TMI Blog2015 (1) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... tax-free dividend income and accordingly, no disallowance of interest can be made in this regard under section 14A of the Act. The AO is directed to delete the same. - Decided in favour of assessee. Disallowance of expenses other than interest, we direct the AO to uphold the disallowance at 5% of exempt income. Disallowance of provision of re-valuation of investments transferred from HTM to AFS category - Held that:- Decision of the Hon'ble Bombay High Court in the case of CIT v. HDFC Bank (2014 (7) TMI 724 - BOMBAY HIGH COURT) and that of the Bangalore bench of the Tribunal in the case of State Bank of Mysore (2009 (5) TMI 610 - ITAT BANGALORE) are in support of assessee’s claim of provision for re-valuation in respect of securities transferred from HTM to AFS category should be allowed as a deduction. - Decided in favour of assessee. - ITA No. 5910/Mum/2012, ITA No. 5833/Mum/2012, ITA No. 2629/Mum/2013 - - - Dated:- 21-1-2015 - Shri R. C. Sharma, AM And Vivek Varma,JM,JJ. For the Petitioner : Shri Yogesh A. Thar For the Respondent : Smt. S. Padmaja ORDER Per R. C. Sharma (A.M): These are the appeals filed by the assessee and Revenue against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of securities from Held to Maturity category to Available for Sale category is not entitled for taxation purpose. 2. The Appellant prays that the disallowance of aforesaid provision of ₹ 3, 85,140/- be deleted. 3. Without prejudice to the above, if the provision for revaluation on investment is disallowed, profit on sale of these securities ought to be reduced by the amount of disallowance, else it would lead to double disallowance of the same amount. GROUND V: DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 ( the Rules ): 1. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the disallowance of ₹ 60,26,522/- under section 14A of the Act towards expenditure purportedly incurred for earning tax-free income by applying Rule 8D of the Rules. 2. The Appellant prays that the disallowance of ₹ 60, 26,522/ - under section 14A of the Act read with Rule 8D of the Rules be deleted. 3. Without prejudice to 2 above, the Appellant prays that the disallowance under section 14A of the Act read with rule 8D of the Rules be restricted to ₹ 16,26,522/- as computed by the AO. 4. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and / or delete all or any of the foregoing grounds of appeal. 3. Rival contentions have been heard and record perused. Facts in brief are that assessee is engaged in banking business. During the scrutiny assessment for the A.Y.2006-07, the AO made an addition on account of provision of investment of ₹ 7,34,15,519/-, profit of revaluation of investment of ₹ 3,85,140/-, loss on sale of assets ₹ 1,55,000/- and disallowance u/s.40(a)(i) ₹ 16,27,522/-. During the course of scrutiny assessment the AO observed that assessee bank had in its possession of investments in securities. The method of valuation followed by assessee bank was to value investments at cost or market value in line with the RBI Guidelines on valuation of investments. The AO observed that assessee has claimed depreciation of ₹ 7,34,15,519/- with regard to securities held as investment. A provision for transfer for securities from available for sale category to held to maturity category of ₹ 3.85,140/-. The AO held that securities were held as investment and consequently assessee is not entitled to value of such investment on the basis of cost or market value whichever is lower. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der all circumstances, should be done at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. 8. In respect of securities available for sale, the individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. Securities under this category shall be valued scrip-wise and depreciation/ appreciation shall be aggregated for each classification referred above. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in anyone classification should not be reduced on account of net appreciation in any other classification. The book value of the individual securities would not undergo any change after the marking of market. In respect of securities held for trading the individual scrips ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e past years and future years. Since the profits on sale of investments and income from investments are always treated as 'business income', it is implied that the investments are treated as stock-in-trade and not as a capital asset . The method of valuation of investments in accordance with RBI guidelines is indicated in the Tax Audit Report at Annexure-I. 10. On page 13 of the CIT(A) s order regarding 9.39% GSEC 02-07-11, it is incorrect statement of the CIT(A) in column 11 that the assessee had only one purchase transaction and one sale transaction. As per pages 207 to 227 of the PB, the profits or loss of GSEC held under the category held for trading as also available for sale have been unlisted. The transaction runs into several pages which shows that the assumption of CIT(A) that the assessee had only one transaction is incorrect. 11. As regards the next item NABARD 5.7% on page 14 of the CIT(A) Order, deal-slip prepared at the time of purchase of the Securities clearly shows against the caption Acc. Section. that the investment is made in the category of AFS . This means that at the time of purchase, when the deal-slip was made the intention of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and are exempt under Sec 10(35) of the Income Tax Act. The IPO closed on June 21, 2005 and shares were allotted on July 5, 2005. A part of the capital funds raised from the IPO were invested in mutual funds till allotment of shares. Thus, we found that its investments were from interest-free funds and accordingly, no interest expenditure can be said to have been incurred in relation to earning the tax-free dividend income and accordingly, no disallowance of interest can be made in this regard under section 14A of the Act. The AO is directed to delete the same. 15. With regard to disallowance of expenses other than interest, we direct the AO to uphold the disallowance at 5% of exempt income. 16. With regard to disallowance of provision of re-valuation of investments transferred from HTM to AFS category. ₹ 3,85,140/-, we found that the decision of the Hon'ble Bombay High Court in the case of CIT v. HDFC Bank (ITA 250 of 2012 (Bom.)(HC) and that of the Bangalore bench of the Tribunal in the case of State Bank of Mysore (33 SOT 7) (Bang), are in support of assessee s claim of provision for re-valuation in respect of securities transferred from HTM to AFS category shou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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