2013-VIL-993-ITAT-PNE
Income Tax Appellate Tribunal PUNE
ITA No. 610/PN/2011
Date: 31.07.2013
BHAVANI URBAN CO-OP. BANK LD.
Vs
ACIT, CIRCLE-2, AURANGABAD
Appellant by : Shri S.N. Puranik
Respondent by : Shri Rajesh Kumar
BENCH
Shri Shailendra Kumar Yadav, Judicial Member and Shri R.K. Panda, Accountant Member
JUDGMENT
PER R.K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 25- 03-2011 of the CIT(A), Aurangabad relating to assessment year 2007-08.
2. The assessee has taken total 8 grounds in the grounds of appeal. However, at the time of hearing, the Ld. Counsel for the assessee did not press grounds of appeal No.3,5,6 and 7 for which the Ld. Departmental Representative has no objection. Accordingly, the above grounds are dismissed as “not pressed”. Ground of appeal No. 8 being general in nature is dismissed.
3. Grounds of appeal No. 1 by the assessee reads as under :
“1. On the facts & circumstances of the case & and in law, the Ld. CIT(A) erred in confirming addition of Rs. 5,73,100/- on account of forfeited shares money. The addition of Rs. 5,73,100/- may please be deleted as it is not taxable at all under Income Tax Act.”
3.1 Facts of the case in brief are that the assessee is a Co-operative Bank registered u/s.9(1) of Maharastra Cooperative Societies Act, 1960. During the course of assessment proceedings the Assessing Officer noted that the bank was established in 1995 and face value of each share was Rs. 25/- only. In 2003, the bank increased the f ace value of each share to Rs. 100/- and members were asked to posses minimum 10 shares instead of single share of Rs. 25/-. Some of the shareholders did not deposit the balance amount to complete the minimum shareholding. The incomplete share balance as on 31/03/2007 has been transferred to Reserve Fund. Relying on various decisions, the AO added the forfeited incomplete share money amounting to Rs. 5,70,700/-u/s. 41(1) of the Income Tax Act, 1961.
3.2 Before the CIT(A) the assessee submitted that the forfeiture of share capital is not a revenue receipt and the cases relied on by the AO are not applicable. The assessee relied on following decisions :
(i) Mahindra & Mahindra Ltd. 261 ITR 501 (Bom.)
(ii) Prism Cement Ltd. Vs. JCIT (2006) 101 ITD 103 ( Bom.)
(iii) DCIT Vs. Brijlaxmi Leasing & Finance Ltd. 118 ITD 546 (Ahmedabad)
3.3 However, the Ld. CIT(A) was also not convinced with the explanation given by the assessee and upheld the addition made by the Assessing Officer by holding as under :
“6.3 I have considered the facts of the case, assessment order of the A.O. and submission of the AR of the appellant. As discussed in the assessment order and decisions of the Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. T.V. Sundaram Ayengar 222 ITR 344 (SC), Hon'ble High Court in the case of Atlas Cycle Industries Vs. Commissioner of Income Tax, 133 ITR 231 P&H (HC), Solid Containers Limited vs. CIT, 308 ITR 417 (Bombay), Rajasthan Golden Transport Co. Ltd., 249 ITR 723 Rajasthan and CIT Vs. Aries Advertising Pvt. Ltd., 255 ITR 510 (Madras) show that the forfeiture of share capital is nothing but income of the assessee. The facts and circumstances of the cases cit id by the appellant are distinguishable from the facts of this case. For the reasons given above and relying on these decisions, the addition made by the A.O. is confirmed and ground No.3 is rejected.”
3.4 Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
3.5 The Ld. Counsel for the assessee strongly challenged the order of the CIT(A). He submitted that the decision of the Hon’ble Bombay High Court in the case of Solid Containers Ltd. (Supra) relied on by the Ld. CIT(A) is not applicable to the facts of the present case. He submitted that in that case it was held that waiver of loan taken for trading activity, cash credit facility would be assessee’s income subject to tax. He submitted that the Hon’ble Bombay High court in the case of CIT Vs. Xylon Holding Pvt. Ltd vide Tax Appeal No.3704/2010 order dated 13-09-2012 following the decision in the case of Mahindra and Mahindra reported in 261 ITR 501 (Bom.) has held that the benefit of cessation of liability to repay a loan liability is not taxable either u/s.41(1) or 28(4) of the Income Tax Act.
3.6 So far as the decision of Hon’ble Supreme Court in the case of CIT Vs. T.V.Sundaram Iyenger (Supra) is concerned he submitted that the said decision is also distinguishable as in that case the advances were received during the course of carrying on business. Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of Brijlaxmi Finance Ltd. reported in 118 ITD 546 and the Mumbai Bench of the Tribunal in the case of Prism Cement Ltd. reported in 101 ITD 103 he submitted that forfeiture of share money is a capital receipt and not a revenue income. He accordingly submitted that the order of the Ld.CIT(A) be set-aside and the ground raised by the assessee be allowed.
3.7 The Ld. Departmental Representative on the other hand heavily relied on the order of the Ld.CIT(A).
4. 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 by both the sides. The only issue to be decided in the impugned ground is regarding the taxability of the forfeiture of share application money. From the details furnished by the assessee, we find the bye-laws of the bank were amended in 2003 and face value of share was increased to Rs. 100/- per share from Rs. 10/- and minimum holding was to be 10 shares. For that payment was required to be made by the shareholders. In the AGM held on 13-08-2006, a resolution was passed according to which those shareholders who do not comply the condition by 31-03-2007, the unpaid/partly paid shares etc. will be forfeited and transferred to Reserve Account. Accordingly, the shares worth Rs. 5,73,000/- were forfeited and credited to reserve being capital receipt. Under these circumstances, the issue to be decided is as to whether such forfeiture is a capital receipt or a revenue income.
4.1 We find the Ld. CIT(A) following various decisions as per Para 6.3 of his order held that the forfeiture of share capital is nothing but income of the assessee. It is the case of the Ld. Counsel for the assessee that the decisions relied on by the Ld.CIT(A) are distinguishable and not applicable to the facts of the present case since in all those cases the advances received were during the course of business whereas in the instant case it is a capital receipt. We find various Benches of the Tribunal, after considering the decision of Hon’ble Supreme Court in the case of T.V. Sundaram Iyenger (Supra) have held that such receipt on account of forfeiture of share money is a capital receipt.
4.2 We find the Hon’ble Supreme Court in the case of Travancore Rubber and Tea Company Ltd. Vs. CIT reported in 243 ITR158 has held that forfeiture of earnest money and advance by vendor is a capital receipt. The Hon’ble Bombay High Court in the case of Xylon Holding Pvt. Ltd. (Supra) after considering the decision of Mahindra & Mahindra Ltd. (Supra) has held that the benefit of cessation of liability to repay a loan liability is not taxable either u/s.28(iv) or u/s.41(1) of the Income Tax Act.
4.3 We find Ahmedabad Bench of the Tribunal in the case of Brijlaxmi Leasing and Finance Ltd. (Supra) after considering the decision of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyenger (Supra) has held as under :
“We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case the assessee was to receive call money in respect of share as per the terms of prospectus and the allotment letters, but the same were not received from some of the shareholders. In this case, the share application money was forfeited as per the terms of the prospectus. The above facts are not in dispute. The short question which falls for our consideration is whether the above forfeiture amount is taxable under provisions of the Income-tax Act, 1961, or not. The learned Departmental representative vehemently placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs. T.V. Sundaram Iyenger and Sons Ltd. (1996) 222 ITR 344 for his contention that forfeited amount is taxable as revenue receipt. However, we find that the facts of the case that were before the Hon’ble Supreme Court are distinguishable from the facts before us. In the instant case no security deposit or advance received for performance of the contract was forfeited. In fact, the amount received was against issue of shares and issue of shares is not the business of the assessee. The same cannot be treated as a receipt in the normal course of the business of the assessee which is engaged in financing and leasing business. Further, the assessee has also not credited the forfeited amount in its profit and loss account but in contradistinction to that it has credited the same in capital reserve account. In the above facts, in our considered opinion of the Tribunal in the case of Prism Cement Ltd. V. Joint CIT[2006] 285 ITR (AT) 43 [2006] 103 TTJ (Mum) 63 is more applicable which was rendered by the Tribunal after duly considering the aforesaid decision of the Hon’ble Supreme Court in the case of CIT V. T.V. Sundaram Iyenger and Sons Ltd. [1996] 222 ITR 344. The Tribunal in the said case has held as under ( page 54 of 285 ITR (AT)) :
“15. Thus, the earnest money or an advance amount received on account of issuance of NCDs, if forfeited on account of nonpayment of call money, the loan liability would only convert into a capital receipt. It would not assume the character of revenue receipt or business of the assessee as evident from the facts of the case. The assessee’s main business is of cement and it was in the process of set of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which was forfeited later on account of non-payment of call money assumes the character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If we consider this receipt to be business receipt even then it would not be taxable to tax under the provisions of section 41(1) of the Act, in as much as there was no allowance or deduction of this liability in the earlier years”.
In view of the above, respectfully following the aforesaid decision of the Mumbai Bench of the Tribunal we find no reason to interfere with the order of the learned Commissioner of Income-tax (Appeals). It is confirmed and the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed”.
4.4 Respectfully following the above decisions we hold that the Ld.CIT(A) was not justified in confirming the addition of Rs. 5,73,100/- on account of forfeited share money as taxable. The various decisions relied on by Ld.CIT(A) are distinguishable and not applicable to the facts of the present case. We, therefore, set aside the order of the Ld.CIT(A) and direct the Assessing Officer to delete the addition. The first ground by the assessee is accordingly allowed.
5. Grounds of appeal No.2 by the assessee reads as under ;
“2. The Ld.CIT(A) erred in confirming addition of Rs. 15,80,000/- on account of depreciation on Government Securities held for trading (valued at lower of cost or net realizable value as at year end date as per Accounting Standards & RBI Directives) hence the same addition may please be deleted.”
5.1 Facts of the case in brief, are that the Assessing Officer during the course of assessment proceedings observed that the assessee has passed resolution on 30/01/2006 for classification of securities according to which the bank may shift investment to/from Held to Maturity Category with the approval of the Board of Directors once in a year normally at the beginning of the accounting year and no further shifting to/from this category/ is allowed during the remaining part of the accounting year. The AO observed that the assessee has shifted the category of investment from 'Held to Maturity' to Available for Sale category which is not allowable as per the RBI guidelines. The assessee has not re-categorized or shifted category of investments at the beginning of accounting year. He observed that the same has been done through General Body Meeting held on 02-09-2006 which is not allowable as per the RBI guidelines. In view of this, the A.O held that loss incurred due to dispute of the investment is not an allowable expenditure. The AO therefore, disallowed Rs. 15,80,000/-.
5.2 Before the CIT(A) it was submitted that according to RBI guidelines shifting of category may be done 'normally' at the beginning of the accounting year. It was submitted that the word used 'normally' shows that it is not mandatory. Further, the delay in shifting is due to election process of Boards of Directors and after elections first meeting of Board of Directors was held on 29-06-2006. Without prejudice it was submitted that no such condition is prescribed under the I.T. Act.
5.3 However, the Ld.CIT(A) was also not satisfied with the explanation given by the assessee and upheld the addition made by the AO by holding as under:
“11.3 I have considered assessment order and submission of the appellant. There is delay of about 5 months in shifting the category of investment. As observed by the A.O., such shifting should be normally done at the beginning of the year. The use of word 'normally' indicates that it is not mandatory but delay of 5 months may not be considered as normal delay. It has been submitted by the appellant that there is no such provision in the Income Tax Act to disallow the depreciation. The submission of the appellant is not acceptable. The securities under the category “Held to maturity” are in the nature of capital asset, which has to be valued at cost only, and no part thereof can be claimed as revenue expenditure. In view of these facts, the addition made by the AO is confirmed”.
5.4 Aggrieved with such order of CIT(A) the assessee is in appeal before us.
6. After hearing both the sides we find the above issue stands decided in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of Latur Urban Cooperative Bank Ltd. vide ITA No.778/PN/2011 and ITA No.792/PN/2011 for A.Y. 2007-08 order dated 31-08-2012. We find the Tribunal at Para Nos. 13 to 15 has held as under :
“13. So far as Ground No. 2 is concerned, it is in respect of the disallowances on the loss on sale of surplus of Rs. 14,70,000/-. The A.O has observed that an amount of Rs. 14,70,000/- is debited to the Profit & Loss A/c on account of loss on sale of securities. The A.O has further observed that the assessee in its submission has stated that securities of the Bank are held under the head “to maturity category” and, therefore, loss arising on the sale of investment is in the nature of capital loss and therefore, the same is not allowable expenditure. The A.O made the addition to the extent of Rs. 14,70,000/-. The Ld CIT(A) confirmed the addition.
14. We have heard the parties. The Ld Counsel placed his heavy reliance on the decision of the Hon’ble High Court of Bombay in the case of CIT Vs. Bank of Baroda and in the case of UCO Bank Vs. CIT, 240 ITR 355 (SC). In the case of Bank of Baroda (Supra), the issue before their Lordship was whether the assessee was entitled for deduction on account of depreciation in the value of investments. The method of valuation followed by the assessee Bank was to value investments at cost or market value whichever was lower. The assessee had claimed the depreciation to the tune of Rs. 11,82,35,007/- and the said depreciation was claimed as a deduction which was disallowed by the A.O, but the assessee Bank succeeded before the CIT(A). The Tribunal confirmed the order of the CIT(A). The Revenue carried the issue before the Hon’ble High Court. The core issue was the method of valuation adopted by the assessee Bank for valuing the stock of the Securities. The Hon’ble High Court followed the decision of Hon’ble Supreme Court in the case of United Commercial Bank (Supra).
15. In the case of United Commercial Bank (Supra), even the issue of valuation of the stock in trade of the investment was before the Hon’ble Supreme Court. In the case of the assessee, the issue is regarding allowability of the loss on the sale of the Securities. Merely because the Securities are kept under the head till the maturity, the said Security cannot be treated as a purely investment. Law is well settled that the Securities held by the Bank are in the nature of Stockin- Trade. We may like to quote here the decision of the Hon’ble High Court of Kerala in the case of CIT Vs. Nedungadi Bank Ltd., 264 ITR 545. In the said case, the Hon’ble High Court has held that the securities held by the Bank are in the nature of stock-in-trade. Both the authorities below has merely gone on the nomenclature of the head under which the Securities are held. In our considered view, nomenclature cannot be decisive for the assessee Bank. We, therefore, hold that the loss on the sale of the Securities is revenue in nature and same is allowable. Accordingly, Ground No. 2 is allowed.”
6.1 Respectfully following the decision of the Co-ordinate Bench of the Tribunal we set aside the order of the CIT(A) and direct the AO to delete the addition. Ground of appeal No.2 by the assessee is accordingly allowed.
7. Grounds of appeal No.4 by the assessee reads as under ;
“4. The Ld.CIT(A) erred in confirming addition of Rs. 1,08,000/- on account of amortization of premium on Government Securities and the same addition may please be deleted”.
7.1 Facts of the case, in brief, are that the AO made an addition of Rs. 1,08,000/- on account of amortization of premium on Government Securities in the category of investment Held to Maturity (HTM). This premium represents the excess of acquisition cost over the face value of HTM securities, which is amortized by the bank over the remaining period of maturity or some other basis. The AO observed that deduction under the head amortization of period is not allowable according to provisions of I.T. Act. He observed that the Reserve Bank of India has issued Master Circular dated 12-07-2006 according to which investments have to be categorised into three categories (i) Held to maturity (HTM), (ii) Available to Sale (AFS), (iii) Held for Trading (HFT). According to the Circular, AFS and HFT securities are in the nature of stock in trade and HTM securities are in the nature of capital assets. All the capital assets are to be valued at cost only and no part thereof can be claimed as revenue expenditure while computing total income. The Assessing Officer accordingly disallowed Rs. 1,08,000/-.
7.2 Before the CIT(A) it was submitted that the bank has strictly followed the method laid down by the RBI and amortized premium paid on investments acquired over the remaining period upto maturity on yearly basis and hence the expenditure is part of banking business expenditure.
7.3 However, the Ld. CIT(A) was also not satisfied with the explanation given by the assessee and upheld the addition made by the AO holding that this amount is capital in nature and the same is not allowable under sub section (1) of section 37.
7.4 Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
7.5 The Ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee in view of CBDT Instruction No.17/2008 dated 26-11- 2008. Further, the Mumbai Bench of the Tribunal in the case of Bank of Rajasthan Ltd. vide ITA No.3228/Mum/2010 order dated 09-09-2011 and the Bangalore Bench of the Tribunal in the case of Sri Subramanyeswara Cooperative Bank Ltd. Vs. ACIT vide ITA No.488/Bang/2011 order dated 06-06-2012 for the A.Y. 2008-09 has decided identical issue in favour of the assessee. He accordingly submitted that the addition should be deleted.
7.6 The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A).
8. After hearing both the sides we find the Mumbai Bench of the Tribunal in the case of Bank of Rajasthan Ltd. (Supra) had an occasion to decide such an issue in favour of the assessee. The relevant observation of the Tribunal at Para 9 and 10 of the order read as under :
“9. The amortized amount of premium paid for securities held under HTM category amounting to Rs. 11.77 crores was claimed by the assessee as deduction in its computation of total income. The same, however, was disallowed by the AO holding that the expenditure incurred on premium paid for securities held under HTM category was a capital expenditure not allowable as deduction. He held that the said securities were in the nature of investment and not stock in trade. On appeal, the learned CIT(Appeals) deleted the disallowance made by the AO on this issue. Besides relying on his own order in assessee’s own case on a similar issue for the earlier year, the learned CIT(Appeals) also relied on CBDT Instruction No.17/2008 dated 26- 11-2008 published in 220 CTR (Statute) page 41. He held that the assessee company was bound to classify its investment as per RBI guidelines dated 16-10-2010 and as per the said guidelines, investment classified under HTM category was required to be carried at acquisition cost unless it was more than the face value. He held that the premium on such investments was also required to be amortized over the period remaining to maturity. He held that the claim of the assessee thus was as per RBI guidelines and CBDT Instruction which clarified that premium amortized over the period remaining to maturity was liable to be allowed as deduction.
10. At the time of hearing before us, the learned representatives of both the sides have agreed that this issue is also squarely covered in favour of the assessee by the various orders of the Tribunal passed in assessee’s own case for earlier years. Copies of the said orders are placed on record before us and a perusal of the same shows that in one of such orders dated 22nd Dec.,2010 passed in assessee’s own case for assessment years 2002-03 to 2006-07, the coordinate bench of this Tribunal has directed the AO to allow the premium amortized by the assessee over the period remaining to maturity holding that the same was claimed as per the relevant RBI guidelines and even the CBDT has issued instructions to allow the same. Respectfully following the said order of the Tribunal in assessee’s own case for earlier years, we uphold the impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue and dismiss ground No.3 of the Revenue’s appeal.”
8.1 Similar view has been taken by the Bangalore Bench of the Tribunal in the case of Subramanyeswara Cooperative Bank Ltd. (Supra). Respectfully following the decisions cited above the ground raised by the assessee is allowed.
9. In the result, the appeal filed by the assessee is partly allowed.
Pronounced in the Open court on this the 31st day of July 2013.
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