TMI Blog2016 (5) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... s are kept under the head till the maturity, the said Security cannot be treated as a purely investment. Law is well settled that the Securities held by the Bank are in the nature of Stock-in-Trade. We may like to quote here the decision of the Hon'ble High Court of Kerala in the case of CIT Vs. Nedungadi Bank Ltd. [2002 (11) TMI 29 - KERALA High Court] wherein held that the securities held by the Bank are in the nature of stock-in-trade. Both the authorities below has merely gone on the nomenclature of the head under which the Securities are held. In our considered view, nomenclature cannot be decisive for the assessee Bank. We, therefore, hold that the loss on the sale of the Securities is revenue in nature and same is allowable - Decided in favour of assessee Applicability of Sec 43D to the appellant bank - Held that:- The above ground has been decided against the assessee by the order of the Tribunal in assessee’s own case. In view of the above submission of the Ld. Counsel for the assessee the above ground is dismissed. - Decided against assessee Disallowance of the payment made to Cosmos Foundation u/s 40 A(2)(b) - Held that:- Provisions of section 40A(2)(b) are not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.38 -- 3.68 14.70 2 Jarandeshwar Sahakari Bank Ltd., Satara 44.71 1.42 9.23 36.90 3 Shriram Sahakari Bank Ltd., Nipani 33.93 (1.44) 6.50 25.99 5. Justifying the claim, the assessee explained before the AO that as there is no concept of amortized revenue expenditure under the Income Tax Act, the entire amount of goodwill of 96.99 lakhs is claimed as a deduction in the computation of total income filed along with the return of income. However, the AO was not satisfied with the explanation furnished by the assessee. According to him, there is no provision in the I.T Act under which the goodwill can be claimed or allowed as deduction. The AO is of the view that while computing the business income, only those expenses/deductions, which are provided under sec. 30 to 43D of the I.T Act, can be allowed as deduction and the goodwill is not one of the items provided in these sections. He therefore held that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee by the order of the Tribunal. 10. After hearing both the sides, we find identical issue had come up before the Tribunal in assessee s own case vide ITA Nos. 460 and 461/PN/2012 for A.Yrs 2007-08 and 2008-09 order dated 23-01-2014. We find the Tribunal has decided the issue in favour of the assessee. The relevant observation of the Tribunal from Para 11 to 14 of the order read as under : 11. We have carefully considered the rival submissions. Section 32(1)(ii) prescribes that in respect of knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 01.04.1998 owned wholly or partly by the assessee and used for the purposes of business or profession shall be entitled for allowance of depreciation as per the prescribed rates. The controversy before us is as to whether on account of merger of four banks assessee has acquired any asset which falls in the meaning of expression business or commercial rights of similar nature so as to be eligible for depreciation under clause (ii) of sub-section (1) of section 32 of the Act. 12. Before proceeding fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or commercial rights of similar nature as contemplated in clause (ii) of sub-section (1) of section 32 of the Act. 13. Therefore, the moot question is as to whether the aforesaid business/ commercial advantages, namely, taking over of huge client base, licenses, operational bank branches in different areas, etc. can be considered to fall within the expression business or commercial rights of similar nature contained in section 32(1)(ii) of the Act. In this context, one may refer to the judgment of the Hon ble Delhi High Court in the case of Areva T D India Ltd. Ors. (supra). In the case before the Hon ble High Court assessee company acquired the business of the transferor lock, stock and barrel under a slump sale agreement. The amount of consideration paid in excess of the net value of tangible assets transferred, was claimed as payment made by the assessee for acquisition of various business and commercial rights, which comprised of business claims; business information; business records; contracts; skilled employees; and, knowhow. Such acquisition was claimed to be an asset in the nature of business or commercial rights contained in section 32(1)(ii) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eding 2 assessment years, the ground raised by the assessee is allowed. 12. Ground of appeal No.4 by the assessee reads as under : The Ld.CIT(A)-III of Income tax was not right legally as well as factually in not holding appellant bank s Head to Maturity securities as its stock in trade. It may please be held that securities held by the appellant bank under Held to Maturity category constitute its stock in trade and consequently the loss on valuation of the said securities as on 31-03-2009 on the basis of Cost or Market value whichever is lower (on the basis of individual scrip) be held as an allowable deduction and the same may please be directed to be allowed. 13. Facts of the case, in brief, are that the AO during the course of assessment proceedings noticed that the assessee had debited a sum of ₹ 6,22,16,204/- as premium on investments under the 'Held to Maturity' (HTM) category of investments. On being questioned by the AO it was contended that the premium was amortized over the residual life of the particular investments and that such a method of valuation of the investment was being followed by the assessee bank consistently in pursuance of the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases of Latur Urban Coop. Bank Ltd. in ITA No.778/PN/2011 for assessment year 2007- 08 dated 31.08.2012 and The Sangli Bank Ltd. in ITA NO.846/PN/2006 for assessment year 2004-05 dated 30.05.2013 wherein such securities are accepted as stock-in-trade. It was contended that the issue is covered by the aforesaid precedents. The learned Department Representative has not disputed the aforesaid factual matrix. 17. In this context, we find that so far as securities held under HTM categories are concerned, the Pune Bench of the Tribunal in the case of Latur Urban Coop. Bank Ltd. (supra) held that such securities held by an assessee bank are part of its stock-in-trade. Following the aforesaid decision we are unable to uphold the plea of the Revenue that the securities held by the assessee under the HTM category are capital in nature. The following discussion in the order of the Tribunal in the case of Latur Urban Coop. Bank Ltd. (supra) is relevant :- 14. We have heard the parties. The Ld Counsel placed his heavy reliance on the decision of the Hon'ble High Court of Bombay in the case of CIT Vs. Bank of Baroda and in the case of UCO Bank Vs. CIT, 240 ITR 355 (SC). In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee reads as under : 6. The Learned CIT(A)-III of Income Tax was not right legally as well as factually in holding that Sec 43 D applies to the appellant bank. The Learned CIT(A)-III of Income Tax has overlooked the fact that the appellant bank being a scheduled bank, the RBI directions should be applied to identify the Doubtful Debts as prescribed u/s 43D.lt is therefore prayed that addition sustained of ₹ 6,53,00,000.00 on account of Sec 43 D may be quashed being illegal and devoid of any merit. 21. The Ld. Counsel for the assessee at the outset submitted that the above ground has been decided against the assessee by the order of the Tribunal in assessee s own case. In view of the above submission of the Ld. Counsel for the assessee the above ground is dismissed. 22. Grounds of appeal No.7 and 8 by the assessee read as under : 7. The Learned CIT(A)-III of Income Tax was not right legally as well as factually in sustaining the disallowance of the payment made to Cosmos Foundation u/s 40 A(2)(b) of the Income Tax Act to the extent of 50 % in respect of outsourcing and Security charges. The addition made by the Learned Addl. Commissioner is arbitrary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Cosmos Foundation and an amount of TDS made thereon is shown at ₹ 12,53,780/-. (b) The Cosmos foundation, in its return of income for Assessment Year 2009-10 has shown the amount of entire TDS in its case at ₹ 10,88,191/- and this TDS also includes the TDS made by other bank on its deposits. (c) In the hand written statement of the trustee, the amount received by the trust from the Cosmos Bank in the year 2008-09 is shown at ₹ 3,31,04,100/-. (d) The trust had received a sum of ₹ 66,37,090/- under the head Security Charges from the assessee bank in the A.Y. 2009-10 (which the bank has shown at ₹ 51,79,291/-). Thus, there is a difference of ₹ 14,57,799/- in the accounts. (e) For the A.Y. 2008-09, a sum of ₹ 58,09,791/- was paid by the bank under the head security charges without any TDS. (f) For the A.Y. 2010-11, ₹ 47,14,960/- was paid under the head security charges on which TDS of ₹ 85,265/- was made which is much less than the actual TDS that should have been made. 26. As per the AO, what the trust was doing is a business activity which it should not have done being a charitable trust. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es from third parties. All these details according to Ld.CIT(A) are essential to ascertain the actual services rendered by the Foundation and whether the payment made is commensurate with the services claimed to have been rendered by the Foundation. He further observed from the process carried out by the assessee that the trust has very limited role in the selection process or imparting the required skills to the prospective employees, which are basically and essentially carried out by the assessee bank itself. Nothing has been brought on record to show that whether the trust had even the required paraphernalia to recruit the manpower on such a major scale or even the necessary infrastructure for giving training in computers etc. Similarly, in case of recruitment of security staff also, the assessee has failed to bring out the procedure followed in the selection process or that whether any basic training process is carried out by the trust before short-listing the prospective candidates. Considering all these aspects and the failure of the assessee to bring out the extent of involvement of the trust in the whole process of selection, recruitment and training of the candidates befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Prajnalaya Trust which was also engaged in the business of manufacturing of the same product. 2 of the trustees of the said trust were also the directors and shareholders of the assessee company. 3 out of 5 directors of the assessee company were the sons of two trustees of the trust. Bulk of the shares of the assessee company was held by the trustees of the trust and their family members. Initially the lease rent was fixed at ₹ 25,000/- per month which was later increased first to ₹ 50,000/- per month and then ₹ 1 lakh per month. The same was subsequently enhanced to ₹ 6,75,000/- per month. The AO applied the provisions of section 40A(2) and further held that this payment was in the nature of capital expenses. The CIT(A) upheld the order of the AO. The Tribunal held that the enhanced lease rent amounting to ₹ 17,25,000/- for the period from January 1992 was a revenue expenditure but held that the provisions of section 40A(2) are applicable since there was a direct relationship between the trustees and the directors of the assessee company. On further appeal the Hon ble High Court held that Mehta Charitable Trust is not an Association of Persons wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch disallowance was made in the preceding year. It is the submission of the Ld. Counsel for the assessee that the provisions of section 40A(2)(b) are not applicable since the assessee is a charitable trust and not an association of persons within the meaning of section 40A(2). We find force in the above arguments of the Ld. Counsel for the assessee. The persons referred to in clause (b) of 40A(2) are as under : (i) where the assessee is an individual any relative of the assessee; (ii) where the assessee is a company, firm, association of persons or Hindu undivided family any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision. It is not in dispute that at least some of the trustees are also directors and shareholders of the assessee-company. The Tribunal vide its order dated 25.02.2002 held that the maximum shareholding in the assessee-company was owned by the trustees and their relatives as defined in Section 2(41) of the Act. However, clause (v) of Section 40A (2)(b) of the Act brings only such companies, firms, HUFs or association of persons within its purview, directors/partners/members of which have a substantial interest in the business or profession of the assessee. The ITAs 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247/2002, 45/2005, 50/2005, 1207/2005, interest of the relatives of a director/partner/member of such company/firm/HUF/association of persons cannot be taken into consideration to ascertain whether the director/partner/member have substantial interest in the business of the assessee or not. The explanation provides that a person shall be deemed to have a substantial interest in a business if in a case where the business is carried on by a company, he, at any time, during the previous year, was the beneficial owner of shares carrying not less than 20% of the voting p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at they constituted an association of persons. This Court was of the view that in the absence of ITAs 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247/2002, 45/2005, 50/2005, 1207/2005, element of volition on the part of either the trustees or beneficiaries by no stretch of imagination it cannot be considered to be an association of persons . In CIT v. Harivadan Tribhovandas (1977) 106 ITR 494 (Guj.), Gujarat High Court was of the view that volition on the part of the members of the association is an essential ingredient and merely because a combination of individuals receives income jointly, without anything further, they cannot be regarded as an association of persons. Obviously, such volition is missing in the case of trustees as well as the beneficiaries of the trust. In Murugesan (G.) Brothers v. Commissioner of Income Tax (1973) 088 ITR 0432, Supreme Court, inter alia, observed that Association of Persons can be formed only when two or more individuals voluntarily combine together for a certain purpose and hence volition on the part of the members of the association is an essential ingredient. In Commissioner of Income Tax v. Venu Suresh Sanjay Trust: (1996) 221 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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