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The Commissioner of Income Tax, Asst. Commissioner of Income Tax Versus Karnataka Vikas Grameen Bank

2015 (12) TMI 1420 - KARNATAKA HIGH COURT

Addition u/s.41(1)- unclaimed 'stale draft and pay orders' - ITAT deleted the addition - Held that:- Section 41(1) can be pressed into service when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant case, the sum of ₹ 58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them. The language employed by the legislature being u .....

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d to maturity" - whether such securities were held as a investments and not as 'stock-in-trade'? - Held that:- Admittedly in the instant case, assessee was following the method of accounting namely, "at cost or market value, whichever is lower". Further, it is not in dispute that this practice was accepted by the Revenue throughout. Thus, in the light of the above pronouncement in the case of United Commercial Bank (1999 (9) TMI 4 - SUPREME Court) notwithstanding the preparation of the balance s .....

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raj, Adv For the Respondent : Sri A Shankar, Adv JUDGMENT Though these two appeals are listed for admission, with consent of learned Counsel for the parties, they are taken up for final disposal. 2. Both appeals have been presented by the Revenue challenging the common order dated 28.11.2013 passed by the Income Tax Appellate Tribunal, Bengaluru Bench "C" in ITA No.112/BANG/2012 and ITA No.226/BANG/2012 raising the following substantial questions of law:- 1. Whether on the facts and ci .....

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uot;held to maturity" when such securities were held as a investments and not as 'stock-in-trade'? 3. Briefly stated the facts of the case are, assessee is a Regional Rural Bank registered under the Schedule of Reserve Bank of India. It caters to the needs of Agricultural and Cottage Industry sectors. It makes investment in Government and other securities. For the assessment year 2007-08, assessee declared a taxable income of ₹ 94,26,91,495/-. Assessment was completed and an i .....

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id period was also completed and the income was determined at ₹ 102,66,57,128/- by disallowing ₹ 2,47,52,075/- deduction claimed under Section 36(1)(viia); ₹ 6,74,91,000/- towards deductions claimed under Section 36(1)(viii); ₹ 68,478/- claimed under Section 14A; ₹ 2,61,911/- claimed under loss of sale of assets; ₹ 13,94,212/- claimed as exemption towards tax on Stale Drafts; ₹ 1,82,112/- claimed towards Commission paid to Pigmy Agents; and ₹ 1,330 .....

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both Revenue and Assessee preferred appeals before the Tribunal. Assessee presented ITA No.112/BANG/2012 for the year 2007-08 and ITA No.113/BANG/2012 for the year 2008-09. Revenue presented ITA No.226/BANG/2012 for the year 2007-08 and ITA No.227/BANG/2012 for the year 2008-09. All the four appeals were disposed of by the common impugned order. 7. Tribunal, by the impugned order upheld the contentions of assessee and deleted the addition made by the assessing authority: (i) under Section 41(1) .....

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el for respondent-assessee. 10. Addressing arguments in support of the questions of law raised by the Revenue, Sri Y.V. Raviraj, learned Counsel submitted that the Tribunal fell in error in reversing the concurrent findings of the assessing authority and the First Appellate Authority namely, the CIT (Appeals) with respect to disallowance of 'Stale Drafts and Pay Orders' and deleting the sum of ₹ 58,31,851/- added by the assessing authority under Section 41(1) of the Act. He strenuo .....

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Tribunal in the case of Canara Bank (ITA No.390/BANG/2011 dated 8.6.2012) and Vijaya Bank (ITA No.455/BANG/2011 dated 22.6.2012). He further contended that the Judgments of the Tribunal on this issue are unsustainable in law in as much as, on the face of it, the unclaimed amount had remained in the hands of the assessee and chargeable to tax under Section 41(1) of the Act. 11. In support of the second question of law, namely, the depreciation on Investments in Government Securities "held t .....

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trictly comply with the guidelines issued by the RBI from time to time. Admittedly, assessee had written off a sum of ₹ 17,59,00,087/- by claiming depreciation on investments by showing it as 'Loss on Valuation of Securities'. The said figure was arrived at by the assessee on the premise that the market value of the securities held as on 31.3.2007 was less than the cost of securities. Accordingly, the assessee had written off the same in its Books of Accounts on the principle of &q .....

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adopted by the First Appellate Authority as also the Tribunal defeats the logic in as much as the concept of "held to maturity" would loose its sanctity and relevance if the assessee is permitted to claim depreciation having declared the securities under the said nomenclature. He contended that the classification "held to maturity" displays a glowing description that the assessee would get back the realizable value of security only upon its maturity. Consequently, the assess .....

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before the Tribunal, he submitted that the amount which remained in the hands of the Bank pursuant to a draft or a pay order becoming stale is not an income in the hands of the assessee. He adverted to Section 41(1) of the Act and contended that by no stretch of imagination, the amount which had remained in the hands of the assessee could be considered to fall within the definition of 'profit chargeable to tax' under the said provision. According to him, the said amount is a liability wh .....

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e case of Commissioner of Income Tax v. T.V. Sundaram Iyengar & Sons Limited reported in (1996) 222 ITR 344 . 15. With regard to the second question of law namely, the depreciation claimed in respect of the investments in Government Securities "held to maturity", he contended that the assessee is consistently following a particular method of accounting namely 'at cost or market value, whichever is lower'. He placed reliance on the judgment of the Hon'ble Supreme Court i .....

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by a Division Bench of the Principal Bench of this Court in ITA No.172/2009 (The Karnataka Bank Limited v. the Assistant Commissioner of Income Tax) disposed of on 11.3.2013 . Thus, the contention of assessee is that although assessee had declared the securities as "held to maturity", in view of the authoritative pronouncement of the Apex Court, assessee was entitled to claim depreciation as was rightly held by the CIT (Appeals) and confirmed by the Tribunal by the impugned order. Acco .....

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sessing authority sought to categorise the said sum within the meaning of 'profit chargeable to tax' under Section 41(1) of the Act. Section 41(1) reads as follows:- "41.(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in ca .....

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in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-metnioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of .....

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y orders had not encashed them. The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. While dealing with a situation of unclaimed amount, the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar (1996) 222 ITR 344, has held as follows:- "12. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits h .....

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ipts but were of capital nature. The provisions of s.41(1) were not attracted in the facts of this case because the assessee's liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view." (underlining is by us) 19. The Tribunal adverting to the above ruling has rightly deleted the sum of ₹ 58,38,581/- added by the assessing authority by holding it as unsustainable in law. 20. Re-depreciation claimed on securities "held to maturity&qu .....

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ion in the given circumstances stands covered by the judgment in the case of United Commercial Bank ITR 240 355 (SC) , wherein the Hon'ble Supreme Court has held as under:- "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable .....

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