DCIT 20(2), MUMBAI vs. KOKAN MERCANTILE CO OP BANK LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) �� केकेकेके अनुसार अनुसार अनुसार PER RAJENDRA, AM- अनुसार राजे�� �� �� लेखा सद�य सद�य राजे लेखा लेखा लेखा सद�य सद�य राजे राजे Challenging the order,dated 31/10/2014 of the CIT (A)-29, Mumbai, the Assessing Officer(AO) has filed the present appeal. 2.Assessee-bank,filed its return of income on 28/09/2011,declaring total income at Rs.3.64 crores.Later on, it filed a revised return on 11/09/2012, declaring income of Rs. 2.68 crores.The AO completed the assessment on 28/02/2014,under section 143 (3) of the act determining the income of the assessee at Rs.7.53 crores.

281/M/15-(11-12) Kokan Mercantile 28.DR of the revenue has argued that the AO rightly disallowed the amount debited as premium on investment amortization by concluding that investment made in Government Securities and Bonds which was shown under the head “Investment” are capital asset of any expenses paid for such acquisition is of capital expenditure and the same cannot be allowed as a deduction and further argued that the AO is rightly concluded that the guidelines of RBI Directory cannot override the provisions of I.T. Act. 29.AR of the assessee has argued that assessee which is a Co-operative Bank is engaged in the banking business and the investment made by assessee are forming part of banking activity and assessee purchased Government Securities and SLR Bonds for which the assessee paid the premium in advance for the next period and claimed the proportionate premium in the current year investment made by assessee is in compliance with the statutory provision and to carry out its banking business and thus investments are banking stock-in-trade and that the banking sector is completely governs by the Directories of RBI and also relied upon the CBDT Circular No. 665 dated 05.10.1993 which is clearly speaks about the guidelines prescribed by the RBI that Income-tax Authority are bound to adhere the prescribed guidelines of the RBI. The contents of Circular No. 665 dated 05.10.1993 are reproduced below (gathered from impugned order). “The question whether a particular item of investment in securities constitutes Stock-in Trade or a Capital Asset is a question of Fact. In fact the banks are generally governed by the instructions of the Reserve Bank of India from time to time with regard to the classification of Assets and also the accounting Standards for investments. The Board has, therefore, decided that the Assessing officers should determine on the facts and circumstances of each case as to whether any particular security constitutes stock in Trade or investment taking into account the guidelines issued by the Reserve Bank of India in this regards from time to time." Thus this amortization was also done as per the Reserve Bank of India guidelines vide its circular No. RBI/2005-06/341/UBD (PCB). BPD.Cir.41/16.20.00/2005-06 dated March, 29, 2006. Thus, the amortization of investments is an allowable Revenue Expenditure. The matter was studied in view in view of Section 145(2) of the Income Tax Act, 1961. In fact, no other treatment can be given for valuation of securities than what is prescribed by Reserve bank of India from time to time. Even the banks may provide for excess depreciation on its securities by following more prudent and conservative approach but for its allowability in Income Tax what is prescribed in the guidelines of Reserve bank of India is required to be followed and the Income tax Authorities are bound to adhere to these guidelines by virtue of CBDT circular No.

30.On relying upon the Circular of CBDT and the other judgments of superior courts and concluded that the question before the CIT(A) is whether a particular item of investment 2

281/M/15-(11-12) Kokan Mercantile in securities as per the RBI guidelines constitute stock-in-trade or capital assets and after considering the decision of Hon’ble Apex Court in United Commercial Bank vs. CIT reported in 240 ITR 355 and considered the investment made in security as a stock-in- trade. 31.The CIT(A) further relied upon the order of co-ordinate bench in case titled as ACIT vs. The Bank of Rajasthan Ltd. reported in 2011-TIOL 35 and deleted the addition. 32.We have carefully considered the rival contention of the parties and gone through the material available on record and find that the order passed by CIT(A) as discussed above is based on sound reasoning and the circular of CBDT and the judgements of superior courts and the same does not require any interference at our end. 33.In these circumstances, this ground of appeal is also rejected.”

Respectfully, following the above order of the Tribunal, we dismiss the first ground of appeal.

4.Next ground of appeal is about deleting the disallowance of Rs.7.06 lakhs of unrealised payslips. The Authorised Representative (AR) and the Departmental Representative (DR) stated that identical issue has been decided in favour of the assessee by the Tribunal, while adjudicating the appeal for the earlier years. We find that the issue has been dealt by the Tribunal, as follow: “9.The next ground for our consideration is deletion of disallowance of Rs. 12,09,832/- of unrealized payslip. The AR of the assessee has argued in the similar line as in respect of ground no.1 and relied upon the finding of AO, however, the DR of the revenue has argued that unrealized payslips are the payslips which are issued but not presented for payment for a period of more than six years and this amount is lying in the said account and is not bank money and it was neither in the past never treated as an income nor credited to the P&L A/c and the same was wrongly added by the AO.

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10.We have considered the rival contentions of both the parties and found that the AO merely concluded that payslips which were not realized for more than six years and treated deemed income. 11.The CIT(A) while dealing with this ground has also relied upon the reasoning given for ground no.1 and has rightly concluded that section 41(1) is not applicable in the case of assessee and deleted the addition. 12.We have carefully gone through the addition made by the AO and the deletion made by the CIT(A) and found that the order of CIT(A) does not require any interference at our end, hence, this ground of appeal is dismissed.”

Respectfully,following the order of the Tribunal, we decide the second ground against the AO.

5.Last ground of appeal is about deleting the addition on account of an identified deposits of Rs. 5.60 lakhs. Representatives of both the sides agreed that similar issue was decided in favour of the assessee by the Tribunal in earlier years. We would like to reproduce the relevant portion of the order of the Tribunal and same reads as under: “5.First ground for our consideration is deletion of unidentified deposits of Rs. 66,82,158/-. DR for the revenue has argued that the AO while making assessment asked the assessee to give details of the unidentified deposits and to prove its liability to pay and the assessee could not produce any explanation in this regard, hence, rightly added the amount as the same was not claimed for several years and was brought to the tax u/s. 14(1) of the Act. 6.On the other hand, AR of the assessee has argued that the unidentified deposits are money deposits by the account holder into their accounts and further due to wrongly mentions of account number or wrong title of accounts, the same could not be credited to their account and as such all that amount are kept under the unidentified deposits and cannot be brought to tax.

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7.The CIT(A) while dealing with the addition has considered the judgment of Delhi High Court in dated 23.12.2011 in a case of M/s Vardhman Overseas Ltd. has held that its sundry creditors continued to be shown in the assessee’s balance-sheet and unless and until the AO proved that the liability seized to exist than the AO cannot be made the addition u/s 41(1) of the Act. The CIT(A) while deleting the addition under consideration has observed as under: 3.3.5. Further it is to be mentioned here that the Delhi High Court in the case of Shri Vardhman Overseas Ltd. (ITA No.774/2009 dated 23.12.2011) has held that the sundry creditors were continued to be shown in the assessee's balance sheet and unless the Assessing Officer proves that the liabilities ceased to exist then the Assessing Officer cannot make an addition u/s.41 (1) of the I.T. Act. The relevant portion of the findings is as under:- “Whether the Ld. ITAT erred in deleting addition under Section 41(1) of Rs. 1,25,46,534/- on account of non-genuine creditors?”

If, as contended before us by the learned standing counsel for the revenue, the alleged benefit enjoyed by the assessee by utilizing the amounts payable to the sundry creditors in its own business for a' period of four years or more is to be brought to tax under Section 28(iv), notwithstanding that the conditions of Section 41 (1), which govern the factual situation, are not satisfied, then it would render the latter section otiose or a dead letter. If we accept the argument of the learned standing counsel for the revenue, it would also introduce an element of uncertainty or subjectiveness in ascertaining as to what would be the lapse of time that would be necessary to render a liability to pay the creditors ineffective, which would result in an alleged benefit to the assessee. Moreover, if after the taxing of the amount u/s 28(iv) on the ground that considerable time has elapsed from the date of the debt during which the assessee had the benefit of the monies in his business, it is found that in another later year the creditor has recovered the money from the assessee, there is no provision in the Act to allow deduction for such payment. The section cannot be made subject to such vagaries or subjectiveness in its applicability It is a well settled rule of interpretation of statutes that a construction that reduces one of the two provisions in a statute to a useless lumber or a dead letter would not amount to a harmonious construction and that a familiar approach in such cases is to find out which one of the two provisions is a special provision made to govern a certain situation and to exclude that situation from the applicability of the general provision. If we apply this rule of interpretation to the case before us, we must necessarily hold that while Section 28(iv) would apply generally to all benefits or perquisites which arise to the assessee from the business carried on by him the benefitwhich he obtains by way of remission or cessation of a trading liability in a later year, in respect of which he has obtained a deduction in an earlier year in computing the business income, should be governed by Section 41(1) which is the specific provision governing the factual situation and not by Section 28(iv). This way there would be no conflict between the two provisions and both will be given effect to. Section 41(1) specifically deals with amounts that were allowed as deduction in the past assessments as trading liabilities, which in a later year cease or are remitted by the creditors. If and 5

281/M/15-(11-12) Kokan Mercantile when there is evidence in a particular later year to show that the liability has ceased or has been remitted, the same can be brought to tax as provided in Section 41(1). In this manner the statute prescribes that a deduction for a trading liability allowed earlier can be brought to tax on the ground that the liability to pay the same has been remitted or ceased. Another distinguishing feature in the present case is that the sundry creditors continue to be shown in the assessee's balance sheet as on 31.3.2002. In the case before the Supreme Court in CIT Vs. T. V.Sundaram Iyengar (supra), the assessee took a positive step of transferring the unclaimed balances in the deposit accounts to its profit and loss account, an act, which was considered to be of considerable significance in demonstrating the intention of the assessee to appropriate the money belonging to the depositors as its own monies". Further in the case of Hotline Electric P. Ltd. it was held by the Delhi High Court that unless notices were issued to the creditors and it is proved that they have given· up their claims against the assessee by the Income Tax Authorities, merely on the ground that the debts remained unpaid in the books of the assessee for a number of years and liabilities has been ceased or has been remitted, there cannot be any addition u/s.41(1). In view of the discussion in para 3.3.1 & 3.3.2 and relying on the case laws mentioned above, the addition made by the Assessing Officer is deleted. This ground of appeal is allowed. 8.We have carefully gone through the order of AO as well as the order passed by CIT(A) and found that the AO while making the addition has merely concluded that the liabilities which is not claimed for several years is brought to tax u/s. 41(1) of the Act. However, the CIT(A) after considering the fact of the present case and on relying upon the judgment of superior Courts has rightly observed that merely on the ground that the amount remained unpaid in the books of assessee for a number of years, the liability has not been seized and there cannot be any addition u/s. 41(1) of the Act, hence, the order passed by CIT(A) does not require any interference at our end and thus this ground of appeal is dismissed.

Respectfully, following the above order ground no.3 is decided against the AO.

As a result,appeal filed by the AO stands dismissed . फलतःिनधा�रती अिधकारी �ारा दािखल क� गई अपील नामंजूर क� जाती है . Order pronounced in the open court on 28th,July,2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 28 ,जुलाई, 2016 को क� गई । Sd/- Sd/- (एन. �साद /C.N. Prasad) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; �दनांकDated : 28 .07.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 6

281/M/15-(11-12) Kokan Mercantile