2024 (2) TMI 1548 - AT - Income Tax

Disallowance of depreciation on securities - HELD THAT - This issue is covered by the order of this Tribunal in assessee s own case 2022 (1) TMI 287 - ITAT DELHI held it is a verifiable fact with reference to the sales of securities if any that took place during the year or in earlier or subsequent years. Such an exercise has not been undertaken by the AO but merely basing on the figures reflected in the balance sheet which was prepared in accordance with the RBI guidelines AO reached a conclusion that there was an escapement of. income due to the preparation of the balance sheet in a particular way as prescribed by the RBI. If we appreciate the facts of this case in the light of the decision of UCO Bank 1999 (9) TMI 4 - SUPREME COURT it is clear that since the assessee has been maintaining its accounts on mercantile system they are entitled to show his real income by taking into account market value of such investments in arriving at real taxable income. All the aspects argued by the Ld. DR were considered in the case of UCO Bank supra and were held in favour of the assessee. Disallowance on account of contribution to pension fund - This issue is covered by the order of this Tribunal in assessee s own case 2022 (1) TMI 287 - ITAT DELHI deleted disallowance. Disallowance of expenses u/s 14A under normal provisions of the Act - HELD THAT - This issue is covered by the order of this Tribunal in assessee s own case 2022 (1) TMI 287 - ITAT DELHI dated deleted the disallowance made u/s. 14A r.w.r. 8D. Disallowance of contribution to P S Bank Employees Pension Fund Trust while computing book profit u/s 115JB - Since the said disallowance is already deleted under normal provisions of the Act hereinabove the disallowance gets automatically deleted u/s 115JB of the Act. Disallowance of expenses u/s 14A in accordance with clause (f) of Explanation 1 to section 115JB(2) of the Act while computing book profit u/s 115JB - Since the said disallowance is already deleted under normal provisions of the Act hereinabove the disallowance gets automatically deleted u/s 115JB of the Act.

The core legal questions considered by the Tribunal in this appeal arise primarily from the revenue's challenge to the deletion of certain additions and disallowances made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The issues can be categorized as follows:

1. Whether the depreciation claimed on securities by the assessee was correctly allowed, or whether the notional changes in value should have been restricted to adjustments in revaluation reserves rather than debited to the profit and loss account, thereby avoiding double deductions.

2. Whether the additional contributions made by the assessee to the pension fund qualify as allowable deductions under Section 36(1)(iv) read with Rules 87 and 88 of the Income Tax Rules, 1962, or whether such contributions lack statutory sanction and should be disallowed.

3. Whether expenses attributable to exempt income earned by the assessee (specifically dividend income on shares held as stock-in-trade) ought to be disallowed under Section 14A of the Income Tax Act, 1961, and whether the methodology adopted by the AO under Rule 8D for such disallowance was justified.

4. Whether disallowances made under normal provisions automatically apply to computation of book profits under Section 115JB of the Act.

5. Miscellaneous grounds including proportional disallowance of expenses in respect of exempt income and general objections raised by the revenue.

Issue 1: Depreciation on Securities

The revenue challenged the deletion of the addition related to depreciation on securities claimed by the assessee, contending that the assessee should have adjusted depreciation only through the revaluation reserve and not debited it to the profit and loss account, thereby avoiding double deductions by also reducing closing stock values.

The Tribunal referred to its earlier decisions in the assessee's own case for earlier assessment years, where identical issues were considered in detail. The Tribunal noted that the assessee, a nationalized bank, follows the Banking Regulation Act, 1949, and maintains accounts on a mercantile system, valuing securities as stock-in-trade at cost or market price, whichever is lower, per RBI guidelines. The AO's suspicion that depreciation claimed was leading to lower profits and tax liability was not supported by evidence of any specific securities being sold at cost rather than at reduced book value.

The Tribunal relied on the Supreme Court decision in UCO Bank vs. CIT, which held that banks maintaining accounts on mercantile basis are entitled to show real income by considering market value of investments, and that the treatment of depreciation on securities as claimed by the assessee was permissible. The Tribunal found no material distinction in facts for the year under consideration and dismissed the revenue's grounds on this issue.

The Hon'ble Jurisdictional High Court had also dismissed revenue appeals on this issue in prior years, and no appeal was preferred against the Tribunal's orders for subsequent years, reinforcing the binding nature of these precedents.

Issue 2: Additional Contribution to Pension Fund

The revenue contended that the additional contributions made by the assessee to the pension fund did not conform to statutory provisions under Section 36(1)(iv) read with Rules 87 and 88 and thus were not allowable deductions. The AO disallowed the excess contribution beyond prescribed limits and added it back for computation of book profit under Section 115JB.

The Tribunal noted that this issue was also covered by its earlier decisions in the assessee's own case, where similar contributions were allowed based on the fact that the payments were actually made and that the contributions were not subject to the limitations imposed by the Rules for ordinary annual contributions. The Tribunal relied on the decision in DCIT vs. Ranbaxy Laboratories, which held that contributions to pension funds are allowable expenses and Section 43B does not apply.

The Tribunal found no change in facts or law warranting a different view and upheld the deletion of the addition. The Hon'ble Jurisdictional High Court had also dismissed revenue appeals on this issue for earlier years, further strengthening the position.

Issue 3: Disallowance under Section 14A of the Act

The revenue challenged the deletion of disallowance under Section 14A, which disallows expenses incurred in relation to exempt income, specifically dividend income earned by the assessee on shares held as stock-in-trade. The AO had made a disallowance based on Rule 8D, but the CIT(A) deleted a substantial part of it, allowing disallowance only to the extent of expenses attributable to exempt income under Rule 8D(2)(iii).

The Tribunal referred to the Supreme Court decision in Maxopp Investment Ltd vs. CIT, which clarified the applicability of Section 14A in cases where shares are held as stock-in-trade. The Court held that when shares are held as stock-in-trade, the main purpose is trading to earn profits, and incidental dividend income is exempt under Section 10(34). The expenditure incurred in acquiring such shares must be apportioned appropriately, and blanket disallowance is not warranted.

The Tribunal also relied on the decision in State Bank of Patiala, where disallowance under Section 14A was restricted to the amount of exempt income and was not upheld in entirety. The Tribunal observed that the assessee's shares were held as stock-in-trade and that the disallowance made by the AO was excessive and not justified.

The Hon'ble Jurisdictional High Court upheld the Tribunal's decision, dismissing revenue appeals and confirming that no question of law arose for consideration.

Issue 4: Disallowances under Section 115JB

The revenue challenged the deletion of disallowances relating to pension fund contributions, depreciation on securities, and Section 14A expenses while computing book profit under Section 115JB. The Tribunal held that since these disallowances were already deleted under the normal provisions of the Act, they automatically stand deleted for the purpose of computing book profits under Section 115JB. Accordingly, the revenue's grounds on this issue were dismissed.

Issue 5: Miscellaneous Grounds

The revenue raised additional grounds relating to proportional disallowance of expenses in respect of exempt income and general objections. The Tribunal found these grounds either covered by earlier decisions or not requiring specific adjudication and dismissed them accordingly.

Significant Holdings and Core Principles Established

1. The Tribunal reaffirmed that a bank maintaining accounts on a mercantile system and following RBI guidelines for valuation of securities is entitled to claim depreciation on securities held as stock-in-trade, and such depreciation can be debited to profit and loss account without resulting in double deductions, provided that the cost or market value principle is adhered to. The Tribunal stated:

"It is a verifiable fact with reference to the sales of securities, if any, that took place during the year or in earlier or subsequent years. Such an exercise has not been undertaken by the learned Assessing officer but merely basing on the figures reflected in the balance sheet which was prepared in accordance with the RBI guidelines, learned Assessing officer reached a conclusion that there was an escapement of income due to the preparation of the balance sheet in a particular way, as prescribed by the RBI."

2. Contributions to pension funds, including additional contributions beyond statutory limits, are allowable deductions under Section 36(1)(iv) where the payments are actually made and the contributions do not fall within the ambit of Section 43B. The Tribunal relied on authoritative precedent holding that such contributions have legal sanctity and are deductible.

3. Section 14A disallowance is applicable only to the extent of expenses incurred in relation to exempt income. Where shares are held as stock-in-trade, the dominant purpose is trading and earning profits, and incidental dividend income does not trigger a blanket disallowance under Section 14A. The Supreme Court's decision in Maxopp Investment Ltd was held to be the guiding precedent, distinguishing shares held for control and dividend income from shares held for trading.

4. Disallowances deleted under normal provisions of the Act automatically stand deleted for the purpose of computing book profits under Section 115JB.

5. The Tribunal emphasized consistency in facts and law and declined to interfere with earlier binding decisions in the absence of any distinguishing features or overruling by higher judicial forums.

Final Determinations

All grounds of appeal raised by the revenue were dismissed. The Tribunal upheld the deletion of additions and disallowances relating to depreciation on securities, additional pension fund contributions, and Section 14A expenses. It further held that these deletions apply to computations under Section 115JB. The appeal of the revenue was dismissed in entirety.

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