ACIT, NEW DELHI vs. M/S. PUNJAB AND SIND BANK, NEW DELHI

Brief facts of the case relevant for the disposal of these two appeals are that the Punjab & Sind Bank (“the assessee”) is a wholly-owned Government of India undertaking. In respect of the assessment for the Assessment Years 2011-12 and 2012-13, Ld. AO made certain additions in respect of the depreciation on securities, contribution to PSB Employees Pension Fund Trust and under section 14 A of the Income-tax Act, 1961 (“the Act”) under the normal provisions of the Act and also while computing the book profits under section 115 JB of the Act.

Ld. CIT(A) in appeal deleted all these three additions. Hence the revenue is before us in these appeals. Ground 1: Depreciation on securities 4. Learned Assessing Officer found that the assessee had claimed deduction of Rs.167,45,36,493/- for the assessment year 2011-12 and Rs.348,36,62,436/- in respect of the assessment year 2012-13 on account of depreciation on investment on account of valuation of securities. Case of the assessee is banked upon the RBI guidelines and that the investment portfolio of the banks is required to be classified under three categories, namely, held to maturity (HTM), held for trading (HFT) and available for sale (AFS); that in the investments classified under HTM category need not be marked to market and are carried at an acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity; that in case of HFT and AFS, that thedepreciation/appreciation is to be aggregated 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 categorisation 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 beendepreciation 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 depreciation/loss in the value of investment was allowable expenditure.

Ld. Assessing officer formed an opinion that though it is correct that the assessee has valued its securities scrip wise at lower of cost or market price, 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 and on that premise he brought to tax the amount claimed by the assessee as depreciation on investment.

In appeal, Ld. CIT(A) considered this issue at length and by following the orders of his predecessor in assessee’s own case for the Assessment Years 2007-08 to 2009-10 and in the light of the decision of the Hon’ble Apex Court in the case of UCO Bank vs. CIT 240 ITR 355 (SC)decided the issue in favour of the assessee bank.

It is the argument of the learned DR that though the assessee has been relying on the orders of the tribunal for the assessment year 2007-08 to 2009-10 questions involved in those matters are entirely different from the facts involved in this matter. It is the submission of the Ld. DR that in the present appeal the fact is that the revenue is challenging the deduction on the ground that the assessee on one hand is taking benefit of deduction on diminution of the value of securities in the closing stock and on the other hand not carrying forward the impact of this claim of diminution on the value of securities in the opening stock. Ld. DR placed reliance on the decision of the Hon’ble Apex Court in the case of Southern Technologies Vs. ACIT [2010] 187 Taxman 346 (SC).

We have perused the record and the case law relied upon by both the sides. It is an admitted fact that the assessee being a nationalized bank is governed by the Banking Regulation Act, 1949; that they are following mercantile system of accounting both for book keeping purpose as well as for tax purposes; that they have been valuing the stock-in-trade (investments) "at cost" in the balance sheet whereas for the same period 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 India judicial precedents.

Further, as understood from the argument of the Ld. DR, her contention is that no opening stock or closing stock of securities was 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 become the opening stock in the subsequent assessment years. On this she submitted that when once the assessee reduces thedepreciation and reaches a particular figure as the book value of the securities, then naturally when the securities were sold in the subsequent years the profit should be estimated with reference to the reduced value of the Scrip’s in the earlier years, but however in the case of the assessee, cost of the security after reducing the same because of the depreciation was not changed or adjusted in the books resulting in the books reflecting the low profit and the resultant offering of less amount to tax.

Plea of the assessee, on the other hand, is that the treatment of the profit on sale of securities is two-fold. Firstly, the profit on sale of securities will be lower due to the nonattachment of cost of securities with deregulated appreciation claimed, but simultaneously at the second stage of the said transaction, claim of depreciation on securities for the year is also reduced to the extent of a community depreciation claimed earlier and resultantly the profit for the year is worked out correctly after taking into account both the folds of the transaction collectively.

On a careful consideration of the matter we are of the considered opinion that it is not the case of the Ld. Assessing officer that in this particular year in respect of any particular security such a thing had happened. It is not the case of the Ld. Assessing officer that with reference to any particular scrip there was depreciationand the loss was claimed in the earlier yearsas deduction but without showing the reduced value of the scrip as the opening value of the stock, on the sale of the scrip, the cost price but not the reduced price was taken as the cost of acquisition and thereby any less amount was offered to tax. The entire edifice of the case of revenue is based on the theoretical suspicion of the Ld. Assessing officer that inasmuch as the assessee has not been showing in the balance sheet reduced value of the scrip but the cost price of the scrip as the value of the scrip, when the securities were sold it is the cost price of the scrip but not the reduced value of the scrip that was taken to estimate the profits and as a consequence of which the less amount has been offered to tax. It is a verifiable fact with reference to the sales of securities, if any, that took place during the year orinearlier 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.

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.

There is consistency of the facts on this aspect quite for a long time and all possible arguments have come before the adjudicatory authorities.On a careful consideration of the matter in the light of the submissions on either side we are of the considered opinion that the question is now fully covered by the orders of the tribunal in assessee’s own case for the earlier years, and while respectfully following the same, we hold the issue in favour of the assessee.

This ground relates to the disallowance of contribution made to P&S Bank Employees Pension Fund Trust of Rs.105,38,42,06/- for the Assessment year 2011-12 and Rs.180,03,55,262/-for the assessment year 2012-13, which the assessee claims to be its legitimate business expenditure.

According to the Ld. AO thisis not a contribution to the pension fund and the provisions of Section43(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) of the Act has to be looked into, according to which any sum paid by the assessee to an employer by way of contribution to a recognised provident fund or an approved superannuation fund or any fund of similar nature is allowable as a deduction, subject to condition laid down under Rule 87 and 88 of Income tax Rules, 1962. Ld. AO held that such contribution should not be in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis.

Assessee argued before the Ld. CIT(A) that the Banking Companies Undertaking Act of 1970 created the assessee also and provides for the creation of a pension trust, which employees of bank will become members; Bank will become members and the bank is required to contribute the fund towards pension fund trust as per actuary evaluation carried out at the end of the financial year. It was further argued that carrying up banking business and funding the pension trust out of the income of banking are made obligation under the Act and the provisions of pension fund trust regulation makes it amply clear that payment directly attributable, compulsory and statutory for carrying on business on banking and should be allowed as a direction. It was further submitted that the liability on account of contribution to pension fund is a recurring liability and not a one-time liability. It was submitted that Rule 87 applies to ordinary annual contributions and not to anything other than annual contribution. It was further submitted that keeping in view the actual method of accounting, consistently followed by the bank, the aforesaid contribution is an allowable business expenditure being incurred wholly and exclusively for the purpose of business and compliance to AS-15, subject to provisions of section 43B.

Ld. CIT(A) found that on similar issue in the Assessment year 2009-10, the issue was decided in of the assessee wherein it was held that similar expenses were allowed in the earlier assessments made under section 143(3) of the Act and the decision of Delhi ITAT in the case of DCIT vs Ranbaxy Laboratories Ltd (2009) 124 TTJ (Delhi) 771 wherein the 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. Following the above orders, Ld. CIT(A)held that the addition made on this score has to be deleted.

We do not find any difference in the facts of the case from their earlier years to render the binding precedents followed by the Ld. CIT(A) inapplicable to the case in hand. In the absence of any change of facts and circumstances, we find it difficult to take a different view. In these circumstances, we uphold the findings of the Ld. CIT(A) and dismiss this ground of appeal

During the financial years2011-12 and 2012-13 assessee earned exempt income amounting to Rs.4,75,92,195/- and Rs.4,62,11,137/-from dividend and tax-free income on account of investments but the assessee has not disallowed any expense under section 14 A of the Income tax Act, 1961. Learned Assessing Officer observed that the assessee, having, infrastructure and common personnel for earning income under various heads and by using its administrative, managerial, and infrastructural setup for earning all the income which includes the exempt income, the expenditure in relation to the exempt income is inbuilt and debited and various heads of profit and loss account, thereby calling for the application of section 14A of the Act read with rule 8D of the income tax rules, 1962 (for short “the Rules”). On this premise learned Ld. AO disallowed the expenditure to the tune of Rs.689.34 lacs and Rs.943.35 Lacs respectively for these two years under section 14A of the Act.

Ld. CIT(A) while following the decision of his predecessor for the assessment year 2009-10 deleted the addition made under Rule 8D(2)(ii) of the Rules but sustained the addition made under Rule 8D(2)(iii) of the Rules.

It is the argument on behalf of the assessee that the investments made by the banking concern are part of the business or banking and therefore the expenses incurred for the purpose of such investment is the business investment. He further submitted that as is held by the Hon’ble Apex Court in the case of Maxopp investment Ltd vs. CIT (2018) 402 ITR 640 (SC), holding off the investment becomes a business activity of the assessee as a business proposition and whether the dividend is earned or not becomes immaterial. He further brought to our notice the observations of the Hon’ble Apex Court to the effect that in case where the bank holds the investments as stock in trade it would be a quirk of fate that when the investee company declared a dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. He, therefore, submits that inasmuch as the Hon’ble Apex Court made a clear distinction between the proposition laid down in the case of Maxopp investments Ltd vs. CIT (2011) 15 taxman.com 390 (Delhi) and the proportion laid down in the case of PCIT vs. state bank of Patiala (2017) 78 taxmann.com 3. He submitted that though the Hon’ble Apex Court rejected the theory of dominant intention, did not lead to the proposition that irrespective of the fact whether or not the shares held by the bank are stock in trade, every investment made by the bank would trigger the applicability of section 14A of the act which is based on the theory of apportionment of expenditure between the taxable and non-taxable income.

Per contra, basing on the CBDT circular No. 5/2014 dated 11th February 2014 and the decision of the Hon’ble Apex Court in Maxopp investment Ltd (supra) the Ld. DR advanced the augments and she invited our attention to the observations of the Hon’ble Apex Court vide paragraph nos. 32 to 39 and submitted that the decision of the Hon’ble Apex Court constitutes an authority in law to say that disallowance under section 14 A(1) attracts to an expenditure in relation to the tax exempt income irrespective of whether such tax exempt income has been earned during the year or not or earned incidentally with business income.

We have carefully perused the decision in the case of Maxopp investment Ltd versus CIT (2018) 91 taxman.com 154 (SC) wherein the Hon’ble Apex Court considered two cases wherein the question of predominant intent of investment in shares was pleaded, though on different facts, on the ground that the objective of investing in shares was not to earn the dividend income, but to either retain controlling interest over the company in which the investment was made or to earn the profit from trading in shares. The question was whether the disallowance under section 14 A of the Act could be invoked in the cases where exempt income was earned from shares held as “trading assets” or “stock in trade”. The first case relates to Maxopp investment Ltd and the second case relates to the case of State Bank of Patiala. In the case of Maxopp investment Ltd the assessee company is in the business of finance, investment and was dealing in shares and securities; that they held the shares and securities, partly as investments on the “capital account” and partly as “trading assets” for the purpose of acquiring and retaining control over its group companies, primarily Max India Ltd.; and that the profits resulting on the sale of shares held as trading assets were duly offered to tax as business income of the assessee. In the case of State Bank of Patiala the assessee has exempt income in the form of dividend was earned by the bank from securities held by as stock in trade. The Hon’ble Supreme Court was considering the question that has arisen under varied circumstances where the shares/stocks were purchased by a company for the purpose of gaining control over the said company or as “stock in trade”, though incidentally income is also generated in the form of dividends as well.

It was argued before the Hon’ble Apex Court that though incidentally income was also generated in the form of dividends, the dominant intention for purchasing the shares was not to earn the dividend income but to acquire and retain the controlling business in the company in which shares were invested, or for the purpose of trading in the shares as business activity.

After considering the entire case law on this aspect in the light of the peculiar facts involved in both the matters, the Hon’ble Apex Court vide paragraph No. 39 and 40 held as follows:-

It is, therefore, clear from the above observations of the Hon’ble Apex Court that depending upon the facts of each case, the expenditure incurred in acquiring the shares will have to be apportioned. Hon’ble Apex Court held that the tribunal and the Hon’ble High Court of Punjab and Haryana arrived at a correct conclusion by setting aside the disallowance under section 14 A of the Act in respect of the dividend earned on the shares held as stock in trade, because such shares were held during the business activity of the assessee and it is only by a quirk of fate that when the investee company declared dividend, those shares were held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits.

Hon’ble Apex Court made clear distinction of this case from the case of Maxopp investment Ltd where the assessee knew that whenever dividend would be declared by the investee company such dividend would necessarily be earned by the assessee and assessee alone, and it would be in the common knowledge of the assessee that such shares would generate dividend income as well as and when such dividend income is generated that would be earned by the assessee only. Hon’ble Apex Court in unequivocal terms held that in contrast, where the shares are held as stock in trade, this may not be necessarily a situation and the main purpose was to liquidate those shares whenever the share price goes up in order to earn profits. Hon’ble Apex Court, therefore, while rejecting the theory of dominant purpose in making investment in shares- whether it was to acquire and retain controlling interest in the other company or to make profits out of the trading activity in such shares - clearly made a clear distinction between the dividend earned in respect of the shares which were acquired by the assessee in their exercise to acquire and retain the controlling interest in the investee company, and the shares that were purchased for the purpose of liquidating those shares whenever the share price goes up, in order to earn profits. It is, therefore, clear that though not the dominant purpose of acquiring the shares is a relevant for the purpose of invoking the provisions under section 14 A of the Act, the shares held as stock in trade stand on a different pedestal in relation to the shares that were acquired with an intention to acquire and retain the controlling interest in the investee company.

We, therefore, while respectfully following the above decision do not find any illegality or irregularity in the Ld. CIT(A) deleting the addition made by the Ld. AO under rule 8D (2) (ii) of the Rules.

These grounds relate to the additions made by the learned AO in respect of the depreciation on securities, contribution to P&S Bank Employees Pension Fund Trust, and disallowance under section 14A of the Act, while computing the book profits under section 115 JB of the Act. In view of our finding in the preceding three grounds deleting the additions made on all these counts, these grounds do not survive and are dismissed.