Bombay High CourtCommissioner Of Income Tax-2 vs Hdfc Bank Ltd on 23 July, 2014Author:B.P. ColabawallaBench:S.C. Dharmadhikari,B.P. Colabawallavrd                                1                           ITXA330/12


                IN THE HIGH COURT OF JUDICATURE AT BOMBAY




                                                                              
                     ORDINARY ORIGINAL CIVIL JURISDICTION




                                                      
                       INCOME TAX APPEAL NO.330 OF 2012


    Commissioner of Income Tax-2,




                                                     
    Mumbai 400 020                                    ...Appellant
        v/s
    HDFC Bank Ltd.                                    ...RespondentMr Suresh Kumar for the Appellant.Mr J.D. Mistry, Sr. Counsel with Mr Atul Jasani for the Respondent.CORAM : S.C. DHARMADHIKARI AND
                             
                                       B.P. COLABAWALLA JJ.Reserved on      : 10th July 2014.
                                     Pronounced on    : 23rd July 2014.
           


    JUDGMENT [ Per B.P. Colabawalla J. ] :-1.         This Appeal undersection 260Aof the Income Tax Act 1961, has





    been filed by the Commissioner of Income Tax-2 challenging the order

    passed by the Income Tax Appellate Tribunal (hereinafter referred to as the

    ITAT) dated 29th June 2011. By the impugned order, the ITAT dismissed





    the Appeal filed by the Revenue in relation to Assessment Years 2001-02,

    2002-03, 2003-04, 2004-05 and 2005-06.2.         Mr Suresh Kumar, the learned counsel appearing on behalf of the

    Appellant, submitted that the impugned order passed by the ITAT requires::: Downloaded on - 23/07/2014 23:50:16 :::vrd                                      2                              ITXA330/12interference and gives rise to substantial questions of law that need to be

    answered by this Court and read as under :-"(A) Whether on the facts and in law, the Hon'ble Tribunal was correct




                                                               
                    in holding that the investment in tax free securities/investments are
                    represented by assessee's own funds in the shape of share capital and
                    reserves, ignoring the fact that the assessee is a bank involved in
                    transactions of money in various forms and treasury operations is only
                    out of its functions ?(B)    Whether the ITAT was correct in law in holding that the broken
                    period interest is allowable as a deduction, inspite of the Hon'ble Supreme
                    Court's decision in the case ofCIT v/s Vijay Bank(187 ITR 541) and the
                    Rajasthan High Court's decision in the case of Bank of Rajasthan (316




                                                 
                    ITR 391) ?(C)
                                
                            Whether the ITAT is right in law in holding that the assessee is
                    entitled for deduction with respect to the diminution in value of the
                    investment and amortization of premium on investment held to maturity
                    on the ground of mandate by RBI guidelines thereby ignoring the decision
                               
                    of the Supreme Court in the case ofSouthern Technologies vs. CIT(320
                    ITR 577) ?"3.         With reference to question (A), Mr Suresh Kumar submitted that the
        



    ITAT erred in holding that the investments of the Assessee in tax free

    securities / investments were from the Assessee's own funds. Since the





    Assessee had paid interest on borrowed funds and and the Assessee's own

    funds were not separately identified, the investment in Government

    securities had been made by the Assessee Bank from common pool of funds





    available with it. According to Mr Suresh Kumar, as per the provisions ofsection 14A, no deduction could be allowed in respect of expenditure

    incurred by the Assessee against the income claimed as exempt from tax, as

    apportionment of expenditure was an inherent part ofsection 14A.                          He

    submitted that in the absence of a direct nexus between Assessee's own::: Downloaded on - 23/07/2014 23:50:16 :::vrd                               3                             ITXA330/12funds and the investment made by it, the investment ought to be treated

    from the common pool having both borrowed as well as own funds of the




                                                                               
    Assessee and therefore, proportionate disallowance of interest by the




                                                      
    Assessing Officer was fully justified. He therefore submitted that the CIT

    (Appeals) & the ITAT had gone wrong on this count that required




                                                     
    interference by this Court.4.         We do not agree. In the case at hand, as recorded by the ITAT,
                              
    undisputedly the Assessee's own funds and other non-interest bearing funds
                             
    were more than the investment in the tax free securities. The ITAT therefore

    held that there was no basis for deeming that the Assessee had used the

    borrowed funds for investment in tax free securities. On this factual aspect,
           


    the ITAT did not find any merit in the contention raised by the Revenue and
        



    therefore, accordingly answered the question in favour of the Assessee. On





    going through the order of the CIT (Appeals) dated 28 th March 2005 as well

    as the impugned order, we do not find that the CIT (Appeals) or the ITAT

    erred in holding in favour of the Assessee.In this regard, the submission of





    Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee,

    that this issue is squarely covered by a judgment of this Court in the case ofCommissioner of Income Tax v/s Reliance Utilities and Power Ltd.,

    reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that

    case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had::: Downloaded on - 23/07/2014 23:50:16 :::vrd                                  4                             ITXA330/12invested certain amounts in Reliance Gas Ltd. and Reliance Strategic

    Investments Ltd. It was the case of the Assessee that they themselves were




                                                                               
    in the business of generation of power and they had earned regular business




                                                      
    income therefrom. The investments made by the Assessee in M/s Reliance

    Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of




                                                     
    their own funds and were in the regular course of business and therefore no

    part of the interest could be disallowed.   It was also pointed out that the




                                          
    Assessee had borrowed Rs.43.62 crores by way of issue of debentures and
                            
    the said amount was utilised as capital expenditure and inter-corporate
                           
    deposit. It was the Assessee's submission that no part of the interest bearing

    funds (viz. Issue of debentures) had gone into making investments in the

    said two companies. It was pointed out that the income from the operations
        


    of the Assessee was Rs.313.53 crores and with the availability of other
     



    interest free funds with the Assessee the amount available for investments





    out of its own funds were to the tune of Rs.398.19 crores. In view thereof, it

    was submitted that from the analysis of the balance-sheet, the Assessee had

    enough interest free funds at its disposal for making the investments. The





    CIT (Appeals) on examining the said material, agreed with the contention of

    the Assessee and accordingly deleted the addition made by the Assessing

    Officer and directed him to allow the same under the provisions of theIncome Tax Act, 1961. The Revenue being aggrieved by the order preferred

    an Appeal before the ITAT who upheld the order of the CIT (Appeals) and::: Downloaded on - 23/07/2014 23:50:16 :::vrd                                        5                              ITXA330/12dismissed the Appeal of the Revenue. From the order of the ITAT, the

    Revenue approached this Court by way of an Appeal. After examining the




                                                                                         
    entire factual matrix of the matter and the law on the subject, this Court held




                                                                 
    as under :-"If there be interest-free funds available to an assessee sufficient to meet




                                                                
                     its investments and at the same time the assessee had raised a loan it can
                     be presumed that the investments were from the interest-free funds
                     available.In our opinion, the Supreme Court inEast India
                     Pharmaceutical Works Ltd. v. CIT(1997) 224 ITR 627 had the occasion
                     to consider the decision of the Calcutta High Court in Woolcombers of




                                                   
                     India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before
                     the Supreme Court it was argued that it should have been presumed that
                     in essence and true character the taxes were paid out of the profits of the
                                 
                     relevant year and not out of the overdraft account for the running of the
                     business and in these circumstances the appellant was entitled to claim
                     the deductions. The Supreme Court noted that the argument had
                                
                     considerable force, but considering the fact that the contention had not
                     been advanced earlier it did not require to be answered.It then noted
                     that inWoolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta
                     High Court had come to the conclusion that the profits were sufficient to
                     meet the advance tax liability and the profits were deposited in the over
           

                     draft account of the assessee and in such a case it should be presumed
                     that the taxes were paid out of the profits of the year and not out of the
        



                     overdraft account for the running of the business. It noted that to raise
                     the presumption, there was sufficient material and the assessee had urged
                     the contention before the High Court. The principle, therefore, would be
                     that if there were funds available both interest-free and over draft and/or
                     loans taken, then a presumption would arise that investments would be





                     out of the interest-free funds generated or available with the company if
                     the interest-free funds were sufficient to meet the investment. In this case
                     this presumption is established considering the finding of fact both by the
                     Commissioner of Income-tax (Appeals) and the Income-tax Appellate
                     Tribunal."(emphasis supplied)5.         We find that the facts of the present case are squarely covered by the

    judgment in the case ofReliance Utilities and Power Ltd.(supra). The

    finding of fact given by the ITAT in the present case is that the Assessee's

    own funds and other non-interest bearing funds were more than the

    investment in the tax-free securities. This factual position is not one that is::: Downloaded on - 23/07/2014 23:50:16 :::vrd                                  6                            ITXA330/12disputed. In the present case, undisputedly the Assessee's capital, profit

    reserves, surplus and current account deposits were higher than the




                                                                                 
    investment in the tax-free securities. In view of this factual position, as per




                                                         
    the judgment of this Court in the case of Reliance Utilities and Power Ltd.(supra), it would have to be presumed that the investment made by the




                                                        
    Assessee would be out of the interest-free funds available with the Assessee.We therefore, are unable to agree with the submission of Mr Suresh Kumar




                                             
    that the Tribunal had erred in dismissing the Appeal of the Revenue on this
                                
    ground. We do not find that question (A) gives rise to any substantial
                               
    question of law and is therefore rejected.6.         Even as far as question (B) is concerned, we find no infirmity in the
           


    orders passed by the CIT (Appeals) or the ITAT.In deciding this issue, CIT
        



    (Appeals) and the ITAT have merely followed the judgment of this Court in





    the case ofAmerican Express International Banking Corporation v/s

    Commissioner of Income Tax, reported in (2002) 258 ITR 601.On going

    throughthe said judgment, we find that question (B) reproduced above and





    projected as substantial by Mr Suresh Kumar is squarely answered by the

    judgment of this Court in the case ofAmerican Express International

    Banking Corporation(supra). In view thereof, we do not find that even

    question (B) gives rise to any substantial question of law that needs to be

    answered by this Court.::: Downloaded on - 23/07/2014 23:50:16 :::vrd                                    7                             ITXA330/127.         As far as question (C) is concerned, we find that an identical question




                                                                                    
    of law was framed and answered in favour of the Assessee by this Court in




                                                            
    its judgement dated 4th July, 2014 in Income Tax Appeal No.1079 of 2012,

    Commissioner of Income Tax-2 v/s M/s Lord Krishna Bank Ltd. (now




                                                           
    merged with HDFC Bank Ltd.). Mr Suresh Kumar fairly stated that

    question (C) reproduced above is covered by the said order. In view thereof,




                                               
    we are of the view that even question (C) does not raise any substantial
                                 
    question of law that requires an answer from us.8.         For all the aforesaid reasons, we find no merit in this Appeal. It raises

    no substantial question of law and is therefore dismissed. No order as to
           


    costs.( B.P. COLABAWALLA J. )                    (S.C. DHARMADHIKARI J. )::: Downloaded on - 23/07/2014 23:50:16 :::