2025 (5) TMI 288 - HC - Income Tax

Disallowance of depreciation of securities - assessee contention that depreciation is claimed in accordance with the guidelines of the RBI - Disallowance of the contribution to Punjab Sind Bank Employee s Pension Fund Trust - whether above contribution were neither the ordinary annual contribution nor the initial contribution of the pension fund? - HELD THAT - Issues covered by the decision of the coordinate bench of this court 2017 (9) TMI 1528 - DELHI HIGH COURT titled Principal Commissioner of Income Tax-07 vs Punjab Sind Bank. Disallowance u/s 14A read with under Rule 8D (2) (ii) and 8D (2) (iii) - As decided in 2019 (11) TMI 342 - DELHI HIGH COURT there appears to be no dispute that subject shares were held as stock in trade by the respondent/assessee. Therefore in any event recourse to Section 14A could not have been taken which is concerned with investments. Revenue appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court, as projected by the Revenue, are:

A. Whether the Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition of Rs. 6,03,46,364/- made by the Assessing Officer (AO) in respect of depreciation of securities, given that the assessee claimed depreciation in accordance with the Reserve Bank of India (RBI) guidelines, but the investments were not shown as "stock in trade" in the books, and resultant profits on sale were not enhanced by the value of depreciation in subsequent years.

B. Whether the ITAT and CIT(A) erred in deleting the disallowance of Rs. 155,86,40,020/- made by the AO out of contributions to the Punjab & Sind Bank Employee's Pension Fund Trust, since these contributions were neither ordinary annual contributions nor initial contributions to the pension fund.

C. Whether the ITAT and CIT(A) erred in deleting the disallowance of Rs. 13,04,85,000/- made by the AO under Section 14A of the Income Tax Act, read with Rule 8D(2)(ii) and 8D(2)(iii), given that the assessee had made investments and thus the provisions of Section 14A were applicable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Depreciation of Securities

Relevant legal framework and precedents: The dispute centers on whether depreciation claimed on securities held by the assessee is allowable when the securities are not recorded as "stock in trade." The RBI guidelines permit depreciation on securities, but the AO contended that since the investments were not treated as stock in trade, depreciation was not justified. The Court relied heavily on prior decisions, notably the coordinate bench rulings and the earlier decision in Principal Commissioner of Income Tax-7 v. Punjab & Sind Bank (AY 2013-14), which addressed similar questions.

Court's interpretation and reasoning: The Court observed that the ITAT and CIT(A) had followed their earlier decisions, which had rejected the Revenue's contention. The Court noted that the assessee's claim for depreciation was in accordance with RBI guidelines and that the investments were held as part of the banking business. The Court also referred to the principle that shares and securities held by a bank, not for maintaining statutory liquidity ratio (SLR), are treated as stock in trade and thus form part of business income rather than investment income.

Key evidence and findings: The Court found no dispute that the shares were held as stock in trade by the assessee bank. The AO's addition was based on the argument that depreciation was not allowable because the securities were not shown as stock in trade, but this was contradicted by the facts and earlier judicial pronouncements.

Application of law to facts: The Court applied the principle that securities held by banks are stock in trade, and income arising therefrom is business income. Therefore, depreciation claimed in accordance with RBI guidelines is justified. The AO's addition was thus not sustainable.

Treatment of competing arguments: The Revenue argued that the depreciation was not justified as the securities were not stock in trade and that profits on sale were not enhanced by depreciation. The Court rejected this, relying on prior decisions and the nature of banking business income.

Conclusions: The Court upheld the ITAT and CIT(A) decisions deleting the addition for depreciation of securities.

Issue B: Disallowance of Contributions to Pension Fund

Relevant legal framework and precedents: The AO disallowed contributions to the Punjab & Sind Bank Employee's Pension Fund Trust on the ground that these contributions were neither ordinary annual contributions nor initial contributions. The Court relied on earlier decisions, including the coordinate bench ruling in the same assessee's case (AY 2013-14), which had addressed similar disallowances.

Court's interpretation and reasoning: The Court noted that the ITAT and CIT(A) had deleted the disallowance based on the nature of the contributions. The prior decision had held that such contributions, not being ordinary or initial contributions, did not warrant disallowance.

Key evidence and findings: The submissions and evidence showed that the contributions in question were not ordinary annual or initial contributions, and thus the AO's disallowance was not justified.

Application of law to facts: Applying the principle that only certain types of contributions are subject to disallowance, the Court found the AO's disallowance unsustainable.

Treatment of competing arguments: The Revenue's argument that the contributions should be disallowed was rejected, as the nature of contributions did not fall within the scope of disallowance.

Conclusions: The Court upheld the deletion of the disallowance of pension fund contributions.

Issue C: Disallowance under Section 14A read with Rule 8D

Relevant legal framework and precedents: Section 14A of the Income Tax Act provides for disallowance of expenditure incurred in relation to income that does not form part of total income, such as exempt income. Rule 8D prescribes the methodology for computing such disallowance. The Court referred to the Supreme Court's decision in South Indian Bank v. Commissioner of Income Tax and earlier coordinate bench decisions involving the assessee.

Court's interpretation and reasoning: The Court observed that the Supreme Court had held that shares and securities held by a bank as stock in trade are part of the business income, and Section 14A would not be attracted to such income. The CBDT Circular No. 18 of 2015 was also noted, which clarified that shares and securities held by banks, except those held for maintaining SLR, are stock in trade. Consequently, expenditure related to such shares is not disallowable under Section 14A.

Key evidence and findings: The Court found no dispute that the shares were held as stock in trade and that the provisions of Section 14A were thus not applicable.

Application of law to facts: Since the income from securities was business income, the expenditure incurred was allowable, and the disallowance under Section 14A was not justified.

Treatment of competing arguments: The Revenue argued applicability of Section 14A on the ground that investments were made by the assessee. The Court rejected this, relying on the nature of securities as stock in trade and the binding precedent of the Supreme Court.

Conclusions: The Court upheld the deletion of the disallowance under Section 14A.

3. SIGNIFICANT HOLDINGS

The Court held as follows:

"...shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT v. Nawanshahar Central Co-operative Bank Ltd., wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits and Gains of business. The Punjab and Haryana High Court, in the case of Pr CIT v. State Bank of Patiala, while advertising to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock-in-trade, and all income received on such shares and securities must be considered to be business income. That is why section 14A would not be attracted to such income."

The Court concluded that no substantial question of law arises for consideration as the issues are squarely covered by earlier binding decisions. The appeal filed by the Revenue was dismissed.