TMI Blog2020 (5) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue in this ground is dismissed. Contribution made by PNB employees pension trust - HELD THAT:- As decided in own case [ 2019 (1) TMI 689 - ITAT DELHI] held that similar expenses were allowed in earlier years in the assessments made under section 143 (3) of the Act and the decision of Delhi ITAT in the case of DCIT verses Ranbaxy laboratories Ltd [ 2009 (6) TMI 126 - ITAT DELHI-I] wherein the allowability of expenses towards provision for Pension Fund were held to be allowable expenses and section 43B has no application, is applicable. The fact that the assessee had actually contributed/paid the amount to pension fund makes the case of the assessee even stronger. Expenses claimed u/s 36(1)(viii) - HELD THAT:- CIT(A), however, held that inasmuch as the ld. AO was not satisfied with the method followed by the assessee bank that they had not correctly calculated the deduction under section 36(1)(viii) of the Act and the Ld. AO was of the view that the assessee bank had claimed profit attributable to eligible business and computed the same on proportionate basis, based on the total fund deployed method, Ld. CIT(A) directed the assessee to furnish the correct computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revaluation of investment on the HTM category . At the outset, it was brought to our notice that the similar issue has been covered in favour of the assessee by the ITAT for assessment years 2006-07, 2007-08, 2008-09, 2009-10, 201011 and 2011-12. 3. The relevant part of the order of the AO and ld. CIT (A) in the instant year is as under: 6.1 During the year under consideration, it is observed that the assessee has claimed losses on account of amortization of premium paid at the time of purchase of securities held under the category of HTM. The loss on account of this amortization was claimed at ₹ 212,47,18,151/-. 6.2 It is observed that though the securities are categorized as HTM, the same are not held till maturity but are disposed off by the bank before the period of maturity ends. Therefore, this act cannot be said to be in strict compliance of the RBI guidelines. Further, the assessee has claimed the HTM securities to be stock in trade for the purpose of Income Tax Act. These securities are considered to be long term securities and held for considerably long periods. Therefore, they continue to remain as part of the stock in trade till they are finally sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent to purchase where these securities are held as it is. The real effect on profit will come only in the year of sale. Thus, till the securities are finally sold any amortization or loss will be notional in nature. Hence, such amortization distorts the picture of true profit /loss of a particular financial year. The A.O. is supposed to examine any claim under the provisions of Income Tax Act for that particular year only and there is no concept of amortization for stock-in-trade under any provisions of the Income Tax Act. As such, the above amortization is only a notional expenditure and it is not an allowable expenditure under the Income Tax Act. 6.6 As the securities have been sold before maturity, the amortization of premium over the remaining life of the securities cannot be worked out correctly as the life of security with assessee is not certain. For working out the amortization, the period for which the assessee is going to hold the securities should be known. However, this is not available in the case of assessee as it is selling the HTM securities before maturity as per its own will. Thus, the loss on account of amortization of premium cannot be treated as provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments (other than investments is joint ventures and subsidiaries of the bank) held by the Assessee bank constitute stock-intrade and as per normally accepted principles of accounting the stock-in-trade is to be valued at cost or market price whichever is lower. The Assessee bank has consistently and regularly following the said principle. Moreover, the Assessee bank has been consistently offering the entire profit on sale of securities as business income and no part of the profits has been offered as capital gain. 1.4 It is submitted that the learned Assessing Officer is not justified is disallowing the claim of the Assessee giving reason that the securities held under HTM category are sold in some cases before maturity. The learned Assessing Officer should have appreciated that RBI guidelines permit sale of the securities under HTM category even before maturity. As the Assessee bank sells certain securities under HTM category before maturity, this is the precise reason that the Assessee bank treats these investments as stock-intrade. Once the investment is treated as stock-intrade, as per generally accepted accounting principle, the same is to be valued at cost or market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h regard to securities held under HTM category the bank is following the RBI's Master Circular on valuation of investments dated 1.7.2002. As per the above Circular, the premium being the difference between the acquisition cost and the face value of the security is amortized over the remaining period of maturity of these securities. According to the appellant bank this method of amortization of premium with regard to the securities held under HTM category had been consistently followed by the bank from the assessment year 2001-02 and the same had been upheld by the CIT(A)s from the Assessment Year 2001-02 onwards. In the appeal order for the assessment year 2008-09, this issue was considered by me and allowed in Appeal No. 145/CIT(A)-XVII/ Del/10-11 dated 29.06.2012 and the relevant portion is as under: 6.4. From the submissions of the appellant, it is dear that the bank is valuing its securities under HTM category at cost which is different from the valuation of securities under AFS and HFT categories which are valued at market price or cost whichever is lower. Though all these securities are 'stock in trade' the valuation of HTM category is different from the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds relates to the disallowance of loss on revaluation of investment held in HTM category of ₹ 301,34,13,448/-. 21. On examination of the annual accounts, Ld. AO found that the assessee claimed loss on revaluation of investment amounting to ₹ 301,34,13,448/-on account of amortization of premium paid at the time of purchase of securities under HTM (Held To Maturity) category. Assessee treated the securities under HTM category as a stock in trade. Contention of the assessee was that as per RBI guidelines dated 16 October 2000, investments classified under HTM category need not be market to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized for the period remaining to maturity. 22. On this aspect the Ld. assessing officer had taken the view that the securities were sold before maturity and therefore the amortization of premium over the remaining life of the securities cannot be worked out correctly and for working out the amortization, the period for which the assessee held the securities are to be known, and for the want of such information coupled with the fact that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment years 2001-02 to 2012-13. The learned CIT(A) has only followed the principle laid down by the Hon ble Apex Court in the case of UCO Bank 240 ITR 355. In the light of the aforesaid binding decision of the Hon ble Apex Court, we do not find any infirmity in the order of CIT(A). In the absence of any material change, as confirmed by both the parties, we hereby delete the addition made by the revenue. 7. The Second ground of the appeal of the revenue pertains to depreciation/loss on investments and on MTM on derivatives. At the outset, it was brought to our notice that the similar issue has been covered in favour of the assessee by the ITAT for assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2011-12. 8. The relevant part of the order of the AO and ld. CIT (A) is as under: 4.1. On this issue, the AO held as under: 7.7 It is seen that in the computation of income, the assessee has claimed deduction on account of depreciation/loss on investment of ₹ 1,06,50,34,039/- and MTM on derivatives of ₹ 5,74,10,270/- on account of depreciation on investment. The above depreciation has been claimed on account of valuation of securities under the category He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok value of the individual securities in this category would also not undergo any change after marking to market. 7.7. Notes on accounts of balance sheet also discuss the method adopted by the bank for valuation of securities in different categories, in Available for Sale and Held for Trading categories, the bank has valued the securities at market price and net depreciation under each category is provided for and the net appreciation is ignored. 7.8 From the method of valuation of investments made in AFS and HFT, it is pertinent to note that first of all, valuation is done scrip wise and depreciation/appreciation is aggregated classification wise in each category but while aggregating, net depreciation is provided for and net appreciation is ignored. For example, the assessee has two securities, both purchased at ₹ 100/- each. Suppose, at the end of the year, the value of both the securities are ₹ 80/- and ₹ 120/- respectively; although the purchase value as well as the market value at the close of the accounting year is the same, but the assessee will book a loss of ₹ 20/- in its books of accounts as under: Security A ₹ 80/- Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recorded at market/cost price at the end of the year in books and whenever it is sold or disposed off otherwise, such diminished value should be considered to arrive at the figure of net profit in the year in which such investments held as Stock- in -trade are sold. However, in the present case, it may be noted in the above mentioned RBI guidelines in both the categories viz. AFS and HFT, individual scrip value is not adjusted by any depreciation charged due to revaluation, which means that such investments are held at the cost of acquisition even after providing the depreciation on it. Thus, corresponding profit in the year is reduced without having any impact on the next years profits, which is not permitted under the Income Tax Act on account of revaluation of Stock- in-trade . 7.12. For example, if any investment of ₹ 1,000/- is made in AY 2003-04 and a depreciation of ₹ 200/- is booked due to depreciation in its value, the carrying cost in the AY 2004-05 of these assets should be Rs- 800/- -and in that year, if these investments are sold at ₹ 1,500/-, the business profit should be booked at ₹ 700/-. If in this example, the assessee continues t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties Contracts (Regulation) Act, 1956, the derivatives are securities. The said depreciation has been claimed on account of valuation of securities under the category of Held for Trading (HFT) and Available for Sale (AFS). 2.2 The learned assessing officer white disallowing the depreciation/loss on investment claimed by the Assessee as per para 7.14 of his Assessment Order has held that though it is correct that Depreciation/Loss is booked in accordance with the Banking Regulation Act and the revaluation is done in accordance with the guidelines of RBI; however the fact remains that these investments have not been shown in the books as Stock-in-Trade and its resultant profits on sale are not enhanced by the value of depreciation in subsequent years when these investments are actually sold. 2.3 With regard to the above it is humble submitted that the contention of the learned Assessing Officer is factually incorrect. The effect of valuation of the Investments is very much reflected in the books of accounts of the Assessee Bank and the resultant profits on sale in the subsequent years when these investments are actually sold is computed after considering the depreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee stating that depreciation/ loss in the value of investments was allowable expenditure. The said bank merged in the Assessee Bank. 2.7 The Assessee bank has been offering the entire profit on sale of securities as business income and no part of profit has been offered as capital gains. 2.8 This issue has been decided in favour of the Assessee bank by the learned Commissioner of Income Tax (Appeals) in the past when it was held that depreciation/ loss in the value of investments is an allowable expenditure. In the assessment year 2009-10, there was no depreciation/loss in the value of the investments. But there was an appreciation of ₹ 216.34 crore which was offered for taxation. A chart showing decision of CIT(A) in earlier assessment years is submitted below for your kind perusal: Assessment Year Amount (Rs.) Remarks 2012-13 233,19,69,576 Allowed by CIT(A) vide order dated 28.01.2016 2011-12 171,96,42,285 Allowed by CIT(A) vide order dated 27.07.2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.10 Thus, the Committee on Disputes has settled the issue once for all that depreciation/loss on investments is an allowable expenditure by not giving permission to the Income Tax Department to pursue the issue before the higher courts. 2.11 Keeping in view the above submissions and since it is a covered matter, your honour is requested to kindly agree to our submissions and delete the addition of ₹ 112,24,44,309/- (₹ 106,50,34,039/- + ₹ 5,74,10,270/-) made by the learned Assessing Officer and allow this ground of appeal. 10. The ld. CIT (A) noted that appeal was instituted on similar facts for the A. Y. 2011-12 which was decided by the ld. CIT(A) vide her order dated 27.07.2014 in A. No. 111/13-14. The finding of the ld. CIT(A) for A. Y. 2011-12 is as under: 5.3 From the details submitted by the appellant, it is dear that only the difference between the book value and the market value is claimed as diminution in the value of investment or depreciation. Since the same method is followed by all banks there is no reason to presume that profit on sale of investments are not correctly reflected as assumed by the AO. As per the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant bank, the dosing stock was valued at market price or cost whichever is lower for income tax purposes alone. Therefore, the decision of the Hon'ble Supreme Court is clearly applicable in the case of the appellant and the diminution in the value claimed as a deduction in the computation statement filed along with the return of income is an allowable deduction. 3.5. Therefore, the appellant bank had correctly valued its closing stock at lower of market value or cost and this method was acceptable one. The AO's allegation that profit on the sale of securities are not correctly reflected in the P L A/c is not true as the bank is following the RBI guidelines strictly in this regard. The appellant bank in their submissions filed on 31.07.2012 had pointed out that the calculation for depreciation on securities is worked out as per RBI guidelines and only the incremental depreciation is debited in the P L A/c. The appellant bank debits only the incremental depreciation in the P L A/c which is actually the difference between the total depreciation at the end of the year and the outstanding accumulated depreciation at the beginning of the year. As a result, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he banks. As such, the aforesaid depreciation / loss on valuation of securities is also allowable. I am, therefore, inclined to agree with the learned AR that the issue of loss on valuation of securities is squarely covered in favour of the appellant bank with the aforesaid dismissal of SLP by Hon'ble Supreme Court. It has been further observed that the AO passed an order u/s 254/143 (3) dated 25.03.2009 for AY 1989-90 after examining the issue of loss on securities in terms of direction of Hon'ble ITA T following the judgment of Hon'ble Supreme Court in the case of UCO Bank vs. CIT 240 ITR 355 (SC). In that order, the AO has accepted that securities are held continuously as stock in trade and accordingly, has allowed the loss on valuation of securities. Based on such findings, the depreciation / loss on securities is also allowable to the assessee bank. I find that my learned predecessors have also allowed the relief to the appellant on this issue consistently from AY 1998-99 onwards. 4.3. In view of the above discussions, the disallowance of ₹ 9,04,35,251/- in respect of depreciation on securities is hereby deleted. This ground of appeal is all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 scrip wise and only netted appreciation, if any, is required to be provided for in the accounts; that the said treatment is also disclosed as per paragraph No.5 of Significant Accounting Policies (schedule-17) adopted to the audited accounts. It was further submitted by the assessee that for the purpose of income tax, bank is treating all securities (except investment in subsidiaries and joint ventures) as stock in trade; that the interest received on such securities and profit/loss on sale of such securities irrespective of its categorization into HTM, HFT and AFS in the books, is offered as business income/loss and the same is also being assessed by the Department as business income/loss; and the diminution in value of such securities is considered as business loss and likewise really been depreciation on valuation of such securities, if any, is offered to tax. Assessee placed reliance on the decision of the Hon ble Kerala High Court in the case of CIT vs. Nedungadi bank Ltd., 264 ITR 545 for the principle that the appreciation/loss in the value of investment was allowable expenditure. 29. Ld. Assessing officer after considering the submissions of the assessee, formed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of time the appellant has been valuing the very same investment at cost or market value whichever is lower for income tax purposes; that it is an established rule of commercial practice and accountancy that closing stock can be valued at cost or market price, whichever is lower. It could be seen from the record that the question as to the reflection of the investments being stock in trade in the audit report, profit and loss account and the annual report with the question of the value of securities as embedded in the closing stock and the corresponding figure as becoming the opening stock in the subsequent year was adverted to Indian judicial precedents. 33. Further as understood from the argument of the Ld. DR, her contention is that no opening stock or closing stock of securities mentioned in the profit and loss account though the assessee had claimed their investment in securities as stock in trade; and that if the investments are stock in trade, it should be reflected in the return of income, audit report, profit and loss account and the annual report and the diminution of the value of securities will be embedded in the closing stock and the corresponding figure will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reference to the sales of securities, if any, that took place during the year or earlier or subsequent years. Such an exercise has not been undertaken by the learned assessing officer but merely basing on the figures reflected in the balance sheet which was prepared in accordance with the RBI guidelines, learned assessing officer reached a conclusion that there was an escapement of income due to the preparation of the balance sheet in a particular way, as prescribed by the RBI. 36. If we appreciate the facts of this case in the light of the decision of the Hon ble Apex Court in UCO Bank vs. CIT 240 ITR 355 (SC) it is clear that since the assessee has been maintaining its accounts on mercantile system, they are entitled to show his real income by taking into account market value of such investments in arriving at real taxable income. All the aspects argued by the Ld. DR were considered by the Hon ble Apex Court in the case of UCO Bank vs. CIT 240 ITR 355 (SC) and were held in favour of the assessee. The decision in Southern technologies Ltd (supra) has no application to the facts of the case. 37. There is consistency of the facts on this aspect quite for a long time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this case for this year are entirely different from the facts involved in the case of the State Bank of Mysore, in as much as in the case of state bank of Mysore the issue was regarding the shifting of securities from stock in trade to capital asset whereas in the present appeal the Learned Assessing Officer challenged the deduction on the ground that there is no transfer of securities from one head to other for the purpose of valuation as all category is under stock in trade. She invited our attention to the circular of RBI in respect of amortization of premium to state that the RBI directions are only disclosure norms, they have nothing to do with the computation of total taxable income under the Income-tax Act or with the accounting treatment and that the RBI directions only lay down the manner of presentation of NPA provision in the balance sheet of the NBFC. She further submitted that the NBFCs have to accept the concept of income as evolved by the RBI after deducting the provision against NPA, but such treatment is confined to presentation/disclosure and has nothing to do with the computation of taxable income under the Income tax Act. She placed reliance on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontribution made by PNB employees pension trust. At the outset, it was brought to our notice that the similar issue has been covered in favour of the assessee by the ITAT for assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2011-12. 15. This issue stands adjudicated vide para nos. 45 to 48 of the order in ITA No. 2469/Del/2011. For the sake of ready reference, the relevant part is reproduced as under: 45. This ground relates to the disallowance of contribution made to PNB Employees Pension Fund Trust of ₹ 215,56,00,000/- which the assessee claims to be its legitimate business expenditure. 46. According to the Ld. AO, this is not a contribution to the pension fund and the provisions of Section 43(B) are not applicable to the assessee bank. According to the Ld. AO, no deduction of such payment is allowable to the assessee bank, even though the same was actually paid and the provisions under section 36(1)(iv) has to be looked into, according to which any sum paid by the assessee to an employer by way of contribution to the Recognized Provident Fund or an approved superannuation fund or any fund of similar nature is allowable as a deduction, subject to condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their earlier years to render the binding precedents followed by the Ld. CIT(A) inapplicable to the case on hand. In the absence of any change of facts and circumstances, we do not find it necessary to take any different view. In these circumstances, respectfully following the above line of decisions, we dismiss this ground of appeal of the revenue. 17. The fifth ground of the appeal of the revenue pertains to deletion on account expenses claimed u/s 36(1)(viii). At the outset, it was brought to our notice that the similar issue has been covered in favour of the assessee by the ITAT for assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2011-12. 18. The relevant part of the AO and ld. CIT (A) on the issue is as under: 7.1. On this issue, the AO held as under: 10.1. For the assessment year under consideration, it was found that the assessee claimed a deduction u/s 36(1)(viii) of ₹ 98,90,00,000/-. The assessee was asked to give justification for such payment vide order sheet noting dated 08.03.2016. The assessee, vide letters dated 08.03.2016 and 11.02.2016, submitted as under: 10.2 The submission of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it derived from eligible business, but it has claimed deduction of the taxable profit in proportion to the funds deployed in eligible business vis-a-vis the total business. In the view of the learned Assessing Officer this is approximate and there is no way of knowing the exact profit from eligible business. 5.2 In this regard it is submitted that Section 36(1)(viii) of the Income Tax Act, 1961, (substituted w.e.f. A.Y. 2008-09 provides as under: Section 36(1): the deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28. (viii) In respect of any special reserve created and maintained by a specified entity an amount not exceeding 20% of the profit derived from eligible business computed under the head Profits Gains of Business or profession (before making any deductions under this clause) carried to such reserve account. Provided that where the aggregates of the amounts carried to such reserve account from time to time exceeds twice the amount of paid up share capital and of the general reserve of the specified entity, no allowance under this clause sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the Income from House Property . The income from other sources represents income received from venture capital funds which is shown as Income from Other Sources in accordance with the treatment given in venture capital funds on account of specific provisions of the Act. These do not therefore cease to be business income of the assessee Bank. The assessee Bank draws its Profit Loss Account and Balance Sheet as per format prescribed under Banking Regulation Act. As per the said format the other income other than interest is disclosed. This does not mean that the said item cannot be included in computing the profits derived from eligible business since these incomes are also derived in the course of carrying on business. 5.6 The Ld. CIT(A) while allowing the ground of the Assessee on the same issue in A.Y. 2009-10 observed as under: 9.1. In the appellant proceedings, the appellant bank had relied on Hon'ble ITAT Delhi's decision in the case of Power Finance Corporation Ltd. Vs. JCIT (2008) 16 DTR (Del) (Trib.) 519 where it was held that there is no time limit for creation of special reserve under Section 36(1)(viii) of IT Act and thus the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble jurisdictional ITAT. 5.7 This issue has been decided in favour of the assessee bank by the CIT(A) for the assessment year 2011-12 in appeal no.111/13-14 dated 27.07.2014 and for the Assessment Year 2012-13 in Appeal No 139/CIT(A)-7/DEL/15-16 dated 28.01.2016. 5.8 In view of the above submissions, your honour is requested to delete the addition of ₹ 98,90,00,000/- made by the learned Assessing Officer and allow this ground of appeal. 7.3. Appeal was instituted on similar facts for the A. Y. 2011-12 which was decided by the CIT(A) vide her order dated 27.07.2014 in A. No. 111/13-14. She had held is as under: 8.3. The Ld. CIT(A) on the same issue in A.Y. 200910 observed as under: 9.1 In the appellant proceedings, the appellant bank had relied on Hon'ble ITA T Delhi's decision in the case of Power Finance Corporation Ltd Vs JCIT (2008) 16 DTR (Del) (Trib) 519 1where it was held that there is no time limit for creation of special reserve under Section 36(1)(viii) of IT Act and thus the entire deduction of ₹ 57,45,97,7867- claimed in the revised return filed on 30.03.2010 is allowable. The relevant portion of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision for the A.Y. 2010-11 of the Ld. CIT(A). Since the facts are similar, therefore respectfully following the decision of the Ld. CIT(A) for A.Y.s 2009-10 2010-11, the addition of ₹ 124,61,00,000/- is deleted. The ground of appeal is ruled in favour of the appellant. 7.4. Since the facts were similar, following the decision of the CIT(A) for A. Y. 2009-10 which was followed by my predecessor in the appeal for A. Y.s 2010-11 2011-12, relief was allowed to the appellant for A.Y. 2012-13. Even in the present appeal, as the facts are similar, following the orders of predecessors CIT(Appeals) on this issue, the addition of ₹ 98,90,00,000/- made by AO is directed to be deleted. The ground of appeal is ruled in favour of the appellant. 19. The ITAT on the similar issue in ITA No.4722/Del/2012 held as under: 69. This ground relates to the disallowance of ₹ 57,45,97,786/- claimed as deduction under section 36(1)(viii) of the Act. It could be seen from the record that the assessee bank did not make any claim under section 36(1)(viii) of the Act in the original return of income filed on 26/9/2008, but this claim was made only in the revised retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity at this juncture, we hereby refrain from interfering with the order of the ld. CIT (A). 21. The ground no. 6 deals with the issue of depreciation on goodwill which is a recurrent issue, hence, we hereby delete the addition made by the AO following the precedence of the order of the ITAT for the earlier assessment years. Reference is being taken to the order in ITA No.2966/Del/2013. This relates to the disallowance of depreciation on goodwill amounting to ₹ 2,58,34,887/- in respect of the goodwill of the erstwhile Nedungadi Bank Ltd., which merged with the assessee in the Assessment Year 2003-04. 22. Since, the merging of Nedungadi Bank in the financial year 2002-03, the depreciation on the goodwill of the Nedungadi Bank has been consistently allowed subsequent to the merger for last many years. The AO may examine the computation part of depreciation on the goodwill from the year of merger and allow the claim of the assessee. 23. The ground No. 4 of the appeal of the revenue and ground no.1 of the appeal of the assessee deals with disallowance under Rule 8D(2). 24. The finding of the AO is as under: 9.1 On examining the annual accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's claim that it is an incidental income, it is mentioned that the provisions of Section 14A refers to a category of income, namely the income which, as a result of investment made by assessee, does not form part of the total income under the Act; in that case, the assessee is not entitled to claim deduction of expenditure incurred in relation to such investment. The allowability of expenditure does not depend upon the direct or incidental receipt of income as the expression used in Section 14A is in relation to income and it does not contemplate that there must be direct receipt of income. 4s the expression used in Section 14A is in relation to income which does not form part of total income under the Act and dividend and tax-free bond income are kinds of income which do not form part of total income under the Act, the expenditure incurred in relation to such investment which would result in such income is not liable to be deducted in view of Section 14A of the Income Tax Act, 1961. Section 14A of the Act does not require that it would operate only if the investment yields positive result by way of direct income. Section 14A is applicable whether the exempt income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same may or may not have yielded any exempt income in the relevant previous years. 9.10 In view of the above facts and having regard to the accounts of the assessee, I am not satisfied with the correctness of the claim of the assessee that no disallowance should be made u/s 14A. 9.11 Thus, as the claim of the assessed regarding expenditure in relation to income which does not form part of total income is not acceptable, the method suggested by Rule 8D of the Income Tax Rules, 1962 is adopted in determining the expenditure incurred by assessee company in relation to income not includable in total income. 9.12 Quantum of disallowance As discussed in the preceding paragraphs that assessee is having common infrastructure and common personnel for earning income under various heads, therefore, income/expenditure cannot be separately attributed to one particular activity. Hence, interest expenditure debited in profit and loss account are considered common interest expenditure attributable to all activities of the company. It needs to be apportioned in view of provisions of Act and Rules framed in this regard. In view of above facts, the disallowance as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2% of [B] = 0.5 X 45,72,11,14,455 100 = ₹ 22,86,05,572/- (iv) Expenditure incurred in relation to income which does not form part of total income. (i) +(i1) + (ii) =₹ 2,86,69,45,381/- Total disallowance as per Rule 8D of the l.T. Rules, 1962 comes to ₹ 2,86,69,45,381/-. In view of the above discussions, the expenses incurred in relation to income which does not form part of total income under the Act of ₹ 2,86,69,45,381/- is disallowed and added to the income of the assessee. 6.2 On this ground, the Ld. AR stated as under: 4.0 The learned Assessing Officer has invoked the provisions of section 14A of the Income Tax Act read with rule 8D and has disallowed a sum of ₹ 2,86,69,45,381/-on a tax free income of ₹ 143,35,22,679/- from dividend and other tax-free income. In this connection we wish to submit as under:- 4.1 Bank has claimed the following income as exempt from tax: S. No. Particulars Amount (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... walior vs. Union of India (1971) 1 SCC 85. Their lordships held that such expression means provisions having a dominant and immediate connection It was also held that it does not mean merely having a reference to. 4.4 It is the settled legal position that if a word or an expression has been judicially defined by the court then it should be presumed that the legislature was well aware of such meaning while enacting an enactment and consequently, such word or expression in the enactment should be understood in the same sense in which it was judicially defined. Reference can be made to the decision of the Hon'ble Supreme Court in the case of Ahmed G.H Ariff vs. CWT 76 ITR 471 (SC) wherein it was observed as under: It is well-settled that where the Legislature uses a legal term which has received judicial interpretation, the courts must assume that the term has been used in the sense in which it has been judicially interpreted. Similar view was taken by the apex court in the case of Keshavji Ravji and Company vs. CIT 183 ITR 1 by observing as under: when words acquire a particular meaning or sense because of their authoritative construction by superior c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time which is chargeable to tax under the Act. Dividend and tax free income is received incidentally. 4.8 During the year, the bank earned the profit on sale of securities of ₹ 591.02 crore which is taxable as business income. The dividend and tax free income of ₹ 126.47 crores has been received which is incidental to trading of securities. Therefore, there was no dominant and immediate connection between the borrowed funds for acquisition of securities held as stock in trade and dividend / tax free income earned there from by the bank. 4.9 Without prejudice to above, it is further stated that bank has not incurred any interest expenditure in earning the aforesaid exempted income as the - noninterest bearing funds are more than sufficient to take care of investments made in earning the exempted income which is evident from the following: A. Average Non-Interest Bearing Funds S. NO. Particulars As on 31.03.13 As on 31.03.12 01 Capital 353.47 339.18 02 Reserve Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the formula given in rule 8D is only the average value of investment, income from which does not or shall form part of total income is to be considered. Therefore, any investment yielding both taxable income as well as exempt income cannot be considered in the value of investment in applying rule 8D. Therefore the provisions of section 14A cannot be made applicable to the assessee bank. This has been so held by Hon'ble ITAT, Jaipur in the case of State Bank of Bikaner Jaipur vs. ACIT (ITA 578/JP/2003 for the A.Y. 2001-02. Reliance for this view is placed on the decision of ITAT Mumbai in the case of Avshesh Mercantile P. Ltd vs. DCIT (ITA 208/Mum/2009 dated 13/06/2012). 4.12 Out of the investment portfolio of the bank, investment are yielding exempted income in the form of dividend and interest as well as taxable income as profit on sale of securities no the investment is yielding only exempted income to the bank. 4.13 Based on the above, computation of disallowance under section 14A terms of Rule 8D is worked out as under: Particulars Amount Total Interest Expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i (ITA 2235/DEL/2011) for the Assessment Year 2005-06 in the assessee's own case. In the said case the learned Assessing Officer had disallowed pro rata expenditure as expenditure attributable to exempt income under section 14A of the Income Tax Act. On appeal, the CIT (A) had restricted the disallowance to 10% of the exempt income. The assessee, then had treated only the prorata administrative expensed of its Treasury Division as expenditure attributable to exempt income. On appeal ITAT as per para 6.1 of the order agreeing with the contention of the assessee bank has stated that at the most a reasonable proportion of administrative expenses can only be disallowed which may be attributable to exempt income. The suo motto disallowance made by the Assessee has not been found fault with either by the Assessing Officer or CIT(A) in these or earlier proceedings. Thus AO or CIT(A) in two rounds of proceedings, have no where pointed out that the working offered by the Assessed suo motto is defective or deficit in any respect. The ITAT has held that under these circumstances they are unable to up-hold the order of CIT(A) retaining 10% disallowance of expenses as attributable to earnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant bank had intimated that the net interest expenditure is a negative amount as interest received by the bank was ₹ 14265 crores while the interest expenditure was only ₹ 8731 crores. Therefore, the appellant bank's AR is of the view that the entire interest expenditure incurred is directly attributable to the taxable interest income earned and offered to tax in the current year and thus no disallowance under Rule 8D(2)(ii) is warranted in the case of the appellant. The appellant also points out that the interest free funds far exceeds the amount invested in assets earning in tax free income. As per the appellant bank, investments in assets earning tax free income is only 3-5% of the total interest free funds available with the appellant at any given period. The appellant bank also points out that they always had substantial balances in current accounts which are interest free funds in the current assessment year as well as in all the earlier assessment years. On verifying the earlier appeal order for A.Y. 2007-08 the submissions made before the then CIT (A) for the A.Y. 2007-08 with regard to 14A disallowance indicates that substantial balances were availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , disallowance under Rule 8D(2)(ii) of ₹ 263,83,39,809/- is deleted and disallowance under Rule 8D(2)(iii) of ₹ 22,86,05,570/- is sustained. The ground of appeal is ruled partly in favour of the appellant. 25. From the facts above, we find that a. Exempt income earned ₹ 143,35,22,679/- b. Amount disallowed by the AO under Rule 8D(2)(ii) ₹ 263,83,39,809/- [deleted by ld. CIT (A)] c. Amount disallowed by the AO under Rule 8D(2)(iii)- ₹ 25,86,05,570/- [confirmed by the ld. CIT (A)] 26. This matter has been examined by the Co-ordinate Bench of Tribunal in ITA No. 1519/Del/2016 wherein it was held as under: 6. Ground No. 2 relates to disallowance conformed by Ld. CIT (A) under rule 8D (iii) of Income Tax Rules, 1963. 6.1. At the outset, Ld.Counsel submitted that, this issue stands squarely covered by following observation by Hon ble Supreme Court in case of Maxopp Investments vs CIT reported in (2018) 91 taxman.com 154, in favour of assessee: 36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in-trade' and not as investment, particularly, by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-intrade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us. 8. It is observed that decisions relied upon by Ld. Sr. DR has been passed prior to decision of Hon ble Supreme Court in the case of Maxopp Investment vs CIT (supra). Further, Hon ble Supreme Court in the case of Maxopp Investment vs CIT (supra), has rendered a clear finding in respect of banking institutions which is peculiar. Present assessee before us is also a Bank, where shares were held as stock-in-trade and therefore it becomes business activity of assessee. In our opinion specific observation Hon ble Supreme Court in the case of Maxopp Investment vs CIT (supra), reproduced hereinabove are squarely applicable to facts of present case. Respectfully following the view taken by Hon ble Supreme Court in the case of Maxopp Investment vs CIT (supra), we allow this ground raised by assessee and hold that these were not investments made by assessee in order to fall within the ambit of Rule 8D (iii) of Income tax Rules 1963. 27. In the result, the ground of appeal of the revenue on Rule 8D(2)(ii) is dismissed and the appeal of the assessee on the issue of Rule 8D(2)(iii) is allowed. 28. Ground No. 2 of the appeal of the assessee deals with addition on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear in which such sum is actually paid by him... 13.3. In view of the specific provision of the Act, deduction for provision for leave encashment is not allowable to the appellant. In view therefore, the action of the AO in not entertaining the claim of the appellant to allow deduction on account of provision of leave encashment of ₹ 31.35 crores is as per provisions of law. This ground of appeal is ruled against the appellant. 30. Before us, the ld. AR brought us to para no. 9 of the order dated 28.11.2018 in ITA No. 1519/Del/2016 wherein the disallowance made by the revenue has been directed to allow the claim in the year in which it has been paid and disallow in the year in which the provision has been made. 31. After referring to the decision in the case of Bharat Earth Movers 245 ITR 428 and the judgment of Hon ble High Court of Delhi in the case of Exide Industries Ltd. Vs Union of India 292 ITR 470, the constitutional bench of the Hon ble Supreme Court vide order dated 24.04.2020 has upheld the constitutional validity of Clause (f) of Section 43B of the Income Tax Act. Hence, were hereby confirm the disallowance made by the revenue. 32. In the result, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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