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2016 (3) TMI 720 - ITAT RAJKOT

2016 (3) TMI 720 - ITAT RAJKOT - TMI - Addition on account of accrued interest on NPA accounts - Held that:- There is no dispute that the assessee/Co-operative Bank has not recognized the impugned accrued interest of ₹ 1.36crores overdue on non performing assets as its income by following real income principal. Ld. co-ordinate bench of the tribunal in Karnavati Co-op. Bank Ltd ( 2011(11) TMI 367 - ITAT AHMEDABAD ) already holds in case of a similar Co-operative Bank that no income accrues .....

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Held that:- There is no dispute that the Assessing Officer invoked Rule 8D for computing the impugned disallowance. Applicability of this Rule is no more res integra since the hon'ble Bombay high court in Godrej Boyce Mfg. Company Limited Vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT ] holds that the same applies w.e.f. A.Y. 2008-09 only. This course of action adopted is accordingly held as not sustainable. We come to CIT(A)'s findings that the assessee's interest free funds as well as interest .....

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ia) - CIT(A) deleted the disallowance - Held that:- The CIT(A) construes Section 36(1)(viia) as to envisage 5% entitlement of bad debts deduction as on last day of the year and not the net figure as taken by the Assessing Officer. There can be no dispute that this one is a deduction provision. The Revenue fails to take us to a different construction thereof in the course of arguments that the net figure has to be adopted instead of the one appearing on last day of year. We find no reason to inte .....

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milar amortization claim pertaining to "held to maturity" category securities' premium by taking into account paragraph VII of the CBDT's Circular No.17 of 2008 dated 26.11.2008 clarifying that investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value in which the premium should be amortized over the period remaining to maturity. The Revenue fails in pointing out any distinction on facts or law thereto - D .....

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ly, hon'ble Bombay high court in CIT vs. Bank of Baroda [2003 (3) TMI 80 - BOMBAY High Court ] observes that the said bank valued its investments in the form of shares and securities at cost or market price, whichever is lower. And that it was entitled to deduction on account of depreciation in value of investments involving debiting of loss to P&L account as reflected in the nature of provision for liability in balance sheet and in case of shares and securities valued at cost on assets side. Th .....

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ents accordingly and direct the Assessing Officer to proceed afresh for necessary computation of the impugned disallowance. - Decided against revenue - ITA Nos. 540, 541, 558, 559 & 542/Rjt/2014 And C.O. No.5/Rjt/2015; ITA No.559/Rjt/2014 - Dated:- 20-1-2016 - SS GODARA, JM AND MANISH BORAD, AM For the Petitioner : Shri C S Anjaria, DR For the Respondent : Shri M J Ranpura, AR ORDER PER: S S GODARA: This one is a batch of six cases. The Revenue has filed ITA Nos. 540, 541, 558, 559 & 542/Rjt .....

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evity. A.Y. 2007-08 Revenue's appeal ITA No. 540/Rjt/2014 2. The Revenue raises two substantive grounds in the instant appeal in challenging lower appellate findings inter alia deleting addition of accrued interest on NPA accounts of ₹ 1,36,09,737/- and disallowance of ₹ 23,13,907/- made u/s.14A r.w.r 8D of the Income Tax Rules; as made in the course of re-assessment framed on 11.03.2013. We come to former ground. The assessee is a Co-operative Bank. It had not offered the impugn .....

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aken from item no.10 under the head "over due interest reserve" account appearing in corpus and liability side of the balance sheet as on 31.03.2007 and in fact opening balance of the above stated reserve account was ₹ 4,49,24,071/- as reduced to ₹ 1,36,09,737/- in question without having any impact on current year's interest, the above stated interest reserve had been carried forward from F.Y. 2001-02 from ₹ 3.51 crores as reduced to ₹ 1.36crores at the end .....

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n accrual basis but only when actually realized and received. 3. It is to be seen from the Assessing Officer's order that he referred to Section 145(1) r.w.s. 5 of the Act defining scope of total income. He observed that Section 43D providing for an exception clause thereto did not apply in case of a Co-operative Bank since the same is nowhere included therein. All this reasoning resulted in the impugned addition. 4. The CIT(A) reverses Assessing Officer's findings as follows: "8.1 .....

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s down the principle that income by way of interest in respect of scheduled hank in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by RB1 in relation to such debts shall be chrgeable to tax in the year in which it is credited by the bank to its P&L account or the year in which it is actually received, whichever is earlier. 8.2 It is now necessary to consider the applicability of these sections to the appellant which is a co-op .....

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ative banks are not included in this definition. In other words, neither this circular nor s.43D seem to be applicable lo co-operative banks. However, the basic principles regarding interest on non-performing assets have been brought about by the circular as well as s.43D. It would therefore be necessary to look at the legislative intent behind enactment of S.43D. In the notes to account to Finance Act No,2 of 1991, it has been mentioned as under:- "FINANCE (NO.2) ACT, 1991 :- Chargeability .....

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n such bad and doubtful advances should be taxed in the year of accrual or of receipt has been a matter of controversy for a long time. FINANCE (NO.2) ACT, 1991 :- 22.1 in view of the fact that interest from bad and doubtful debts in the case of banks and financial institutions are normally very difficult to recover, taxing such income on accrual basis reduces the liquidity of the bank without any actual generation of income. FINANCE (NO.2) ACT. 1991 22.2 With a view to improving the viability o .....

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will be prescribed by the Central Board of Direct Taxes. keeping in view the guidelines issued by the Reserve Bank of India in relation to such debts." 8.3 Similarly, circular No.621 of CBDT dt. 19/12/1991 clearly states that s.43D was inserted with a view to improving the viability of banks so as to provide that the interest on non-performing, assets or sticky loans would be charged to tax only in the year in which the i merest is actually received or credited to the P&L account. It i .....

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submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income-tax Act and was, therefore, exigible to tax our answer is in the negative and we give the following reasons in support : - (1) First of all we would discuss the matter in the light of the provisions of Income-tax Act and to examine as to whether in the given circumstances, interest income has accr .....

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year 2006-07. Reason was adverse financial circumstances and the financial crunch faced by Shaw Wallace. So much so. it was facing winding up petitions which were filed by many creditors. These circumstances, led to an uncertainty insofar as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that i .....

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sued by the RBI in exercise of its statutory powers. As per these norms the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee." 8.5 The Hon'ble ITAT, Ahmedabad Bench 'D' (17 Taxman 239) has discussed the relevant decisions in detail and has stated as under :- "We can therefore safely draw a conclusion that by the insertion of a Special prov .....

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nk v. CIT [199] 240 ITR 355/106 Taxman 601 (SC). Likewise, in an another case of CIT V. State Bank of India [2003] 262 ITR 662/129 Taxman 409 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra). v) Judgement in favour of Revenue : From the side of the Revenue an order of the Tribunal has been vehemently relied upon and this is the basic reason of the elaborate discussion made hereinab .....

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on receipt basis. Since the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No.621, dated 19-12-1991 gives the legislative intention, stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc.. so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and lo .....

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may be prescribed having regard to the Guidelines issued by the RBI in relation to such debts'. This expression continues to exist in the newly substituted section 43D applicable with effect from 1-4-2000. This shows that the RBI Guidelines in respect of scheduled banks, public financial institutions etc., were not sufficient for recognition of income on cash basis for the purposes of income-tax. The income of such assessees was determined as per circular dated 9- 10-1984. Because of this r .....

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nt In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land." Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion of "NBFC" in section 43-D of the I.T.Ac .....

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een cited but the fundamental difference is that the issue before the Hon'ble Court was in respect of provision for NPA and debited to P&L Account by a NBFC. The said provision was undisputedly made by the said NBFC as per the prudential norms made by the Reserve Bank. Therefore we want to make it clear that the question for consideration before the Hon'ble Court was that if a provision for doubtful debt is made then what will be the legal position of the applicability of Explanation .....

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al income under the Income-tax Act failing which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Income-tax Act." Therefore the distinction can easily be drawn that in the appeal before us the question is accrual of interest income on stick by loan but in .....

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an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted. Now at present the situation is that the Hon'ble Madras High Court in the case of CIT vs. Elgi Finance Ltd. 293 ITR 357 (Mad.) has taken a view that the assessee is a company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the asses .....

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such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of CIT vs. India Equipment Leasing Ltd. [2007] 293 ITR 350. (Mad.). To conclude the issue, we deem it important to discuss the decision of India Equipment Leasing Ltd. (293 ITR 350) for the sake of completeness of our judgement. In that appeal, .....

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erest income which is transferred to suspense account is, in fact, arising in respect of a doubtful or sticky loan. This was done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan, but if after three years the payment of interest is not received, from the 4th year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. Following the UCO Bank (supra), the said .....

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of this amount. Before us, the assessee submitted that the AO has not considered that it is credited into profit and loss account and debited back as per RB1 guidelines accounting policy of the bank adopted consistently. Thus, there is no real income and the amount does not remain credited in P/L A/c. as required u/s..43D. In support of this, reliance is placed on the decision of ITAT Ahmedabad Bench in the case of Karnavati Co-op. Bank Ltd. v. DCIT [2012] 134 1TD 486 (Ahd.). The ld. D.R. appear .....

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by the decision of ITAT Ahmedabad in the case of Karnavati Co-op. Bank Ltd. (supra). In this case, the Tribunal has followed the judgment of Hon'ble Apex Court rendered in the case of UCO Bank vs. CIT as reported in 237 ITR 889. We, therefore, following the decision of ITAT Ahmedabad Bench in the case of Karnavati Co-op Bank Ltd (supra) delete the disallowance of ₹ 1,15,00,000/- made by AO. This ground of appeal is allowed." Respectfully following the above decisions, I hold that .....

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. Ld. co-ordinate bench of the tribunal (supra) already holds in case of a similar Co-operative Bank that no income accrues in an instance of crediting of overdue interest from NPAs to P&L account and debited as per RBI guidelines, since there is no ultimate credit in P&L account. The Revenue is unable to point out any distinction on facts or law after being granted adequate opportunity. We confirm CIT(A)'s appeal's findings accordingly deleting the impugned addition of ₹ 1 .....

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isallowance of ₹ 23,13,907/-. The assessee submitted in the course of lower appellate proceedings that it had received interest income of ₹ 8.59 crores turning out to be much more than interest expenditure of ₹ 6.98crores. It highlighted the fact that its capital and reserves of ₹ 13.54crores exceeded the impugned tax free investments in UTI MNC funds of ₹ 3.24crores. The CIT(A) quotes Hon'ble jurisdictional high court's decision in CIT vs. Gujarat State Fer .....

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des. Case file perused. There is no dispute that the Assessing Officer invoked Rule 8D for computing the impugned disallowance. Applicability of this Rule is no more res integra since the hon'ble Bombay high court in Godrej Boyce Mfg. Company Limited Vs. DCIT 328 ITR 81 holds that the same applies w.e.f. A.Y. 2008-09 only. This course of action adopted is accordingly held as not sustainable. We come to CIT(A)'s findings that the assessee's interest free funds as well as interest inco .....

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nd is also declined. Revenue's appeal in ITA No.540/Rjt/2014 is dismissed. A.Y. 2008-09 Revenue's appeal ITA No.541/Rjt/2014 8. The Revenue's first substantive ground seeks to restore addition of accrued interest on NPA accounts of ₹ 1,20,22,806/-. Both parties clarify at the outset that our corresponding finding hereinabove in preceding assessment year decide this issue in assessee's favour. We follow the very course of action and reject this first ground. 9. The Revenue&# .....

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7; 38,55,000/- claimed by the appellant on the alleged ground of excess claim of bad debt as per the provision of section 36(1)(viia) of the Act. It was noticed by the A.O. that the bad debt balance as on 31/3/2008 was ₹ 2,54,34,400/-. Thus, as per provisions of s.36(1)(viia) 5% of the bad debts amounting to ₹ 12,61,720/- could be written off. However, the bank had claimed write off of ₹ 38,55,000/- which exceeded the allowable limit by ₹ 25,93,280/-. The excess write off .....

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77; 463.56 lakhs and arrived at a figure of ₹ 252.35 lakhs for calculating the maximum allowable write off to the extent of ₹ 12,61,720/-. It was therefore requested that the disallowance may be deleted. I have carefully considered the appellant's contention and the assessment order. What the A.O. has done is reduced the amount of reserve for bad debts from the total had debts as on the last day of the previous year. On careful perusal of s. 36(1)(viia), it is seen that the sched .....

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same. There is no dispute about the bad debts on the last day of the previous year to be ₹ 771 lakhs. The A.O. has reduced ₹ 463.56 lakhs from the same and allowed 5% on the balance of ₹ 252.34 lakhs. In my considered opinion, the appellant "is entitled to deduction of 5% on the amount of bad debt as on the last day of the year and not the net figure as arrived at by the A.O. The disallowance computed by the A.O. is not as per the first proviso of s. 36(1)(viia). The same .....

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nd no reason to interfere with CIT(A) findings accordingly. This ground is rejected. Revenue's appeal ITA No.541/Rjt/2014 is dismissed. A.Y. 2009-10 Revenue's appeal ITA No.558/Rjt/2014 11. The Revenue's first substantive ground assails correctness of the CIT(A)'s order in deleting addition of ₹ 5,92,429/- on account of amortization of premium paid on investments. These findings under challenge summarize Assessing Officer's observation as well as assessee's argument .....

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tax Act, 1961. He accordingly held that the items in question are 'held to maturity' [HTM] are investment and premium paid is basically 'cost of investment'. The ld. AR of the appellant pleaded that, on one hand the AO states that the RBI's directions are not binding to the AO to determine the taxability under the Act whereas vide para 5.3 of the assessment order the AO had held that the guidelines of the RBI very clearly show that the securities held under HTM are not meant .....

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and maturity value if the market conditions are favourable. In view of the above it is clear that no amortization premium paid on Govt. securities can be allowed. Thus, according to the ld. AR, the AO was 'misdirected in following the RBI's guidelines; in proper perspective. It is the contention of the learned AR of the Appellant that AOs are bound to follow the provisions of the Act and the instructions of the Board issued from time to time to avoid hard ship to the tax payer public at .....

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at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and AFS securities forming stock-in-trade of the bank, the depreciation/appreciation is to be aggregated scrip-wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims." 5.2.2 According to the ld. AR, in view of the .....

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No. 17 of 2008 dated 26.11.2008 clearly provide for amortization of premium paid on acquisition, of securities when the same are acquired at the rate higher than the face value. Such amortization would have to be for the remaining period of maturity. This precisely the Tribunal had directed in the impugned order. Though contended, no contrary instructions of CBDT are brought to our notice. The instruction in question having been issued u/s. 119(2) of the Income tax Act, 1961, would bind the rev .....

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16 for valuation of investment and valuation standards, has held that, 'Investments classified under HTM category need not be marked to market and will be carried at acquisition cost unless it is more than the face value. In such a case, the premium should be amortized over the period remaining to maturity. Now, in the instruction No 17 from the CBDT (reproduced supra), the AOs are specifically guided to follow RBI's guidelines for allowing (a) amortization of premium paid on investments .....

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above two circulars of the Board and the RBI and also respectfully following the judicial principles laid down by various higher judicial authorities, the disallowance made by the AO of ₹ 5,92,429/- being amount charged on account of amortization of premium of Govt. Securities held under HTM category (which again is to maintain SLR), is directed to be deleted. Therefore the appellant gets relief on this ground of appeal." 12. There is hardly any dispute about the fact that the assess .....

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ing that investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value in which the premium should be amortized over the period remaining to maturity. The Revenue fails in pointing out any distinction on facts or law thereto. We affirm CIT(A)'s actions. This substantive ground is rejected. 13. The Revenue's second substantive ground seeks to revive interest of ₹ 5,32,375/- on account of accrued i .....

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ssessment year under consideration, the appellant has claimed depreciation of ₹ 1,07,50,000/- being the difference between the cost of acquisition and market value (NAV) of the mutual funds units held under the category of non-SLR securities, Held for Trading [HFT] and Available for Sale [AFS]. The appellant values its investment in Mutual Fund Unite at the market value, i.e., Net Asset Value [NAV] at the end of each year and depreciation in the value, if any, were debited to the Free Rese .....

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orked out. This is seen from the audited balance sheet that, investment in mutual funds are stated at cost, i.e, ₹ 399.89 Lacs against which depreciation in the value of investment at ₹ 127.00 Lacs are credited to Depreciation Fluctuation Fund. Therefore, by netting-off the value of investment with depreciation fluctuation fund, amount of ₹ 272.89 Lacs is worked out, which is the market value [NAV] of the Mutual Funds Units as on 31st March, 2007. During the year under appeal, .....

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ara 8.4 of-the assessment order disallowed the claim of depreciation of ₹ 1,07,50,000/- and added back the same to the total income of the appellant on the following grounds: 1) As per the audit report for the A.Y. 2008-09, "Investments are valued at cost", whereas audit report for the assessment year under consideration shows "Investments are valued at current market price based on surrender value as on the last date of accounting year". Therefore, the assessee has not .....

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elf, the assesses has earned ₹ 1,80,18,202/- as dividend. It is well known fact that after declaration of dividend the NAV falls drastically. The assesses was clearly not providing for Appreciation on those securities as just before the declaration of dividend, the NAV of these securities would have been higher and there would have been appreciation. Since the assessee has valued the investment at the year-end, hence, setting of appreciation has been completely ignored. 7.2.2 On the other .....

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format and principles of Banking Regulation Act, as per which, they are required to show value of shares/securities at cost or market value under the head "Investment". In the instant case, balance sheet and profit & loss a/c is prepared by following the statutory guidelines and real income is brought to tax. According to the Id. AR, the appellant had in the past also created-the depreciation fluctuation fund to safeguard the loss in future. The opening balance of the said depreci .....

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th of the bank at the end of accounting year. In this connection, the ld. AR relied upon the decision of the Hon'ble High Court of Gujarat in the case of CIT vs. Rajkot Dist. Co-operative Bank Ltd. has directed to allow any premium paid on investment [more than the cost] during the maturity period of securities though it is not part of stock in trade. The ld. AR also relied upon the decisions rendered in the cases of CIT vs. Vijaya Bank 40 Taxmann.com 92, CIT vs. Bank of Baroda 129 TAXMAN 71 .....

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in as much as the value of investment at the end of the year reflects the "Realizable Value", i.e., value at which this investment can be sold/redeemed at that point of time. Therefore, the said realizable value is always a net result of all the appreciation/depreciation in investment happened during the year. For example, an investment made for ₹ 100/- is having the market value of ₹ 150/- at the middle of the year and ₹ 90/- at the end of the year. According to the .....

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he AO has totally misunderstood the principle of accountancy and hence, the allegation is not sustainable. The AR of the appellant also submitted that "provision of section 94(7) of the Act (Dividend Stripping) is not applicable to the Appellant and requested to allow the claim of depreciation as per audited financial statement. 7.2.5 I have carefully assessed the above situation. The Hon. Supreme Court in the case of United Commercial bank Vs CIT (1999) 240 ITR 355 has held that, preparati .....

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which the assessee bank is valuing securities by treating them as stock in trade is in accordance with the accounting principles and the revenue itself was treating the profit on maturity of such securities as business income. Again, as per RBI guidelines, non-SLR securities are available for sale and are required to be valued at Market Value. The CBDT vide circular no.599 dated 24.04.1991 clarified that securities held by banks must be regarded as their stock-in-trade and the claim of loss, if .....

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allowance of ₹ 1,07,50,000/- made by the AO is directed to be deleted." 15. Heard ld. counsel for both the parties. We find that hon'ble jurisdiction high court in case of Rajkot District Co-op. Bank Ltd. (supra) has held to allow any premium paid on investment turning out to be more than the cost thereof during the maturity period of securities although not forming part of stock in trade. The assessee accordingly submits that investments in the impugned mutual funds is to be acco .....

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rving that it was correct in allowing depreciation claimed on held to maturity investment by treating it as stock in trade despite the same not being traded on a regular basis in accordance with RBI and CBDT Circulars. Similarly, hon'ble Bombay high court in CIT vs. Bank of Baroda 129 Taxman 716 observes that the said bank valued its investments in the form of shares and securities at cost or market price, whichever is lower. And that it was entitled to deduction on account of depreciation i .....

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o.559/Rjt/2014 & Assessee's C.O. No.5/Rjt/15. 16. The Revenue's first substantive ground seeking to revive addition of accrued interest on NPA account of ₹ 23,49,786/- is found to be covered by our corresponding finding in A.Y. 2007-08 on an identical issue decided therein in preceding paragraphs. This ground also follows suit. 17. The Revenue's second substantive ground assails correctness of the lower appellate order restricting Section 14A r.w.r. 8D disallowance of ͅ .....

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estment in UTI Mid Cap Funds etc and claimed the said income as exempt u/s 10 of the Act. The AO disallowed ₹ 1,51,56,596/-, u/s. 14A by applying the formula prescribed in Rule 8D of the IT Rules, 1962. In the said working the interest expenditure of ₹ 7,05,55,708/- debited to the P&L account was adopted. Thus, according to the AO, the interest paid on deposit, had direct nexus with the earning of exempt dividend income. On the other hand, it is the contention of the Id. AR that, .....

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hority to estimate the expenditure which the appellant would have, in his opinion, incurred in relation to the exempted income. The word "incurred" signifies that the expenditure must have been actually incurred, not notionally". He further requires establishing that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. In support of this contention, the .....

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High Court Of Gujarat in the case of CIT vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 217 TAXMAN 343 (Gujarat) wherein it was held that "No ad-hoc disallowance of dividend income u/s 14A was warranted where the assessee had sufficient funds available with it, which was more than amount it invested for earning dividend income", the appellant submitted that, the disallowance made by the AO is on wrong footing and sought its deletion. 4.2.3 I have perused the above submissio .....

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implies, that the appellant had borrowed all its funds to make investment in mutual funds, resulting into earning of exempt income. However from the face of the records, this is virtually not correct. The appellant had sufficient interest free funds and reserves which were deployed to make the investments, and hence, the .element of deploying borrowed funds to make investments does not exist. There is a direct decision of the Hon. Gujarat High Court (which is reproduced supra), which upholds thi .....

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blished. Therefore, in the present case, since the appellant had not utilized borrowed funds in making investments in order to earn dividend income, the AO, by disallowing expenditure almost 10 times more than the actual dividend income, had actually erred in establishing the nexus between the dividend income and expenditure incurred on earning such dividend income. Therefore, to that extent it can be said that the interest expenditure has been nationally worked out by the Assessing Officer. 4.2 .....

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to the disallowance u/s. 14A of the IT Act, The Hon. ITAT held that, as the assessee's own funds were far in excess of the investment made by it, which yielded exempt income, it has to be presumed that the investments had come from interest free funds available with the assesses and therefore, the disallowance u/s. 14A made by the AO in respect of interest on borrowings could not be sustained. While dismissing the appeal of the department, the Hon.Tribunal had relied upon the judgement of t .....

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e basis that the investments were out of interest bearing fluids. It is thus quite clear from the above decisions of the Hon. Bombay High Court and ITAT Mumbai that, no disallowance is warranted, notwithstanding the provisions of Rule 8D where the assessoe's own funds are in excess of the investments made by it which yielded exempt income. Therefore, since the appellant was having sufficient interest free funds, it is reasonably acceptable that such interest free funds went into investments, .....

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the office and administrative machinery would have a small involvement in managing the investments of the appellant. Therefore, respectfully following the ratio laid down by the Hon. Calcutta High Court in the case of EIH Associated Hotels Ltd (126 TTJ 246), it is held that, 1% of the exempt dividend income, would go towards incurring administrative expenses and hence, the disallowance made by the AO u/s 14A is restricted to 1% of the exempt dividend income. Therefore, the disallowance is restr .....

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essment year is 2010-11. The lower appellate findings read that assessee's interest income of ₹ 11.61 crores is much more than interest expenditure of ₹ 7.05 crores. This makes the CIT(A) to hold that it is a case of availability of sufficient interest free funds and capital and reserves. He also followed hon'ble jurisdiction high court decision (supra) to the very effect in deciding the interest disallowance issue in assessee's favour. The Revenue does not rebut both the .....

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