Depreciation and amortization on investments held in permanent category cannot be allowed to be deducted while computing taxable income : ITAT
1. Depreciation on investment and amortization of securities : The assessee bank claimed deduction of Rs.36,65,55, 222/- for assessment year 1996-97 and Rs.4,32,32,579/ – for assessment year 1997-98 on
account of depreciation on investments. The assessee also claimed Rs.63,34,793/ – in assessment year 1996-97 and Rs. 49,64,423/- in assessment year 1997-98 towards amortization of securities. The claim was made while computing the total income for respective assessment years. Before Assessing Officer it was explained that the assessee bank was governed by Banking Regulation Act, 1949. As per provisions of Act, banks are required to maintain in India amount equivalent to specified percentage of its demand time liability in unencumbered securities. The bank’s investments were bifurcated in two categories namely current investments and permanent investments. The permanent investments are held till maturity and are to be valued at cost. In case cost price is higher than the face value, the excess thereto i.e. premium paid is to be amortized over the remaining period of the maturity of the security. With regard to depreciation on investment it was submitted before Assessing Officer that this represented by difference between the surplus and deficit in the valuation of other approved securities as per statement of market value of security enclosed with the return. With effect from 1992-93, the banks are not allowed to hold more than specified percentage of its total approved investment in permanent category. As regards specified percentage, it was submitted that percentage was reduced every year. Regarding method of bifurcation, those investments with the bank intended to hold till maturities are kept in permanent category.
The Tribunal’s order: The issue for consideration relates to allowance of depreciation on investments kept in permanent category. These investments are held till the maturity date. Therefore, the investments are not held by the bank as stock-in-trade which should be valued as per market price or cost price. The assessee has valued the permanent investments at a lower price as per guidelines issued
by RBI. The investment held not as stock in trade cannot be valued at the yearend for the purposes of Income tax. When the investments are sold whatever may be capital gain or loss will be determined as per the provisions of Income Tax Act. Madras High Court in the case of TN Power Financial & Infrastructure Development Corporation Ltd. v Joint CIT held that RBI guidelines cannot over-ride statutory provisions of Income Tax Act. Therefore, contention of assessee that assessee’s case is covered by ITAT order for assessment year 1975-76 is no longer applicable. Moreover, in assessment year 1975-76 it was held that change in the method of valuation of stock and security to comply with the directive of the Reserve Bank of India could not be said that the change was not bonafide. The valuation of stocks and securities held as stock in trade has to be valued on market price or cost price which ever is lower. However, where stocks & securities are held as investments, the valuation cannot be made for the purposes of income tax as per RBI guidelines. As regards amortization of premium paid cannot be treated as expenditure. For example if assessee purchases a security of face value Rs. 100/- for a sum of Rs.125/-, Rs.25/- cannot be amortized over the life of the security. As already observed that the securities are held as investments and therefore whenever such securities are sold or en-cashed at the time of maturity, the profit or loss arising thereon is to be considered under the head capital gains. Since RBI guidelines as held by Madras High Court in the case of TN Power Finance and Infrastructure Development Corporation Ltd. cannot override the mandatory provisions of Income Tax Act, 1961, the depreciation and amortization claimed by assessee on investments held in the permanent category cannot be allowed to be deducted while computing the taxable income. We may also like to state that income is to be computed as per the mandatory provisions of section 145 of the Act and not in accordance with guidelines issued by RBI. In view of above facts, we do not find any infirmity in the order passed by ld CIT (A) for both the years.
2. Inclusion of interest on accrual basis on the investments made in 2.5% Bihar Jamindari Abolition Compensation Bonds, 1973. This issue is covered by the order of ITAT in I.T.A. No.2604/Del/ 05 dated
14.09.2007 wherein it has been held:-
The bonds purchased by assessee had not been transferred in the name of the assessee and interest had also not been received from RBI. The assessee has filed a civil suit which is pending before Calcutta High Court. Therefore the matter is sub-judice. Admittedly, the assessee’s case is not covered by provisions of sections section 43D of the Act. Accounting Standard -9 issued by the Institute of Chartered Accountants of India cannot override the mandatory provisions of section 145(2) of the Act under which accounting standard I & II have been issued. However, fact still remains that the issue is sub judice. None of the party could tell the latest position of the case pending before Hon’ble Calcutta High Court. The issue regarding charging of interest is dependent on decision of the case whether the Bonds acquired by the assessee are genuine or not. Therefore, we are of the considered view that this issue should be restored to the file of the Assessing Officer who will decide the matter after considering the decision of Hon’ble Calcutta High Court in accordance with law.
The Tribunal’s order: Respectfully following the precedent we set aside this issue to the file of Assessing Officer with the similar directions.
3. disallowance of depreciation on steel furniture, counters and electric fitting treating them as plant & machinery of the bank merely on the ground that the details were not available. assessee claimed depreciation on steel furniture such as lockers, counters, safe, cooling equipment etc at the rates applicable to plants. The Assessing Officer treated such items as furniture and fixture instead of plant and allowed depreciation accordingly. This resulted in disallowance of depreciation due to difference of rate of depreciation between furniture and fixture and plant & machinery.
9. During the course of hearing it was submitted that this issue is covered in favour of the assessee by the decision of Hon’ble ITAT for assessment year 1970-71, 1971-72 and 1995- 96 in its own case. On the other hand, Ld CIT -DR relied on the orders of the authorities below.
ITAT Delhi Bench ‘C Delhi in I.T.A. No.1910/Del/ 1999 for assessment year 1995-96 held:-
” The assessee had claimed the impugned depreciation on the basis of an earlier order of the Tribunal holding that the steel furniture at the training college at Chandigarh constituted plant and machinery.
The Assessing Officer disallowed the claim by observing that the decision of the Tribunal had not been accepted by the Department and the matter was pending before the Delhi high Court. The CIT (A) confirmed the disallowance by following the order of his predecessor for assessment years 1992-93 and 1993-94.
No judgment of the High Court reversing the order of the Tribunal has been brought to our notice by the Ld DR. Till then, therefore, the earlier order of the Tribunal stand and hence respectfully following the same, we allow the claim of the assessee.”
The Tribunal’s order: The facts of the case are identical to the facts of the case before us. No decision contrary to what has been held in the case of the assessee has been brought to our notice. Therefore, assessee’s case is covered by order of ITAT referred to above. Respectfully following the same, we allow the claim of the assessee.
4. interest tax Act liability. the assessee follo
wing the mercantile system of accounting made provisions towards Interest Tax liability at Rs.9,24,00,000/ – for assessment year 1996-97. However, at the time of filing of interest tax return the interest tax liability was. worked out to Rs.8,64,34,460/ -: This resulted in reversal of excess provisions of Rs. 59,65,540/-by crediting the expenditure as “provisions for interest tax” in assessment year 1997-98 and was offered to tax during A.Y. 1997- 98. In assessment year 1997-98 excess provision of Rs.92,08,000/ – was reversed which included the provision of Rs.59,65,540/ -. The Assessing Officer disallowed the claim of excess amount on the ground that while computing the total income interest tax liability actually payable for the year was to
be allowed. The stand of Assessing Officer has been confirmed by ld CIT (A).
In assessment year 1997-98 the assessee claimed deduction of Rs. 10,53,00,000/ – towards interest tax liability. The assessee filed interest tax return at Rs.305,54,98, 700/- on which interest tax was worked out at the rate of 2%. The Assessing Officer while making the assessment under the interest tax act worked out the chargeable interest at Rs.314,71,63, 660/- and charged interest tax at Rs.9,44,14,910/ – being 3 % of the tax payable on the interest. It has been submitted that assessee is eligible for deduction of interest tax at Rs.9,44,14,910/ -.
The Tribunal’s order: Under Income tax Act while computing taxable income of the assessee, the interest tax liability is allowable as deduction. For assessment year 1996-97 the actual interest tax liability is at Rs.8,64,34,460/ – which is allowable as deduction and not the amount of provision made at Rs.9,24,00,000/ -. The contention of assessee that the difference between two has been admitted as
income for assessment year 1997-98 and therefore, the entire amount should be allowed as deduction, cannot be accepted. The assessee is entitled for deduction to the extent of Rs.8,64,34,460/ -. However,
since the assessee had admitted income of Rs.59,65,540/ – in assessment year 1997-98, the Assessing Officer will reduce the income to this extent in assessment year 1997-98 after verifying the facts. As regards for assessment year 1997-98, the actual interest tax liability is to be allowed as deduction. The Assessing Officer is directed to allow the interest tax liability as determined under the interest tax act, 1974. The Assessing Officer is directed accordingly.
5. Entertainment expenditure. During the course of assessment proceedings, the Assessing Officer found that tax auditors in their report have stated that tax audit statement were not received in respect of certain branches. The Assessing Officer estimated the entertainment expenditure in respect of those branches at Rs.5 lakhs each for both the assessment years and computed disallowance u/s 37 (2A) of the Act.
The Tribunal’s order: It is a fact that tax audit report in respect of certain branches were not received and tax auditors have not included the expenditure incurred on entertainment in respect of those branches. Nothing has been brought on record by the assessee that expenditure incurred in respect of those branches was less than Rs.5 lakhs. In the absence of such details we do not find any reason to interfere in the matter. Therefore, the authorities below were justified in recomputing the disallowance on account of entertainment expenditure. As regards the disallowance for assessment year 1997-98 at Rs.6,28,391/ – is concerned, we find that assessee himself has added Rs.5,04,891/ – while computing the total income for the assessment year 1997-98. Therefore, the addition of Rs.5,04,891/ – has been made twice. We, accordingly, direct the Assessing Officer to delete the addition of Rs.5,04,891/ – for assessment year 1997-98.
6. computation of deduction u/s 80M of the Act. ITAT had in I.T.A. No.1910/ Del/98 dated 24.2.2006 had held
“Though the claim of the assessee for deduction on the entire gross amount cannot be accepted, the expenditure determined by the Assessing Officer is certainly on the higher side. It has to be appreciated that once the investments are made, except for minor expenses to be incurred for the collection of the income, no further expenses are required to be incurred. In the present case, the investment in shares is much lower than investment in other securities. Therefore, the presumption of the Assessing Officer that much of borrowed funds must have been utilized for purchase of shares is without any basis. In our opinion, it would suffice if 25% of the gross dividend is estimated as expenses and accordingly the assessee should be entitled to deduction under section 80M on 75% of the gross amount of dividend. We direct accordingly. ”
The Tribunal’s order: Respectfully following the precedent, it is held that the assessee should be allowed deduction u/s 80M on 75% of gross amount of dividend received by the assessee. The Assessing Officer is directed accordingly.
7. Disallowance of Rs.60 lakhs on account of gratuity. The bank made provision for payment of gratuity to approved gratuity fund amounting to Rs.5,89,30,450/ -. The same amount of Rs.5,89,30,450/ – was remitted through IBR to its approved gratuity fund which was received on 21.5.1996 well before the due date for filing the return and accordingly was allowable as deduction u/s 43B of the Act. Both the authorities have disallowed the claim of the assessee.
The Tribunal’s order: Under section 43B (b) any sum payable by assessee as an employer by way of contribution any provident fund and superannuation fund or gratuity fund or any other fund for the welfare of the employee shall be allowed in the year in which such sum is actually paid by the assessee. Second proviso to section 43B provides that no deduction shall be allowed unless said sum has actually been paid in cash or by issue of cheque or draft or by any other mode on or before the due date as defined in Explanation below to clause (va) of sub section (1) of section 36 and where such payment has been made otherwise then in cash, the sum has been realized within fifteen days from the due date. The due date means the date by which the assessee is required as an employer to credit to an account of an employee in the relevant fund under any act, rule or order or modification issued there under or under any standing order, award, and contract of service or otherwise. The gratuity fund is not governed by the provisions by 1st proviso to section 43B under which the payment is to be allowed if the same is paid before filing of return of income. Since the assessee had not made payment within the due date, the same will not be allowable as deduction. Accordingly, we do not find any infirmity in the order passed by the authority below.
8. rebate allowed to borrowers in various branches in respect of non performing assets in compromise deed for recovery of dues. The assessee granted the rebate at the time of recovery of the payment. The claim of assessee has been allowed till assessment year 1995-96. The authorities below have disallowed the claim of the assessee on the ground that the assessee had disclosed the expenditure under the head “provisions for contingencies rebate”.
The Tribunal’s order: The amount written off as irrecoverable is an actual loss to the bank. However, from the details we are unable to find out whether the rebate claimed is on account of interest admitted as income in earlier years or on account of moneys lent in money lending business. The rebate allowed in recovery process as one time payment scheme will be allowable as deduction as bad debt. Since the nature of claim has not been examined by the Assessing Officer, we set aside this issue to the file of the Assessing Officer to examine the nature of claim and decide the issue after affording the assessee a reasonable opportunity of being heard.
9. disallowance of claim in respect of interest paid to sellers. During the course of assessment proceedings, the Assessing Offi
cer found that an amount of Rs. 15.61 crores was paid as interest to sellers on security for the period from 1.4.1992 to 31.3.1994 which was capitalized by credit to income. The bank claimed as deduction in its computation of income in assessment year 1995-96. The bank under the RBI directives reversed the entry for Rs. 15.61 crores as on 31st March, 1996 by debiting the “provisions and contingencies” and crediting the investments. The Assessing Officer made addition of Rs. 15.61 crores. Subsequently the assessee filed application u/s 154 on the ground that assessee itself has added the amount of Rs. 13.52 crores while computing the income for assessment year 1996-97.
The Assessing Officer, accordingly, allowed the relief of Rs. 13.52
The Tribunal’s order: From the facts stated above it is clear that assessee has debited the profit & loss account by Rs. 15.61 crores. While computing the total income, the amount of Rs. 13.52 crores had been added back which has been allowed by Assessing Officer u/s 154 of the Act. The balance amount of Rs.2.09 crores does not represent expenditure for the year under consideration. No arguments have been advanced by the assessee as to why the claim of assessee is maintainable. In fact, interest paid to sellers on purchase of investments is capital expenditure which has been capitalized by the assessee itself. Therefore, we do not find any infirmity in the order passed by the Ld CIT (A) confirming the addition of Rs.2.09 crores.
10. writing off of the amount of Rs.4,49,030/ -. The Assessing Officer from profit & loss account found an amount of Rs.4,49,030/ – debited on account of bad debts written off. The assessee claimed deduction on the ground that the income in respect of provision do not include the amount for deduction as bad debts written off was otherwise allowable u/s 36(1)(vii). The Assessing Officer observed that in earlier years the assessee had claimed deduction on provision basis u/s 36(1)(viia) and the amount written off during the year is not more than the provision for which deduction u/s 36(1)(viia) claimed in the earlier years and not adjusted by writing off against bad debts. The Assessing Officer accordingly, disallowed the claim of the assessee.
The Tribunal’s order: Since matter has not been examined with reference to loss occurred due to robbery and long outstanding debts written off we set aside the matter to the file of the Assessing Officer with the direction that he will examine the details and decide the issue on merits as per law after affording the assessee a reasonable opportunity of being heard given to him.
11. Computation u/s 115JA. The Assessing Officer while computing book profits u/s 115JA made disallowance on account of provisions made for (i) depreciation on investment, (ii) provision for amortization of securities, (iii) rebate allowed, (iv) provision for bad and doubtful debts, and (v) provision for fraud cases. It has been pleaded that in respect of first three items the nature of provisions has been explained under normal provisions. As regards provision for bad and doubtful debts, the same had been made as per RBI guidelines. The provision made for fraud cases had been made on the basis of accounting policy regularly employed by the assessee. The books of accounts have been duly audited by Central statutory auditors. Therefore, no disallowance could be made under clause (a) to (f) of Explanation to section 115JA of the Act.
The Tribunal’s order: Supreme Court in the case of Apollo Tyres Ltd. v CIT held that the profits determined as per the provisions of Companies Act cannot be tinkered unless the amounts specified in clause (a) to (f) are debited to profit & loss account. Clause (c) of the Explanation deals with the amount or the amounts set aside to provision made for meeting liabilities other than ascertained liability. From assessment order we find that the Assessing Officer has not examined the matter in the light of decision of Hon’ble Supreme Court whether the items specified are in nature of provision for unascertained liability.We, therefore, set aside this issue to the file of Assessing Officer with the direction to decide the issue in the light of decision of Hon’ble Supreme Court.