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Income Tax Appellate Tribunal, BANGALORE BENCH “ B ”
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Appellant By : Dr. P.K. Srihari, Addl. CIT (D.R) Respondent By : Shri S. Ramasubramanian, C.A. Date of Hearing : 05.03.2015. Date of Pronouncement : 10.4.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals), Hubli, dt.26.2.2014 for Assessment Year 2010-11.
The facts of the case, briefly, are as under :-
2.1 The assessee, a co-operative bank, filed its return of income for Assessment Year 2010-11 on 27.10.2010 declaring income of Rs.1,25,20430. The case was selected for scrutiny and the assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dt.18.1.2013 wherein the income of the assessee was Rs.1,90,68,400 as against the returned income of Rs.1,25,20,430 in view of the following disallowances :-
(i) Disallowance u/s.36(1)(vii)(a) : Rs.45,62,276. (ii) Amortization of premium on investment : Rs.9,65,946 (iii) Disallowance u/s.14A : Rs.10,14,398 (iv) Disallowance u/s.40(a)(ia) : Rs.5,350.
2.2 Aggrieved by the order of assessment for Assessment Year 2010-11 dt.28.1.2013, the assessee preferred an appeal before the CIT (Appeals), Hubli. The learned CIT (Appeals) disposed off the assessee's appeal vide order dt.26.2.2014 allowing the assessee partial relief.
Aggrieved by the order of the CIT (Appeals), Hubli dt.26.2.2014 for Assessment Year 2010-11, the Revenue has preferred this appeal before the Tribunal raising the following grounds :-
“1. The order of CIT (Appeals) is opposed to law and facts of the case.
2. Whether on facts and circumstances of the case, is the learned CIT (Appeals) right in allowing relief regarding amortization of premium paid on government securities, even when they are not held as stock-in-trade.
3. Whether on facts and circumstances of the case, is the learned CIT (Appeals) right in ruling premium paid on govt. securities as not a capital expenditure even when they were held as investment year after year.
4. Whether on facts and circumstances of the case, is the learned CIT (Appeals) correct in deleting additions made under Section 14A for exempt income without appreciating facts that establishment and administrative expenses were incurred ? 5. The appellant craves leave to add, alter, amend and delete any of the grounds of leave.”
The Grounds raised at S.Nos.1 and 5 by Revenue are general in nature and therefore no adjudication is called for thereon.
Grounds at S.Nos.2 & 3 – Amortization of premium of Rs.9,65,946 paid on Govt. Securities. 5.1 In these grounds, the Revenue contends that the learned CIT (Appeals) erred in allowing relief regarding amortization of premium paid on Govt. Securities even when they are not held as stock-in-trade but were held as investment year on year. The learned Departmental Representative was heard in support of the grounds raised and pleaded that the order of the learned CIT (Appeals) on this issue be reversed and that of the Assessing Officer be restored.
5.2 Per contra, the learned Authorised Representative supported the impugned order of the learned CIT (Appeals) on this issue. The learned Authorised Representative submitted that an identical matter on the issue of amortization of premium paid on investment / purchase of Govt. Securities was before the co-ordinate bench of this Tribunal for consideration in the case of Sri M. Visweswaraya Co-operative Bank Ltd. in dt.11.5.2012 and the co-ordinate bench held that the assessee is entitled to this deduction. The learned Authorised Representative submitted that in view of this issue being held in favour of the assessee and against Revenue, Revenue’s grounds are liable to be dismissed.
5.3.1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncement cited and placed reliance upon by the assessee. We find that an identical issue of the claim of amortization of premium on investment in the purchase of Govt. Securities was the subject matter of consideration before a co-ordinate bench of ITAT, Bangalore in the case of Sri M. Visweswaraya Co- operative Bank Ltd. (supra). The co-ordinate bench in the cited case (supra), at para 8 thereof has held that the assessee is entitled to claim the deduction in respect of amortization of premium on investment in the purchase of Govt. Securities. The operative portion of this order at para 8 thereof is extracted hereunder :-
“ 8. We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal, as under : (i) Catholic Syrian Bank Ltd v. ACIT – (2010) 38 SOT 553 (Cochin) : An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analyzing the issue in depth, the bench has observed that with regard to amortization of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities. United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 ; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd., (ITA No.126/Coch/2004, dated.___ Sept, 2005 followed." (ii) The Khanapur Co-op Bank Ltd v. ITO – dated.8.9.2011 : The Hon'ble Bench of Panaji Tribunal had recorded its findings that "6. Likewise, the premium amortized at Rs.1,78,098/- is claimed to be in respect of securities held under the category 'held to maturity'. The Assessing Officer has taken them as long term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the CBDT Instruction No.17 of 2008 dated.26.11.2008 as reproduced herein above, the premium paid on such government securities is required to be amortized over the period remaining to maturity ………." (iii) In the case of Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang), for the assessment year 2004-05, the earlier bench had also held a similar view.
In the light of the above discussion and the case laws discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.”
5.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Sri M. Visweswaraya Co-operative Bank Ltd. (supra), we are of the considered view that the assessee is entitled to claim and be allowed the deduction of Rs.9,65,946 claimed on account of amortization of premium paid on investment in Govt. Securities. Consequently, Grounds No.2 & 3 of Revenue’s appeal are dismissed.
Ground No.4 – Disallowance u/s.14A r.w. Rule 8D(2)(iii).
6.1 In this ground, the Revenue challenges the action of the learned CIT (Appeals) in deleting the disallowance under Section 14A r.w. Rule 8D amounting to Rs.10,14,398.
6.2 The facts of the matter as emanate from the record are that in the course of assessment proceedings, the Assessing Officer observed that the assessee earned income of Rs.1,08,950 as dividend from listed shares and UTI which were exempt under Section 10 of the Act. On being queried, the assessee submitted that it had not incurred any expenditure to earn this exempt income. The Assessing Officer not being satisfied with the assessee's averments that it had not incurred any expenditure to earn the exempt income proceeded to compute the disallowance under Section 14A r.w. Rule 8D at Rs.10,14,398.
6.3 On appeal, the learned CIT (Appeals) allowed the assessee partial relief by directing the Assessing Officer to estimate the expenditure @ 2% of the exempted income holding as under :-
I have gone through the facts of the case, contents of the assessment order and written submissions of the assessee. The appellant earned tax free income of Rs.1,08,950 being the dividends from IFCI and Unit Trust of India and same is treated as exempted income under Section 10 of the IT Act, 1961 while computing the taxable income for the A.Y. 2010-11. Whereas the DCIT, C-1(1), Hubli, computed expenditure to earn above tax free income at Rs.10,14,398 under Section 14A read with Rule D as under : 1. Interest on Rs.;1,86,48,805 investment in IFCIU and Unit Trust of India Bonds at Rs.9,21,154 and 2. Administrative expenditure at 0.50% of the average investment of Rs.18648805 at Rs.93,244. Whereas the appellant has not incurred from its capital and reserves of Rs.52.18 Crores and not borrowed any money nor paid any interest. The copy of Balance Sheet as at 31.3.2010 and Profit and Loss Account is enclosed herewith in this regard. Further the management and administrative expenses of the appellant is fixed and it has not incurred any extra expenditure to earn above tax free income and thus there cannot be said to be relatable expenditure to earn exempted income. Hence no disallowance can be made under Section 14A read with Rule 8D towards interest and management expenditure as held by Hon'ble ITAT Amritsar Bench in the case of DCIT Vs. Jammu & Kashmir Bank (2013) 152 TTJ(AS) S2L, Ing Vysya Bank Ltd. Vs. CIT Bangalore Bench and Syndicate Bank Vs. ACIT, Udupi ITA 1282, 1283 & 1284/Bang/2007 ITAT Bangalore Bench. In the case of Priya Exhibitions (P) Ltd Vs. ACIT, Circle 14(1), New Delhi 27 TAxmann.com 88 (2012), the Hon'ble Delhi F Bench has held that the A.O. has not fulfilled his onus of recording his findings and specifically pointed out any direct expenses for disallowance under Section 14A which requires a clear findings of incurring of expenditure and that no disallowance can be made on the basis of presumptions. The learned A.O. neither proved that any interest expenditure and administrative expenses is actually incurred but estimated the expenditure under Section 14A read with Rule 8D without any evidence in his possession. The appellants case was subject to scrutiny assessment for the A.Y. 2009-10 and copy of the assessment order under Section 143(3) dt.7.12.2011 wherein the learned A.O. had estimated 2% of tax free income as expenditure to earn the tax free income and the assessee has accepted the same and have not preferred an appeal. Hence the Assessing Officer is directed to estimate the expenditure at 2% of the exempted income and total income has to be computed accordingly. Hence this ground of appeal of the assessee is partly allowed.”
6.4 The learned D.R. was heard in support of the grounds raised and placed support on the order of the Assessing Officer. It was prayed that the order of the learned CIT (Appeals) on this issue be reversed and that of the Assessing Officer be restored.
6.5 Per contra, the learned Authorised Representative supported the impugned order of the learned CIT (Appeals). It was, however, submitted that a similar issue, as in the case on hand, where the assessee has taken a stand that no expenses whatsoever have been incurred by it to earn the exempt income, was before a co-ordinate bench of this Tribunal for consideration in the case of Bharatiya Reserve Bank Note Mudran Pvt. Ltd. in M.P. Nos.43 & 51/Bang/2013. It is submitted at paras 18 to 20 of the order dt.31.5.2013, the co-ordinate bench has remanded this issue back to the file of the Assessing Officer for fresh consideration in accordance with directions laid down in para 18 thereof. The learned Authorised Representative prayed that the ground raised by Revenue for restoration of the order of the Assessing Officer on this issue be rejected.
6.6.1 We have heard the rival submissions and perused and carefully considered the material on record. We find that an identical situation as in the case on hand, where the assessee had taken the stand that no expenditure was incurred by it for earning the exempted income, was considered by a co-ordinate bench of this Tribunal in the case of Bharatiya Reserve Bank Note Mudran Pvt. Ltd. in M.P. Nos.43 & 51/Bang/2013 dt.31.5.2013, the co-ordinate bench at paras 18 & 20 of its order it has held and directed as under :-
In the present case, the assessee, in so far it relates to common expenses [falling within the ambit of Rule 8D(2)(iii) of the Rules], has taken a stand that no expenses whatsoever was incurred by the assessee. The AO in para 3.4 of his order has only dealt with the expenditure in the form of interest. With regard to other indirect common expenses, he has only made an observation that the assessee does not maintain separate accounts to enable identification of expenditure relating to exempt income. It is thus clear that as far as indirect expenses are concerned, neither the assessee has given any basis for his claim that no expenses were incurred for earning the exempt income, nor has the AO arrived at an objective satisfaction regarding the claim of the assessee that no indirect expenses were incurred to earn the tax-free income is not correct. In the circumstances, we are of the view that it would be just and appropriate that the order of the CIT(A) should be set aside and the issue with regard to disallowance to be made of indirect expenses under Rule 8D(2)(iii) of the Rules should be remanded to the AO for fresh consideration. The assessee should make a claim before the AO specifying the basis on which a claim is made that no indirect expenses were incurred to earn exempt income. The AO should examine such a claim and arrive at an objective satisfaction regarding the correctness or otherwise of the claim made by the assessee. If the AO comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. Even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The plea of the assessee that applying the Rule 8D blindly by the AO will lead to absurd results, in our view, is without any basis because while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income.” “ 20. We are of the view that in the light of the discussion in the earlier part of this order, the question of disallowance to be made under Rule 8D(2)(iii) of the Rules is remanded to the AO for fresh consideration and the order of the CIT(A) in this regard is set aside. The assessee as well as the AO shall follow the directions given in para 18 of this order. The issue will be decided by the AO after giving opportunity of being heard to the assessee.” 6.6.2 Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Bharatiya Reserve Bank Note Mudran Pvt. Ltd. in M.P. Nos.43 & 51/Bang/2013 (supra), we restore to the file of the Assessing Officer, the matter of the issue of the disallowance under Section 14A r.w. Rule 8D in respect of expenditure incurred for earning of exempt income of Rs.1,08,950, for fresh consideration and adjudication in accordance 18 of the order of the cited case (supra) after affording the assessee adequate opportunity of being heard and to file details and submissions required. The Assessing Officer is directed accordingly. Consequently, Ground No.4 of Revenue’s appeal is treated as allowed for statistical purposes.