Case Law Details
Sarva Haryana Gramin Bank Vs ACIT (ITAT Delhi)
ITAT Delhi held that proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds or securities which yield tax free dividend and interest.
Facts-
AO noted that assessee has made investment in tax free bonds/debentures, mutual funds, shares etc. which yielded tax free dividend and tax-free interest and exempted long term capital gain totaling to Rs.3,87,57,264.25. That against this exempted income, the assessee has made disallowance of expenses under Section 14A of the Income Tax Act amounting to Rs. 18,69,824/-. AO enquired about the computation of disallowance under Section 14A. After the submissions of the computation by the assessee, AO was not satisfied. He proceeded to invoke the provisions of Rule 8D of the Income Tax Rules, 1962 and made disallowance under Section 14A read with Rule 8D(2)(ii) amounting to Rs. 2,27,55,202/- and under Rule 8D(2)(iii) amounting to Rs. 22,32,490/-.
CIT(A) was of the opinion that AO has rightly invoked the provisions of section 14A and computed the disallowance as per Rule 8D and that there is no anomaly in the order of the AO. Being aggrieved, the present appeal is filed.
Conclusion-
ITAT in assessee’s own case has held that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds or securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.
We find that in assessee’s own case on the similar issue, ITAT has deleted the addition. It is not the case that Hon’ble jurisdictional High Court has reversed the said decision. Hence, following the aforesaid precedent, we set aside the orders of the authorities below and delete the addition.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the assessee is directed against the order of the ld. CIT (A), Rohtak dated 31.12.2018 for the assessment year 2015-16.
2. The grounds of appeal taken by the assessee read as under :-
“1. That on the facts and circumstances of the case and provisions of the law, the order u/s 250(6) dated 31/12/2018 passed by the Ld. CIT(A) in the name of the non-existence assessee, is void ab initio and therefore the same needs to be quashed.
2. That without prejudice to ground no 1 above and on the facts and circumstances of the case and provisions of the law, the Ld. AO as well as Ld. CIT(A) erred in making/confirming the disallowance of Rs. 2,49,87,692/- as against Rs.18,69,823/-offered by the appellant u/s 14A read with Rule 8D of IT Act resulting into net disallowance of Rs.2,31,17,869/- against the exempted income of dividend and other tax free income of Rs.3,87,57,263/-.
3. That without prejudice to ground no 1 above and on the facts and circumstances of the case and provisions of the law, the Ld. AO as well as Ld. CIT (A) erred in making/confirming the disallowance of Rs.2,33,02,768/- in respect of amortisation of premium paid at the time of purchase of securities over the remaining period of securities.
4. That without prejudice to ground no 1 above and on the facts and circumstances of the case and provisions of the law, the Ld. AO as well as Ld. CIT (A) erred in not allowing the loss on sale of obsolete stationery items during the course of business of Rs.56,66,140/- besides the loss on sale of other petty items of Rs.54,860/- aggregating to Rs.57,21,000/-.”
3. Apropos issue relating to Ground No.1 : In this ground, the assessee has alleged that ld. CIT (A) has passed the order in the name of Haryana Gramin Bank (now Sarva Haryana Gramin Bank). It is the contention of the assessee that the appellate order has been passed in the case of a bank which is no longer in existence, hence the appellate order is void ab initio.
4. We find that there is no grievance of the assessee regarding the name in which assessment order has been passed. The same has been duly passed under M/s. Sarva Haryana Gramin Bank. It is the cause title of ld. CIT (A)’s order wherein it is mentioned Haryana Gramin Bank (now Sarva Haryana Gramin Bank). In our considered opinion, in these circumstances, the ld. CIT (A)’s appellate order is not liable to be quashed as void ab initio. This is a clerical mistake which does not make the ld. CIT (A)’s order void ab initio. Accordingly, ground no.1 stands dismissed.
5. Apropos ground relating to disallowance u/s 14A : On this issue, AO noted that assessee has made investment in tax free bonds/debentures, mutual funds, shares etc. which yielded tax free dividend and tax free interest and exempted long term capital gain totaling to Rs.3,87,57,264.25. That against this exempted income, the assessee has made disallowance of expenses u/s 14A of the Income-tax Act, 1961 (for short ‘the Act’) amounting to Rs.18,69,824/-. AO enquired about the computation of disallowance u/s 14A. After the submissions of the computation by the assessee, AO was not satisfied. He proceeded to invoke the provisions of Rule 8D of the Income-tax Rules, 1962 (for short ‘the Rules’) and made disallowance u/s 14A read with Rule 8D(2)(ii) amounting to Rs.2,27,55,202/- and under Rule 8D(2)(iii) amounting to Rs.22,32,490/-.
6. Against the above order, assessee filed an appeal before the ld. CIT(A). Ld. CIT (A) referred to the provisions of section 14A. Ld. CIT(A) noted the assessee’s submissions and case laws relied upon and also obtained the remand report from the AO. In this remand report, disallowance u/s 8D(2)(ii) was Rs.2,27,55,202/- and under Rule 8D(2)(iii) was Rs.22,32,490/-, thus total disallowance u/s 14A read with Rule 8D was Rs.2,49,87,692/-. Ld. CIT (A) relied upon the decision of Hon’ble Apex Court in the case of Maxopp Investment Ltd. 91 taxmann.com 154 (SC) to distinguish the jurisdiction of Hon’ble Punjab & Haryana High Court in the case of 78 taxmann.com 3 (2017) and CBDT Circular No.18/2015. Ld. CIT (A) was of the opinion that AO has rightly invoked the provisions of section 14A and computed the disallowance as per Rule 8D and that there is no anomaly in the order of the AO.
7. Against this order, assessee filed an appeal before us. We have heard both the parties and perused the record.
8. Assessee reiterated that assessee has sufficient interest free funds to make investment in tax free bonds/debentures/mutual funds/shares etc. and bank has not incurred any interest expenditure. In this regard, assessee has referred to the decision of Maruti Udyog Ltd. vs. DCIT 92 ITD 119 (Del.). Certain other case laws have been referred and also referred the decision of ITAT in assessee’s own case in ITA No.4073/Del/2018 for AY 2014-15 order dated 25.10.2021.
9. Per contra, ld. DR for the Revenue relied upon the orders of the authorities below.
10. We note that ITAT in assessee’s own case for AY 2014-15 (supra) has dealt with the same issue and deleted the addition by holding as under:-
“10. We have heard the rival contentions and perused the material available on record. We find merit into the contentions of the Ld. Counsel for the assessee that Ld.CIT(A) has misdirected himself by wrongly applying the ratio of the judgement of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (supra). Infact, the judgement of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) supports the case of the assessee. Moreover, the Hon’ble Apex Court in later judgement rendered in Civil Appeal No.9606 of 2011 in the case of South Indian Bank Ltd. vs CIT after considering the judgement rendered in the Maxopp Investment Ltd. (supra) clarified as under:-
25. “Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd. wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income.
26. Reverting back to the situation here, the Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular.
27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.
28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (Supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance.
29. In the above context, the following saying of Adam Smith in his seminal work – The Wealth of Nations may aptly be quoted:
“The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.”
Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.
30. In view of the forgoing discussion, the issue framed in these appeals is answered against the Revenue and in favour of the assessee. The appeals by the Assessees are accordingly allowed with no order on costs.”
Respectfully following the above-referred judgement of Hon’ble Supreme Court, we hereby direct the Assessing Officer to delete the addition.”
11. We find that in assessee’s own case on the similar issue, ITAT has deleted the addition. It is not the case that Hon’ble jurisdictional High Court has reversed the said decision. Hence, following the aforesaid precedent, we set aside the orders of the authorities below and delete the addition. Accordingly, ground no.2 is allowed.
12. Apropos Ground No.3 regarding disallowance of Rs.2,33,02,768: On this issue, AO noted that assessee has debited a sum of Rs.2,33,02,768/- to the P&L account on account of the amortization in respect of securities held under the head “Hold to Maturity”. AO further observed that in these investments, when the cost price is more than the face value, the loss is not booked by the assessee bank in the year of sale but is spread over the period of holding. By claiming amortization, the bank’s tax liability gets deferred. Further, these securities are held as investment by the bank and expenses debited are of capital nature as per Instruction No.17/2008. The assessee vide notice dated 23.10.2017 was asked to furnish the details of amortization of premium over the securities held under “Hold to Maturity” debited to profit & loss account. No justification was filed by the assessee.
13. Upon assessee’s appeal, ld.CIT (A) confirmed the addition. He also noted that in deciding the assessee’s appeal for AY 2012-13 on the same issue, ld. CIT (A) confirmed the addition made by the AO. Accordingly, he confirmed the order of the AO on this issue.
14. Against this order, assessee filed an appeal before us. We have heard both the parties and perused the record.
15. Ld. Counsel of the assessee contended that ITAT in assessee’s own case in earlier assessment year i.e. AY 2014-15 has deleted the similar addition made by the Revenue authorities.
16. We note that the ITAT in assessee’s own case for AY 2014-15 (supra) on the same issue has adjudicated as under :-
“11. Ground No.3 is against the disallowance of Rs.62,06,818/- confirmed in respect of amortization of premium paid at the time of purchase of securities over the remaining period of securities.
12. Ld. Counsel for the assessee reiterated the submissions as made before the Ld.CIT(A). Ld. Counsel for the assessee submitted that the assessee company being a banking company had to hold investment as per RBI norms in HTM (“held to maturity”) category and in this investment when the cost price was more than the face value than premium was spread over the period of holding. It was contended that this practice is continuously followed by the assessee and accepted by the Revenue in earlier years also and this practice had been duly disclosed in Schedule 17. It is further contended that the Assessing Officer wrongly interpreted the CBDT Circular No.17 dated 26.11.2008. However, Ld.CIT(A) did not accept the contention of the assessee and sustained the addition. He contended that law is well settled law that amortization premium is in the nature of revenue expenditure and hence, allowable. In support of this, Ld. Counsel for the assessee placed reliance on various judicial pronouncements.
13. On the contrary, Ld. Sr. DR opposed these submissions and supported the orders of the authorities below.
14. We have heard the rival contentions and perused the material available on record. The Co-ordinate Bench of this Tribunal in ITA No.1334/Ahd/2014 & Others in the case of The Chanasma Nagrik Sahakari Bank Ltd. vs ACIT decided the identical issue by observing as under:-
15. “As regards claim of amortization of securities premium amounting to Rs.1,91,690/-, we notice that the aforesaid amount represents the excess of acquisition cost over the face value of Government securities taken under HTM category. We find that the issue is squarely covered in favour of assessee by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Rajkot Dist. Co-op Bank Ltd. in Tax Appeal No.56 of 2013 dated 10/02/2014. The Hon’ble Gujarat High Court placed reliance upon the CBDT Circular No.17 of 2008 and held that loss on account of premium paid on the face value of the security is required to be amortized for the remaining period of maturity.
16. In view of the binding judicial fiat, the claim of the assessee towards amortization of security premium requires to be accepted.”
15. The facts and issue are identical as were in ITA No.1334/Ahd/2014 (supra) therefore, respectfully following the decision of the Co-ordinate Bench in ITA No.1334/Ahd/2014 (supra), we hereby direct the Assessing Officer to delete the addition. This ground of assessee’s appeal is allowed.”
17. We note that the aforesaid decision has been rendered on the same issue in the assessee’s own case. It is not the case that Hon’ble jurisdictional High Court has reversed the said decision. Hence, following the aforesaid precedent, we set aside the orders of the authorities below and delete the addition. Accordingly, ground no.3 is allowed.
18. Apropos issue of disallowance of loss on sale of obsolete stationery and other petty items : On this issue, AO noted that during assessment proceedings from the perusal of P&L account, assessee has claimed expenses of Rs.57.21 lacs on account of loss on sale of land, building and other asset. AO enquired from the assessee about them. He reproduced the assessee’s submission as under :-
“The loss on sale of land, building and other assets amounting to Rs.57.21 lacs represent sale of old / outdated SFF items and waste items.”
The loss on sale amounting to Rs.57.21 lacs represented the sale of old/ outdated items and waste items. AO observed that from the above reply, the assessee has claimed the loss on account of lost stationery and related items. That assessee failed to submit any documentary evidence and the expenses were not justified. He also held that moreover the said loss on sale of SFF items is of capital nature and not revenue nature. Referring to section 37 of the Act, he was of the opinion that the said amount was not allowable, hence he disallowed amount of Rs.57.21 lacs.
19. Upon assessee’s appeal, ld. CIT (A) in his order referred to AO’s remand report which is stated that assessee has failed to justify its claim on said expenses and failed to produce/furnish copy of any vouchers, bills, supporting the same for verification and to prove beyond doubt that the said loss was incurred for business purpose and it was of revenue in nature. Ld. CIT (A) observed that during appellate proceedings, assessee has not furnished any evidence which can show that addition made by the AO is unjustified. He noted that in the remand report, AO stated that assessee has failed to submit any documentary evidence. He also referred to AO’s finding that the said loss on sale of SFF items was of capital in nature and not revenue in nature. Accordingly, he confirmed the addition.
20. Against this order, assessee is in appeal before us. We have heard both the parties and perused the record.
21. In the submissions, assessee has stated that AO has noted that these are loss on account of lost stationery and related items but AO has treated it as capital loss. It has been mentioned that erstwhile Gurgaon Gramin Bank and Erstwhile Haryana Gramin Bank were amalgamated into a single bank, namely, Sarva Haryana Gramin Bank vide Govt. of India Notification dated 29.11.2013. As such, printed stationery in the name of Erstwhile Gurgaon Gramin Bank available in stock became obsolete. Accordingly, the management of bank decided to dispose of such obsolete stock of stationery. Against this obsolete stationery of Rs.57,99,930/- outstanding the books, the amount of Rs.1,33,790/- was received on disposal and balance amount of Rs.56,66,140/- was claimed as loss incurred during the course of business of banking. Assessee also claimed that copy of approval of Chairman of the Bank and other relevant documents are available at pages 36 to 40 of the paper book.
22. Per contra, ld. DR for the Revenue relied upon the orders of the authorities below.
23. Upon careful consideration, we note that the documentary evidences that assessee is now submitting before us, were not filed before the authorities below, so these are documents submitted before us for the first time. We deem it proper to remit this issue to the file of AO. AO shall consider the same in the light of the fresh evidences being the note for loss of obsolete stationery, approval of Chairman of the Bank for disposal of sale of stationery items, etc. After examining these documents, AO shall decide the issue as per law. Needless to add, assessee should be provided an opportunity of being heard.
24. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on this 19th day of October, 2022 after the conclusion of the hearing.
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