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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
ORDER Per Prashant Maharishi, AM:
Both these cross appeals has arisen out of the order of CIT(A)-XVI, New Delhi for AY 2007-08.
2. We first take up the appeal of the assessee. Assessee has raised following grounds of appeal -:
1. The Ld. CIT (A) has erred in law and on the facts and circumstances of the case in disallowing the claim of loss on fall in value of investments held as stock-in-trade of Rs.
2 & Oriental Bank of Commerce A Y 2007-08 205.43 crores. The disallowance is wrong and bad in law the claim of the assessee bank should be allowed.
The appellant contends that the claim of the bank is in accordance with the RBI circular allowing the bank once in a year shifting of securities duly approved by the Board of the Bank. Resultant loss, if any, has to be provided by the bank as per the said RBI circular. Therefore, it is an actual loss and not a notional loss. The claim of Rs. 205.43 crores should be allowed.
The appellant contends that the principle of valuation of investments held as stock in trade on the basis of cost or market value whichever is lower, has been accepted in the earlier years and the consequential fall in value has been allowed as business loss. Therefore, applying the same principle the fall in value of investments of Rs. 205.43 crores at the time of shifting the securities from AFS to HTM should be allowed.
4. The Ld. CIT (A) has erred in law and on the facts and circumstances of the case in not accepting the plea of the assessee that there is no expenditure incurred by the assessee bank for earning tax-free income and hence no disallowance should be made u/s 14A of the Income Tax Act, 1961.
5. The appellant contends that no expenditure is incurred for earning tax free income because a) expenditure incurred is for banking business of the assessee, b) assessee has sufficient non- interest bearing own funds to invest c) the investments made by the bank are to meet RBI norms like CRR, SLR ratios etc. d) the investments in the bank are made to realize gains or losses and earning dividend is only incidental e) neither the Assessing Officer nor the CIT(A) has any material to support nexus 3 & Oriental Bank of Commerce A Y 2007-08 between expenditure incurred and earning of tax free income for disallowance. Hence, the order of the CIT (A) upholding disallowance u/s 14A is wrong and bad in law.
6. The appellant contends that in the earlier years on similar grounds the addition made u/s 14A has been deleted by the highest fact finding authority i.e. ITAT. Therefore, following precedence in the assessee’s own case, the addition sustained by CIT (A) u/s 14A of Rs. 1,90,80,033/- should be deleted.”
3. During the course of hearing assessee has also raised an additional grounds of appeal
as under :-
1. The Appellant is making this legal claim pursuant to the judgment of the Hon’ble Supreme Court arising out of the interpretation of section 36(1)(viia) and Section 36(1)(vii) of the Income Tax Act, 1961 in the case of Catholic Syrian Bank Ltd. V. CIT reported in [2012] 248 CTR 1 (SC) wherein it has been held that the provisions of bad and doubtful debts u/s 36(1)(viia) applies only to rural advances and therefore, the provisions of sec. 36(1)(vii) operate in their own field and are not restricted by the limitation of section 36(1)(viia) of the Act.
2. The Appellant by this additional ground is claiming relief u/s 36(1)(vii) of Rs. 274,32,77,945/- being the bad debts in respect of non-rural advances which may kindly be allowed.
3. The above additional grounds being legal grounds may kindly be admitted and adjudicated in view of the Supreme Court decision in the case of NTPC v. CIT(1998)229 ITR 383(S.C.), Jute Corporation of India Ltd. v. CIT(1991) 187 ITR688 (SC). The powers of the appellate authority being co-terminus with that of the Assessing Officer, the claim of the Appellant may kindly be admitted and adjudicated.”
4. Regarding the prayer of the assessee for admission of additional ground, Ld. AR of the assessee submitted that above additional ground a) is purely legal in nature b) the facts of the ground are on record He further submitted that powers of the tribunal being co-terminus with power of the AO, additional ground of the assessee may be admitted and claim raised by the assessee in additional ground may be adjudicated on merits. For this proposition, he relied on decision of Hon’ble Supreme Court in case of NTPC v. CIT 229 ITR 383 and Jute Corporation of India ltd. vs. CIT 187 ITR 688. Ld. AR further submitted that the facts relating to the additional ground are available at page no. 11 and 12 of the paper book wherein a query letter dated 18.9.2009 a query has been raised for the deduction u/s 36(1)(vii) and 36(1) (viia) vide point no. 1, 2 and 3 of that notice. Ld. AR further stated that vide letter dated 13.10.2009 assessee has submitted the details of deduction u/s 36(1) (viia) and 36(1) (vii). In the letter it was submitted that the claim of bad debt u/s 36(1) (vii) has been made by the assessee after considering the provisions for bad and doubtful debts u/s 36(1) (viia). Ld. AR of the assessee submitted that identical issue has been decided in case of assessee for AY 2006-07 in dated 15 March 2013 and ITAT has admitted additional ground, accepted the contention of the assessee and remitted matter back to AO with direction to make verification and grant deduction. Therefore, he contended that this ground may be admitted and adjudicated upon.
5. Ld. DR did not object to the raising of additional ground but submitted that as this ground requires verification of the facts same may be set aside to the file of AO. Ld. DR has submitted that in order for AY 2006-07 matter
5 & Oriental Bank of Commerce A Y 2007-08 has been restored back to the file of AO for verification and granting deduction thereafter, so he agreed that matter for this year may also be sent back to the file of AO for verification. 06. As relevant facts are already on record, ground is purely legal in nature, and issues has already been admitted in case of assessee for earlier year, we admit the additional ground of appeal and decide the same first.
07. Brief facts for this additional ground are that appellant is a Nationalized Bank and in return filed for AY 2007-08 appellant’s claim of bad debt of Rs. 4,48,73,33,446/- pertaining to non-rural branches has been set off against the provisions of Rs. 2,74,32,77,945/- with respect to rural branches u/s 36(1)(viia) of the Income Tax Act, 1961. The appellant set off this amount under impression that according to provisions of Section 36(1)(vii) the bad debt in respect of non-rural branches are also required to be restricted to the extent of such debt or part thereof exceeds the credit balance in the account of provision of bad and doubtful debts made u/s 36(1)(viia). Hon’ble Supreme Court in case of Catholic Syrian Bank Ltd. V. CIT 343 ITR 270 has held that the provisions of sections 36(1)(vii) and 36(1)(viia ) are distinct and independent items of deduction and operate in their respective fields. Accordingly, bad debts written off in accounts, other than those for which the provision is made under clause (viia), will not be restricted to extent of provision of bad and doubtful debts made u/s 36(1) (viia). The proviso to section 36(1) (vii) will relate to cases covered under section 36(1) (viia) and has to be read with section 36(2) (v). Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans. Deduction u/s 36(1)(vii) the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year without any restriction. This, obviously, would be subject to satisfaction of the requirements contemplated under section 36(2).
6 & Oriental Bank of Commerce A Y 2007-08 Therefore, assessee is entitled to the deduction of bad debt pertaining to non-rural branches without any restriction of provisioning. Identical issue has arisen in the case of assessee for AY 2006-07 in ITA no. 22/Del/2011 dated 15 March, 2013 wherein ITAT has admitted these additional grounds, accepted the contention of the assessee and has remitted back to file of AO with direction to make verification and grant deduction.
We have carefully considered the rival submission. The breakup of the bad and doubtful debts shows that the banks has total bad debts of Rs. 4,49,05,86,446/- out of which bad debts claimed in computation of total income is Rs 1,74,40,55,501/- leaving a balance of Rs 2,74,65,30,945/-. Out of the above sum amount has been written off comprising bad debts in respect of rural branches of Rs. 32,53,000/- and balance amount of 2,74,32,77,945/- relates to claim of deduction on account of bad debt u/s 36(1) (vii) with respect to non-rural branches. The facts and workings relating to the same are at page no. 11 and 12 of the paper book wherein a query letter dated 18.9.2009 a query has been raised for the deduction u/s 36(1)(vii) and 36(1) (viia) vide point no. 1, 2 and 3 of that notice and assessee replied on 13.10.2009 . In the letter it was submitted that the claim of bad debt u/s 36(1) (vii) has been made by the assessee after considering the provisions for bad and doubtful debts claimed u/s 36(1) (vii). Therefore, assessee raised fresh claim of deduction u/s 36(1) (vii) with respect to non-rural branches of Rs. 2,74,32,77,945/-. For AY 2006- 07 in the case of the assessee on identical circumstances ITAT has dealt with this issue in para no. 15 of aforesaid order as under :- “15. We have considered the submissions of both the parties and have perused the record of the case. In view of the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra), bad debts in respect of non-rural branches are to be allowed u/s 36(i) (vii). The assessee’s claim is that bad debts of Rs. 191,17,16,392/- pertaining to non- rural branches have been set off against the 7 & Oriental Bank of Commerce A Y 2007-08 provisions of Rs. 246,74,70,998/- u/s 36(i) (viia). In support of this contention, ld. counsel referred to page 27 of paper book, wherein the working for claim u/s 36(i) (viia) is contained, to demonstrate that assessee had set off bad debts relating to non- rural branches against the opening provision u/s 36(i) (viia). In the same statement, assessee had claimed bad debts relating to rural branches amounting to Rs. 10,38,51,000/-. Considering the entirety of facts, we are of the opinion that the claim of assessee needs to be examined afresh in the light of decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra). If on verification, the AO finds that no separate bad debts had been written off in respect of non rural branches, then the same is to be allowed after due verification.”
We have satisfied ourselves that facts and circumstances in this appeal compared to AY 2006-07 for which ITAT has decided the issue are identical. Therefore respectfully following the order of Co-ordinate bench, we set aside this ground of appeal to the file of AO for fresh examination and to grant deduction on merits to the assessee in light of decision of Hon’ble Supreme Court in case of Catholic Syrian Bank Ltd. v. CIT 343 ITR 270. Additional ground of the appeal of the assessee is allowed for statistical purposes.
10. Ground no 1 to 3 of appeal of the assessee is with respect to disallowance of the claim of loss on account of fall in value of investments held as stock- in-trade amounting to Rs. 205.43 crores. The brief facts of the case is that pursuant to the direction of RBI the bank has transferred SLR securities aggregating to 1664.32 crores from ‘Available for sale’ category to ‘Held to Maturity’ category during the year. Due to this, mark to market devaluation of Rs. 205.43 crores has been debited to the P & L Account. Further deduction of Rs. 205.10 crores was also claimed being fall in value
8 & Oriental Bank of Commerce A Y 2007-08 of investments as on 31 March 2007, which is allowed as deduction. During the course of assessment proceedings, AO disallowed the deduction claimed of Rs. 205.43 crores for the reason that it is loss arising out of provisions in the books and therefore it is notional loss and not real. Assessee carried the matter before CIT (A) who in turn concurring with the views of assessing officer confirmed the disallowance. Therefore, assessee has raised this ground before us.
Before us ld. AR submitted that RBI circular provides for transfer of securities from ‘available for sale’ category to ‘held to maturity’ category once in a year. The Board of the Directors of the Bank authorizes such transfer and such loss is charged to profit and loss account of the bank. He submitted that loss arising therefrom is not a notional loss but real loss arising on account of principles of valuation of stocks on the basis of cost or market value whichever less, AO and CIT (A) both have erred in terming it as notional loss. He further submitted that in case of the assessee in earlier years such loss has been allowed without dispute in assessment proceedings. He further submitted that this issue is covered in favour of the assessee by decision of State Bank of Mysore vs. DCIT 33 SOT 7 (Bangalore). He submitted that Hon’ble Bombay High Court in 107 DTR 395 has now confirmed the decision of Bangalore Bench of ITAT. Therefore, the disallowance of Rs. 205.43 crores may be deleted.
12. Ld. DR relied on the order of lower authorities and submitted that this is a notional loss.
We have carefully considered the rival contentions. During the year, assessee has debited the loss of Rs. 205.43 crores arising of on account of transfer of securities of Rs. 1664.32 crores from ‘available for sale’
9 & Oriental Bank of Commerce A Y 2007-08 category to ‘held to maturity’ category in terms of resolution of the Board of Directors of the appellant. Claim has arisen because of the circular issued by Reserve Bank of India on prudential norms for classification, valuation and operation of investment portfolio bank dated 1st July, 2006. According to that circular the banks are allowed to transfer securities from one category to another category once every year at the least value of following :- (a) Acquisition cost (b) Book value and (c) Market value. It is further provided that if because of such transfer any depreciation arises, it should be fully provided for. The claim of the assessee is that this loss should be allowed as deduction because of transfer of securities from one category to another category. Therefore, the issue in appeal is that whether a banking company claims the loss, based on circulars and instructions of Reserve Bank of India, is allowable because of transfer of security from category of “available for sale” to “held to maturity”. This issue now no longer survives in view of two decisions of Hon’ble Karnataka High Court in case of Karnataka Bank Ltd. vs. Assistant Commissioner of Income Tax 356 ITR 549 and CIT vs. Bank of Baroda 262 ITR 334 and a decision of honourable Bombay High Court in case of CIT vs. HDFC Bank Ltd. reported at 368 ITR 377 considering decision of honourable supreme court in case of united commercial bank V CIT 240 ITR 355 and Southern technologies Limited V Jt CIT 320 ITR 577, wherein Hon’ble High Court has held as under:- “9. In the present case, we find that the facts and issues that are covered by the aforesaid judgment squarely apply to the facts and issues raised in the present Appeal. Not only are we in full agreement with the judgment of this Court in the case of Bank of Baroda (supra) but we are bound by the same. We therefore respectfully follow the ratio laid down in the said judgment.
10 & Oriental Bank of Commerce A Y 2007-08 10. We find that even the judgment of the Karnataka High Court in the case of Karnataka Bank Ltd. (supra), reliance on which was placed by Mr Mistry, squarely covers the issue raised in this Appeal. The facts in the case before the Karnataka High Court were that the Assessee was holding securities in different categories as mandated by the RBI Master Circular dated 1st September 2003. The Assessee treated such securities as stock-in-trade and claimed depreciation on the book value after valuing the securities at cost or market value whichever was lower. The Revenue refused to accept the Assessee's plea for the deduction and disallowed the same and added back to the total income the said amount. Aggrieved by the said order, the Assessee preferred an Appeal before the CIT (Appeals). The same was dismissed upholding the contention of the Assessing Authority. Aggrieved thereby, the Assessee preferred an Appeal to the Tribunal. The Tribunal inter alia held that since the securities on which the depreciation had been claimed on the earlier years had not been identified, the issue was restored to the file of the Assessing Officer for consideration afresh and partly allowed the Appeal. Being aggrieved by the said order, Karnataka Bank Ltd. preferred an Appeal to the Karnataka High Court under section 260A of the Act. After discussing various judgments of the Supreme Court, the Karnataka High Court held as under :— "From the aforesaid judgments of the apex court, now it is clear that a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. Financial institutions like bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of account. It is not decisive or conclusive in the matter. For the purpose of the Income Tax Act whichever method is adopted by the assessee, a true picture of the profits and gains, i.e. real income is to be disclosed. For determining the real income, the entries in the balance- sheet is required to be maintained in the statutory form may not be decisive or conclusive. It is open to the Income Tax Officer as well as the assessee to point out true and proper income while submitting the income tax returns. Even if the assessee under some misrepresentation or mistake fails to make an entry in the books of account, although under law, a deduction must be allowed by the Income Tax Officer, the assessee will not lose any right on claiming or will be debarred from being allowed the deduction. Therefore, the approach of the authorities in this regard is contrary to the well settled legal position as declared by the apex court. In the instant case, the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment. But consistently for more than two decades it has been shown as stock-in-trade and depreciation is claimed and allowed.
11 & Oriental Bank of Commerce A Y 2007-08 Therefore, notwithstanding that in the balance-sheet , it is shown as investment, for the purpose of Income Tax Act, it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet." (emphasis supplied) 11. We therefore find that the issue raised in this Appeal is also squarely covered by the judgment of the Karnataka High Court in the case of Karnataka Bank Ltd. (supra).
In view thereof, we find no infirmity in the order passed by the ITAT. The present Appeal does not raise any substantial question of law as projected by the learned counsel appearing for the Appellant. The Appeal is therefore dismissed.”
Therefore, we find that the issue raised in this appeal squarely covered by the decision of Hon’ble Karnataka High Court as well as Mumbai High Court in favour of asssessee. Therefore, respectfully following those judicial precedents, we reverse the order of CIT (A) and delete the disallowance of Rs. 205.43 crores on account of claim of loss of transfer of security from ‘available for sale’ category to ‘held to maturity’ category by the appellant bank in accordance with direction/ circular of Reserve Bank of India.
Ground no 4 to 6 are against the disallowance of Rs. 1,90,80,033/- sustained by CIT(A) u/s 14A of the Act. The brief facts of the cases that assessee has earned exempt income of Rs. 38,16,00,665/- which is exempt under the provisions of Section 10 of the Income Tax Act. During assessment proceedings, no disallowance was offered by the assessee under the provisions of section 14A of the Act. Therefore, assessing officer rejecting the contention of the assessee applied provisions of Rule 8D of the Income Tax Rules 1962 for A.Y. 2007-08 and disallowed expenditure of Rs.39,23,61,000/-. Appellant assessee preferred appeal before CIT(A) against the same who in turn held that no apportionment of expenditure towards interest can be made for disallowance u/s 14A of the Act in view
12 & Oriental Bank of Commerce A Y 2007-08 of the own funds of the appellant are substantially large than amounts invested in securities earning tax free income. The CIT (A) was also of the view that there are certain expenditure that has been incurred by the appellant for earning exempt income and therefore he confirmed the disallowance of expenditure at 5% of exempt income earned u/s 14A. Against this disallowance, assessee is in appeal before us.
The ld. AR of the appellant submitted that CIT (A) has deleted the addition though on account of interest expenditure but has confirmed the disallowance to the expenditure of 5% of exempt income. He submitted that the assessee has not incurred any expenditure to earn that income. He further relied upon the decision of Hon’ble Mumbai High Court in case of CIT vs. HDFC Bank Ltd. Income Tax Appeal No. 330 of 2012 that no disallowance can be made in case of banking company on account of interest while applying Section 14A. Regarding disallowance of ½ % of the exempt income, Ld. Counsel further submitted that for AY 2006-07 the Hon’ble ITAT in assessee’s own case in has considered this issue and in view of decision of Hon’ble Delhi High Court in case of Maxopp Investment Ltd. & Ors. Vs. CIT 247 CTR 162 set aside the issue back to the file of AO.
Ld. DR relied on the orders of lower authorities and submitted that the disallowance has rightly been made of interest expenditure as well as other expenditure by AO.
We have carefully considered rival submission and we have perused the orders placed before us. Undisputedly for AY 2007-08, Rule 8 D of Income Tax Rules 1962 does not apply. Therefore, any disallowance, if at all to be made, has to be without the support of rule 8D and based on reasonable
13 & Oriental Bank of Commerce A Y 2007-08 basis. Regarding interest disallowance in view of decision of Hon’ble Bombay High Court in case of CIT vs. HDFC Bank Ltd. Income Tax Appeal no. 330 of 2012 dated 23rd July 2014, it is undisputed now that no disallowances cannot be made in case of a bank where assessee’s own funds and other non-interest bearing funds are more than investment in the tax free securities. However, it cannot be said without detailed examination that the assessee, which can be disallowed, has incurred no expenditure other than interest. However, Rule 8 D does not apply for the year under appeal but reasonable amount of disallowance out of other expenditure may be determined based on details of expenses incurred which are related to earning exempt income. On identical facts and circumstances, in assessee’s own case, Hon’ble ITAT for AY 2006-07 has set aside this issue to the file of AO vide para no 22-23 with direction to determine the amount of expenditure incurred in a relation to tax free income earned by the assessee in view decision of Honourable Delhi high court on case of Maxopp Investments V CIT 247 CTR 162. Therefore respectfully following the order of coordinate bench we restore these ground back to the file of AO to examine the issue afresh with respect to work out disallowance, if any, of other expenditure other than interest expenditure relating to exempt income.
Ground no. 4 to 6 of the appeal are allowed for statistical purposes.
Now we come to the appeal of Revenue in .
Revenue has raised following grounds in appeal
“1. That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in restricting the 14 & Oriental Bank of Commerce A Y 2007-08 disallowance to Rs. 1,90,80,033/- from Rs. 39,23,61,000/- made by the AO u/s 14A of the IT Act, 1961.
2. That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the disallowance of Rs. 98,12,00,000/- being broken period interest.
3. That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the disallowance of Rs. 5,77,71,439/- made by the AO on account of excess claim of depreciation of LAN and WAN equipments.
That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the disallowance of Rs. 6,01,09,266/- made by the A.O. on account of excess claim of depreciation on fixture and fiting on temporary structure.
That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in directing the AO to allow deduction u/s 36(1)(viia) as per law.
The Hon’ble Apex Court in the case of the Electronics Corporation of India vs. UOI (full bench decision) [Civil Appeal No. 1883 of 2011 arising out of SLP © No. 2538 of 2009 dated 17.02.2011], has recalled the law relating to approval of COD. Therefore, earlier COD decision to grounds at Sl. No. 2,3 and 5 above for not filing appeals on these points no longer exists.”
The ground no. 1 is regarding restricting the disallowance u/s 14A of the IT Act to Rs. 1,19,80,033/- from Rs. 39,23,61,000/- by CIT (A). Brief facts are already discussed in deciding ground no. 4 to 6 of the assessee’ s appeal however, to state the facts succinctly that assessee has earned tax free income during the year as under :- (i) Interest on tax free bonds Rs.18,29,60,056/- (ii) Dividend received from UTI etc. Rs. 16,48,80,807/- (iii) Dividend received from companies of Rs. 3,37,59,792/- The Assessing Officer has applied rule 8D and made disallowance of 39,23,61,000/-. However, CIT(A) restricted the disallowance to 5% of total exempt income of Rs. 38,16,00,665/- amounting to Rs. 19,08,0033/-. The 15 & Oriental Bank of Commerce A Y 2007-08 CIT(A) has deleted the addition on account of interest components amounting to Rs. 37,32,80,967/- and estimated disallowance at 5% of total exempt income. The CIT(A) deleted the addition mainly because of the reason that assessee is having interest free funds of share capital of Rs. 250.53 crores in reserve and surplus of Rs. 5349 crores aggregating to Rs. 5600 crores which is more than of investment made in case of securities earning tax free income. Therefore, Revenue is in appeal before us on this ground.
Before us, the LD DR relied up on the orders of AO.
Ld. AR submitted that this issue is now covered in favour of the assessee by decision of Honourable Mumbai High court in case of CIT V HDFC bank Limited in tax Appeal no 330 of 2012 dated 23/7/2014 where in the amount of investments in tax frees earning securities is less than the amount of interest free funds available with the bank no disallowance on account of interest can be made.
We have carefully considered the rival contentions. Assessee has invested in the tax-free income earning securities. It is the contention of the assessee is that assessee has own on interest bearing funds available with it amounting to Rs 5600.30 crore which is much more than the amount of investments. On the identical facts honourable Bombay high court in case of CIT Vs HDFC bank limited has held as under :- 4. We do not agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee’ s own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax-free securities. On this factual aspect, the ITAT did not find any merit in the 16 & Oriental Bank of Commerce A Y 2007-08 contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. Had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs.43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs.313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs.398.19 crores. In view thereof, it was submitted that from the analysis of the balance sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and Honourable Bombay High Court ITA 330/12 dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue
17 & Oriental Bank of Commerce A Y 2007-08 approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under :- “If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In 18 & Oriental Bank of Commerce A Y 2007-08 this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.” (emphasis supplied) 5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest- free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.”
Therefore respectfully following the decision of Honourable Mumbai high court we confirm the order of CIT (A) in deleting interest portion of expenditure amounting to Rs. 37,32,80,967/- u/s 14A in view of the excess of owned interest free funds than the investment in tax free income earning securities for the year. Ground No 1 of the appeal of the department is dismissed.
Ground No 2 of the appeal is against the deletion of the disallowance of Rs. 98,12,00,000/- being broken period interest.
Ld. DR relied up on the orders of AO. Whereas the LD AR submitted that this issues was decided by CIT appeal in favour of the assessee for AY 2006-07 and though on other counts revenue appealed before ITAT but not 19 & Oriental Bank of Commerce A Y 2007-08 on this issue. He took us to page no 52-73 of the orders of CIT (A) where in this issue is discussed. Therefore, he submitted that the department accepts this issue in favour of assessee.
We have carefully considered the issue. Ao has brought to tax an amount of Rs 98.12 crores. Assesse bank has incurred broken period interest expenditure of Rs 98.12 cr at the time of purchase of securities and claimed it as revenue expenditure. As the securities of the assessee bank are stock in trade of the bank natural corollary would be that the amount of interest paid for broken period shall also be revenue expenditure in nature and allowable to the bank. This issue has been considered by various high courts, which have been considered by CIT (A) in his orders while deciding the issue. Further, the revenue has also not contested this issue in earlier years. Hon Bombay high court in case of CIT V HDFC bank Limited in 366 ITR 505 has held that even after the decision of Hon. supreme court in case of CIT v Vijaya bank (187 ITR 541) broken period interest is allowable to the assesse. The issue raised before Honourable High court was (B) Whether the ITAT was correct in law in holding that the broken period interest is allowable as a deduction, inspite of the Hon'ble Supreme Court's decision in the case of CIT v. Vijay Bank (187 ITR 541) and the Rajasthan High Court's decision in the case of Bank of Rajasthan (316 ITR 391) ? Honourable high court answered this question as under-
“6. Even as far as question (B) is concerned, we find no infirmity in the orders passed by the CIT (Appeals) or the ITAT. In deciding this issue, CIT (Appeals) and the ITAT have merely followed the judgment of this Court in the case of American Express International Banking Corpn. v. CIT [2002] 258 ITR 601/125 Taxman 488. On going through the said judgment, we find that question (B) reproduced above and projected as substantial by Mr Suresh Kumar is squarely answered by the judgment of this Court in the case of American Express International Banking Corpn. (supra). In view thereof, we do not find that even question (B) gives rise to any substantial question of law that needs to be answered by this Court.”
20 & Oriental Bank of Commerce A Y 2007-08 Therefore respectfully following the decision of Honourable Bombay high court we confirm the orders of CIT (A) in deleting the disallowance of Rs 98.12 crore on account of broken period Interest on purchase of securities. Therefore ground no two of the appeal is dismissed.
Ground No 3 of the appeal is Ld. CIT(A) has erred in deleting the disallowance of Rs. 5,77,71,439/- made by the AO on account of excess claim of depreciation of LAN and WAN equipment. On these assets assesse claimed depreciation @ 60 % considering them as computers whereas AO granted the depreciation @ 15 % as plant and machinery.
Before us, Ld. DR relied on the order of AO.
Ld. AR submitted that this issue is decided by Hon ITAT in assessee’ s own case for A Y 2006-07 in ITA 22/Del/2011 and 173/del/2011. He further relied on decision of Hon Delhi high court where it is held that depreciation on such assets is eligible for depreciation @ 60 % and not 15%.
We have carefully considered the issue. LAN (local Area Network) and WAN *(wide area network) is a bunch of cables and switches which can be used with computers only. Hon Delhi High court in case of CIT V BSES Yamuna Power Limited 358 ITR 447 has held that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent. Therefore following the decision of Jurisdictional high court we also hold that on WAN and LAN equipment are used with computers
21 & Oriental Bank of Commerce A Y 2007-08 only same are also eligible for depreciation @ 60 % therefore, we confirm the order of CIT (A) in deleting the granting depreciation of disallowance of Rs. 5,77,71,439/- made by the AO on account of excess claim of depreciation of LAN and WAN equipment. Therefore ground no three of the appeal is dismissed.
Ground No 4 of the appeal is That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the disallowance of Rs. 6,01,09,266/- made by the A.O. on account of excess claim of depreciation on fixture and fitting.
Brief facts of the case is that during the year assessee has claimed depreciation on temporary structures @ 100% on furniture and fixtures in rented premises and claimed as temporary structure. Before AO, it was submitted that assessee has included under temporary wooden structure, internal portion, cabin formation, flooring concealed wiring etc. for the computers were constructed and on that depreciation @ 100 % is claimed. AO amortized these expenditure over 5 years and granted only 20 % of the total expenditure of Rs 7,51,36,583/- .CIT (A) has deleted the addition and allowed 100 % depreciation holding that depreciation on temporary structure is allowable @ 100 % under income Tax Rules 1962. Therefore, revenue is in appeal.
Before us, Ld. AR relied on the order of CIT (A) and ld. DR Relied on the order of AO.
We have carefully considered the rival submissions. Assessee banks has shown addition of Rs. 15,73,78,019/- to the opening WDV of Rs 15622208/- and reduction therefrom of Rs 100163 resulting in to WDV of Rs. 99748028 and claimed depreciation thereon of Rs 75136583/-. Firstly,
22 & Oriental Bank of Commerce A Y 2007-08 assessee has shown these items as furniture and fixtures and we do not find that Appendix I as per Income tax rules 1962 prescribed under the head furniture and fixtures any class of items, which is eligible for 100 % depreciation. As per annexure D of the tax audit report, assessee himself has classified it is temporary wooden structure. Definitely, it is apparent that it is not building which CIT (A) has considered. Therefore, from the facts it is not clear that whether it is building or furniture and fittings. Secondly, we agree with the views of the CIT (A) that AO has erred in allowing depreciation at the correct rates has amortized these expenditure over 5 years. Therefore, in absence of these facts, this ground of appeal is restored back to the file of AO for fresh verification. Hence ground no four of the appeal is allowed for statistical purposes.
37. On Ground No 5 and 6, no arguments were advanced by the either party and hence are dismissed.
In the result, appeal of the assessee and revenue is partly allowed. (Order Pronounced in the Court on 04 /11/2015)