1. Introduction

The case of Assistant Commissioner Of Income Tax Circle - 20(1) New Delhi v. Punjab & Sind Bank HO-Accounts & Audit Department adjudicated by the Income Tax Appellate Tribunal (ITAT) Delhi in January 2022 marks a significant development in the interpretation of depreciation on securities and pension fund contributions under the Income Tax Act, 1961. The appellant, the Revenue, challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] which had dismissed the additions made by the Assessing Officer (AO). The core issues revolved around the allowability of depreciation on securities classified as 'Stock-in-Trade' and contributions to the Punjab & Sind Bank Employees Pension Fund Trust.

2. Summary of the Judgment

The ITAT, upon reviewing the appeals raised by the Revenue against the CIT(A)'s decision, upheld the CIT(A)'s deletions of additions made by the AO concerning:

• Depreciation on securities amounting to ₹372,70,70,520/-
• Contribution to the Punjab & Sind Bank Employees Pension Fund Trust under Section 36(1)(iv) amounting to ₹85,05,92,380/-
• Disallowance under Section 14A of the Act amounting to ₹19,17,00,000/-

The Tribunal affirmed that the AO's disallowances were not substantiated by concrete evidence and were based on theoretical suppositions. It emphasized adherence to established precedents and ruled in favor of the assessee, Punjab & Sind Bank, thereby dismissing the Revenue's appeal.

3. Analysis

3.1 Precedents Cited

The Tribunal extensively referred to previous cases to substantiate its decision:

• UCO Bank v. CIT (240 ITR 355 SC): The Supreme Court held that nationalized banks maintaining mercantile system accounts are entitled to show real income by considering market value of investments, supporting the allowability of depreciation on securities.
• Maxopp Investment Ltd v. CIT (2018) 402ITR 640 (SC): Clarified the applicability of Section 14A, distinguishing between shares held as 'stock-in-trade' and those held for retaining control over investee companies. Emphasized the necessity of apportionment of expenditures based on the intent of holding securities.
• State Bank of Patiala Case: Distinguished from Maxopp, affirming that in cases where shares are held primarily as stock-in-trade, incidental dividend income does not trigger the same disallowances under Section 14A.
• Ranbaxy Laboratories Ltd (2009) 124 TTJ (Delhi) 771: Held that actual contributions to pension funds are allowable expenses.

3.2 Legal Reasoning

The Tribunal's legal reasoning was anchored in the principle that the AO's disallowances lacked factual substantiation. It posited that:

• Punjab & Sind Bank consistently treated securities as 'Stock-in-Trade' in line with RBI guidelines, valuing them at cost or market price, whichever is lower.
• The AO failed to demonstrate that the depreciation claimed did not reflect in the subsequent valuation or sale of securities, rendering the depreciation unjustified.
• The contributions to the pension fund were in excess of the permissible limits under Section 36(1)(iv), Rule 87 & 88, but prior similar cases had been adjudicated in favor of the assessee, warranting consistency.
• Disallowances under Section 14A were not applicable as the exempt income was incidental and the primary intent was trading, not earning dividend income.

The Tribunal underscored the importance of following established jurisprudence and highlighted that the AO's approach was speculative without concrete evidence.

3.3 Impact

This judgment reinforces the application of established legal principles concerning the treatment of securities and pension fund contributions in tax assessments:

• Affirms the admissibility of depreciation on securities classified as 'Stock-in-Trade' when aligned with mercantile accounting practices.
• Clarifies that contributions to pension funds are allowable within the prescribed limits, promoting compliance among financial institutions.
• Reiterates the necessity of apportioning expenditures between taxable and exempt income based on the primary intent of holding assets, thereby providing clarity for future tax assessments.
• Emphasizes judicial consistency, discouraging arbitrary disallowances by Assessing Officers without substantive evidence.

Financial institutions and other entities managing significant securities portfolios will find this judgment pivotal in structuring their accounting and tax compliance strategies.

4. Complex Concepts Simplified

5. Conclusion

The ITAT Delhi's decision in the Punjab & Sind Bank case underscores the judiciary's commitment to ensuring fair and consistent tax assessments. By upholding the CIT(A)'s deletions of disallowances, the Tribunal reinforced the legitimacy of treating securities as 'Stock-in-Trade' with corresponding allowable depreciation and validated pension fund contributions within prescribed limits.

This judgment not only provides clarity on specific sections of the Income Tax Act but also sets a precedent for similar cases, promoting adherence to established accounting practices and judicial precedents. Entities engaged in significant securities trading and managing employee welfare funds can draw guidance from this decision to align their financial practices with legal expectations, thereby mitigating potential disputes with tax authorities.