Yes Bank Ltd., Mumbai vs Department Of Income Tax

Date of Hearing : 20th November, 2014 Date of Pronouncement 21st January,2015 2 ITA No.5910&5833/12 & ITA No.2629/13

ORDER

PER R.C.SHARMA (A.M):

These are the appeals filed by the assessee and Revenue against

the order of CIT(A) for the Assessment Year 2006-07 & 2007-08, in the

matter of order passed u/s.143(3) of the I.T. Act.

2. The assessee in its appeal for the A.Y.2006-07 (i.e. ITA

No.5910/Mum/2012) has taken following grounds :-

"GROUND I: DISALLOWANCE OF LOSS AMOUNTING TO RS. 7,23,65,168/- ARISING ON THE YEAR-END REVALUATION OF SECURITIES:

1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in upholding the action of the Deputy Commissioner of Income-tax - 7(3), Mumbai ("the AO") of disallowing loss of Rs.7,23,65,168/ - arising on the year-end revaluation of securities on the alleged ground that the securities were held as investment and not held as available for sale / held for trading, and hence had to be valued at cost.

2. The Appellant, prays that the disallowance of loss of Rs. 7,23,65,168/ - be deleted.

3. Without Prejudice to above, if the revaluation loss is disallowed, profit on sale/redemption of these securities ought to be reduced by the amount of the disallowance, else it would lead to double disallowance of the same amount.

WITHOUT PREJUDICE TO GROUND I:

GROUND II:

1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in comparing the valuation of securities as on March 31, 2006 as per the NSDL statement with the valuation carried out by the Appellant as per the Master Circular on Valuation of Reserve Bank of India.

2. The Appellant prays that the valuation of securities as on March 31, 2006 as per the Master Circular of Reserve Bank of India be upheld.

WITHOUT PREJUDICE TO GROUND I:

GROUND III:

1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in disregarding the classification of securities into Available for Sale and Held for Trading carried out by the Appellant.

3 ITA No.5910&5833/12 & ITA No.2629/13

2. The Appellant prays that the classification of securities into Available for Sale and Held for Trading by the Appellant be upheld.

GROUND IV: DISALLOWANCE OF PROVISION FOR REVALUATION ON INVESTMENT OF RS. 3,85,140/-:

1. On the facts and circumstances of the case and in law, the Learned CIT (A) erred in upholding the action of the AO of disallowing provision for revaluation on investment amounting to Rs. 3, 85,140/ - on the alleged ground that the depreciation / devaluation on mere recategorisation i.e. transfer of securities from Held to Maturity category to Available for Sale category is not entitled for taxation purpose.

2. The Appellant prays that the disallowance of aforesaid provision of Rs. 3, 85,140/- be deleted.

3. Without prejudice to the above, if the provision for revaluation on investment is disallowed, profit on sale of these securities ought to be reduced by the amount of disallowance, else it would lead to double disallowance of the same amount.

GROUND V: DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE

8D OF THE INCOME-TAX RULES, 1962 ("the Rules"):

1. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the disallowance of Rs. 60,26,522/- under section 14A of the Act towards expenditure purportedly incurred for earning tax-free income by applying Rule 8D of the Rules.

2. The Appellant prays that the disallowance of Rs. 60, 26,522/ -

under section 14A of the Act read with Rule 8D of the Rules be deleted.

3. Without prejudice to 2 above, the Appellant prays that the disallowance under section 14A of the Act read with rule 8D of the Rules be restricted to Rs. 16,26,522/- as computed by the AO.

4. Without prejudice to 2 & 3 above, the Appellant prays that the disallowance under section 14A of the Act read with rule 8D of the Rules be restricted to Rs. 4,63,542/-."

The Revenue in its appeal i.e. ITA No.5833/Mum/2012, has taken

following grounds :-

"1. The ld. CIT(A) has erred in law and on facts in taking decision on the basis of enquiries conducted by him in deleting an amount of Rs.10,50,351/- without confronting the assessing officer with the results on such enquiries.

2. the Ld. CIT(A)‟s order is perverse in law and on facts and deserves to be set aside.

3. the appellant prays that the order of CIT(A) on the above grounds be set aside and that of the AO restored. The 4 ITA No.5910&5833/12 & ITA No.2629/13

appellant craves leave to amend or alter any ground or add a new ground that may be necessary."

The assessee in the appeal for A.Y.2007-08 (i.e. ITA

No.2629/Mum/2013) has taken following grounds :-

GROUNDS OF APPEAL

GROUND I: DISALLOWANCE OF LOSS AMOUNTING TO RS. 3,09,75,500/- ARISING ON THE YEAR-END REVALUATION OF SECURITIES:

1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in upholding the action of the Assistant Commissioner of Income-tax - 7(3), Mumbai („the AO") of disallowing loss of Rs.3,09,75,500/ - arising on the year-end revaluation of securities on the alleged ground that the securities were held as investment and hence had to be valued at cost.

2. He further erred in holding that since the Appellant is not engaged in the business of share trading, the securities held by the Appellant at the end of the year were not required to be valued at cost or market value whichever is lower.

3. The Appellant therefore prays that the disallowance of loss of Rs.

3,09,75,500/- be deleted.

4. Without Prejudice to above, if the revaluation loss is disallowed, profit on sale/ redemption of these securities ought to be reduced by the amount of the disallowance, else it would lead to double disallowance of the same amount.

GROUND II:

1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in dismissing the ground of interest charged u/ s 234B, 234C and 234D of the Act by holding that the same is consequential in nature.

2. The Appellant prays that interest charged be deleted or appropriately reduced.

GROUND III:

The Appellant craves leave to add, to alter, amend and / or delete all or any of the foregoing grounds of appeal."

5

ITA No.5910&5833/12 & ITA No.2629/13

3. Rival contentions have been heard and record perused. Facts in

brief are that assessee is engaged in banking business. During the

scrutiny assessment for the A.Y.2006-07, the AO made an addition on

account of provision of investment of Rs.7,34,15,519/-, profit of

revaluation of investment of Rs.3,85,140/-, loss on sale of assets

Rs.1,55,000/- and disallowance u/s.40(a)(i) Rs.16,27,522/-. During the

course of scrutiny assessment the AO observed that assessee bank had

in its possession of investments in securities. The method of valuation

followed by assessee bank was to value investments at cost or market

value in line with the RBI Guidelines on valuation of investments. The AO

observed that assessee has claimed depreciation of Rs.7,34,15,519/- with

regard to securities held as investment. A provision for transfer for

securities from available for sale category to held to maturity category of

Rs.3.85,140/-. The AO held that securities were held as investment and

consequently assessee is not entitled to value of such investment on the

basis of cost or market value whichever is lower. Accordingly, assesee's

claim of depreciation of Rs.7,34,15,519/- was declined along with the

provision for transfer of securities from available for sale category to hold

on maturity category of Rs.3,85,140/-.

4. By the impugned order, CIT(A) confirmed the action of the AO to

the extent of loss of Rs.7,23,65,168/- arising on year end revaluation of

securities. The CIT(A) also confirmed the addition of Rs.3,85,140/- and

disallowance made u/s.14A. However, the CIT(A) deleted the

disallowance of devaluation of Rs.10,50,351/- in respect of HDFC Bonds

and debentures held as HFT.

6

ITA No.5910&5833/12 & ITA No.2629/13

5. Against this order of CIT(A), the assessee and Revenue are in

appeals before us.

6. We have considered rival contentions and found that first grievance

of the assessee relates to disallowance of loss of Rs.7,23,65,168/- arose

on account of revaluation of securities. From the record we found that the

entire investment portfolio of the banks (including SLR securities and non-

SLR securities) are required to be classified under three categories viz.

'Held to Maturity', 'Available for Sale' and 'Held for Trading'. However, in

the balance sheet, the investments will continue to be disclosed as per

the existing six classifications viz. a) Government securities, b) Other

approved securities, c) Shares, d) Debentures & Bonds, e) Subsidiaries/

joint ventures and f) Others (CP, Mutual Fund Units, etc.). As per RBI

guidelines, Banks have to decide the category of the investment at the

time of acquisition and the decision should be recorded on the investment

proposals. The securities acquired by the banks with the intention to hold

them up to maturity will be classified under Held to Maturity. The

securities acquired by the banks with the intention to trade by taking

advantage of the short-term price/ interest rate movements will be

classified under Held for Trading. Profit or loss on sale of investments in

both the categories will be taken to the Profit & Loss Account.

7. However, Banks may shift investments to/from Held to Maturity

category with the approval of the Board of Directors once a year. Such

shifting will normally be allowed at the beginning of the accounting year.

No further shifting to/from this category will be allowed during the

remaining part of that accounting year. Transfer of scrips from one 7 ITA No.5910&5833/12 & ITA No.2629/13

category to another, under all circumstances, should be done at the

acquisition cost/ book value/ market value on the date of transfer,

whichever is the least, and the depreciation, if any, on such transfer

should be fully provided for. Investments classified under Held to Maturity

category need not be marked to market and will be carried at acquisition

cost unless it is more than the face value, in which case the premium

should be amortised over the period remaining to maturity.

8. In respect of securities available for sale, the individual scrips in the

Available for Sale category will be marked to market at quarterly or at

more frequent intervals. Securities under this category shall be valued

scrip-wise and depreciation/ appreciation shall be aggregated for each

classification referred above. Net depreciation, if any, shall be provided

for. Net appreciation, if any, should be ignored. Net depreciation required

to be provided for in anyone classification should not be reduced on

account of net appreciation in any other classification. The book value of

the individual securities would not undergo any change after the marking

of market. In respect of securities held for trading the individual scrips in

the Held for Trading category will be marked to market at monthly or at

more frequent intervals and provided for as in the case of those in the

Available for Sale category. Consequently, the book value of the

individual securities in this category would also not undergo any change

after marking to market.

9. In the instant case, before us, the issues relates to disallowance of

loss on account of re-valuation of Securities on the balance Sheet date

aggregating to Rs.7.33 crores out of which relief has been granted by the 8 ITA No.5910&5833/12 & ITA No.2629/13

CIT(A) to the extent ofRs.0.10 crores and the disallowance of Rs.7.23

crores is upheld. The disallowance has been made by the AO on the

ground that the concerned securities are held as investments and not as

stock-in-trade. The contention of assessee is that the investments are

held as stock-in-trade and not as capital asset. The Balance Sheet format,

as required under the Banking Regulations Act, does not envisage any

heading as "stock-in-trade". Therefore, all investments are to be disclosed

under the head "investments" on the asset side irrespective whether they

are held as "stock-in-trade" or as "capital assets". We found that the

significant accounting policy stated in the audited accounts state that the

investments are valued in accordance with the RBI guidelines and that

Securities held under "Available for Sale" (AFS) and "Held for Trading"

(HFT) are valued script wise and depreciation and appreciation is

aggregated for each category and that net depreciation, if any, is ignored.

On the other hand securities that are classified and held under the

category "Held to Maturity" ("HTM") are not allowed to be depreciated.

The profits and loss on sale of securities have always been treated as

"business income" and never as "capital gains" in the assessee's

assessments. This is evident from the computation of income wherein the

entire profits as per the profit and loss account are reflected under the

head "Business" and that the gross total income does not include any

capital gains whatsoever. As per Schedule 13 to Profit and Loss Account

the entire income on investments is also treated as 'business income' and

not as "income from other sources. This entire amount is included in the

profits of the business in the computation of the total income which is 9 ITA No.5910&5833/12 & ITA No.2629/13

accepted by the AO. This position also remains the same for all the past

years and future years. Since the profits on sale of investments and

income from investments are always treated as 'business income', it is

implied that the investments are treated as "stock-in-trade" and not as a

"capital asset". The method of valuation of investments in accordance with

RBI guidelines is indicated in the Tax Audit Report at Annexure-I.

10. On page 13 of the CIT(A)'s order regarding 9.39% GSEC 02-07-11,

it is incorrect statement of the CIT(A) in column 11 that the assessee had

only one purchase transaction and one sale transaction. As per pages

207 to 227 of the PB, the profits or loss of GSEC held under the category

"held for trading" as also "available for sale" have been unlisted. The

transaction runs into several pages which shows that the assumption of

CIT(A) that the assessee had only one transaction is incorrect.

11. As regards the next item NABARD 5.7% on page 14 of the CIT(A)

Order, deal-slip prepared at the time of purchase of the Securities clearly

shows against the caption "Acc. Section." that the investment is made in

the category of "AFS". This means that at the time of purchase, when the

deal-slip was made the intention of the assessee is very clear, namely,

that the securities purchased shall be held as "available for sale.

12. It is pertinent to mention that a single largest test to decide whether

the security is held as capital asset or in stock-in-trade is the intention of

the assessee at the time of purchase. Merely because some items so

purchased happen to be held till maturity cannot convert what is acquired

as stock-in-trade into a capital asset at a later point of time. Intention at

the time of purchase is relevant and not a subsequent event of holding the 10 ITA No.5910&5833/12 & ITA No.2629/13

security for a longer period. Instruction No.17/2008 dated 26.11.2008

issued by the CBDT wherein, at para vi, it has been clearly stated that in

the case of HFT and AFS Securities of the Bank, the depreciation and

appreciation to be aggregated script wise and only depreciation, if any, is

required to be provided in the accounts.

13. In view of the above, we do not find any merit in the action of lower

authorities for disallowing loss arose on the year end revaluation of

securities. Our view is supported by decision of Hon'ble Bombay High

Court in the case of CIT Vs. HDFC Bank Ltd., passed in ITA No.330 of

2012; United Commercial Bank Vs. CIT, 240 ITR 355(SC); Investment

Ltd. Vs. CIT, 77 ITR 533 (SC); and CIT Vs. Bank of Baroda, 262 ITR

334 (Bom). Respectfully following the decision of Hon'ble Supreme Court

and Hon'ble Bombay High Court and considering the classification of

security so made and the loss arose on account of revaluation of

securities are required to be allowed. Accordingly, we set aside the order

of both the lower authorities and matter is restored back to the file of AO

for deciding afresh in the light of our above observation. We direct

accordingly.

14. The assessee is also aggrieved for disallowance u/s.14A r.w.Rule

8D. During the course of scrutiny assessment the AO found that the

assessee-bank has declared dividend income of Rs.17,86,785/- and

claimed it as exempt u/s10(35). In view of the claim of the exempt income

a query was raised regarding disallowance u/s 14A of the Act. It wa

submitted by the assessee that it had raised capital funds with an Initial

Public Offering (IPO) in the financial year 2005-06. The investment in 11 ITA No.5910&5833/12 & ITA No.2629/13

mutual fund was made from the money collected in the IPO. The mutual

funds under which investments were made were notified under See

10(23D) of the Income Tax Act 1961 and are exempt under Sec 10(35) of

the Income Tax Act. The IPO closed on June 21, 2005 and shares were

allotted on July 5, 2005. A part of the capital funds raised from the IPO

were invested in mutual funds till allotment of shares. Thus, we found that

its investments were from interest-free funds and accordingly, no interest

expenditure can be said to have been incurred in relation to earning the

tax-free dividend income and accordingly, no disallowance of interest can

be made in this regard under section 14A of the Act. The AO is directed to

delete the same.

15. With regard to disallowance of expenses other than interest, we

direct the AO to uphold the disallowance at 5% of exempt income.

16. With regard to disallowance of provision of re-valuation of

investments transferred from HTM to AFS category. Rs.3,85,140/-, we

found that the decision of the Hon'ble Bombay High Court in the case of

CIT v. HDFC Bank (ITA 250 of 2012 (Bom.)(HC) and that of the

Bangalore bench of the Tribunal in the case of State Bank of Mysore (33

SOT 7) (Bang), are in support of assessee's claim of provision for re-

valuation in respect of securities transferred from HTM to AFS category

should be allowed as a deduction. Accordingly, we direct the AO to delete

the addition of Rs.3,85,140/-.

17. In view of our discussion at para 6 to 13 hereinabove, we do not

find any infirmity in the order of CIT(A) for allowing the claim of

depreciation/devaluation of Rs.10,50,351/- in respect of HDFC bonds and 12 ITA No.5910&5833/12 & ITA No.2629/13

debentures which were held to be HFT. In view of discussion in para 6 to

13 assessee's claim of loss Rs.3,07,75,500/- for the A.Y.2007-08 are

restored back to the file of AO for deciding afresh, in terms of directions

given in para 13.

18. In the result, appeals of the assessee for both the assessment years(i.e. ITA Nos.5910/Mum/12&2629/Mum/13) are allowed in part, whereas appeal of revenue (ie. ITA No.5833/Mum/12) is dismissed.

Order pronounced in the open court on this 21/01/2015.

21/01/2015

Sd/- Sd/- ( ) ( ) (VIVEK VARMA) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 21/01/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai / BY ORDER, 6. Guard file. //True Copy// (Asstt. Registrar) / ITAT, Mumbai