TMI Blog2013 (4) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. Deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No. 95/Hyd/10, 96/Hyd/10, 97/Hyd/10, 218/H/10 - - - Dated:- 4-4-2013 - SHRI CHANDRA POOJARI AND SMT. ASHA VIJAYARAGHAVAN, JJ. For the Appellant : Shri s. Ananthan For the Respondent : Shri M. Dayasagar ORDER PER ASHA VIJAYARAGHAVAN, J.M.: Appeals being ITA Nos. 95 to 97/Hyd/10 filed by the assessee and appeal being ITA No. 218/Hyd/10 filed by the revenue are directed against the orders of the CIT(A) for the assessment years 2001-02, 2003-04, and 2006-07. Since common issues are involved in these appeals, they were clubbed and heard 2. The assessee bank has filed its Return of Income for A.Y. 2001-02 on 30.10.2001 returning income of ₹ 97 ,69,98,502/-. Thereafter, the bank filed a revised return of income on 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the assessee bank has sought for the reasons recorded and same were furnished and brought to the notice of Authorised Representatives vide order sheet notings dated 14.05.2008, 14.06.2008, 24.07.2008 and 08.08.2008 and requested to file their replies/ objections if any along with details of information as called for. Further, assessee was requested to give information as called for vide this office letter dated 14.05.2008 and sufficient time and opportunity was offered as requested from time to time. Further, assessee filed their submissions vide their letter dated 20.10.2008 and information as called for vide their letter dated 06.12.2008 after verifying the submissions made and information submitted/ available assessment is completed as under: 3. The assessee's observations and submissions are not acceptable and tenable as per the provisions of IT Act keeping in view the facts of the case on hand for the assessee bank for relevant A.Y. 2001-02 Proceedings u/s. 148 are valid as the revenue has the reason to believe that the income has escaped assessment 811.d S81ne is more so when the S81ne is backed by such issue (s) in the assessments made in subsequent years or cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions and objections are not acceptable and proceedings u/s. 148 are squarely valid ill the larger perspective and in the interest of justice as per the provisions of I.'T. Act. Accordingly, all the facts of the case, provisions of IT Act and of re-assessment proceedings are brought to the notice of assessee's Authorised Representatives Shri M.V. Prasad Reddy and others vide order sheet notings dated 20.10.2008 and 28.11.2008 and requested to give full information as called for and as discussed as it is time barring assessment. Accordingly, assessee's Authorised Representative has submitted the details of information as called for vide their letter dated 06.12.2008 and after verifying the information submitted available assessment was completed. 5. The AO has held that the relevant issues have been considered and disallowances made in the subsequent assessments and as upheld/ adjudicated by Appellate Authorities. In the circumstances the AO justified the reopening of assessment. 6. Aggrieved the Assessee preferred an appeal before the Commissioner of Income tax (Appeals). The CIT(A) upheld the reopening observing as under: 4.0 I have considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(vii) of the IT Act.` 9. The learned DR filed written submissions wherein he has contended that the plain reading of proviso to section 147 coupled with the explanation clarifies that even if the details were produced before the AO in the course of proceedings u/s 143(3) or 147, even then on the same issue reopening only justified after expiry of four years from the end of the relevant assessment year. The learned DR relied on the decision of Malegaon Electricity Co. (P) Ltd. Vs. CIT, 78 ITR 466 and the Hon ble Karnataka High Court in the case of CIT Vs. Rinku Chakrobarty, 56 DTR 227. Further, the learned DR relied on the case laws, relied on by the CIT(A), which are as follows: 1. Sundaram and Company, 66 ITR 604 (SC) 2. Shahbara (Delhi) Saharanpur Light Railway Co. Ltd., 208 ITR 882 (Cal.) 3. Girilal and Co., 300 ITR 432 (Bom.) 10. The learned counsel for the assessee relied on the following case laws in support of assessee s case: 1. Hindustan Lever Ltd., [2004] 137 Taxman 479 (Bom.) 2. Hewelett Packard Digital Global Soft Ltd., [2011 (9) TMI 800 (HC- Karnataka) 3. Titanor Components Ltd., [2011] 243 CTR 520 (Bom.) 4. Smt. Raj Rani Gulati, [2010] 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viz., broken period interest, this has been a subject matter of litigation and numerous decisions. 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) 258 ITR 601 Bom. CIT vs. Nedungadi Bank Ltd. (2003) 264 ITR 545 Ker).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. 15. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent under sec 143(3) has been completed and the Assessee had furnished full facts, is not permissible under proviso to sec 147(1). The following among other cases support this view: CIT Vs M/s Kelvinator of India Limited 320 ITR 561 SC Mihir Textiles Ltd. v. JCIT 347 ITR 546 Guj. NYK Line (India) Ltd. v. DCIT (No. 2) 346 ITR 361 Bom. 18. The AO has substantiated reopening stating that that disallowances on the above issues have been made and were adjudicated by Appellate Authorities. It was not as if there was any factual and tangible material regarding these issues which came to light in the subsequent years. It was only a conclusion based on a different interpretation on the same set of facts. Thus the AO had merely changed his conclusion, on the same set of facts available for this year. Legal conclusion arrived at on similar set off facts in the subsequent year cannot be the reason for reopening. It is a settled proposition that reopening is not permitted on the basis of subsequent decision of the High Court or Supreme Court. Commercial Co-operative Bank Ltd. v. ITO 336 ITR 196 Guj Austin engineering Co Ltd v CIT 312 ITR 70 Guj CIT v. Baer Shoes (India) Pvt. Ltd 331 ITR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the category in which the existing stocks are held, the profits and investments would have been higher by ₹ 32.68 crores; - that it is relevant to note that securities are understated by ₹ 32. 68 crores. In this connection, it is relevant to note that securities are held by banks in the following three categories: HTM - Held to Maturity AFS - Available for Sale HFT - Held for trading Bank can sell securities only when such a security is available with it in anyone of the above categories but cannot sell it if no stock of such security is available in any of the above categories. Securities in HFT category are normally traded. However, if a security is available in AFS Category, sale of such security can be made and bought again on the same day. Such purchase and sale are recorded in the HFT category and difference between sale and purchase value is taken as profit. The auditors opined that while computing the profit on sale of securities, the appellant had taken into account the purchase rate of security in the same category on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f security. 26. After considering the submissions of the assessee, the CIT(A) held as follows: In this context, we need to consider the provision u/s 145 viz., the method of accounting by the assessee's in respect of income chargeable under the head profits and gains of business or profession and the CBDT notification no.9949 dated 25/01/1996 notifying the accounting standards for assessee's following the mercantile system of accounting. According to this notification, all assessees' following the mercantile system of accounting should disclose accounting principles and changes in accounting policies and they cannot have hybrid or mixed system of accounting for the purpose of declaring income under the I.T. Act. In the appellant's case, the Central Statutory Auditors have, in accordance with the accepted accounting standards observed that the accounting practice followed by the appellant in arriving at the profits in trading of securities in AFS, HFT HTM was not in order and that had the accounting of the sale or securities in the trading account considered the stocks available under AFS category or HTM category, the profits and investments would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of CIT Vs. Realest Builders, 170 tax man 218 (SC) and in the case of CIT Vs. Bilahari Investment (P.) Ltd., 168 Taxman 95(SC) where it was held as under: Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore we do not wish to interfere with the impugned judgment of the High Court. 30. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital for expansion of appellant s business stating that the appellant is not an industrial undertaking. Ground No. 4.a) b) are directed against the of the CIT(A) in confirming the action of the Assessing Officer in disallowing provision of ₹ 38,50,26,716/- made on standard assets and claimed as deduction u/s 36(1)(viia) of the Act. Ground No. 5.a) to d) are directed against the action of the CIT(A) in confirming the action of the Assessing Officer in disallowing ₹ 175,60,43,567/- being depreciation/fall in value of investments held to maturity (HTM) category on the ground that the investments in HTM category cannot be treated as stock-in-trade, as per RBI guidelines and hence no depreciation is to be provided on these investments. Ground No. 6.a) to c) are directed against the action of the CIT(A) in disallowing ₹ 5,07,12,515/- broken period interest (Net) at the time of purchase of HTM securities treating it as capital expenditure relying on the decision of Supreme Court in the case of Vijaya Bank Vs. CIT, 187 ITR 541. Ground No. 7.a) b) are directed against the action of the CIT(A) in confirming the action of the Assessing Officer in disallowing unre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd 328 ITR 1 Bom) the same has to be estimated. The AO has estimated such expenditure at 5% of the dividends earned. This has been confirmed by the CIT(A). 39. The learned counsel for the assessee relied on the following case laws: 1. Munjal Sales Corpn. Vs. CIT, Ludhiana [2008] 298 ITR 298 (SC). 2. CIT Vs. Reliance Utilities Power Ltd., [2009] 313 ITR 340 (Bom.) 3. State Bank of Hyderabad Vs. DCIT, Hyderabad in ITA Nos. 661,662 663/Hyd/2003. 40. We find that the Delhi High Court in the case of CIT Vs. Oriental Structural Engineers Pvt. Ltd., in ITA No. 605 of 2012 dated 15th January, 2013 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. The appeal of the Assessee is partly allowed. 41. The second ground of appeal is against the disallowance of deduction u/s 35D of ₹ 3,64,08,364/-. We find that this issue is covered against the Assessee by the order of the tribunal Assessee s own case in ITA Nos. 615 to 619/Hyd/2007 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at case also, the assessee would be entitled for deduction. To further buttress his argument, the learned counsel has also drawn our attention to the words 'they new industrial unit commences production or operation'. The argument is that the word 'production' is used In connection with an industrial undertaking whereas the word 'operation' is used in connection with any business other than industrial undertaking. Let us consider both the arguments. 8. It is said that Parliament never wastes words. If the argument of the learned counsel is to be accepted, there was no need to split the eligibility criteria into two clauses. It could have well said that, ' .... any expenditure specified in sub-section (2) before or after the commencement of his business/ the assessee shall, ... '. The deduction is contemplated in two different time zones. One is in respect of expenditure incurred before the commencement of business and the other is in respect of expenditure incurred after the commencement of business. The two clauses are meant for two different' time zones as mentioned above. The second clause is qualified by providing that after the commenceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason for not grouping it along with other deductions in Chapter VIA, in our view, could be that the expenditure contemplated under this provision are as such capital in nature but as a special incentive. the amortization thereof has been allowed in a phased manner. They are not industry specific or activity specific and these expenses have to be claimed as normal revenue expenditure only over the specified period. Therefore, it finds place in Chapter IV pertaining to the computation of business income. The expression 'industrial undertaking' has been used at several places in the Act. Wherever an activity other than industrial is also to be covered for deduction, such other activity has been specified separately. As an illustration, 5.80I provides for deduction in respect of profits and gains from an industrial undertaking. Besides this, the said deduction is also available to profits derived from shipping business or by running a hotel. The activities of shipping and hotel have been separately specified over and above profit and from industrial undertaking. If industrial undertaking was meant to cover shipping and hotel industry, as is sometimes loosely stated, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liminary expenses relate to a period after the commencement of business, such expenses are only allowed if they are in relation to the extension of an industrial undertaking or the setting up of a new industrial unit. The proposed amendment seeks to substitute the words industrial undertaking with the word undertaking and the words industrial units with the word unit , wherever they occur in the said section. This is intended to provide benefit of amortization of specified post commencement preliminary expenses to all sectors for the extension of an undertaking or the setting up of a new unit. This amendment will take effect from 1st April, will accordingly apply in relation to the year 2009-10 and subsequent assessment years. The above note makes it clear that prior- to 1.4.2009, post commencement expenditure was not eligible for deduction in any other sector other- than industrial sector. Thus, the amendment brought about is not to remove any hardship or to remove any ambiguity. So far as the legislature is concerned, it was conscious that post commencement expenditure was to be allowed only in the case of industrial sector. The judgment of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lower authorities disallowing the claim of deduction u/s 35D of ₹ 3,64,08,364/-. The Assessee s appeal on this issue is dismissed. 43. The next ground of appeal is regarding disallowance of provisions for ₹ 38,50,26,716/- made on standard assets and claimed as a deduction under section 36(1)(viia). The assessee had made provisions for bad and doubtful debts of ₹ 40,00,03,838/- and provisions of ₹ 38,50,26,716/- in respect of standard assets and claimed the same. The CIT(A) followed the decision of the ITAT in the assessee s own case of the assessment years 2000-01 to 2004-05 A Bench in ITA Nos.615 to 619/ and 711/ dated 22.05.2009 wherein it was observed as under:- 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 prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to claim depreciation/fall in value of securities under HTM category. This grounds of appeal is dismissed. 51. The learned counsel for the assessee cited the following decisions in support of assessee s case: a) UCO Bank Ltd Vs CIT reported in 240 ITR 355 b) Andhra Bank Vs DCIT in ITA Nos.880 and 881 and 2075/Hyd/96 dated 29.11.2004 c) State Bank of Hydrabad Vs DCIT - ITA No 1232/Hyd/06 dated 28.11.2008 d) CIT Vs Karur Vysya Bank Ltd - TC(A) No.2139/08 dated 13.07.2009 (Mad) - SLP dismissed by the Supreme Court e) ACIT Vs Corporation Bank in ITA No. 710/Bang/2010 dated 31.05.2011 f) ACIT Vs Vijaya Bank ITA No.225 253/Bang/07 dated 24.01.2008 50. We are of the opinion that the assessee Bank is holding various Government Securities in order to comply with the statutory liquidated ratio. The bank would have to hold requisite percentage of deposits in the form of cash, gold, government or approved securities. The government securities held for the purpose of comply with the SLR has been held to be stock in trade and therefore value of the same as on 31st March has to be made and there is any depreciation the same should be allowed as a revenue deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s broken period interest extended on purchase of securities aggregating to ₹ 70,53,59,446/-. The Assessee has offered the broken period interest it has earned as income and claimed the broken period interest it has paid as deduction. 53. However the AO had disallowed the entire amount of broken period interest on the purchase of securities aggregating to ₹ 70,53,59,446/- as a deduction but has not disturbed the broken period interest on sale of securities offered as income. 54. The CIT(A) has allowed broken period interest in respect of securities purchased which are held for trading and available for sale as they are to be treated as stock in trade and therefore broken period interest for these period are to be allowed. However, the CIT(A) held that broken period interest relatable to securities which are classified in `held to maturity category cannot be allowed as these are not stock in trade. 55. Earlier in the order while considering the allowability of depreciation or reduction in valuation of the government securities held to comply with the SLR ratio, we have held that the entire such investment in order to comply with SLR would constitute stock in tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- on Non-Performing Assets as deduction u/s 36(1)(vii) of the Act by treating the same as bad debts written off. 61. The Delhi High Court 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. In this connection they have also referred to the decision of the Apex Court in the case of Vijaya bank reported in 323 ITR 166 and TRF Ltd reported in 323 ITR 397. The Delhi High Court upheld the claim of the assessee for deduction of interest reversed. 62. Respectfully following the above 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. 63. The next ground of appeal is against disallowance of provision for leave encashment. The assessee has provided leave encashment and claimed it as deduction. However, amount claimed for ₹ 105691015/- , the same was disallowed in view of the amendment to Section 43B by the introduction of Sub Section (f) which provides for allowing deduction on leave encashment onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res and current deposits of ₹ 2906 Crores which carry no interest burden. Against this the Assessee Bank had made an investment of ₹ 1145.13 Crores in Bonds and advances, income from which is exempt from tax. The Assessee has given a table of Interest free funds available and the investment in tax free securities from 31.3.2002 onwards and we find that for all the years, interest free funds were more than the investments in tax free securities. As on 31st March: 2006 2005 2004 2003 2002 Free funds 5800.62 4369.72 3671.52 2720.81 2279.08 Investment 1145.12 795.31 1021.73 649.84 594.08 69. It is the contention of the Assessee that the entire investment of tax free securities were made out of interest free funds. They relied on the decisions of Munjal sales Corporation v CIT (298 ITR 298 SC): CIT v Reliance Utilities Power Ltd ( 313 ITR 340 BOM). It has been held in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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