The Ahmednagar Shahar Sahakari Bank ... vs Department Of Income Tax

Ahmednagar Shahar Sahakari Bank Ltd., C/o M/s Shantilal Gandhi, Tax Consultant, 146 Amber Plaza, 1st Floor, Station Road, Ahmednagar - 414 001. PAN : AAABB0323R .... Appellant

Vs.

Asstt. Commissioner of Income Tax, Ahmednagar Circle, Ahmednagar. .... Respondent

ITA No.1980/PN/2013 (Assessment Year : 2010-11)

Asstt. Commissioner of Income Tax, Ahmednagar Circle, Ahmednagar. .... Appellant

Vs.

Ahmednagar Shahar Sahakari Bank Ltd., Sarwartha, Navi Peth, Ahmednagar. PAN : AAABB0323R .... Respondent

Assessee by : Mrs. Kiran Sangmane Department by : Mr. Rajesh Damor Date of hearing : 03-02-2015 Date of pronouncement : 20-02-2015

ORDER

PER G. S. PANNU, AM

The captioned cross-appeals preferred by the assessee and the

Revenue for assessment year 2010-11 were heard together and are being

disposed-off by way of a consolidated order for the sake of convenience and

brevity. The captioned cross-appeals are directed against the order of the

Commissioner of Income Tax (Appeals)-IT/TP, Pune dated 30.08.2013 which, 2 ITA No.1862/PN/2013 ITA No.1980/PN/2013

in turn, has arisen from an order dated 31.01.2013 passed by the Assessing

Officer u/s 143(3) of the Income Tax Act, 1961 (in short "the Act").

2. In appeal of the assessee, the only issue is with regard to an addition of

Rs.6,71,662/- on account of unpaid dividends. In brief, the relevant facts are

that the Assessing Officer noted that a sum of Rs.6,72,662/- was credited to

the General Reserve Account which represented unclaimed dividend.

Assessee explained that the dividend is credited to dividend payable account

after declaration of dividend and its approval by the general body meeting. At

the end of the year, the dividend remaining undisbursed is transferred to

unclaimed dividend account and if a Member does not collect dividend within

three years from the date of General Body meeting, the unclaimed amounts

are transferred to General Reserve. In any case, it was pointed out that even

on a future date if a Member demands his dividend, the bank has to pay the

same. The Assessing Officer was of the view that it reflects a cessation of

liability and therefore the amount of unclaimed dividend is taxable. The CIT(A)

held that unclaimed dividend is taxable since it has been foregone by the

Member of the bank. The CIT(A) has also relied upon the judgement of the

Hon'ble Supreme Court in the case of CIT vs. TVS Sundaram Iyengar and

Sons Ltd., (1996) 222 ITR 344 (SC) in coming to the said conclusion.

3. Before us, the Ld. Representative for the assessee submitted that an

identical controversy has been considered by the Pune Bench of the Tribunal

in the case of ACIT vs. M/s Peoples Co-operative Bank Ltd. vide ITA

No.2197/PN/2012 dated 27.09.2013, wherein the following discussion is

relevant :-

"5. Ground No.2 by the Revenue reads as under :

"2. Whether on the facts and in the circumstances of the case, the CIT(A) is correct in holding that the forfeited amount of dividend is not an income of the assessee u/s.28 of the Act."

3 ITA No.1862/PN/2013 ITA No.1980/PN/2013 6. The issue is in respect of the treatment of the forfeited dividend which is credited to the General Reserve. The AO has observed that the assessee has forfeited an amount of Rs.10,30,2180/- on account of dividend payable which is shown in the Liability side of the Balance sheet by reversing the entry and credited to the General Reserve Fund. The AO has observed that the dividend is declared by the Assessee bank out of its profit as per its regulations. The AO made addition to the extent of Rs.10,30,218/- which was in respect of the amount of the forfeited dividend by holding that the same is income liable to tax u/s.28 of the Act.

6.1 Identical issue has come for consideration before this Bench in case of ACIT, Circle-1, Aurangabad Vs. M/s. Sunderlal Swaji Urban Co-op Bank Ltd. - ITA No.2353/PN/2013 order dated 24-09-2013. The operative part of the decision is as under :

"7. We have heard the parties. In this case, it is not controverted before us by the Ld. DR that the dividend which is forfeited was provided from the business profit which has already suffered the tax. In our opinion, as rightly held by the Ld.CIT(A), the provisions of section 41(1) are not applicable to the issue before us as the said provision operate in the different situation. In the case of T.V. Iyengar and Sons Ltd (Supra) applicability of the section 41(1) was before the Hon'ble Supreme Court but in present case section 41(1) itself is not applicable, then we need not discuss the principles laid down in the said decision. We find no fault in deleting the addition by the Ld.CIT(A), which is as per law. We accordingly confirm the order of the Ld.CIT(A) and dismiss the ground No.2 taken by the revenue." 6.2 Admittedly, in this case the provision for dividend is made out of profit which has already suffered tax. Only the provision is reversed as per bye- laws of the cooperative society. In our opinion, the Ld.CIT(A) has rightly deleted the addition and no interference is called for from our side. Accordingly, ground No.2 is dismissed."

4. The Ld. Departmental Representative appearing for the Revenue has

reiterated the stand of the Revenue that once the dividend is unclaimed, it

reflects extinguishment of liability, and is liable to be taxed.

5. We have carefully considered the rival stands and find no merit in the

stand of the Revenue. Quite clearly, the dividend is paid by the bank out of

tax paid profits. Dividends are declared out of such profits and is to be

understood as an apportionment of income. If for any reason, the dividend so

declared is not actually disbursed and were to be added back to the taxable

income, it would mean a double taxation. Therefore, there is no justification

for taxing unclaimed dividend as a 'cessation' of liability. No doubt, cessation

of liability may be a taxable event but only in situations where such liability has 4 ITA No.1862/PN/2013 ITA No.1980/PN/2013

entered the computation of taxable income on an earlier occasion. Quite

clearly, the declaration of dividend does not enter the computation of taxable

income as the dividend is declared out of the profits remaining after taxation.

6. In so far as, the reliance placed by the CIT(A) on the judgement of the

Hon'ble Supreme Court in the case of TVS Sundaram Iyengar and Sons Ltd.

(supra) is concerned, the same is quite misplaced. In the case before the

Hon'ble Supreme Court, assessee had received deposits in the course of his

business which were originally treated as capital receipt. Some of the

deposits were neither claimed nor returned to the depositors. Such

unreturned and unclaimed deposits were taxed by the Revenue, which was

upheld by the Hon'ble Supreme Court. As per the Hon'ble Supreme Court, by

lapse of time, the claim of deposits became time-barred and the amounts

attained a totally different quality. According to the Hon'ble Supreme Court,

such surplus became a trade surplus because the amounts were received

originally in the course of trading transactions, though treated as a capital

receipt originally. Quite clearly, the fact-position before the Hon'ble Supreme

Court was quite different from the issue before us.

7. It cannot be anybody's position that the unclaimed dividend is a receipt

by the assessee in the course of its trading transactions. In-fact, the

unclaimed dividend amount, does not reflect any receipt at all. Therefore, in

our view, the reliance placed by the CIT(A) on the decision of the Hon'ble

Supreme Court in the case of TVS Sundaram Iyengar and Sons Ltd. (supra) is

erroneous.

8. As a consequence, we set-aside the order of the CIT(A) and direct the

Assessing Officer to delete the addition of Rs.6,71,662/-.

9. In the result, the appeal of the assessee is allowed.

5 ITA No.1862/PN/2013 ITA No.1980/PN/2013 10. In the cross-appeal of the Revenue, the solitary dispute raised by the

Revenue is with regard to a disallowance of Rs.11,38,000/- made by the

Assessing Officer on account of amortization of premium paid for acquisition of

securities categorized as Held to Maturity (HTM), which has since been

deleted by the CIT(A).

11. In brief, the relevant facts are that the assessee is a Co-operative

Society registered under the Maharashtra Co-operative Societies Act, 1960

and is carrying on the business of banking in terms of a license issued by the

Reserve Bank of India (RBI). Assessee claimed deduction for amortization of

premium paid on acquisition of securities categorized as HTM, which was

disallowed by the Assessing Officer on the ground that the same was capital in

nature. The CIT(A) has deleted the addition of Rs.11,38,000/- following the

decision of the Pune of the Tribunal in the case of Latur Urban Co-operative

Bank vs. DCIT vide ITA No.778/PN/2011 dated 31.08.2012 wherein the similar

issue has been decided in favour of the assessee. Against such a decision of

the CIT(A), Revenue is in appeal before us.

12. Before us, it was a common point between the parties that similar issue

of the allowability of Premium on Amortization of HTM Securities, arose before

Pune Bench of the Tribunal in the case of Pune District Central Co. Operative

Bank Ltd. vs. Addl.CIT in ITA No.1796/PN/2013 relating to assessment year

2009-10 vide order dated 28th November 2014, it was held as under:-

"10. ...... We find that a similar issue of allowability or deduction on account of amortization of premium expenditure for HTM securities arose before Pune Bench of the Tribunal in assessee's own case in ITA No.1795/PN/2013 relating to assessment year 2008-09 vide order dated 22.09.2014 wherein, it was held as under:-

"2.1 The only issue remains is with regard to disallowance made by the Assessing Officer of Rs.2,20,68,302/- claimed by the assessee as amortization of premium expenditure for HTM securities by payment of over and above the value of such securities. The learned Authorized Representative has pointed out that this issue is covered in favour of the assessee by order of the Hon'ble Bombay High Court in the case 6 ITA No.1862/PN/2013 ITA No.1980/PN/2013

of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), wherein the Hon'ble Bombay High Court on similar issue, held as under:

"As far as question (C) is concerned, we find that an identical question of law was framed and answered in favour of the assessee by this court in its judgment dated July 4, 2014, in Income Tax Appeal No.1079 of 2012, CIT v. Lord Krishna Bank Ltd. (now merged with HDFC Bank Ltd.) (2014) 366 ITR 416 (Bom). Mr. Suresh Kumar fairly stated that question (C) reproduced above is covered by the said order. In view thereof, we are of the view that even question (C) does not arise any substantial question of law that requires an answer from us."

And a similar view has been taken by ITAT, Pune 'A' Bench in the case of Dy.CIT vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. in ITA No.449/PN/2012 and another by observing as under:

"10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find an identical issue had come up before the Tribunal in the case of Nahsik Merchant Cooperative Bank Ltd. (Supra). We find the Tribunal has discussed the issue and dismissed the grounds raised by the Revenue by holding as under :

"4. After going through rival submissions and material on record we find that with the advent of section 80P(4) w.e.f. A.Y, 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(i) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in section 80P has taken away the benefit of the erstwhile deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the Finance Act, 2006 w.e.f. 01- 04-2007 reads as under:

" The provision of the section was not in relation to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank".

5. The intention of the provision may be derived more precisely from relevant Para 166 of the budget speech which stated that : "Co-operative banks, like any other bank, are lending institutions and should pay tax on their profits, Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a special footing and will continue to be exempt under section 80P of the Income Tax Act. However, I propose to exclude all other co-operative banks from the scope of that section". Accordingly, section 80P is to be amended to give effect to the above proposal. It is also 7 ITA No.1862/PN/2013 ITA No.1980/PN/2013

proposed to amend section 2(24) to provide that profits and gains of business of banking (Including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of 'income' (with effect from 1st April, 2007)".

6. Cooperative bank unlike other commercial banks are subjected to dual control from both RBI as well as from state cooperative department. The accounting treatment for a cooperative bank is therefore a result of guidelines from both the controlling authorities. Ordinarily a deduction is not available to an assessee unless specifically provided under the Act. This is irrespective of accounting treatment provided by the assessee in its books of accounts. But at the same time it was well settled that deduction expressly mentioned under the Act are not exhaustive and profit is to be derived according to ordinary commercial principles. As per the extant RBI guidelines dated 01- 07-2009 the investment portfolio of the banks is required to be classified under 3 categories viz., Held the maturity HTM), Held for Trading (HFT) and Available for Sale (AFS). The value of each kind of investment is to be done in the following manner:

Sr.No. Classification Valuation Norms of Investment.

1.....

2.....

3.....

7. In para (vii) of the CBDT Instruction No.17 of 2008 dated 26.11.2008, on 'Assessment of Bank -

check list for deduction, states as under:

"As per RBI guidelines....."

8. The ITAT, Mumbai Bench, in the case of ACIT vs. The Bank of Rajasthan Ltd. (2011) TIOL-35-ITAT- Mumbai, has held that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. Vs. ACIT that amortization on purchase of Government securities was made as per prudential norms of the RBI and same was allowable deduction.

In view of above, assessee was justified in contending for amortization of premium paid in excess of face value of securities held to maturity (HTM) category or period remaining till maturity was found reasonable by the CIT(A). Accordingly addition of Rs.17,91,659/- made by the Assessing Officer by disallowing amount towards amortization of Government Securities (HMT) was deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side. We uphold the same.

8 ITA No.1862/PN/2013 ITA No.1980/PN/2013 9. As a result, the appeal filed by the Revenue is dismissed".

10.1 Respectfully following the decision of the Coordinate Bench of the Tribunal and in absence of any contrary material brought to our notice against the above cited decision we find no infirmity in the order of the Ld.CIT(A) deleting the addition. Accordingly, the order of the Ld.CIT(A) is upheld and the grounds raised by the Revenue are dismissed."

2.2 Nothing contrary has been brought to our knowledge on behalf of the Revenue. Facts being similar, so following the same reasoning we hold that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. In view of above, the assessee is justified in contending that the amortization of premium in excess of face value securities as HTM, period remaining difference was found reasonable. Accordingly, the disallowance of Rs.2,20,68,302/- made by the Assessing Officer claimed as amortization of premium expenditure for HTM securities by payment of premium over and above the face value of such securities is directed to be allowed."

11. The Hon'ble Bombay High Court in CIT Vs. HDFC Bank (supra) held that the assessee therein was entitled to deduction with respect to the diminution in the value of investments and amortization of premium on investments Held To Maturity on the ground of mandate of the RBI guidelines. The issue raised in the present appeal is identical to the issue before the Pune Bench of the Tribunal in the assessee's own case for assessment year 2008- 09 and Hon'ble Bombay High Court in CIT Vs. HDFC Bank (supra). We hold that amortization of premium expenditure for securities Held To Maturity in view of RBI guidelines are allowable business expenditure in the case of assessee. The grounds of appeal No.1 and 2 raised by the assessee are thus, allowed."

13. We further find that the Hon'ble Bombay High Court in case of HDFC

Bank Ltd. (supra) in Income Tax Appeal No.330 of 2012 vide order dated

23.07.2014, on a similar issue on account of deduction with respect to

diminution in the value of investment and amortization of premium on

investment (Held To Maturity) after referring to the mandate of the RBI

Guidelines, and the decision of the Hon'ble Supreme Court in the case of

Southern Technologies vs. JCIT, (2010) 320 ITR 577 (SC) had dismissed the

appeal filed by the Revenue.

14. The issue arising in the present appeal is identical to the issue decided

by the Pune Bench of the Tribunal in the case of Pune District Central Co.

9 ITA No.1862/PN/2013 ITA No.1980/PN/2013 Operative Bank Ltd. (supra) and also the Hon'ble Bombay High Court in the

case of HDFC Bank Ltd. (supra), and following the same parity of reasoning,

we hold that the assessee is entitled to the deduction of Rs.11,38,000/- being

the premium on Amortization of Securities. Accordingly, we hereby affirm the

action of CIT(A) in deleting the disallowance of Rs.11,38,000/- representing

amortization of premium paid on Government Securities under the HTM

category. Thus on this aspect, Revenue fails.

15. In the result, the appeal of the Revenue is dismissed.

16. Resultantly, whereas the appeal of the assessee is allowed that of the

Revenue is dismissed.

Order pronounced on 20 th February, 2015.

Sd/- Sd/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 20 th February, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-IT/TP, Pune; 4) The CIT-IT/TP, Pune; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy//

Assistant Registrar I.T.A.T., Pune