Case Law Details
Brief of the Case
Karnataka High Court held In the case of CIT & ACIT vs. Karnataka Vikas Grameen Bank that Section 41(1) attracted when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant case, the sum of Rs.58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them. The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. While dealing with a situation of unclaimed amount, the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar (1996) 222 ITR 344, has held that CIT (A) correctly observed that the amount were not in nature of revenue receipts but were of capital nature. The provisions of section 41(1) were not attracted in the facts of this case because the assessee’s liability to pay back the amounts to its customers had not ceased.
Facts of the Case
The assessee is a Regional Rural Bank registered under the Schedule of Reserve Bank of India. It caters to the needs of Agricultural and Cottage Industry sectors. It makes investment in Government and other securities. For the assessment year 2007-08, assessee declared a taxable income of Rs.94,26,91,495/-. Assessment was completed and an income of Rs.112,45,33,700/- was assessed against the returned income of Rs.94,26,91,495/- by disallowing Rs.17,59,00,087/- claimed towards depreciation on Investment , Rs. 87,224 claimed u/s 14A , Rs. 23,040 towards commission on locker rent and Rs. 58,31,851 towards Stale Drafts / Pay Orders.
For the assessment year 2008-09, the assessee filed its income declaring an income of Rs.93,25,06,010/- as per revised return. Assessment for the said period was also completed and the income was determined at Rs.102,66,57,128/- by disallowing Rs.2,47,52,075/- deduction claimed under Section 36(1)(viia); Rs.6,74,91,000/- towards deductions claimed under Section 36(1)(viii); Rs.68,478/- claimed under Section 14A; Rs.2,61,911/- claimed under loss of sale of assets; Rs.13,94,212/- claimed as exemption towards tax on Stale Drafts; Rs. 1,82,112 claimed towards Commission paid to Pigmy Agents and Rs. 1330 towards Locker rent.
Contention of the Assessee
The ld counsel of the Assessee submitted that that the amount which remained in the hands of the Bank pursuant to a draft or a pay order becoming stale is not an income in the hands of the assessee. He contended that no stretch of imagination, the amount which had remained in the hands of the assessee could be considered to fall within the definition of ‘profit chargeable to tax’ u/s 41 (1). He further submitted that the said amount is a liability which the Bank will have to discharge as and when a claim is lodged by the holder/payee of a draft/pay order. The amount held by the assessee is governed by the guidelines issued by the RBI in that behalf. The sum and substance of his argument is that the amount which had remained in the Bank pursuant to a draft/pay order becoming stale cannot be construed as ‘profit chargeable to tax’. He placed reliance on the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. T.V. Sundaram Iyengar & Sons Limited reported in (1996) 222 ITR 344.
With regard to the depreciation claimed in respect of the investments in Government Securities “held to maturity”, he contended that the assessee is consistently following a particular method of accounting namely ‘at cost or market value, whichever is lower’. He placed reliance on the judgment of the Hon’ble Supreme Court in the case of United Commercial Bank v. Commissioner of Income Tax reported in ITR 240 355 (SC) and submitted that the Apex Court has held therein that preparation of balance sheet in accordance with the statutory provisions would not in any way disentitle an assessee in submitting Income Tax returns on the real taxable income in accordance with the consistent method of accounting adopted by the assessee.
Contention of the Revenue
The ld counsel of the revenue submitted that the Tribunal fell in error in reversing the concurrent findings of the assessing authority and the CIT (A) with respect to disallowance of ‘Stale Drafts and Pay Orders’ and deleting the sum of Rs.58,31,851/- added by the assessing authority under Section 41(1). He strongly contended that admittedly, the said amount came into the hands of the assessee as the purchasers of DD/Pay Orders had not claimed/encashed them. Therefore, the assessing authority was right in coming to the conclusion that the said amount which remained unclaimed in the hands of the assessee was ‘profit’ chargeable to tax under Section 41(1).
He further contended that the Tribunal misguided itself by placing reliance on the Judgments rendered by Co-ordinate Benches of the Tribunal in the case of Canara Bank (ITA No.390/BANG/2011 dated 8.6.2012) and Vijaya Bank (ITA No.455/BANG/2011 dated 22.6.2012). He further contended that the Judgments of the Tribunal on this issue are unsustainable in law in as much as, on the face of it, the unclaimed amount had remained in the hands of the assessee and chargeable to tax under Section 41(1).
In support of depreciation on Investments in Government Securities “held to maturity”, learned Counsel for the Revenue contended that the Tribunal grossly erred in rejecting it’s appeal by confirming the order passed by the CIT (Appeals). He submitted that Reserve Bank of India (RBI) is the Controlling Authority of all Banks and has laid down clear guidelines for Classification of Securities held. .He further contended that it is mandatory for the Banks to strictly comply with the guidelines issued by the RBI from time to time. Admittedly, assessee had written off a sum of Rs.17,59,00,087/- by claiming depreciation on investments by showing it as ‘Loss on Valuation of Securities’. The said figure was arrived at by the assessee on the premise that the market value of the securities held as on 31.3.2007 was less than the cost of securities. Accordingly, the assessee had written off the same in its Books of Accounts on the principle of “Cost or Market Value, whichever is less applicable to the valuation of closing stock”. He submitted that the securities were admittedly “held to maturity” and therefore could not have been subjected to depreciation. He contended that the classification “held to maturity” displays a glowing description that the assessee would get back the realizable value of security only upon its maturity. Consequently, the assessee was not entitled for the benefit of depreciation as was rightly held by the AO.
Held by CIT (A)
CIT (A) partly allowed the appeals of the assessee. He deleted the disallowance towards depreciation on investment and Locker Rent in respect of assessment year 2007-08 and and deductions claimed under Section 36(1) (viia), 36(1)(viii) and Loss on Sale of Assets for the assessment year 2008-09.
Held by ITAT
ITAT allowed the appeal of the assessee and deleted the additions made by AO on account of unclaimed ‘Stale Drafts and Pay Orders’ where assessing authority had disallowed a sum of Rs.58,31,851/- u/s 41(1) and disallowance of Rs.17,59,00,087/- towards depreciation on investment.
Held by High Court
Stale Draft and Pay Orders
High Court held that Section 41(1) attracted when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant case, the sum of Rs.58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them. The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. While dealing with a situation of unclaimed amount, the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar (1996) 222 ITR 344, has held that CIT (A) correctly held that the amount were not in nature of revenue receipts but were of capital nature. The provisions of section 41(1) were not attracted in the facts of this case because the assessee’s liability to pay back the amounts to its customers had not ceased.
Depreciation on securities “held to maturity”.
High Court held that the issue with regard to the question as to whether an assessee would be entitled to claim depreciation in the given circumstances stands covered by the judgment in the case of United Commercial Bank ITR 240 355 (SC), wherein the Hon’ble Supreme Court has held preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be dis-carded by the departmental authorities on the ground that the assessee was maintaining the balance- sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in- trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case
Admittedly in the instant case, assessee was following the method of accounting namely, “at cost or market value, whichever is lower”. Further, it is not in dispute that this practice was accepted by the Revenue throughout. Thus, in the light of the above pronouncement of the Hon’ble Supreme Court, notwithstanding the preparation of the balance sheet and describing the security under a particular nomenclature in compliance with the directions/instructions issued by the RBI, the assessee would be lawfully entitled to submit the tax returns on the real taxable income in accordance with the method of accounting consistently and regularly adopted.
Accordingly appeal of the revenue dismissed.
