Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 09.01.2019 passed by the Income Tax Appellate Tribunal for Assessment Year 2009–10. The respondent, Punjab National Bank, had filed its return declaring income of ₹47,05,64,49,815/-, which was assessed under Section 143(3) at ₹49,51,49,52,704/-.

The Assessing Officer made several additions including disallowance under Section 14A read with Rule 8D amounting to ₹133.16 crore, disallowance of loss on revaluation and shifting of securities, disallowance of pension fund contribution, denial of amortisation of premium on HTM securities, and disallowance of depreciation on goodwill. The CIT(A) granted relief on all issues except minor disallowance of penal expenses. The ITAT dismissed the Revenue’s appeal.

Issues Involved

Whether disallowance under Section 14A was sustainable where shares were held as stock-in-trade, whether amortisation of premium on HTM securities and loss on shifting of securities was allowable, whether contribution to Employees’ Pension Fund was deductible, and whether depreciation on goodwill arising from amalgamation was permissible.

Petitioner’s Arguments (Revenue)

The Revenue contended that Section 14A disallowance was mandatory since exempt dividend income had been earned, that losses on revaluation and shifting of securities were notional, that pension fund contributions exceeded permissible limits, and that depreciation on goodwill was not allowable.

Respondent’s Arguments (Assessee)

The assessee argued that shares were held as stock-in-trade and dividend income was incidental, rendering Section 14A inapplicable. It was submitted that amortisation of premium on HTM securities and loss on shifting of securities was consistently allowed in earlier years, pension fund contributions were statutory and business-related, and depreciation on goodwill was covered by settled law.

Court Order / Findings

The Delhi High Court held that the issue of Section 14A stood conclusively settled by the Supreme Court in Maxopp Investment Ltd. and South Indian Bank Ltd., holding that no disallowance is warranted where shares are held as stock-in-trade and dividend income is incidental.

The Court upheld amortisation of premium on HTM securities, holding that premium paid over face value must be spread over the holding period. The Court also upheld allowance of loss on shifting of securities between AFS/HFT and HTM categories, relying on earlier binding precedents.

On pension fund contributions, the Court held that the amounts were actually paid, wholly related to business, and allowable under the Act. The claim of depreciation on goodwill arising from amalgamation was also upheld, being a recurring issue settled in favour of the assessee by earlier decisions including Smifs Securities Ltd.

Important Clarification

The Court clarified that banking companies holding securities as stock-in-trade stand on a distinct footing for Section 14A, and accounting treatment mandated by RBI guidelines for HTM securities and pension obligations cannot be disregarded for tax purposes where consistent and lawful.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court held that no substantial question of law arose from the ITAT’s order and upheld all reliefs granted in favour of Punjab National Bank for Assessment Year 2009–10.

 

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769841166_PR.COMMISSIONEROFINCOMETAX7DELHIVsPUNJABNATIONALBANK.pdf

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