind and refused permission to the revenue to pursue the appeal in respect of certain issues, the revenue is precluded from doing so. It is an inter-se arrangement between the Government departments/ Government owned undertakings. Hence the issue regarding reversal of interest income recognised offered for income no longer survives. Even otherwise all the materials were before the AO and the AO has now sought to disallow the reversed income on the basis of the materials already before him. It is clearly a change of opinion. Broken period interest - Held that:- Whenever securities are purchased, the purchase price is inclusive of interest upto the date of purchase. As interest earned from the securities are assessed as business income, interest for the broken period included in the purchase price of the securities are to be allowed as a deduction. (American Express International Banking Corporation vs. CIT (2002 (9) TMI 96 - BOMBAY High Court) & CIT vs. Nedungadi Bank Ltd. (2002 (11) TMI 29 - KERALA High Court ). That being so, the allowance of broken period interest as a deduction in cases of securities purchased has been allowed by various courts. Therefore in allowing the broken period interest in the original assessment, the AO can not said to have committed any error. The particulars about the broken period interest claimed was before the Assessing officer as he has taken the figure from the original assessment for disallowing. The AO had not come across any fresh material which will lead him to the satisfaction that income has escaped assessment. Therefore the present reopening on this issue is merely a change of opinion on the part of the Assessing officer. Depreciation on securities - Held that:- Once the investment in securities are made with a view to comply with statutory requirement of liquidity, the securities constitute stock in trade and valuing them at market or cost whichever is lower is an accepted method of accounting. The Apex Court has upheld the same in the case of United Commercial Bank v. CIT (1999 (9) TMI 4 - SUPREME Court). The AO’s attempt to classify them at Held to market or ready for sale etc is merely a change of opinion. There has been no fresh facts or evidence collected by the AO on the basis of which he can be said to have come to conclusion that income has escaped assessment. Disallowance of unrealised interest - Held that:- The issue is covered by the decisions of Union Bank of India Vs. ACIT,(2012 (6) TMI 500 - ITAT MUMBAI ) Deduction u/s 36(1)(vii) in respect of debts written off by the non-rural branches of the asessee’s bank - Held that:- Covered in favour of the assessee by the Cathelic Syrian Bank Vs. CIT [2012 (2) TMI 262 - SUPREME COURT OF INDIA] .Thus in the instant case there is nothing new which has come to the notice of the Assessing officer after the original assessment u/s 143(3). - Appeal decided in favour of assessee. Notional profit on sales of investments in trading book as income of the assessee - Held that:- Notional profit on sale of investment of trading book has been brought to tax by the AO relying on the statutory audit report as real income and following the order u/s 263 of the Act. The CIT(A) held that the AO was justified in bringing to tax the profits that have been unreported by the assessee in its accounts. The learned counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of CIT Vs. Realest Builders, [2008 (5) TMI 6 - SUPREME COURT ] and in the case of CIT Vs. Bilahari Investment (P.) Ltd., [2008 (2) TMI 23 - SUPREME COURT] to held that the department has to prove satisfactory that the accounts books are unreliable and incorrect or incomplete before it can reject the books of accounts and this can be done by showing that important transactions are omitted or if proper particulars and vouchers are not forthcoming or the accounts do not include entries relating to a particular class of business. - Decided in favour of assessee. Estimation of income - Non Rejection of books of accounts - Held that:- As decided in ACIT Vs. Intermedia cable communication Pvt. Ltd. [2012 (4) TMI 265 - ITAT PUNE] How the AO can resort to estimation of income without rejection of accounts systematically maintained by the assessee for all the years under consideration and also without invoking the provisions of section 145 of the Act after duly complying with the conditions specified in them ? AO’s order does not contain a whisper about the provisions of section 145 of the Act, while he proceeded to make best judgment of the assessment. This is not done. Therefore, in our considered opinion the AO made a best judgment assessments in this case assuming jurisdiction u/s 145(3) of the Act invalidly - Decided in favour of assessee. Disallowance under 14A - expenditure attributable to earning of exempt income - CIT(A) confirming ₹ 3,17,01,996/- out of operating expenditure holding that expenditure to that extent was incurred by the appellant for earning tax free income - Held that:- Delhi High Court in the case of CIT Vs. Oriental Structural Engineers Pvt. Ltd., [2013 (1) TMI 720 - DELHI HIGH COURT] has upheld the disallowance of reasonable amount based on the facts of the case. Following the decision of the Delhi High Court we direct the AO to disallow 2% expenditure as relating to earning of the exempted income u/s 14A as we find it reasonable looking into the facts of the case. - Decided partly in favour of assessee. Disallowance of deduction u/s 35D - Held that:- This issue is covered against the Assessee by the order of the tribunal Assessee’s own case for the Assessment Years 2000- 01 to 2004-05 as the meaning of the word depends on the company it keeps and in s. 35D, since it is used with reference to industrial undertaking, it has to be understood to be an operation connected with industrial undertaking only and nothing else. There may be certain activities prior to the commencement of actual production and income may accrue from such activities. It is to describe these activities, the word 'operation' has been in s.35D. - Decided against assessee. Disallowance of provisions made on standard assets and claimed as a deduction under section 36(1)(viia) - Held that:- Issue under consideration is squarely covered by the decision of the ITAT in its own case for AY 2003-04 and 2004-05 as against assessee wherein held that it is prescribed by the RBI that the provision for standard assets need not be netted out from the gross advances but should be shown separately as “contingent provisions against standard assets”. The heading itself is indicative of the fact that this provision is contingent in nature whereas the provision for non performing asset is to guard against a loss which is looming large on the bank or for the loss which was already taken place. Therefore, the RBI further prescribed that provision on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision for its doubtful or loss assets first proviso to Section 36(1)(viia). We do agree that the bank is bound to follow the RBI guidelines.But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets. - Decided against assessee. Disallowance of depreciation / fall in value of investment held to maturity (HTM) - investment in HTM category cannot be treated as stock in trade as per RBI guidelines and hence no depreciation is to be provided on these investment - Held that:- The Apex Court in the case of UCO Bank Ltd Vs CIT [1999 (9) TMI 4 - SUPREME Court ] has held that value of the securities at cost or market value whichever is less should be accepted for income tax even if the banks in their books do not value on that basis. Therefore, it is an accepted proportion that investment made by the bank to comply with the SLR requirement would constitute their stock in trade and depreciation in value of the same is an allowable deduction. Thus we uphold the claim of the assessee and direct the AO to allow depreciation / fall in value of investment in Government Securities including those classified under HTM category. No doubt the value in opening stock in the next year would correspondingly be adjusted. - Decided in favour of assessee. Disallowance of broken period expenses (net) at the time of purchase of HTM Securities - Held that:- As held by the Supreme Court in the case of Southern technologies Ltd v JCIT (2010 (1) TMI 5 - SUPREME COURT OF INDIA ), directions of the RBI are not binding for deciding the issue under the Income tax Act. Securities which are held for comply with SLR has consistently been held to be stock in trade. That being so there can be no further distinction and no part such holding will cease to be stock in trade merely because RBI has classified the same as `held to maturity’. Thus we direct the Assessing officer to allow a sum of ₹ 5,07,02,515/- being broken period interest (net) included in the purchase value of HTM securities as revenue deduction. - Decided in favour of assessee. Deduction being unrealised interest on NPA which is reduced from the interest income - Held that:- Income which was earlier recognised is not to be allowed in the subsequent year in case it is permissible for the assessee to write off such income in concerned assessment year when it was found that it was not recoverable. Thus we direct the AO to allow deduction of ₹ 2.36 crores being unrealised interest offered for tax in the earlier year now reversed by the assessee. - Decided in favour of assessee. Disallowance of provision for leave encashment - Held that:- The ITAT which is creature of the Income tax Act is bound by the provisions of the Act and therefore in view of the specific provisions of sub-clause (f) to Section 43B the claim of the assessee for deduction of ₹ 1056911015/- towards provisions for leave encashment cannot be allowed. - Decided against assessee. Disallowance u/s 14A - CIT(A) deletion of interest payments which the AO held to be relatable to investment in Tax free securities - Held that:- When the Assessee has sufficient interest free funds, the investments should be considered to have been made out of those funds and not interest bearing borrowals. It is only with the introduction of Rule 8D, interest expenditure was apportioned on the basis of investment, even though there was no direct nexus between the borrowals and the investments. Rule 8D is not applicable to the AY under appeal ( Godrej & Boyce Mfg Co Ltd (2010 (8) TMI 77 - BOMBAY HIGH COURT ). However it was held by the Bombay High Court a reasonable amount should be disallowed under 14A. In view of the above, we uphold the order of the CIT(A) deleting the disallowance of interest disallowance Disallowance of administrative expenses - CIT(A) upheld the disallowance at 5% of the tax exempt income - Held that:- We have held in the appeal by the Assessee that their contention that no expenses were incurred cannot be accepted. The expenditure to be disallowed is to be necessarily to be made on an estimate basis. We find that the Delhi High Court in the case of CIT Vs. Oriental Structural Engineers Pvt. Ltd.,[2013 (1) TMI 720 - DELHI HIGH COURT] has upheld the disallowance of reasonable amount based on the facts of the case. We follow the said decision of the Delhi High Court and reduce the disallowance to 2% expenditure as relating to earning of the exempted income u/s 14A - Decided partly in favour of assessee.
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