Contai Cooperative Bank Ltd. vs Assistant C.I.T.

The appeal is directed against a judgment and order dated 28th January, 2010 passed by the learned Income Tax Appellate Tribunal "A" Bench, Kolkata in ITA No.1432(Kol) of 2008 pertaining to the assessment year 2005-06 by which an appeal preferred by the assessee was dismissed. Being aggrieved, the assessee has once again come up in appeal.

The assessee is a co-operative bank. The assessee is required to invest its moneys in various securities. The securities are purchased by the assessee at the market value. There are instances when the market value of a security is more than the face value. In such a case, the Reserve Bank of India, by its circular dated 28th March, 2005, a copy whereof is at page-28 of the Paper Book, has issued the following guidelines :

"Scheduled UCBs may crystalize the provisions requirement arising on account of shifting of securities from HFT/AFS categories to the HTM category consequent to the issue of our guidelines dated 02.09.2004 and amortize the same over a maximum period of five years commencing from the current accounting year ending 31.03.2005, with a minimum of 20% of such amount, each year."

Based on the aforesaid circular, the assessee has been amortizing the differential amount between facevalue and market value of such security. The learned CIT(Appeals) and the learned Tribunal were of the opinion that such amortization was not permissible. The reasons advanced by the learned Tribunal are as follows :

"We have carefully considered the arguments of both the sides and perused the material placed before us. The assessee has claimed the deduction for the amortization of the investment under section 80P(2)(a)(i). Section 80P(2)(a)(i) reads as under :-

"(2) The sums referred to in sub-section (1) shall be the following, namely :-

(a) in the case of a co-operative society engaged in �

(i) carrying on the business of banking or providing credit facilities to its members,"

From the above it is evident that under section 80P(2)(a)(i), deduction is allowable in respect of the income of a co-operative society from the business of banking or providing credit facilities to its members. We find that the deduction under section 80P is already allowed by the A.O. The question before us is with regard to deduction on the write off of an investment. The C.I.T.(A) has held that the deduction for write off of a capital asset is not admissible under the provisions of the I.T. Act. The learned counsel for the assessee has also not been able to point out under which provision of the Act the deduction for the write off of the investment is permissible. Moreover, the Ld. Department Representative has pointed out that even the circular of the R.B.I., on which reliance is placed by the assessee for the write off, is not applicable, which has also not been controverted by the learned counsel. Considering the totality of the above factual as well as legal position, we find no justification to interfere with the order of the C.I.T.(A). The same is sustained.

In the result, the assessee�s appeal is dismissed."

It would appear that the view taken by the learned Tribunal strictly speaking is not wrong. By amortizing the differential amount of the security, the assessee is really incurring an expenditure of a capital nature which could not have been debited to the Profit and Loss Account. Strictly speaking, the view taken by both by the CIT (A) and the learned Tribunal is correct in law. But the learned Tribunal erred in not taking into account that by resorting to amortization the highest that could be said to have been done was that by this process the assessee was engaged in reducing its net profit. This criticism would be of no effect, considering that the Tribunal itself has opined as follows :

"From the above it is evident that under section 80P(2)(a)(i), deduction is allowable in respect of the income of a co-operative society from the business of banking or providing credit facilities to its members."

If the income of the assessee is deductible under section 80P, then whether the income has been reduced by the amortization or not becomes only a question of academic interest which does not involve any effect on the Revenue. There has been no loss of revenue. In such a case, insisting upon refusing to allow the amortization would result in insisting upon following a practise, contrary to the circular issued by the Reserve Bank of India which is not desirable.

For the aforesaid reasons, we are of the opinion that the amortization may be permitted so long as the deduction is available to the assessee under section 80P.

The question formulated at the time of admission of the appeal, is as follows :

"Whether the Income-tax Appellate Tribunal has substantially erred in law in holding that the amortization of premium on investment of Rs. 5,60,614/- is capital expenditure ?

The question is already answered by our discussion made above in favour of the assessee.

The appeal is disposed of.