Facts of the Case

The appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT), which had granted relief to the assessee, i.e., Punjab and Sind Bank.

The dispute primarily revolved around three key additions/disallowances made by the Assessing Officer (AO):

  1. Disallowance of depreciation on securities.
  2. Disallowance of contribution to the employee pension fund trust.
  3. Disallowance under Section 14A read with Rule 8D.

The ITAT and CIT(A) had deleted these additions, leading the Revenue to approach the High Court.

Issues Involved

  1. Whether depreciation on securities claimed by the bank was allowable when such securities were not shown as stock-in-trade.
  2. Whether contribution to the pension fund trust was allowable as deduction.
  3. Whether disallowance under Section 14A read with Rule 8D was justified in respect of investments made by the assessee.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that depreciation on securities was wrongly allowed since the investments were not reflected as stock-in-trade.
  • It argued that pension fund contributions were not allowable as they were neither initial nor regular contributions.
  • It further submitted that Section 14A was applicable as the assessee had made investments yielding exempt income.

Respondent’s Arguments (Assessee)

  • The assessee relied on RBI guidelines and judicial precedents to justify depreciation on securities.
  • It contended that pension contributions were legitimate business expenses.
  • Regarding Section 14A, it argued that securities held by banks are part of banking business (stock-in-trade), and hence disallowance provisions do not apply.

Court Findings / Order

The Court dismissed the Revenue’s appeal and held:

  • Questions A & B (Depreciation & Pension Contribution):
    Already covered by earlier decisions of the High Court in:
    • Principal Commissioner of Income Tax-07 vs Punjab & Sind Bank
  • Question C (Section 14A):
    Covered by:
    • Pr. Commissioner of Income Tax-7 vs M/s Punjab and Sind Bank
    • South Indian Bank vs Commissioner of Income Tax
  • The Court observed that securities held by banks are stock-in-trade, and therefore:
     Section 14A is not applicable
  • It concluded that:
     No substantial question of law arises
  • The appeal was accordingly dismissed.

Important Clarification

  • Banking companies treat securities as stock-in-trade, not investments.
  • Income from such securities is considered business income.
  • Therefore, Section 14A disallowance does not apply to banks in such cases.
  • The Court also relied on CBDT Circular No. 18/2015 and Supreme Court jurisprudence.

Sections Involved

  • Section 14A of the Income Tax Act, 1961
  • Rule 8D of the Income Tax Rules
  • Provisions relating to business income & deductions

Link to download the order -   https://delhihighcourt.nic.in/app/showFileJudgment/60821092023ITA5412023_142833.pdf

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