ASST CIT CIR 2(2)(1), MUMBAI vs. STATE BANK OF INDIA, MUMBAI

The present cross-appeal has been filed challenging the order dated 29/03/2016, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-5, Mumbai [“learned CIT(A)”], for the assessment years 2009-10.

In its appeal, the assessee has raised the following grounds:– 3.

“The appellant objects to the order of the Commissioner of Income-tax (Appeals) - 5, Mumbai [CIT(A)] dated 29 March 2016 for the aforesaid assessment year on the following among other grounds:

1. 1. Provision for pension of Rs.1495,50,00,000 The learned CIT(A) erred in upholding the action of the Assessing Officer in disallowing the appellant‟s claim in respect of provision for pension amounting to Rs.1495,50,00,000.

2. Depreciation on matured securities of Rs.53,14,55,386 The learned CIT(A) erred in confirming the disallowance of Rs.53,14,55,386 in respect of depreciation on matured securities which had fallen due for redemption during year ended 31 March 2009 but redemption proceeds were not received.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

3. Disallowance under section 14A The learned CIT(A) erred in not specifically directing the Assessing Officer to compute disallowance under section 14A in respect to tax-free bonds, shares (other than strategic investments) and units of mutual funds as nil, as these investments of the Bank are stock-in- trade. The learned CIT(A) erred in holding that the disallowance shall not be below the amount disallowed by the appellant himself in the computation of total income. Without prejudice to the above, the learned CIT(A) erred not accepting the claim of the appellant that only 1% of the exempt interest and dividend income is to be disallowed under section 14A. Without prejudice to the above, the learned CIT(A) erred in not appreciating that income not yielding any exempt income during the year will not be considered for the purpose of computing disallowance under section 14A.

4. Depreciation on leased assets of Rs.9,43,69,363 4.1 The learned CIT(A) erred in upholding the action of the Assessing Officer in disallowing the appellant‟s claim in respect of depreciation of Rs.9,43,69,363 on leased assets. 5. Deduction under section 36(1)(vii) of Rs.1334,21,65,835 5.1 The learned CIT(A) erred in not allowing deduction of Rs. 1334,21,65,835, under section 36(1)(vii) being the amount of bad debts written-off (other than in respect of rural Svances). 5.2 The learned CIT(A) erred in relying on explanation 2 to section 36(1) as inserted by the Finance Act, 2013 which is applicable from assessment years 2014-15 onwards. 6. Depreciation on securities The learned CIT(A) erred in upholding the action of the Assessing Officer in reducing depreciation/taxing appreciation in the value of securities held as Available for Sale (AFS) and Held for Trading (HFT) category. 7. Depreciation under section 36(1)(viia) of Rs.234,81,61,782 7.1 The learned CIT(A) erred in holding that the provision for standard assets amounting to Rs.234,81,61,782is to be excluded for determining the deduction under section 36(1)(viia). 7.2 The learned CIT(A) erred in not appreciating that even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery and accordingly qualifies for deduction under section 36(1)(viia). 8. Taxation of interest on non-performing assets (NPAs) of Rs.17,46,28,278 The learned CIT(A) erred in confirming the action of the Assessing Officer in making an addition of Rs.17,46,28,278 in respect of interest on sticky advances that had classified as NPAs by the Bank in terms of RBI guidelines.

9. Taxation of non-performing investments (NPIs) of Rs.11,93,00,000

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 The learned CIT(A) erred in confirming the action of the Assessing Officer in making an addition of Rs. 11,93,00,000 in respect of interest on NPIs.

10. Contribution to Retired Employees Medical Benefit Scheme (REMBS) 10.1 The learned CIT(A) erred in confirming the action of the Assessing Officer in making disallowance of Rs.13 crore in respect of payment towards contribution to Retired Employees Medical Benefit Scheme which was disallowed under section 43B by the Bank in the return of income of assessment year 2008-09 for non-payment. 10.2 The learned CIT(A) erred in not appreciating the fact that during the assessment year 2009. 10 the said sum was actually paid by the Bank to the Fund.

11. Double taxation relief (“DTR’) 11.1 The learned CIT(A) erred in not directing the Assessing Officer to grant the entire credit of DTR of Rs.286,12,06,042. 11.2 Without prejudice, the learned CIT(A) erred in not directing the Assessing Officer to grant the credit of DTR relief to the extent of Rs.268,29,87,342.

12. Payment for setting up a chair in London School of Economics 12.1 The learned CIT(A) erred in confirming the action of the Assessing Officer in not allowing the amount of Rs.72,92,750 paid for setting up a chair in London School of Economics.

13. Recovery of bad-debts written off in earlier years 13.1 The learned CIT(A) erred in not allowing the claim of the Bank in respect of non- taxability of recovery of bad debts written off in earlier years. 13.2 The learned CIT(A) erred in not directing the Assessing Officer to not tax the recovery of bad debts written off in terms of section 41(4), as the appellant had not claimed a deduction under section 36(1)(vii). 13.3 The learned CIT(A) erred in not directing the Assessing Officer to verify and allow the claim of the appellant.

14. Non-taxability of income from foreign branches 14.1 The learned CIT(A) erred in not allowing the claim of the Bank in respect of non- taxability of income earned by its foreign branches. 14.2 The learned CIT(A) erred in not directing the Assessing Officer to not tax the income earned by the foreign branches of the appellant, based in countries with whom India has entered into a tax treaty. 14.3 The learned CIT(A) erred in not directing the Assessing Officer to verify and allow the claim of the appellant. 14.4 The learned CIT(A) erred in observing that no facts were on record, without appreciating that the claim of Double Taxation Relief was verified by the Assessing Officer and hence significant facts were available on record.

15. Each one of the above grounds of appeal is without prejudice to the other.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

16. The appellant reserves the right to amend, alter or add to the grounds of appeal.”

4. The issue arising in ground no.1, raised in assessee’s appeal, is pertaining to the disallowance of provision for pension.

“(a) Since there are specific provisions for allowing Provisional Liabilities of Pension by way of contribution of employer towards pension benefits, i.e. u/s. (36)(1)(iv) and 36(1)(v) where allowability is subject to several conditions, and Sec.40A(7) & (9), put several restrictions on allowances of certain expenditure relating to the benefits linked to retirement, a “provision” made for expenses of similar nature will not be allowable u/s.37(1) of the Income Tax Act, by circumventing these specific provision. In fact it has been provided in the section 37(1) itself that the expenditure allowable under this section should not be in the nature of expenditure described in section 30 to section 36. (b) Further, the provisions of Sec.43B will also need to be applied before allowing expenses of above nature and accordingly, the provisions will become inadmissible. (c) without prejudice (a) and (b), the provision otherwise not admissible u/s. 37(1) of the Income Tax Act as the provision is in respect of contingent liabilities.”

“15. We have heard rival contentions on this issue and gone through facts and circumstances of the case. We have also perused the material placed before us including assessment order, order of CIT(A) and case laws. We noted that the assessee provides post-employment benefits such as pension, gratuity, etc. to its employees, Page | 5

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 under a “Defined Benefit Plan”. In terms of the said Plan, the assessee operates a Provident Scheme, Gratuity scheme and Pension Scheme. The Pension scheme comprises of two parts, (i) where the assessee makes a contribution to an approved Pension Fund, and (ii) where the assessee provides for pension payable to vested employees on retirement, on death while employed or on termination of employment, etc. The issue in the present appeal is only with regard to (ii) above i.e. provision for pension payable to employees. Based on the employment policy, the assessee provides pension benefits to its employees under a defined benefit plan. The provision is in respect of the agreed benefits payable to its employees on retirement in respect of the services rendered by the said employees. The assessee has been measuring its liability for such benefits actuarially and obtains a valuation report every year and, on basis thereof, makes a provision in accordance with the Accounting Standards. During the year under consideration, the assessee has adopted AS-15 issued by the ICAI. Accordingly, an actuarial valuation was obtained to determine the additional obligation of the assessee towards pension liability. In accordance with the transitional provisions of AS-15, a provision of Rs.3,724 crores were made based on the actuarial valuation by debiting the revenue reserves. The details are filed by the assessee in its note filed vide note 18.9 (a)(v)(I) of the financial statements at page no.73 of the Paper Book – I, filed by assessee.

16. We noted that the above amount was debited to revenue reserves, the assessee claimed a deduction for the same separately in the computation of total income and the relevant details are filed by the assessee at Sr. No III.14 of the computation of total income on page 2 of the Paper Book – I filed by assessee. As consideration for availing of the benefit of the services of the employees during the year it in addition to the salary, bonus, allowances, perquisites, etc. is also obliged to provide various retirement benefits such as pension, gratuity, etc. to the employees. These liabilities although to be discharged in the future relate to the rendering of the services during the year and because of the various imponderables determined based on an actuarial valuation. The assessee explained this by an example stating that, if as per employee policy an amount of Rs.250/- is payable to each employee towards pension and there are 10,000 employees, the total pension payable would be Rs.25,00,000/-. However, based on actuarial valuation, which takes into consideration entry into service, length of service and date of retirement of all employees, attrition before retirement, etc. the pension liability amounts to Rs.18,00,000/-. Accordingly, a provision of Rs.18,00,000/- is required to be created in the books. Therefore, the pension liability has definitely arisen during the year as the services of the employees are already availed, and they are eligible for the said pension. It is also possible to estimate the pension liability with reasonable certainty. Hence, the provision made is for a present actual liability, payable in future, and not a contingent liability. It is clearly an ascertained liability and has been recognised in the books of account on a scientific basis, based on actuarial valuation. The Supreme Court in the case of Metal Box Co. of India (supra) and Bharat Earth Movers (supra) and several other cases, have held that if a business liability has definitely arisen in the accounting year, a deduction should be allowed if the liability could be reasonably estimated though actually discharged at a later date. Also, the Delhi High Court in the case of Delhi Flour Mills Vs. CIT [1974] 95 ITR 151 (Delhi), while allowing the provision for gratuity, observed as under: “The gratuity payable to an employee represented a part of the emoluments payable to him for rendering service during each year. The right to receive gratuity accrued to the employee as soon as he completed one year of service and, as a corollary, the liability to pay the gratuity to the employee arose to the assessee at the end of each year. The amount of the liability was also ascertainable and there was no question in the instant case of the discounted present value of the liability being not ascertainable. It was no doubt true that the actual payment of the gratuity was deferred to a later date on the happening of a certain event, namely, death or voluntary retirement of the employee. But, these were not uncertain events. Therefore, the provision made by the assessee for the payment of gratuity under the agreement dated 14-2-1956, was in the Page | 6

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 nature of a revenue expenditure in respect of the assessment years under reference”.

17. Accordingly, a deduction was claimed in respect of provision for pension liability based on the principle laid down by the Courts, as discussed above. The claim was further supported by the Accounting Standard 1 notified by the Central Government in terms of section 145(2) of the Act, which mandates the adoption of a policy of prudence pursuant to which a provision is to be made for every known liability even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. But, the Revenue before the Tribunal has emphasised on the following contentions: a. expenditure does not relate to the year under consideration; b. Specific provision of sections 36(1)(iv)/36(1)(v) and 40A(7)/40A(9) of the Act are applicable to the pension liability. Further, the same should only be allowed on payment basis as per section 43B of the Act. Hence, a general provision like section 37(1) of the Act cannot apply.

19. The fact that in year of change of accounting method there may be a distortion was accepted by the Bombay High Court in CIT vs. West Coast Paper Mills Ltd. [1992] 193 ITR 349 (Bombay). The Court was concerned with a case where the assessee changed its method of accounting for claiming deduction of bonus payments to employees from cash to mercantile. Consequently, in the year of change it claimed such deduction in respect of the cash payment for the past year accounts as well as for the provision made for the current year‟s liability. The High Court held that whenever there is a change in the method of accounting, something of this kind is bound to happen. In the present case also, liability has arisen on account of change in the policy that was thrust on the assessee as a consequence of the revised accounting standard that was mandated to adopt by the Reserve Bank of India. Therefore, no disallowance could be made on this ground.

20. The assessee is under an obligation to pay pension to their employees as per the agreed terms. With the rise in salary levels and reduction in interest rates and the fact that pension payments will have to made, based on the salary last drawn before retirement, a huge gap existed between the amount funded to the approved scheme and the actuarial valuation of such liability. With a view to bridge the gap a provision of Rs.3,724 crores have been made during the year. The basis of arriving at this amount is referred by the AO at pages 22 and 23 of his assessment order. The provision in the present case is not for making contribution to any Fund, but for payment of pension to employees on their retirement over and above what they will be entitled to claim from the approved scheme. A bare perusal of sections 36(1)(iv)/36(1)(v) of the Act shows that, they would apply when deduction is claimed of any sum paid by an assessee as an employer towards a recognised provident fund or an approved superannuation fund or an approved gratuity fund. The amount of Rs.3,724 crores are clearly not a contribution towards any recognised provident fund or approved superannuation fund or approved gratuity fund. Similarly sections 40A(7)/40A(9) of the Act would apply to provision Page | 7

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 made as an employer towards contribution to fund, or trust or any other entity. We also noted that the amount of Rs. 3,724 crore is not a provision made for contribution to any fund or trust or any other entity. Similarly, section 43B of the Act deals with contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees. The amount of Rs.3,724 crores are not a contribution to a pension fund and is a provision towards pension liability. We are of the view that only the prescribed items can be disallowed in terms of section 43B of the Act. Therefore, the above provisions are clearly not applicable in the present case.

21. It also requires consideration that this aspect of the matter has not been controverted by the Revenue in their submissions before the Tribunal. The aforesaid provision represents the liability arising on account of the availment of services during the tenure of the employment recognized as a consequence of the transitional provisions of AS-15. The aforesaid provision does not represent contribution to any pension fund, and hence, the provisions of sections 36(1)(iv)/36(1)(v) or 40A(7)/40A(9) or 43B of the Act are not applicable.

22. In CIT vs. Ranbaxy Laboratories Ltd. [2011] 334 ITR 341 (Delhi), the Delhi High Court was concerned with a case where the assessee had introduced a pension scheme for its managerial employees which was over and above the benefits available under the superannuation scheme of the company. The Delhi High Court held that the pension scheme of the assessee does not envisage any regular contribution to any fund or trust or any other entity and, therefore, allowed the deduction on the basis that liability in this regard accrues year on year. Further, reliance is placed on the decision of Mumbai Bench of the Tribunal in the case of Hindustan Unilever Ltd. vs. ACIT [2013] 22 ITR(T) 737 (Mumbai), wherein the issue of allowability of pension payable to employees over and above the amount payable under the LIC scheme was restored to the file of the AO since additional evidence was filed by the assessee. However, in a subsequent decision by an order dated 30.10.2014 in the Tribunal has allowed the deduction after noting that the deduction was allowed by the AO while giving effect to the earlier year‟s order wherein the matter was restored back.

23. The issue is also squarely covered by the decision of the Hon‟ble Bench of the Mumbai Tribunal in the case of erstwhile State Bank of Suarashtra (which has merged with the Assessee) vs. DCIT in ITA no. 4502/Mum/2013 dated 23.12.2016. The findings of the Tribunal are reproduced below: “It is not disputed that the assessee has made the provision on the basis of actuarial valuation towards the pension of the employees in accordance with Accounting Standard 15, which was applicable from the impugned assessment year. The liability has therefore, definitely arisen during the impugned assessment year although it has to be discharged on a future date. The case of the assessee, in our view, is duly covered by the decision of the Hon‟ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] (245 ITR 428) in which it was held as under: “………………… ……………………” The provision of section 43B will not apply to the same as this does not represent the sum payable by the assessee as an employer by way of contribution to pension fund. We, therefore, respectfully, following the decision of Hon‟ble Supreme Court delete the disallowance” Hence, this issue is also covered by the Tribunal decision in the case of State Bank of Suarashtra (supra), which has merged with the Assessee.

24. The reliance placed by the learned Departmental Representative at the time of the hearing on the decision of the Madras High Court in the case of Pricol Limited is Page | 8

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 completely misplaced since the same deals with a case of disallowance of provision towards gratuity which was squarely covered by the provision of section 40A(7) of the Act. Further, it is clarified that section 40A(9) of the Act will not be applicable since the provision is not towards contribution to any pension fund. We are of the view that sections 36(1)(iv) and 36(1)(v) of the Act specifically deal with contribution to a recognized provident fund or an approved superannuation fund or an approved gratuity fund. The said sections do not deal with providing for a liability vis-à-vis pension or any other retirement benefits. Thus, the aforesaid provision for pension made on the basis of an actuarial valuation ought to be allowed as a deduction under section 37(1) of the Act. Since there are specific provisions dealing with contribution to pension fund/ gratuity fund, etc., the provision for pension (which doesn‟t represent any contribution to fund) falls under the purview of section 37(1) of the Act and ought to be allowed as deduction. Reliance in this regard is placed on the decision of the Supreme Court in the case of CIT vs. Kalyanji Mavji & Co. [1980] 122 ITR 49 (SC), wherein it was held that if expenditure incurred by the assessee was not covered by the specific provision under section 10(2)(v) of the Act, then, benefit should be given to the assessee under the residuary clause i.e. section 10(2)(xv) of the Act. Moreover, Instruction no. 17/2008 dated 26.11.2008, relied upon by the CIT DR is also not applicable to the facts of the case. As regards, para ix of the aforesaid instruction, it is applicable to deduction towards contribution to provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees. Whereas the provision for pension of Rs. 3,724 crore is not towards contribution to any fund, but it is payable to the employees directly. Also, Sr. no. xi of the aforesaid instruction states that contingent liability cannot constitute deductible expenditure. As elaborated above, provision towards pension of Rs.3,724 crore is not a contingent liability. It is an ascertained liability and has been provided for in the books of account on a scientific basis, as per the actuarial valuation. Further, it would also be contrary to the judgement of the Supreme Court in the case of Metal Box Co. of India (supra) where the Supreme Court observed that contingent liabilities properly discounted were to be allowed as a deduction. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee is allowable and hence, allowed. This issue of assessee‟s appeal is allowed.”

8. The learned Departmental Representative (“learned DR”) could not show us any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we uphold the plea of the assessee and allow the claim of provision for pension. Accordingly, ground no. 1 raised in assessee’s appeal is allowed.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 securities as well as an explanation as to why the same should not be disallowed. As per the assessee, it has booked an amount of Rs. 53,14,55,386 on account of securities which were due for redemption during the year ending 31/03/2009. It was further submitted that such provisions were made in line with NPA norms in respect of overdue debentures/bonds which matured but remain unpaid as on 31/03/2009 or the interest is not serviced regularly. It was further submitted that this provision for impairment on the valuation of investments is made in light of the RBI guidelines. The AO vide order passed under section 143(3) of the Act did not agree with the submissions of the assessee and disallowed the depreciation on matured securities claim by the assessee. The learned CIT(A), vide impugned order, following the finding of its predecessor in assessee’s own case for the assessment years 2004-05 and 2005-06 dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.

“38. Additional Ground No. 4 is regarding depreciation on matured securities. The assessee has claimed a sum of Rs. 2,23,86,418/- towards depreciation of investments. The AO disallowed the claim of the assessee and the CIT(A) has confirmed the action of the AO. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The CIT(A) has decided the issue in para 9 as under: “9. The ninth effective ground of appeal is against the disallowance of Rs.2,23,86,418/- being the provision for diminution in the value of securities which had matured and become due for redemption during the year but were not redeemed. It was contended before the A. O. That in some cases, the companies or the State Governments who had issued the relevant securities were not able to pay the amount due on redemption. The appellant treats these securities as non- performing assets and a provision is made at a certain percentage for diminution in their value as in the case of other non-performing assets. There may be some delay on the part of the companies or the State Governments in paying the redemption amount. But, whenever the payment would be made it cannot be expected to be less than the face value. On the date of maturity, the whole of the amount of redemption money becomes due under the mercantile system of accounting followed by the appellant unless a portion of this amount is written off as bad debt. It is a real income and hence has to betaxed as such under the mercantile system followed by the appellant. Reliance in this regard is placed on State Bank of Travancore vs. CIT 158 ITR 102, 155 (SC) which was followed in Western India Oil Distributing Co. Ltd. Vs. CIT 206 ITR 359 (Bom). It was held in this decision that the concept of real income should not be so read as to defeat the provisions of the Act. Extension of the concept of real income to a field so as to negate accrual after the amount had become receivable is contrary to the postulates of the Act, the Supreme Page | 10

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 Court held (p. 146 of 158 ITR). Moreover, as held in the case of Navin R. Karnani vs. CIT 185 ITR 408 (Bom), it was not possible to waive any amount of income which had accrued under the mercantile system of accounting on the ground of diminished hope of recovery. Furthermore, any liability de 11stopp is not an ascertained liability in praesenti and cannot be allowed as deduction under the Income-tax Act as held in the case of Indian Molasses Co. Pvt. Ltd. vs. CIT 37 ITR 66 (SC) and Standard Mills Co. Ltd. Vs.CIT 229 ITR 366(Bom). Hence, no such ad hoc deduction could be allowed against the amount receivable on redemption of securities which had matured and become due for payment before the close of the accounting year. This ground therefore fails.”

39. The findings of the CIT(A) is based the on the various decisions of the Hon‟ble Supreme Court as well Jurisdiction High Court. No contrary decisions has been brought before us accordingly we do not find any error or illegality in the impugned order of CIT(A) qua this issue. The same is upheld.”

12. We further find that the Hon’ble jurisdictional High Court in State Bank of India v/s DCIT, in of 2014 vide order dated 23/08/2016 upheld the aforesaid findings of the coordinate bench of the Tribunal. Since, a similar issue has already been decided in assessee’s own case for the preceding assessment year, therefore, we see no reason to deviate from the view so taken, in the absence of any allegation of change in facts and law. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. Accordingly, ground no. 2 raised in assessee’s appeal is dismissed.

14. The issue arising in ground no. 4, raised in assessee’s appeal, is pertaining to depreciation on leased assets.

15. The brief facts of the case, pertaining to this issue, are: During the assessment proceedings, referring to the addition made on this issue in the assessment year 2008-09, the assessee was asked to explain as to why the addition should not be made on similar lines in this year. The assessee was also asked to furnish details of leased rentals and apportionment thereof between the principal and finance income. In response thereto, the assessee submitted that the claim of depreciation in the return of income is Rs. 9,43,69,363. The depreciation on these assets as per books of Rs.24.02 crores has been added back in the computation of total income. The Page | 11

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 assessee further submitted that the capital recovery component included in the leased rental credited to the profit and loss account and offered for taxation is Rs.5,89,64,762. The assessee also submitted there is no new lease transaction entered in the year under consideration. The AO vide order passed under section 143(3) of the Act by relying on the discussion made in the assessment order for the assessment year 2008-09 disallowed the depreciation claimed on leased assets. The learned CIT(A), vide impugned order, following the decision of the coordinate bench of the Tribunal in assessee’s own case for the assessment year 1996-97 dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.

16. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee’s own case in State Bank of India (supra) for the assessment year 1996-97 while deciding a similar issue observed as under:-

“20. We have considered the rival submissions as well as relevant material on record. The assessee has claimed that as per the lease agreement the assessee has entered into an operating lease of the asset in question. In order to determine the real nature of transaction and arrangement between the parties, the substance of the document intention of the parties and surroundings circumstances under which the parties have entered into the transaction are material and relevant to be considered. Therefore, mere nomenclature words used in the agreement cannot be looked into in isolation of the substance of the document, the real intentions of the parties and the surroundings circumstances under which the transaction took place. Undisputedly in the case in hand the asset in question is the railway track which is already owned by the lessee Konkan Railway Corporation Ltd. (KRCL) but because of the requirement of funds the KRCL decided to raise the funds by making the arrangement of sale and lease back of the asset. Thus, the real object as far as KRCL is concerned for entering into the transaction of sale and lease back is to raise/arrange the funds. The two transaction of sale of the asset in question to the assessee bank and lease back cannot be separated as there was no choice with either of the party to restrict the transaction of sale alone independently because it was neither possible nor permissible to sell out the asset in question by the Konkan Railway Corporation being the integral part of their railway system which is the very basis of the existence of the KRCL. Thus, we have not doubt that the sale transaction in question is merely on paper and to facilitate the financial arrangement by the assessee to the KRCL without involving any real intention of transfer of the asset in question. Even otherwise the transfer of asset in question is impossible in the facts and circumstances of the case and therefore it was not the real intention of the parties even reflected from the lease agreement. Some of the relevant clauses of the agreement are as under: “1.5 The Acquisition Cost of the equipment shall be the Invoice Value of the Equipment inclusive of levies on important of the Equipment, Customs Duty, Central Excise Duty, Sales Tax, Additional Tax, Surcharge on Sales Tax, Interest Tax, where applicable, Turnover Tax, where payable and all other costs and expenses, as the case may be such as Freight, Octroi, Entry Tax, Erection and Installation Charges, Commissioning Charges, Testing Charges paid or payable in respect of the Equipment or value assessed by the valuers as per clause 2.2. Below whichever is lower. In case the Lessee proposes to avail MODVAT on the Page | 12

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 specified Excise Duty paid in terms of the Central Excise Rules, 1944, of which due intimation will be given by the Lessee to the Lessor, the acquisition cost will not include Excise duty payable on the equipment. 1.6 The Lessee hereby takes on lease the Equipment for the Fixed period from the Commencement Date as hereinafter referred to subject to the terms, conditions, covenants and stipulations contained herein and in the Schedules hereto. The Fixed period or the primary period of the Lease as defined in Part II of the First Schedule hereto is non-cancellable by the Lessee and/or the Lessor except as provided in Clause 13 hereof. The fixed period of the lease may be renewed for a further fixed term referred to as “the secondary period” at the option of the Lessee on the same terms and conditions as are contained in this agreement subject to payment by the Lessee of lease rentals in advance as stipulated in Part II of the First Schedule hereto.

5. Insurance It is agreed by and between the Parties hereto that the Lessee shall, for and on behalf of the lessor. 5.1 Take out insurance on the Equipment against loss in transit, erection and installation risks, maritime risks, where necessary prior to the despatch of the Equipment, or alternatively to ensure that the insurance on the Equipment in respect of the said risks is effected by the Manufacturer/Supplier before delivery of the Equipment. 5.2 immediately after the delivery of the Equipment, insure the Equipment and keep the same insured throughout the term of this Agreement against loss or damage by accident, lighting, fire, flood, storm, earthquake, tempest, falling aircraft, malicious damage, riot, strike, civil commotion, explosion, implosion and where necessary against third party claims in respect of Equipment used in hazardous industries and those requiring environmental protection as also for other risks usually covered by insurance in the type of business for which the Equipment is for the time being used to the satisfaction of the Lessor upto the full replacement value thereof under a Comprehensive Policy of Insurance, in the joint names of the Lessor and the Lessee with an endorsement showing the Lessor as the owner and Loss payee.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

8.4 not do or omit to do any act which may result in seizure and/or confiscation of the Equipment by the Central or State Government or Local Authority or any Public Officer or Authority under any law for the time being in force: 8.5 not sell, assign, sub-let, pledge, mortgage, charge, encumber, or part with possession of or otherwise deal with the Equipment or any interest therein nor create or allow to be created any lien on the Equipment whether for repairs or otherwise and in the event of any breach of this sub-clause by the Lessee, the Lessor shall be entitled to call upon the Lessee to have the lien or charge or other encumbrance lifted at its cost and in the event of the Lessee failing to do so within a reasonable time, the Lessor shall be entitled (but shall not be bound) to pay to any third party such sum as is necessary to procure the release of the Equipment from any lien charge or encumbrance and shall be entitled to recover from the Lessee forthwith all such expenses as might have been incurred for such release: 8.6 not sell, mortgage, charge, demise, sub-let or otherwise dispose of any land or building on or in which the Equipment are kept or enter into any contract to do any of the aforesaid things without giving to the Lessor at least six weeks prior notice in writing and the Lessee shall in any event ensure that any such sale, mortgage, charge, demise, sub-lease, or other disposition as the case my be is made subject to the right of the Lessor to repossess the Equipment at any time(whether or not the same or any part thereof shall have become affixed to the said land or building) and for that purpose to enter upon such land or building and sever any Equipment affixed thereto: 8.7 punctually pay all registration charges, licence fees, rent, rates, taxes including in particular Sales Tax and other outgoings payable in respect of the Equipment under this Agreement or for storage, installation, or use thereof, or in respect of any premises in which the Equipment form time to time may be placed or kept and produce to the Lessor, on demand, the latest receipts for all such payments and in the event of the Lessee making default under this sub- clause the Lessor shall be at liberty to make all or any of such payments and to recover the amount thereof from the Lessee forthwith. 8.8 not claim any relief by way of any deduction, allowance or grant available to the Lessor as the owner of the Equipment, under the Income Tax Act, 1961 or under any other Statute, rule, regulation or guideline issued or that may be issued by the Government of India or any Statutory Authority and not do or omit to do or be done any act, deed or thing whereby the Lessor is deprived, whether wholly or partly of such relief by way of deduction, allowance or grant. The Lessee shall at the end of each financial year of the Lessor provide to the Lessor such information as it may require to claim relief by way of any deduction allowance or grant as the owner of the Equipment under the Income Tax Act, 1961 and the Lessee undertakes to comply with and observe at all times all the terms and conditions to be complied with or observed in respect of the use and operation of the Equipment so as to entitle the Lessor to obtain such relief. 8.9 The Lessee irrevocably agrees that if due to incremental taxes whether on account of the impact of the sales tax legislation in the various States as applicable or on account of customs duty or excise duties or any other related and consequential taxes or charges levied or leviable on this transaction now or hereafter as also due to any increase in the purchase price of the Equipment covered by this Agreement on account of purchase tax and/or any other tax or imposition or due to tax on the right to use goods as may be applicable to the Equipment the Acquisition Cost of the Equipment stands increased, then the Lessor reserves the right to increase the Lease rentals proportionate thereto and on such notification by the Lessor to the Lessee, the Lease Rentals shall

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 correspondingly stand increased from the date specified by the Lessor in such notification.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 others or keep idle such Equipment, all free and clear of any rights of the lessee and without any duty to account to the Lessee for such action or inaction or with respect to any proceeds thereto and if such Equipment is sold the price obtained upon such sale shall not be questioned or challenged by the Lessee more shall the Lessee question or dispute the exercise or non-exercise by the Lessor of any one or more of the rights and remedies as set out in Clause 13 hereinabove.

21. It is manifest from the terms and conditions of the lease agreement that the lease is for a fixed period of 84 months and as per clause 1.6 it is non-concealable by the lessee and/or by the lessor except on the default on the part of the lessee. Even in case of default and consequential termination of lease its is provided that the lessee shall pay the entire arrears of the lease as well the future instalment for the unexpired period of the lease term, therefore the lease agreement has been framed and constructed in such a way that the assessee recovers its entire cost along with the interest in equated monthly instalments. Even in the schedule to the lease agreement the period of 84 months is a fixed non-concealable period. As per clause 5 of the agreement the lessee is required to take out the insurance on the asset in question and also bear all the damages, loss and risk attached to the leased asset, therefore, it is agreement between the parties that all the risk and reward attach to the lease asset shall be born and enjoyed by the lessee. The so-called restrictions on the sale, creating charge, lien by the lessee are necessary being a security against the funds provided by the assessee to the lessee. Even otherwise in case of simple finance, the asset which is being financed is always kept as a security/mortgage with the bank to protect the interest of the bank till the repayment of the finance. Therefore, the restrictions provided in the lease agreement are only to secure the interest of the bank till the recovery of the full amount along with the interest. Some of the terms of the agreement appear to be only for sake of the conditions as to protect to the interest of the bank but the same could not be given effect in practical. For instance, in case of default if the assessee terminates the lease agreement in question then it is not possible for the assessee either to take the possession of the asset in question because of the nature of asset which could not be separated from the railway network or remove the asset from the place of its existence being part of the railway network. Further apart from the lessee the asset cannot be transferred or assigned to anybody else as it is not possible to use only a particular stretch of railway track without connecting or being a part of the entire network. Thus, the terms and conditions as heavily relied upon Ld. AR would not help the case of the assessee to establish that the asset in question could actually be taken in possession by the assessee. Therefore, the assessee cannot exercise the real and actual ownership over the asset keeping in view the facts and circumstances and nature of the asset in question. The Special Bench of this Tribunal in case of IndusInd Bank Ltd. (supra) by following the decision of Hon‟ble Supreme Court in case of Asea Brown Boveri Ltd. Vs Industrial Finance Corporation of India (IFCI) 154 Taxman 512 as well decision in case of Association of Lease and Financing Service Company Vs Union of India (supra) has enumerated various features which make distinction between operating lease and finance lease in para 5.20 as under: “5.20 In view of the fact that the Id. AR has lodged a strong claim to consider the present agreement as that of operating and not a finance lease, it is imperative to understand the distinction between the two as under :- Page | 16

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 a. In the case of an operating lease, the lessor provides the asset for use for a certain period of time to the lessee for rent. On the expiry of such lease period, the lessor has to inevitably repossess the asset. On the other hand, a case of finance lease is in essence an arrangement for borrowing. The role of lessor is limited to that of financier only. b. In operating lease, it is the lessor who bears the loss and obsolescence of the asset leased, whereas in &se of finance lease it is the lessee who always bears such loss. c. In the case of an operating lease, the lessor remains the owner of the asset throughout the lease period and thereafter also, whereas in a finance lease it is the lessee who becomes the real owner. The lessor‟s title over the asset is only symbolic to serve as security for the rentals, which are nothing but the return of his investment with interest. d. Operating lease is cancellable, whereas tinance lease is always non- cancellable. In a case of finance lease, the lessor is interested in lease rentals and not the asset. e. In the case of an operating lease, substantial risks and rewards of ownership of the asset remain with the lessor, whereas in the case of finance lease these ab initio vest with the lessee. f. In the case of an operating lease, the fixation of lease rental bear no symmetry with the economic life of the asset and the possibility of the asset reverting back to the lessor can never be ruled out. However in the case of a finance lease, the lease period is ordinarily equal to the economic life of the asset and lease rentals are fixed in such a way so as to recover the investment with interest during the lease peiod itself. The possibility of the asset reverting back to the lessor is never there. g. In the case of an operating lease, the asset is ordinarily common use utility whereas in case of finance lease the asset is normally selected by the lessee himself so as to suit his particular requirements. h. Normally an operating lease is non payout whereas a finance lease is full payout. Full payout lease means that the lessor recovers the full value of the leased asset plus the finance cost over the period of first lease. Full payout lease is peculiar to finance lease. On the other hand, a non payout lease is one where the lessor is not interested in recovering his principal investment plus interest from one lessee only because he may lease out the same asset over and over again. Though no single lease recovers the principal amount plus interest component of the lessor but all the leases taken together make it a full payout. That is why the non payout lease is peculiar to operating lease.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 operating lease whereas the others largely indicate it to be a finance lease. How to resolve the conflict? In order to decide as to whether the instant lease agreement be characterized as operating or finance lease, we need to take shelter of the doctrine of pith and substance. This rule stipulates that if there is some overlapping in the contents of the clauses of an agreement, then it becomes necessary to examine the pith and substance of the agreement. It can be done by seeing as to whether it predominantly satisfies the conditions of operating lease or finance lease. The crux is that we should find out the substance of the agreement. 5.22 We have highlighted the broad features of operating lease such as, the lease is cancellable; the lessor provides services, maintenance and insurance; total of all the lease payments by the lessee does not provide for the recovery of the investment with interest. Further the operating lease generally covers the asset which can be needed by different users so that the lessor may make available to one lessee after another. 5.23 Now let us try to find out the substance of the extant lease agreement as to whether it predominantly satisfies the conditions of an operating lease. On reading the lease agreement as a whole, we find that except for naming the lessor as owner at some places in the agreement and inserting certain cosmetic clauses to give the colour of operating lease, there is nothing in substance which satisfies the inherent requisites of operating lease. It can be observed that the lease is not cancellable prior to the expiry period of seven years. The cost of repairs and insurance is to be borne by the lessee. Sum total of the lease rentals by the lessee recoups the amount invested by the lessor plus interest. There is a clause that after the expiry of seven years period, the boiler will be sold to the lessee at predetermined value. It is the lessee who has to bear the loss due to obsolescence. All the risks and rewards vest with the lessee. When we consider the cumulative effect of all the factors for and against the operating lease, it can be easily found out that if one has to choose between the finance lease and operating lease, there can be no difficulty in reaching the irresistible conclusion that it is a case of finance lease agreement. In pith and substance this agreement is nothing but a finance lease.”

23. In the case in hand the lease is for fix period of 84 months during which the assessee would recover the full value of lease asset with finance cost being interest as agreed between the parties. All the costs regarding loss and obsolences, repairs, maintenance, insurance etc. Are to be born by the lessee. Thus the risk and reward of ownership of the asset vested with the lessee and therefore for all practical purposes the ownership of the asset was vested with the lessee and not with the assessee. The terms of the agreement are designed in a manner so that in any eventuality the assessee would recover the investment (cost of asset) with interest and not the asset in question. As discussed in the foregoing paras the title over the asset as per the lease agreement is only for securing the financial interest of the assessee and not intended to really take the asset in its possession on the expiry of lease term or on the termination of the lease agreement. Therefore all the features and attributes of finance lease as discussed by the Special Bench in case of Indusind Bank do exist in the case of the assessee.

24. Apart from the terms and conditions as stipulated in the lease agreement one more important aspect which is very relevant in deciding the issue is that as per the Banking Regulation Act, 1949, a Banking company is not permitted to engage in the activity of leasing of asset. Section 6 of the Banking Regulation Act specifies various business in which banking company may engage as under: “6. Forms of business in which banking companies may engage. - (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:- Page | 18

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller‟s cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a 1[managing agent or secretary and treasurer] of a company; (c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; (i) undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company;

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company: (m) acquiring and undertaking the whole or an part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section; (n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage. (2) No banking company shall engage in any form of business other than those referred to in sub-section (1).”

25. As it is clear from the sub-section 2 that no banking company shall engaged in any form of business other than those referred in sub- section 1 of section 6. However, as per circular dated 19.2.1994 the Reserve Bank of India has allowed the banking companies to undertake the activities of equipment leasing but the same should be treated on par with the loan and advances. Therefore, the activity of equipment leasing permitted by the RBI vide said circular is only in the nature of finance lease. The said circular has also been considered and discussed by the Special Bench in para 5.24-5.27 as under: “5.24 Our view is fortified by the RBI Circular No. FSCBC 18/24- 01-001/93-94 dated 14.02.1994 which inter alia deals with equipment leasing. It is needless to say that this circular is binding on the assessee bank. Para 1(i) of it provides that the activities like equipment leasing, hire purchase and factoring services should be undertaken only by certain selected branches of the Bank. Para 1 (ii) which is relevant for our purpose reads as under: “(ii) These activities should be treated on par with loans and advances and should accordingly be given risk weight of 100 per cent for calculation of capital to risk asset ratio. Further, the extant guidelines on income recognition, asset classification, asset classification and provisioning would also be applicable to them.” Paras 1(v) and (vi) which are also relevant read as under:- “(v) Banks undertaking equipment leasing departmentally should follow prudential accounting standards. The entire lease rental should not be taken to the bank‟s income account. It would be recognized that lease rentals comprise two elements a finance charge (i.e. interest charge) and a charge towards recovery of the cost of the asset. The interest component alone should be taken to the income account. The component representing the replacement cost of the asset should be carried to the balance sheet in the form of a provision for depreciation. (vi) As a prudent measure, full depreciation should be provided for during the primary lease period of the asset. The period of lease should not normally exceed five years. In exceptional cases, lease period not exceeding 7 years may be fixed in respect of lease transactions covering assets of Rs. 1 crore and above, as the recovery of cost may not be possible in a period of 5 years.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 5.25 On perusal of the above paras of the above circular it becomes patent that the equipment leasing activity should be treated by banks “on par with loans and advances”. The further contents of para 1 (ii) which provides that the guidelines on income recognition, asset classification and provisioning would also be applicable to them, make it clear that the activity of equipment leasing should be considered as an act of advancing loans and advances. It is so for the reason that the guidelines on income recognition and asset classification etc. As referred to herein, are applicable to loans and advances. Further para 1 (v) provides that the entire lease rental should not be taken to the bank‟s income account. Only the interest component being the finance charge should be taken to the income account and the second component being charge towards recovery of the cost representing the replacement cost of the asset should be carried to the balance sheet in the form of a provision for depreciation. Para 1 (vi) states that as a prudent measure full depreciation should be provided for during the preliminary lease period of the asset. It is impermissible to read para 1 (vi) of the Circular in isolation to support the contention that the RBI permits claiming depreciation on the leased assets. It is in fact not so because the Circular as a whole treats the activity of equipment leasing as that of loans and advances and the reference to full depreciation in para 1 (vi) should be read in juxtaposition to para 1(v) which talks of the second component of the lease rental being the replacement cost of the asset. When we read this Circular in entirety, there remains no doubt that the activity of equipment leasing has to be considered by a bank on par with the loans and advances. 5.26 In view of the above circular we do not find any scope for argument that the instant lease agreement be treated as that of operating lease. Since the loans and advances encompass finance lease, naturally such type of equipment leasing cannot be given any name other than the finance lease. Here it is relevant to note that the assessee claimed depreciation on leased asset and also showed full amount of lease rental as income in contravention of para 1(v) of the afore noted RBI Circular. When the Assessing Officer concluded that the instant lease cannot be characterized as finance lease, the assessee requested the A.O. that in case the depreciation on the leased asset to assessee is not to be granted by treating it as a loan transaction, then the capital recovery embedded in the lease rental should not be charged to tax. This issue has been discussed in para 2.30 of the assessment order. Acceding to the assessee‟s request, the Assessing Officer excluded the portion of capital recoveries from the rental income. Thus it can be observed that the action of the A.O. is fully in consonance with the RBI Circular which states that in case of equipment leasing the entire lease rental should not be treated as bank‟s income but only that component of such lease rental which represents finance charges i.e. interest should be recognized as income alone. 5.27 We, therefore, approve the view taken by the authorities below in coming to the conclusion that the lease agreement under consideration is that of finance lease and not operating lease.”

27. It is pertinent to note that in case of ICDS Ltd. (supra) it was not a lease by a bank but the assessee in the said case is a non-banking financial institution and one of the business of the assessee was leasing out the vehicles as the facts recorded by the Hon‟ble Supreme Court in para 2 of the said decision as under: “2. The assessee is a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company. It is engaged in the business of hire purchase, leasing and real estate etc. The vehicles, on which depreciation was claimed, are stated to have been purchased by the assessee against direct payment to the manufacturers. The assessee, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. In fact, lessees were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”).”

17. We find that the coordinate bench of the Tribunal in assessee’s own case in subsequent assessment years rendered similar findings following the decision rendered in the assessment year 1996-97. We find that the Hon’ble jurisdictional High Court vide its order dated 23/08/2016 in of 2014 admitted the appeal filed by the assessee on this issue, however, the operation of the order was not stayed. Since a similar issue has already been decided in assessee’s own case for the preceding assessment years, therefore, we see no reason to deviate from the view so taken, in absence of any allegation of change in facts and law. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. Accordingly, ground no. 4 raised in assessee’s appeal is dismissed.

18. The issue arising in ground No. 5, raised in assessee’s appeal, is pertaining to the disallowance of deduction under section 36(1)(vii) in respect of non-rural advances.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 that as per Board’s Circular No. 464 dated 18/07/1986 the provision of section 36(1)(viia) of the Act is applicable both for rural and non-rural debts. The learned CIT(A), vide impugned order, after noting that this is a recurring issue, dismissed the appeal filed by the assessee on this issue by following the findings of its predecessor in assessee’s own case for the assessment year 2007-08. Being aggrieved, the assessee is in appeal before us.

“56. We noted that for the year under consideration the assessee has not claimed any deduction for bad debts writtenoff. However, it should be allowed deduction in respect of writeoffs of non-rural branch advances amounting to Rs. 1026 crore. Before us Revenue has emphasised that deduction under section 36(1)(viia) of the Act is available to both rural and nonrural debts and accordingly, the restriction as per the proviso to section 36(1)(vii) of the Act is also applicable. The learned Counsel argued that as per the provisions of section 36(1)(viia) of the Act, a bank is eligible to avail deduction in respect of provision made for bad and doubtful debts, of an amount not exceeding 7.5% of total income and of an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank. Accordingly, the assessee is eligible to claim deduction of an amount lower of the provision made for bad and doubtful debts or the amount calculated as per the prescribed methodology. As per the proviso to section 36(1)(vii) of the Act, deduction under section 36(1)(vii) of the Act is limited to excess of the amount written off over the credit balance in the provision for bad and doubtful debts accounts made under section 36(1)(viia) of the Act. Further, as per section 36(2)(v) of the Act, where a debt made by the assessee to which section 36(1)(viia) of the Act applies, no deduction shall be allowed unless the assessee has debited the amount of such debt to the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act. On a conjoint reading of the aforesaid provisions, it can be inferred that sections 36(1)(viia) and 36(2)(v) of the Act and the first proviso to section 36(1)(vii) of the Act, apply only to rural advances.

57. We noted that, as reliance placed by assessee, this issue is decided in favour of the assessee by the Supreme Court judgment in the case of The Catholic Syrian Bank Ltd. vs. CIT [2012] 343 ITR 270 (SC). The Supreme Court was concerned with a case where the assessee had claimed a deduction under section 36(1)(vii) of the Act pertaining to urban advances. The deduction was not allowed to the assessee on the basis that deduction under section 36(1)(vii) of the Act can be allowed only to the extent it is in excess of the provisions created and allowed as a deduction under clause (viia). The Supreme Court held that if the bad debts actually written off in the accounts of the assessee-bank represents only debts arising out of urban advances, allowance thereof is not affected, controlled or limited in any way by the proviso to section 36(1)(vii) of the Act. The relevant extract of the judgement of the Supreme Court is reproduced below: “41. To conclude, we hold that the provisions of Sections 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under Page | 23

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2).”

22. The issue arising in ground No. 6, raised in assessee’s appeal, is pertaining to depreciation on securities.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 order passed under section 143(3) of the Act did not agree with the submissions of the assessee by following the approach adopted in the assessment year 2007-08. The learned CIT(A), vide impugned order, after noting that this is a recurring issue, dismissed the appeal filed by the assessee on this issue by following the findings of its predecessor in assessee’s own case for the assessment year 2007-08. Being aggrieved, the assessee is in appeal before us.

“62. Before us it was argued that from the financial year 2004-05, the assessee has been valuing investments in „Available for Sale‟ (AFS) and „Held for Trading‟ (HFT) in books after netting off classification-wise depreciation and appreciation, computed scrip-wise and providing for net deprecation in each classification while ignoring net appreciation, as required by RBI guidelines. However, for tax purposes, investments in AFS and HFT categories are being consistently valued scrip wise and depreciation, if any, was provided scrip wise while ignoring appreciation. Valuation of investments in AFS and HFT categories has consistently been done scrip-wise for tax purposes in earlier years. The same has also been accepted by the AO upto assessment year 2004- 05 i.e. prior to the change in the treatment given in books of account. Therefore, for tax purposes valuation is done on the basis of lower of cost or market value computed scrip-wise and providing for depreciation in each of the scrip, while ignoring any appreciation. The assessee has claimed a deduction on this account vide note 24 to the revised return of income.

63. We noted that revenue rejected the claim of the assessee following the decision of the Mumbai Tribunal in the case of Deutsche Bank AG. The CIT(A) upheld the disallowance made by the AO following the earlier years order of CIT(A) for assessment year 2007-08. The Revenue before the Tribunal has emphasised on the applicability of Mumbai Tribunal‟s decision in the case of Deutsche Bank AG and that the valuation is as per RBI guidelines. It was contended by the assessee that it is a well settled principle of law that unrealised gains on stock are not to be brought to the tax net. Reliance in this regard is placed on the decision of the Supreme Court in the case of Chainrup Sampatram vs. CIT [1953] 24 ITR 481 (SC), wherein it is held that profit cannot “arise out of the valuation of the closing stock”. The relevant extract of the judgement of the Supreme Court is reproduced below: “While we agree with the conclusion that no part of the profits of the firm in the accounting year can be said to have accrued or arisen at Bikaner, the reasoning by which the learned Judges arrived at that conclusion seems to us, with all respect, to proceed on a misconception. It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually 25stoppel on the year‟s trading.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 ….. While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year‟s account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually 26stoppel. …. Again, it is a misconception to think that any profit “arises out of the valuation of the closing stock” and the sites of its arising or accrual is where the valuation is made. As already stated, valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the “source” of such profits.”

64. The Supreme Court in the case of A.L.A. Firm vs. CIT (1991) (189 ITR 285) (SC) has observed that closing stock cannot be valued at a market value higher than the cost as that will result in taxation of the notional profits which the assessee has not realised. The relevant extract of the judgement of the Supreme Court is reproduced below: “The valuation of the closing stock at market value invariably will create a problem. For if the market value is higher than cost, the accounts will reflect notional profits not actually 26stoppel. On the other hand, if the market value is less, the assessee will get the benefit of a notional loss he has not incurred. Nevertheless, as mentioned earlier, the ordinary principles of commercial accounting permit valuation „at cost or market price, whichever is the lower‟. [para 27] The proper practice is to value the closing stock at cost. That will eliminate entries relating to the same stock from both sides of the account. To this rule custom recognises only one exemption and that is to value the stock at market value if that is lower. But on no principle can one justify the valuation of the closing stock at a market value higher than cost as that will result in the taxation of notional profits the assessee has not 26stoppel. [para 28]”

65. In Sanjeev Wollen Mills vs. CIT [2005] 279 ITR 434 (SC), the Supreme Court was concerned with a case where the assessee had valued its finished goods at market value. For assessment year 1992-93, the opening stock was valued at Rs.90 per kg (market price as on 1.4.1991 was Rs.98 per kg) and the closing stock at Rs. 130 per kg. For assessment year 1993- 94, the opening stock was valued at Rs.130 per kg and there was no closing stock. The assessee returned a loss of Rs.54,420 for the second year. The AO held that the profits were artificially inflated in assessment year 1992-93 to claim higher deduction under section 80HHC of the Act. The Supreme Court held that the profit earned by valuing finished goods is notional imaginary profit which could not be taxed. In view of the above, it is argued that appreciation in value of investments cannot be taken into account. The netting off of appreciation against the depreciation within a classification is therefore contrary to the principle laid down by the Supreme Court in the aforementioned judgements.

66. In context of netting off depreciation against appreciation, the Madras High Court in the case of CIT vs. Chari & Ram [1949] 17 ITR 1 (Madras) has held that there would be Page | 26

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 no assurance that there would be a market for the entire stock of articles of which the market value is higher and therefore, it would be hazardous to assume that the entire stock could be sold at the prevailing market rate and necessarily bring in a profit. The High Court also held that there is no provision of law or principle according to which the assessee could be compelled to adopt either the average cost for all the items or the market rate for all the items. Further, the Supreme Court in the case of United Commercial Bank vs. CIT [1999] 240 ITR 355 (SC) has held that there is no such question of following two different methods for valuing its stock-in-trade (investments) because bank was required to prepare balance sheet in the prescribed form and it had no option to change it and for the purpose of income-tax, what is taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee. In view of the above, it was claimed that the assessee be allowed a deduction in respect of depreciation on each securities, scrip wise, while ignoring the appreciation.

68. The assessee also relied on the judgement of the Bombay High Court in the case of Union Bank of India dated 08.02.2016 in ITA 1977 of 2013. The assessee in this case for the purpose of its books was netting off the depreciation in its securities against appreciation in other securities while for tax purpose, the assessee has been claiming gross depreciation that is without netting of the appreciation in other securities held as a part of investment. The Bombay High Court has dismissed the appeal of the Revenue and has decided the issue in favour of the assessee. It is argued that the facts of the present case are exactly same as in the aforesaid case of Union Bank of India. This issue stands covered by the judgement of the jurisdictional High Court. The facts of the assessee‟s case and the facts in the decision of the Bombay High Court in the case of Harinagar Sugar Mills Ltd. vs. CIT [1994] 207 ITR 901 (Bombay), relied by the AO are different. In the aforesaid decision, the assessee had changed the method of valuing stock in the year under consideration, whereas in the assessee‟s case, there is no change in the method of valuation. Also, in that case, sugar was valued differently by bifurcating the stock into „levy sugar‟ and „free sugar‟. The Court‟s conclusion is based on the fact that there was no justification for bifurcation of sugar between free and levy sugar. The Mumbai Tribunal in the case of DCIT vs. Majestic Holdings And Finvest (P.) Ltd. [2010] 2 ITR(T) 407 (Mumbai) has noted that the reliance of the Departmental Representative on the judgement of the Bombay High Court in the case of Harinagar Sugar Mills Ltd. is misconceived inasmuch as in that case there was nothing to show the bifurcation of the closing stick of sugar into levy sugar and free sugar and hence, the assessee was obligated to value the entire stock at one value. In the assessee‟s case as well, each scrip is different and therefore requires independent valuation. The CIT DR placed reliance on the decision of the Mumbai Tribunal in the case of JCIT vs. Dena Bank [2012] 20 taxmann.com 278 (Mumbai). In the aforementioned case, the security was purchased in year 1 at Rs. 100 and the market price at the end of the year was Rs.

95. Accordingly, the stock was valued at market price of Rs. 95 being lower than the cost. However, suppose in year 3, the market value rises to Rs. 120, in such a situation, the stock would be valued at cost i.e Rs. 100, being lower than the market price. The Mumbai Tribunal held that excess of appreciation over the cost price would not be considered for valuing the closing stock. In the present case, we are not concerned with a scenario where in the Page | 27

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 later year the depreciation provided in earlier years is reduced. Further, the decision of the Mumbai Tribunal in the case of Deutsche Bank A.G vs. DCIT [2003] 86 ITD 431 (Mumbai), relied by the AO is in connection with valuation of foreign exchange forward contracts. In this case the assessee did not account for in the financial statement the anticipated/contingent profits from the contracts to the extent not settled as on the last day of the accounting year whereas any loss on such contracts was provided for by a charge in the profit and loss account on the best estimates. The Department brought to tax the profit on such forward exchange contracts and stated that one method for valuation of the entire stock of securities should be followed. This resulted in a situation of taxing appreciation of stock, which goes against the general and settled principle of non-taxation of notional income, as laid by the Supreme Court in the case of Sanjeev Wollen Mills vs. CIT [2005] 279 ITR 434 (SC) and others discussed supra. Hence, we are of the view that this disallowance of depreciation/ reducing of depreciation on appreciation in the value of securities held as available for sale and held for trading category are allowable. We direct the AO accordingly.”

26. The issue arising in ground no.7, raised in assessee’s appeal is pertaining to the deduction claimed under section 36(1)(viia) of the Act.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 for recovery. Accordingly, the entire provisions made by the assessee including in respect of standard assets are for bad and doubtful debts as envisaged by provisions of section 36(1)(viia) of the Act. The AO, vide order passed under section 143(3) of the Act, did not agree with the submissions of the assessee and held that even as per the RBI guidelines, the assessee can make provisions on different categories of assets which does not mean that the provisions made for the standard asset is a provision for bad and doubtful assets. The AO further held that the provisions made on loans, assets, sub–standard assets, and doubtful assets can only to be taken as provisions for bad and doubtful debts. Accordingly, the A.O. disallowed the deduction claimed under section 36(1)(viia) of the Act in respect of provisions on standard assets.

28. The learned CIT(A), vide impugned order dated 29/03/2016, after noting that this issue is recurring in nature dismissed, the appeal filed by the assessee ss by following the findings of its predecessor–in–office in assessee’s own case for the assessment year 2007–08. Being aggrieved, the assessee is in appeal before us.

“71. We have noted the facts that the assessee has claimed that provision for standard assets should be taken into consideration for computing the deduction under section 36(1)(viia) of the Act. The assessee has also filed the details vide note 17 and Annexure 6 to the revised return of income on pages 8, 9 and 20 of Paper Book – 1 filed by assessee. As per the provisions of section 36(1)(viia) of the Act, a bank is eligible to avail deduction in respect of provision made for bad and doubtful debts, of an amount not exceeding 7.5% of total income and 10% of the aggregate average advances made by the rural branches of the bank. The provision is created by the assessee on the basis of RBI Guidelines. The assessee is required to create provision on non-performing assets on the basis of the classification of assets into the four prescribed categories i.e. loss assets, doubtful assets, substandard assets and standard assets [refer para 5.1.2 of the RBI Guidelines].

72. The Revenue before us emphasized that the provision for standard assets is not same as provision for bad and doubtful debts and the same is contingent in nature, since it is created only out of abundant caution. We noted from the provisions that the assessee is required to make a provision on all its debts ranging from 0.25% to 100% depending upon the categorization of the loan in terms of the guidelines issued by RBI. The provision on debts made by the assessee is in line with the RBI guidelines and section 36(1)(viia) of the Act does not have a requirement that the provision for debts should be in respect of specified debts only. Section 36(1)(viia) of the Act provides for a deduction to the bank in respect of „any provision made for bad and doubtful debts‟ subject to certain ceiling. It does not specify the methodology for calculation of provision for bad and doubtful debts. The banks are required to make provision for bad and doubtful debts in accordance with the RBI guidelines. All the loan assets are initially classified as „Standard‟. Later on depending upon the problems arising, if any, Page | 29

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 and symptoms of sickness shown including delays in the repayment of the principal and interest, deterioration of security, etc., they may be shifted to other categories. A provision made on any loan assets is a provision for „bad and doubtful debts‟ irrespective of the category in which the loan falls. This is to provide for the inherent risk of loan losses which the bank may suffer in subsequent years.

73. We noted from the provision of Section 36(1)(viia) of the Act that the same allows a deduction to banks in respect of any provision made „for‟ bad and doubtful debts. It does not restrict the allowance to provision made „on‟ bad and doubtful debts. Even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery. The fact that a provision is made for standard assets by itself indicates that a part of the standard assets are doubtful of recovery. Accordingly, the entire provision made by the assessee, including in respect of standard assets, is for bad and doubtful debts as envisaged by section 36(1)(viia) of the Act. Thus, in light of above, the assessee is eligible to claim deduction under section 36(1)(viia) of the Act even in respect of the provision made for standard assets. This issue was considered by the ITAT in assessment year 2006-07 in ITA 3145/Mum/2009 dated 6.09.2016, in an appeal against the revision order of the CIT passed under section 263 of the Act, wherein it is held as under: “So, however, we may also clarify that we are in principle in agreement that a provision for bad and doubtful debts cannot include that against standard assets i.e. which the bank (assessee) itself regards as good for receipt and, therefore with the decision by the tribunal in Bharat Overseas Bank Ltd. (supra) relied upon by the Revenue. A provision by definition a charge against profits, while that in respect of an asset, considered good, would be more in the nature of an appropriation of profit i.e. a reserve. This is precisely what the Tribunal in Bharat Overseas Bank Ltd. (supra) means when its states of the deduction being not in the nature of a standard allowance. No contrary judgement by the Tribunal or a higher court has even otherwise been brought to our notice. At the same time, the provision as per RBI guidelines – which are contended to have been followed / adopted, provide for the minimum provision, and the bank is free to make a higher provision, i.e., than that prescribed by the RBI norms. Provisioning, it may be noted, is a management function, made reflecting its risk assessment qua different assets. If therefore, the assessee-bank is able to satisfy the assessing authority that the provision as made is justified with reference to the debts considered by it as bad and doubtful, we see no reason as to why the same cannot be allowed. The matter is accordingly restored back to the file of the Assessing Officer for fresh determination by issuing definite findings of fact. Even as the primary onus would be on the assessee, the Assessing Officer cannot substitute his own judgement with regard to the risk assessment qua a particular asset and, correspondingly, the provision in its respect. His purview would be to examine the reasonableness of the assessee‟s claim in light of the facts and circumstances qua each asset/s in respect of which provision is made. In arriving at our decision, we have taken a holistic view of the matter, placing due emphasis on the words „provision‟ preceding the words „for bad and doubtful debts‟ as well as the words „not exceeding‟ occurring in the section, and which stand highlighted for the purpose. We decide accordingly.”

74. In view of the above discussion, arguments of both the sides, we are of the view that the assessee is eligible for claim of deduction u/s 36(1)(viia) of the Act on standard assets and this issue is covered by Tribunal‟s decision in assessee‟s own case for AY 2006-07 in vide order dated 06.09.2016. Hence, we allow this issue of assessee‟s appeal.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 in the relevant assessment year. Therefore, respectfully following the judicial precedents in assessee’s own case cited supra, we uphold the plea of the assessee and allow the claim of deduction on provisions for standard assets under section 36(1)(viia) of the Act. Accordingly, ground no.7, raised in assessee’s appeal is allowed.

“78. We noted that the assessee does not offer to tax, the interest income on NPAs, classified in terms of RBI guidelines, on accrual basis. The same is offered to tax in the year in which the same is received and credited to the profit and loss account in terms of the RBI guidelines. Presently, the period to recognise an advance as a NPA as per RBI guidelines is where interest and/ or instalment of principal remained overdue for 90 Page | 31

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 days whereas as per Rule 6EA, the same is 180 days. The AO has brought to tax the notional interest on sticky advances having irregularities for the period between 90 days to 180 days on accrual basis, relying on section 43D of the Act and rule 6EA of the Rules. The CIT(A) has upheld the disallowance made by the Assessing Officer following the directions of the DRP for the assessment year 2012-13.

79. The Revenuebefore the Tribunal has emphasized on the applicability of the criteria prescribed as per rule 6EA and that the interest on NPAs cannot fall under the exception provided in clause (e) of rule 6EA. But, the assessee argued that the action of the lower authorities cannot be sustained due to the following three reasons viz., a. section 43D of the Act would not apply in cases where interest is neither received nor credited to the profit and loss account; b. RBI guidelines are the primary criteria for determining whether a debt is bad or doubtful and the rule should be framed having regard to the guidelines; c. without prejudice, a deduction should be allowed of such interest as bad debts.

80. In relation to the above, it was argued that the provisions of section 43D of the Act provide that the categories of bad or doubtful debts would be prescribed having regard to the guidelines issued by the RBI in relation to such debts. In other words, the Legislature envisages that the RBI guidelines are the primary criteria for determining whether a debt is bad or doubtful and the categories prescribed in rule 6EA necessarily have to follow the RBI guidelines. Accordingly, rule 6EA operates in a very narrow scope and has to be read in conjunction with RBI guidelines.

81. We have gone through the case law in American Express Bank Ltd. vs. Addl. CIT [2012] 25 taxmann.com 572 (Mumbai), wherein the Mumbai Tribunal was considering a case where the loans on which interest/principal remained unpaid for 90 days were classified as no-accrual loans. The unpaid interest in respect of such loans was reversed to an account called Reserve for Doubtful Interest (RFDI) account. All subsequent interest accruals of such loans were credited to RFDI account and not to the profit and loss account. The assessee offered to tax the net amount credited to the RFDI account i.e. the interestaccruals in the RFDI account net of recoveries. However, it was arguedthat such tax treatment leads to offering interest on non-accrual loans to tax on accrual basis, even if the same is not credited to the profit and loss account. The Mumbai Tribunal held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss accountfor the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. The aforesaid decision has been affirmed by the Bombay High Court inthe case of DIT vs. American Express Bank Ltd[2015] 235 Taxman 85 (Bombay).In the present case the assessee argued that there is no credit entry in the books of the account in respect of the interest on such NPAs and, accordingly, the addition madecannot be sustained. Hence according to assessee the issue stood covered by the first proposition in terms of the Bombay High Court in assessee‟s favourand hence,nofurther submissions were made on other two propositions.

82. Wenoted that this issue is squarely covered by the decision of Hon‟ble Bombay High Court in the case of American Express Bank Ltd (supra), wherein it is held that there is no credit entry in the books of the account in respect of the interest on such NPAs, no addition can be made. Further, even the Mumbai Tribunal in the case of American Express Bank Ltd. (supra) has considered this issue and held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in Page | 32

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence bywhich the said interest could be charged to tax. Hence, we delete the addition of interest income and allow this issue of assessee‟s appeal.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

“85. We noted that the RBI guidelines require interest on non performing securities also to be reckoned as income on realisation basis and the same has regularly been recognised in the books of account accordingly. The case law cited by the learned Counsel for the assessee before us in the case of CIT vs. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Delhi), the Delhi High Court had to consider a case where the assessee, being a NBFC, treated the inter corporate deposits as an NPA, in terms of the directions of the RBI and, hence, did not recognise interest income in respect of the same. The Delhi High Court has recognised the real income theory and this was approved by the Supreme Court in the case of Sothern Technologies and held that provisions of other enactment which contain a non obstante clause, would override the provisions of the Act. In view of the above, the Delhi High Court held that the interest on inter corporate deposits recognised as NPA, in terms of the directions of RBI was not taxable. The aforesaid decision of Hon‟ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) has been affirmed by Hon‟ble Supreme Court in thecase of CIT vs. Vasisth Chay Vyapar Ltd. [2019] 410 ITR 244 (SC).

86. In view of the above decision of Hon‟ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra), which was affirmed by Hon‟ble Supreme Court, the facts and circumstances are exactly identical in the present case before us and hence, respectfully following the same, we delete the addition of interest income from non- performing Investments made by the AO. This issue of assessee‟s appeal is allowed.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

“We have heard the rival submissions and perused the materials before us. We find that in the case of State Bank of Travancore(supra), the AO had disallowed the claim of the Bank in respect of the contribution to medical benefit scheme, amounting to Rs.50.00 lakhs. The AO. Was of the opinion that the provision of section 40A(9) of the Act were applicable and the assessee was not entitled to claim the expenditure as an allowable item Matter travelled upto the Tribunal and it deliberated upon the provisions of Section 40A(9)of the Act at length, The Tribunal held that the basic intention of the legislature for insertion of sub section 9 of section 40A was to discourage the practice of creation of camouflage Trust funds, ostensibly for the welfare of the employees and transferring huge funds to such Trusts by way of contribution, that in those cases the investment of the trust corpus was also left to the complete discretion of the Trustees, that to avoid hardship in the case where Trust/Funds had been set up wholly and exclusively for the welfare of the employees prior to 1.4.1984 sub section (10) was also inserted to section 40A.The Tribunal was of the opinion that provisions of section 40A(9) should not make any harm to the expenditure incurred bonafide, that the contribution by the assessee bank was not disputed by the AO, stating that the same was not bonafide, that the funds were not controlled by the assessee banks, that the bonafide contribution made by the assessee as an employer was not hit by section 9 of section 40A of the Act.In the case under consideration,there is no doubt about genuineness of payment nor it is the case of the AO or FAA that Trust was not bonafide or the expenditure was not incurred wholly and exclusively for the employees.Considering these facts of the case and following the judgment of State Bank of Travancore (supra),Ground No.9 is decided in favour of the assessee.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 of the Act treated the amount as not for the purpose of business and accordingly disallowed the claim made by the assessee in the Notes accompanying computation of income. The AO further held that even otherwise the claim is not allowable as the same has not been made in the revised return of income. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee on this issue by following the decision of its predecessor in assessee’s own case for the assessment year 2004- 05. Being aggrieved, the assessee is in appeal before us.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 assessee’s own case for the assessment year 2007–08. Being aggrieved, the assessee is in appeal before us.

“88. Brief facts are that duringthe year under consideration the assessee has recovered bad debts written off in earlier years, in respect of which no claim for deduction was made under section 36(1)(vii) of the Act in the past. The assessee raised an additional ground before the CIT(A) in this regard. But, the CIT(A) has dismissed the additional ground raised on the basis that a similar issue was decided against the assessee by the CIT(A) in assessment year 2007-08 and that the facts of this issue are not verified during the assessment proceedings and appellate proceedings.

89. The Revenue before theTribunal has emphasized that the claim made for deduction under section 36(1)(viia) of the Act and also under section 36(1)(vii) of the Act, to the extent the write off exceeds the opening credit balance for the provision made for bad and doubtful debts and that even if the assessee has not claimed deduction under section 36(1)(vii) of the Act, but has claimed a deduction under section 36(1)(viia) of the Act, the same will be hit by the provisions of section 41(1) or 41(4) of the Act. In relationto the above, the assessee argued that the provisions of section 41(4) of the Act are applicable only when the recovery of bad debts are in relation to a debt for which a deduction under section 36(1)(vii) of the Act is allowed. The assessee has been allowed a deduction in relation to provision made for bad debts under section 36(1)(viia) of the Act in the earlier years. This provision, as ifby a fiction deems something to be income, has to be strictly construed. Therefore, the provisions of section 41(4) of the Act, do not apply.

90. We noted from the above arguments of both the sides and case law cited by the parties, that the issue is squarely covered by a decision of the Bangalore Bench of the Tribunal in the case of State Bank of MysoreVs. DCIT[2009] 33 SOT 7 (Bangalore), now merged with assessee. We noted that the Tribunal in the case of State Bank of Mysore (supra) narrated the facts and the facts in the present case are exactly the same as in the case of State Bank of Mysore. In the case of State Bank of Mysore(supra), the assessee had claimed deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act. Accordingly, the Bangalore Tribunal has held that section 41(4) of the Act cannot be invoked. Sections 41(1), 41(2), 41(3) and 41(4) of the Act operate in different spheres. Each of the sub-sections to section 41 of the Act deals with different and distinct circumstances. Each of the sub-sections deals with different and distinct topics and one cannot read recoupment under one sub-section into another. We have considered the decision relied on in this regard of Supreme Court in the case of Nectar Beverages (P.) Ltd. vs. DCIT [2009] 314 ITR 314 (SC)wherein the Supreme Court has dealt with the specific section 41(2) of the Act for taxing balancing charge versus taxing the same under section 41(1) of the Act and has concluded that section 41(1) of the Act shall not be applicable.

91. As the aspects of bad and doubtful debts is dealt with specifically under section 41(4) of the Act, as laiddown by the Supreme court in Nectar Beverages (supra), section 41(1) of the Act is not applicable in case of the assessee. Further, the primary condition to be satisfied for taxing an amount as deemed income under section 41(1) of the Act is that a deduction/allowance should have been claimed by the assessee in respect of a loss, expenditure or trading liability. A deduction under section 36(1)(viia) of the Act is not for a loss, expenditure or trading liability, but for a provision for bad Page | 38

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 and doubtful debts. We noted that the learnedCITDepartmental Representative had raised a contention that the CIT(A) and AO have not perused the details and, hence, the matter may be restored back which was opposed. In relation to the above contention, without prejudice to the assessee‟s objection in the event the matter is proposed to be remanded back to the AO, a direction may be given to the AO to delete the addition, if the recovery of the amount is in respect of a write off claimed and allowed as a deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act in the earlier years.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 taxmann.com 215 (Bom.). Reliance was also placed upon the decision of the coordinate bench of the Tribunal rendered in assessee’s own case in State Bank of India (supra), vide order dated 03/02/2020, for the assessment year 2008-09, wherein the coordinate bench observed as under:-

“95. Now before us assessee claimed that income earned by the branches of the assessee located outside India is not to be taxed in India in light of the tax treaties between India and the countries where the branches are located, as the income has been subject to tax in foreign countries. The details of the income earned by foreign branches were submitted to the AO vide Annexure 1 of letter dated 19.02.2010 and now enclosed in assessee paper book 1 at page 325. It was contended that the assessee raised an additional ground before the CIT(A) in this regard. However, the CIT(A) dismissed the additional ground raised by the assessee on the basis that a similar issue was decided against the assessee by the CIT(A) in assessment year 2007- 08 and that the facts of this issue are not verified during the assessment proceedings and appellate proceedings.

96. The Revenue before the Tribunal emphasized that no details were filed before the AO in connection with income from foreign branches and that the Notification No.91/2008 dated 28 August 2008 issued under section 90(3) by the CBDT is Clarificatory in nature and applicable to the assessee for the year.

97. During the course of the hearing, it was pointed out that the details of income earned by foreign branches were submitted to the AO vide Annexure 1 of letter dated 19.02.2010. In fact, based on the said details, the AO has allowed relief for the tax credit in respect of taxes paid in the foreign branches as can be verified from the assessment order. The issueis decided in favour of the assessee by the decision of the Mumbai Tribunal in the case of Bank of India vs. ACIT [2012]27 taxmann.com 335 (Mumbai.Trib), wherein it has been held that income attributable to foreign branches being permanent establishments outside India cannot be taxed in India having regard to the mandate contained in Article 7(1) of the relevant double taxation avoidance agreements. The aforesaid decision has been affirmed by the Bombay High Court [2015] 64 taxmann.com 215 (Bombay). When under the relevant tax treaty it is provided that tax „may be‟ charged in a particular State in respect of the specified income, it is implied that tax will not be charged by the other State. Once an income is held to be taxable in a particular jurisdiction under a tax treaty, unless there is a specific mention that it can be taxed in the other jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. As regards the learned CIT DR‟s reliance on the Notification No.91/2008 dated 28 August 2008 issued under section 90(3), it is submitted as under: section 90(3) empowers the Central Government to define any term which is not defined in the Income-tax Act, 1961 or in the relevant tax treaty. The legal meaning of „term‟ is any expression or phrase which has a fixed or known meaning in art, science, or profession. Accordingly, it is submitted that sale, transfer, gift, etc. could be regarded as terms; however „may be taxed‟ cannot be regarded as a term. Hence, the said notification, is not applicable The Notification does not define any „term‟; it only gives a result / clarification. Section 90(3) empowers the Central Government to define any term which is not inconsistent with the provisions of the Income-tax Act, 1961 or the tax treaty. As the Supreme Court has already interpreted the meaning of the phrase „may be taxed‟ in the case of CIT v/s. PAVL Kulandagan Chettiar [267 ITR 654], the notification cannot give a meaning to „may be taxed‟ which is inconsistent with the views of the Supreme Court. Page | 40

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 The Notification cannot survive as it directly contradicts the judgment of the Supreme Court.

98. Without prejudiceto the above argument made was thateven if it held that the above notification is applicable, the same can be said to be applicable prospectively (i.e. from assessment 2009-10 onwards) and, hence, is not applicable for the year under consideration. Reliance in this regard, is placed on the decision of the Supreme Court in case CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466 (SC), wherein it was held that one established rule for interpretation of legislation is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. Similar view has been taken by the Madras High Court in V.R.S.M Firm[1994] 208 ITR 400 (Madras).

58. Before proceeding further, it is pertinent to note that the aforesaid Notification no. 91 of 2008 was issued under section 90(3) of the Act, which reads as under:-

“(3) Any term used but not defined in this Act or in the agreement referred to in sub- section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.”

59. Further, Notification no. 91 of 2008 dated 20/08/2008 issued by the Central Government as per section 90(3) of the Act, reads as under:-

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

“In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of a resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

“16. None of these judicial precedents take into account the developments with respect to the provisions of Section 90(3) and the notification issued thereunder. The only exception is a coordinate bench decision in the case of Bank of India (supra) wherein the issue of notification was specifically raised but then the coordinate bench, following Hon'ble jurisdictional High Court's judgment in assessee's own case for the assessment year 2003-04 and without realizing that the amendment in law was effective 1st April 2004 i.e. assessment year 2004-05, decided the issue in favour of the assessee. The impact of amendment with effect from 1st April 2004 not having been noted or having been brought to the notice of the coordinate bench, this decision is clearly per incurium and, as such, not a binding judicial precedent. As a matter of fact, when subsequent assessment years of this very assessee came up for consideration of another bench, the said precedent was not followed and, vide order dated 30th November 2018, it was observed that "the decision of the Hon'ble High Court in assessee's own case pertained to the assessment years 2001-01 and 2003-04 and the Hon'ble High Court never had any occasion to examine the taxability of income of foreign branches in India keeping in view provisions of Section 90(3) read with the Government notification dated 28th August 2008" and that " we are unable to accept the submission of the learned authorised representative that the issue is covered earlier decisions of the Tribunal". The assessee, therefore, does not derive any benefit from this legal precedent relied upon. All other judicial precedents hold good in respect of the pre-amendment law, but then the legal Page | 42

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 position, as analysed above, has changed, and, under the changed legal position, these judicial precedents do not hold good. As regards the DRP decisions for the immediately two preceding assessment years, we have noted that the post amendment legal position was not even brought to the notice of the Dispute Resolution Panel. There is not even a whisper of a suggestion that the amendment in law in Section 90(3) and the post amendment notification was brought to the notice of the DRP. Learned counsel's arguments before the DRP simply proceeded on the basis that there was no change in statutory provisions after the Kulangadan Chettiar's judgment. That is simply unacceptable. While we restrain from making any observations on the conduct of the representatives of the assessee, we find it difficult to believe that a big-4 accounting firm, as the assessee's representative before the DRP, as indeed before us, is, would really be oblivious of the correct legal position and it was anything less than a calculated ignorance, before the DRP, on the basic legal position. Advising the correct legal position and then making whatever aggressive claim one makes is one thing, but not explaining the correct legal position and then hoping to succeed with the claim, by keeping the adjudicator in dark about the statutory developments, is quite another. The path chosen by the assessee could have fallen in the first category if submissions were made before the DRP about the amendment in law by way of Section 90(3) and notification thereunder, and yet the exemption claim was to be justified due to no fresh notification being issued after the substitution of section 90(3) with effect from 1st October 2009. That is not the case. In any case, the DRP decisions cannot fetter our adjudication.

“7. Learned counsel has shown, in accepting the fact that even though the issue is covered in favour of the assessee by earlier decisions of the coordinate benches, these coordinate bench decisions cease to be binding judicial precedents inasmuch as reasoning adopted therein does not hold good any longer in the light of the decision in the case of Technimont (P.) Ltd. (supra), admirable grace. It is not clear to us whether this approach is to preempt a detailed discussion on merits of the matter, or whether this approach is indeed bonafide stand of the assessee. That does not, however, matter much at this stage, as all the facets of this matter are covered above nevertheless. The basis on which the relief was granted in the earlier years has been examined and that basis being ex facie incorrect and even rendered by inadvertence is glaring in the analysis that has been extensively reproduced above. Learned counsel for the assessee, however, does not give up; he has an even more innovative plea now. He Page | 43

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 submits that above decision is per incuriam for some other reason, which has not been discussed in any judicial precedent so far, inasmuch as it overlooks the fact that the notification dated 28th August 2008 was not issued in the context of the business income, and, should accordingly not be applicable so far as business income earned abroad, as in this case, is concerned. We see no substance in this plea either. The notification deals with connotations of the expression “may be taxed”, appearing in the tax treaties entered into by India, and there is absolutely no basis whatsoever to support the proposition that the effect of the notification has to be restricted in its application to non-business income only. No such differentiation in treatment of business and non-business income is envisaged in the said notification, nor to do we see any justification for inferring the same. Learned counsel does not have any material whatsoever in support of the proposition canvassed by him, nor does this proposition make any sense on the first principles- inasmuch as once the notification is issued without any such specific restriction for application to business income, we cannot infer a restriction in its application. We, therefore, reject the plea of the assessee, and thus decline to interfere in the matter. We uphold the action of the Assessing Officer in including the profits of the assessee‟s overseas branches, amounting to Rs.1,408.32 crores, in its taxable income in India.”

“100. The next issue raised by assessee by way of additional ground is as regards to claimof deduction on account of write-off of bad debts under section 36(1)(vii) of the State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 Act in terms of the decision of the Hon‟ble Supreme Court in the case of VijayaBank Vs. CIT [2010] 323 ITR 166 (SC). For this, assessee raised additional ground.

102. We noted that the assessee now raised an additional ground, to claim a deduction under section 36(1)(vii) of the Act in respect of the provision for bad debts of Rs. 2000.94 crore (excluding the provision for standard assets of Rs. 566.97 crore), in accordance with the decision of the Supreme Court in the case of Vijaya Bank (Supra).The assessee claimed that if the aforesaid claim is allowed, the deduction under section 36(1)(viia) of the Act as allowed by the AO may be withdrawn.In relation to theDepartmental representative‟s stand on non-admission of additional grounds by relying on the decision of the Bombay High Court in the case of Ultratech Cement Ltd. Vs. ACIT [2018] 408 ITR 500 (Bombay), the Ld. Counsel of assessee argued that whether or not to allow an additional ground to be raised before the appellate authority is to be decided by the appellate authority in exercise of its discretion considering the facts and circumstances of the case before it.

104. We noted that as per the Supreme Court judgement, the twin conditions for eligibility of deduction under section 36(1)(vii) of the Act are as under:  debit to profit and loss account; and  reduction of loans and advances from the asset side of balance sheet both of which conditions are satisfied in the assessee‟s case.

97. (para No. 5), where the AO has allowed the deduction in the order giving effect to the Tribunal‟s order.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016  29.04.2016 for the assessment years 1997-98 and 1998-99 (refer para 10 and para 21), where the AO allowed the deduction in the order giving effect to the Tribunal‟s order. However, the CIT exercising power of revision under section 263 of the Act, set aside the matter. The appeal filed by the assessee before the Tribunal against the aforesaid order under section 263 of the Act is heard on 14 March 2019 and the Tribunal‟s order is awaited.  31.01.2018 for assessment year 1999-00 (refer para 34 to 36 on page 43 to 45), where the AO is yet to pass the order giving effect to the Tribunal‟s order. Moreover, the AO in the assessee‟s own case, while passing the assessment orders for Ays 2011-12 to 2015-16 has allowed the claim of deduction under section 36(1)(vii) as per Supreme Court‟s ruling in the case Vijaya Bank.

106. Hence, we are of the view that this issue needs to be set aside to the file of the AO and AO will decide the issue after examining the facts afresh. Hence, this issue of assessee‟s appeal is allowed for statistical purposes and matter remanded back to the file of the AO.”

67. The additional ground filed by the assessee vide application dated 19/04/2021 pertaining to deduction in respect of education cess and secondary & higher education cess was not pressed during the course of the hearing. Accordingly, the said application is dismissed as not pressed.

“1. The order of the CIT(A) is opposed to law and facts of the case.

2. On the facts and circumstances of case, in law, the Ld. CIT(A) has erred in allowing the assessee's plea that the interest income on securities has to be taxed on the due basis only without appreciating that as per the mercantile system of accounting followed by the assessee, interest on securities has to be taxed on accrual basis.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

5. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 22,33,433/- incurred by the assessee on reservation of seats in the schools for the children of the bank officers without appreciating the amount was not incurred wholly and exclusively for the purposes of its business. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that no disallowance under section 14A read with Rule 8D(2)(ii) is called for, thereby granting relief to the assessee, overlooking the fact that the AO had correctly made the disallowance, as the assessee could not establish the nexus between its own funds and investments made in tax free income. 7. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to restrict the disallowance u/s. 14A r.w.r 8D(2)(iii) by excluding the long term investments in subsidiary/group concerns relying on the decision of ITAT in the case of Garware Wall Ropes Ltd. (65 SOT 86), without appreciating the fact that the decision of the ITAT has not been accepted by the department and appeal has been admitted by the Hon'ble High Court. 8. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in treating loss on account of depreciation of securities in HTM category/amortization of securities in HTM category without appreciating that no depreciation is to be provided for investment classified under the HTM category. 9. On the facts and circumstances of the case and in law, the CIT(A) has erred in allowing depreciation on foreign assets without appreciating that depreciation had not been properly computed by the assessee as certain blocks of assets had not been properly computed by the assessee as certain blocks of assets had turned negative after allowing depreciation. 10. On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the Assessing Officer, to allow loss determined in the case of Bank of Saurashtra when the order passed for A.Y. 2009-10 has not reached finality. 11. On the facts and circumstances of the case, the CIT(A) has erred in allowing the discount on issue of Employee Stock Purchase Scheme in accordance with the principle laid down by the Bangalore Special Bench in the case of Biocon Ltd. (ITA No. 368 to 371 & 1206/Ban/2010), when the decision has not been accepted and further appeal has been filed before the Karnataka High Court on this issue.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 for the relevant financial year to the extent of Rs.1466,80,70,080 from the income as per profit and loss account prepared in accordance with books of account maintained by the assessee. In the revised return of income, the assessee has reduced an amount of Rs. 221,80,00,309. During the assessment proceedings, it was brought to the notice of the assessee that interest accrued on government securities but not due has been claimed in the computation of income, though the same is income as per the accounting system adopted by it. It was also brought to the notice of the assessee that in view of the provision of section 145(1) of the Act, the taxable income is computed on the basis of accounting employed by the assessee unless it is against the normal accounting principles or there are Income Tax provisions giving contrary/different treatment to some items. Accordingly, the assessee was asked to explain as to why the interest accrued but not due claimed in the computation of income shall not be disallowed and added to its income. In response thereto, the assessee submitted that it is the practice of the assessee to account for the interest on securities on an accrual basis while arriving at the book profit, however, in the return of income, the interest on securities is taxed on due basis. It was further submitted that the right to receive interest on securities arises on the due date only which was after the accounting year and accordingly, it cannot be taxed in the accounting year itself. The AO vide order passed in section 143(3) of the Act did not agree with the submissions of the assessee and held that to arrive at a correct and undistorted profit, the method of accounting of interest on an accrual basis is correct and also falls in line with the RBI guidelines. Therefore, it was held that the assessee is totally incorrect in excluding interest accrued but not due for income tax purposes. The learned CIT(A), vide impugned order, after noting that this issue is recurring in nature, allowed the appeal filed by the assessee on this issue by following the decisions of the coordinate bench of the Tribunal in assessee’s own case. Being aggrieved, the Revenue is in appeal before us.

“31. Ground No. 10 is regarding interest on securities due to difference between accrual and due method. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. We note that an identical issue has been considered and decided by this Tribunal in assessee's own case for the assessment year 1991-92. Further for the assessment year 1995-96 again the Tribunal has considered and decided this issue in para 16 & 17 as under: Page | 48

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

"16. As regards ground No. 8 relating to the addition of? 2,45,42,24,967/- made by the A.O. and confirmed by the Id. CIT(A) on account of interest on securities holding the same to be taxable on accrual basis instead of due basis, it is observed that this issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee's own case for earlier years vide its order dated 19.05.2008 (supra) wherein a similar addition was deleted by the Tribunal for the following reasons given in Para 20: "We have considered the submissions made by both sides, material on record and orders of authorities below. We find that the Tribunal in the case of Union Bank of India (supra) after going through various facts and various judicial decisions held as under: "In the course of the arguments, the Id. Counsel for the assessee had made a submission that though in the profit & loss account the Interest on Govt. securities are credited on day to day basis, for purposes of computation of total income under the Income Tax Act, the credit entries are deleted from the net profit and are substituted by the interest that has become due during the year on specified dates and offered to tax. It was pointed out that the interest that is offered to tax in the return of income has also been assessed to tax by the A.O. In order to verify the submission, we directed the assessee to furnish the relevant statements to us. These were filed along with a covering letter which was taken on record. We find that in the profit & loss account the year ended 31.12.1987, interest on Govt. securities amounting to 7 138,06,30,075/-has been included in the credit side. However, in the computation of total income for income tax purposes, the interest has been reduced from the net profit and interest of 138,06,30,075/- has been included in the coupon date basis. In the assessment order for the A.Y. 1988-89, a copy of which was also filed before us. The Assessing Officer has accepted the above computation made by the assessee. With regard to the contention that the assessee cannot set up a claim in the return of income which is altogether different from the manner in which entries are made in its accounts, we may notice the judgment of the Supreme Court in the case of United Commercial Bank in 240 ITR 355(SC). While reversing the judgment of the Calcutta High Court reported in 200 ITR 68 (Cal), wherein it was held that the assessee cannot prepare the computation of its income fro income tax purposes in a manner different form the method under which it keeps accounts. It was held by the Supreme court that preparation of the balance sheet in accordance with the statutory provisions of the banking Regulation Act would not disentitle the assessee in submitting the income tax return on the real taxable income in accordance with a method of accounting adopted by the assessee consistently and regularly. For the purpose on income tax, what is to be taxed is the real income and in assessing the real income, the assessee cannot be bound by the manner in which its balance sheet is prepared under a particular statute. Thus, merely because in the balance sheet or the profit & loss account, the assessee bank before us has taken credit for the interest on Govt. securities on day today basis, it cannot be prevented form urging in the return that such interest accrues not on day to day basis but only on the specified coupon dates and Page | 49

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 that this is the correct legal position on the basis of which its income should be computed. Therefore, we reject the contention of the Id. (D.R.). For the above reasons, we accept the assessee's claim and hold that the interest on Govt. securities cannot be assessed "de die in diem". We direct the A.O. to assess the interest on the basis of the coupon dates. Ground No. 2 is allowed." Similarly, the Tribunal in the case of Housing Development and Finance Corporation (supra), following the aforesaid decision of the Tribunal, has also held that Section 145 of the Act could not override the provisions of Section 5 and, therefore, no person could be assessed unless the income accrued to him and in the cases of Securities, interest accrued to the assessee on specified dates and not on day today basis as the assessee has no right to receive the income before fixed date, hence, interest was taxable on the due basis only. In this view of the matter, we accept this ground of the assessee.

17. Moreover, as rightly submitted by the learned counsel for the assessee, the decision of Mumbai bench of Income Tax Appellate Tribunal in the case of Dy. CIT Vs Housing Development & Finance Corporation Ltd. 98 ITD 319 and that of the Hon'ble Kerala High Court in the case of C.I.T Vs Federal bank Ltd., 301 ITR 188 also support the assessee's case on this issue. Respectfully following these judicial pronouncements, we delete the addition made by the A.O. and confirmed by the Id. CIT(A) on this issue and allow ground No. 8 of assessee's appeal." Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 the purchase of securities and treated the same as revenue expenditure. Similarly, it has credited the amount of Rs. 2111,40,69,425 received on account of broken period interest on the sale of securities. During the assessment proceedings, the assessee was asked to furnish an explanation as to why the broken period interest should be allowed as revenue expenditure. In response thereto, the assessee submitted that the broken period interest relating to government and other approved securities refers to the interest relatable to the period from the last due date till the date of purchase or sale. Thus, when a bank purchase a security, it pays the market price of the security plus broken period interest to the seller, because the seller is entitled to interest to the date of sale. The assessee further submitted that this is an age-old practice in the government securities market. It was further submitted that the purchasing bank trades the broken period interest paid as expenditure and the selling bank trades the broken period interest received as income. The assessee also submitted that the above-said market practice is in conformity with Accounting Standards 9 and 13 framed by the Institute of Chartered Accountants of India. The AO vide order passed under section 143(3) of the Act noted that in the assessment year 2007-08 and for earlier years, the contention of the assessee treating the broken period interest paid on the purchase of securities as revenue expenditure has not been accepted by the Revenue. The AO further noted that during the year under consideration, in the computation of income appended to return of income, the assessee has reduced income accrued on government securities but not due from the income as per profit and loss account, same as last year i.e. the assessment year 2008-09. Thus, it was held that if the income accrued but not due is not offered for taxation, then the broken period interest corresponding to the securities in closing stock is claimed without the corresponding revenue being realised. Accordingly, the AO disallowed broken period interest of Rs. 909,59,38,265 claimed as a deduction on the ground that this goes against the theory of real income as well as the matching concept, which are fundamental to accounting. The learned CIT(A), vide impugned order, after noting that this issue is recurring in nature, allowed the appeal filed by the assessee on this issue following the judicial precedents in assessee’s own case. Being aggrieved, the Revenue is in appeal before us.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 “117. We noted that BPI refers to interest on Government and other approved securities relatable to the period from last due date (upto which interest was paid) till the date of purchase or sale. Thus, when the assessee purchases a security, it pays a price which is calculated having regard to two components, viz., the market price of security plus BPI to the seller. In this case, the assessee treats the BPI paid as expenditure. Similarly, when the assessee sells a security, such interest is treated as income of the assessee.

is covered in favour of the assessee by the order of the Tribunal in its own case for the AYs 1991-92 to 1994

95. (Order dated 19.05.2008), which was followed by the Tribunalin subsequent AYs. Further, the Bombay High Court on the appeal by Revenue for the assessment year 1996-97 upheld the decision of Tribunal, vide its order dated 01.08.2016. From these facts we noted that this issue is covered in favour of assessee and hence, this ground is decided against Revenue. This issue of Revenue‟s appeal is dismissed.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 that in the assessment year 2008-09, the claim for provision for wage revision made in the revised return of income was disallowed by the AO. During the year, the assessee has not made the claim in the revised return of income. The AO held that the claim made by the assessee by way of note cannot be allowed, being a contingent liability. The AO further noted that in this case the assessee has filed revised return still the above claim has not been made in the computation of income. Accordingly, following the decision of the Hon’ble Supreme Court in Goetze India Ltd (284 ITR 323) rejected the claim for allowability of provision of wage revision made by the assessee only in the notes to computation of income. The learned CIT(A), vide impugned order, allowed the provision for wage revision following the decision of the Hon’ble Delhi High Court in CIT v/s Bharat Heavy Electrical Ltd (2010) 26 taxmann.com 202. Being aggrieved, the Revenue is in appeal before us.

“126. We noted that the assessee enters into agreements with its employees (officers and other staff) union in respect of revision ofwages. The Eighth Bipartite Settlement entered into by the Indian Banks‟ Association (IBA) on behalf of the member Banks with the All India Unions of Workmen expired on 31.10.07. The employees union had placed a fresh charter of demands before the management of the assessee for, inter alia, revision of wages on 07.11.07. Discussions had taken place between the Government, IBA, the assessee and Employees Unions/Associations. In light of the ongoing trend of wage revision since the past several years and charter of demands, the assessee was required to create a provision of increase in wages for its employees from 01.11.2007. Accordingly, the assessee has made a provision of Rs. 575 crore for the estimated liability in respect of additional wages payable for the period 01.11.2007 to 31.03.2008. The said additional wages were computed, considering 13.25% increase in salary and allowances on salary slip component (i.e. based on the percentage increase finalised during the earlier Eighth Bipartite Settlement). On27.04.2010, IBA signed an industry level Bi-partite settlement/ Joint Note (effective from 1.11.2007) with representative Unions, Associations of workmen & officers, following which a 17.5% wage increment was decided to be given to the employees.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016  CIT vs. Mahindra Ugine & Steel Co. Ltd. [2000] 245 ITR 428 (SC) (Bom.) [see para 2 on page 2]  CIT vs. United Motors (India) Ltd. [1990] 181 ITR 347 (Bombay) (Bom.) [last para page 3-4] 128. In fact on exact similar issue of deductibility of wage revision relating to the same Agreement, pending finalisation of wage settlement, is also decided in favour of the assessee by the Tribunal in the case of other Bank‟s. In the case of Bank of India vs. DCIT [ITA No. 3082/Mum/2015] [Mum. Trib]the assessee had claimed a deduction for provision created toward wage revision arrived at based on indicative increase for assessment year 2009-10. The Mumbai Bench of the Tribunal allowed the claim on the basis that the provision was for services rendered by the employees and there was no doubt that the assessee has to make payment once the negotiations were over. We may mention that Bank of India is also a part of the same Bipartite settlement as in the present case of the assessee.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 facilities for the benefit of the employee. The staff welfare expenses also include a payment of Rs.22,33,432 made with a view to ensure that certain seats in various schools all over India are reserved for the children of the officers of the assessee so that the hardship otherwise faced by the officers of the bank for children’s education during transfer/relocation may be reduced. The institution-wise breakup of the amount of Rs.22,33,422 was also provided by the assessee. The payment for the reservation of seats was done by the assessee for its employees under the Bank’s Staff Welfare Scheme and hence the same was treated as part of normal business expenditure. During the assessment proceedings, the assessee also placed reliance upon the decisions rendered by the appellate authorities in its favour. The AO vide order passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that payments are in the nature of outright grants or deposits and the same is not really for the welfare of the staff, what is meant to ensure is that only the Senior officers of the bank are able to secure the children admitted to the top-level schools. Accordingly, the AO disallowed the amount of Rs.22,33,432 by holding that the same is not the expenditure incurred wholly and exclusively for the purpose of business. The learned CIT(A), vide impugned order, after following the decision of the coordinate bench of the Tribunal in assessee’s own case for the assessment year 1996-97 allowed the appeal filed by the assessee on this issue.

“9. Ground No. 5 is regarding staff welfare expenses. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The AO disallow a sum of 1,00,55,676/- being the payment made to certain schools for reservation of seats for the children of senior officers. The CIT(A) confirm the disallowance on the ground that these payments are gratitude without any contractual obligation. The Ld. AR of the assessee has filed the policy of assessee-Bank whereby the bank under the scheme has made the arrangements with certain schools to reserve seats for the children of officers to ensure proper education of the children of the officers who are transferred periodically. We further note that an identical issue has been considered and decided by this Tribunal in assessee's own case for the assessment year 1992-93 vide order dated 19.5.2008 in para 30-34 as under: 30. The next issue is regarding deduction amounting to 32,27,534/- being staff welfare expenses on account of payments made to educational institutions for reservation of seat to the children of the employees. The learned Authorised Representative of the assessee has pointed out that the amount paid to schools for reservation of seats for children of employees.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

31. The facts, in brief, are that the A.O. disallowed these expenses as these were not staff welfare expenses in the true sense of the word because of this, these were contrary to the Constitutional provisions of law and opposed to the public policy also. The Id. CIT(A), following his appellate order for A.Y. 1987- 88, also confirmed the same. Aggrieved by this, the assessee is in appeal before us.

32. The Id. Counsel submitted that the officers of the assessee bank were subject to frequent transfers, hence, to avoid difficulty to....in getting admission for their children in god educational institutions, the assessee had made a policy to contribute to few institutions for some seats in various cities and, therefore, the expenditure incurred on this account was allowable as staff welfare expenses. The Id. Counsel contended that it was available to all officers of the bank and not merely to few officers of the bank as held by the A.O. The Id. Counsel contended that in A.Y. 1987-88 this issue arose before the Tribunal and was decided against the assessee for the reason that the assessee did not furnish details of expenditure before the Revenue authorities, however, in the present year, the details of payments were available and referred to the relevant pages of compilation. Accordingly, he contended that the aforesaid decision of the Tribunal was not applicable for the year under consideration. The Id. Counsel, thereafter, placed strong reliance on the decision of the Hon'ble jurisdictional High Court in the case of Mahindra & Mahindra as reported in 261 ITR 501 where the assessee provided donation to an education society which ran a school in which children of the employees of the company were studying and the Hon'ble Court held the same allowable as expenditure incurred for business purposes. The Id. Counsel also contended that Mumbai Tribunal in the following two cases also held so. Indian Oil Corporation Ltd. (ITA Nos. 4923 & 6063/Mum/1989(Mum) pages 23 to 28 of the compilation. Nuclear Power Corporation of India Ltd. (ITA No. 336/Mum/1999 pages 29 to 32 of the compilation. The Id. Counsel also placed reliance on the following judicial decisions in this regard. Shri Venkatastayanarayana Rice Mills Vs CIT (223 ITR 101) (SC)  CIT VS India Radiators Ltd. (236 ITR 719) (Mad)  CIT Vs Emtici Engineering Ltd. (242 ITR 86) 33. The Id. D.R., on the other hand, contended that this facility was restricted to only officers and not employees, hence, its was arbitrary and un-reasonable, hence, assessee being as government owned bank falling within definition as per Article 12 of Constitution of India could not do so and, therefore, expenditure was correctly disallowed by the Revenue Authorities. 34. We have considered the submissions made by both sides, material on record and orders of authorities below. We find that the Tribunal in the earlier A.Y. 1987-88 rejected the claim of the assessee for want of details whereas in the present case the assessee has submitted these details, hence, the decision of the Tribunal in that year is not applicable. We find that both the Revenue Authorities have treated this expenditure as opposed to the public policy, however, in our view the same cannot be a valid reason for disallowing the expenditure because this aspect does not come within the provisions of I.T. Act, 1961. We are further of the opinion that it is a mater of corporate policy where policies of this type are framed after due consultation with employees/officers association, hence, it cannot be treated as arbitrary. Further, the officers of the bank do not get any bonus whereas the employees get bonus which can also be treated as arbitrary in the similar manner, if the contentions of the Revenue are Page | 56

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 accepted. As far as incurrence of this expenditure for business purpose is concerned, that is not doubted. In this back ground, we hold that the expenditure incurred by the assessee is allowable as revenue expenditure. Thus, this ground of the assessee stands accepted."

10. As it is clear from the above order of the Tribunal that for the assessment year 1992-93 this issue was decided in favour of the assessee. The ground of disallowance for the year under consideration is treating the same as gratitudes payment. We note that as per the policy of the bank the arrangements are made for the reservation of seats in the schools for the children of the officer who are frequently transferred. Thus there is no discrimination in the policy as far as the officers subjected to transfer. A similar view has been taken by the Tribunal for the assessment year 1995-96 vide order dated 17.9.2009. Accordingly, following the order of this Tribunal for the assessment year 1992-93, we allow this claim of the assessee.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 same. In the case of other expenses, the assessee disallowed 0.5% of the average investment in accordance with Rule 8D(2)(iii). The AO vide order passed in section 143(3) of the Act did not agree with the submissions of the assessee and made a total disallowance of Rs.512,11,54,149 under section 14A read with Rule 8D (i.e Rs.466,31,64,648 under Rule 8D(2)(ii) and Rs.45,79,89,501 under Rule 8D(2)(iii)). Since the assessee has already disallowed an amount of Rs.31,33,74,490, the difference of Rs.480,77,79,659 was added to the income of the assessee. The learned CIT(A), vide impugned order, after noting that assessee’s own funds are more than investments deleted the disallowance made under Rule 8D(2)(ii) of the Rules. Further, in respect of disallowance made under Rule 8D(2)(iii) of the Rules, the learned CIT(A) directed to exclude stock in trade of the assessee, investment in subsidiaries which are strategic in nature, and investment in fully owned subsidiaries. The learned CIT(A) also directed that the disallowance under section 14A of the Act should not be below the amount already disallowed by the assessee in its computation of total income. The relevant findings of the learned CIT(A), on this issue, are as under:-

“11.3 I have considered the appellant's submission. During the year appellant had disallowed u/s 14A Rs. 31,33,74,490/- However, after considering the above amount AO had recomputed the disallowance u/s 14A applying Rule 8D and balance amount disallowed by the AO is Rs. 480,77,79,659/-. During the year appellant earned exempt income of Rs,524,40,42,479/- from foreign currency loans, interest on tax free bonds, dividend income from domestic companies and mutual funds. Here appellant's share capital is Rs.634.88 crs. and Reserves and Surplus is Rs. 57,312.81 crs. Total own fund of the appellant is share capital plus Rs. 57,947.69 crs and investment in earning exempt income is Rs. 6,559.24 crs. As here appellant's own funds are more than appellant's investment, here there should not be any disallowance of interest u/s 14A r.w.r. 8D(2)(ii) (iii), in view of Bombay High Court decision in the case of CIT v. HDFC Bank 330 ITR 221. With regard to disallowance under Rule 8D(2)(iii) ie. 0.5% of average investment for disallowance under administrative expenses, here AO has directed to compute ) 0.5% of average investment but from this AO has to exclude stock in trade of the appellant in view of the Bombay High Court decision in the case of CIT v. India Advantage Securities Ltd. I.T. Act, 1961 1131 of 2013. Further investment in subsidiaries which are strategic in nature and also fully owned subsidiaries are to be excluded in view of the Mumbai Tribunal's decision in the case of Gareware Wall Ropes Ltd. v. ACIT (2014) 46 Taxmann.com 18) and J M Financial Ltd. (IT Act, 1961 No. 4521/Mum/2012) So in computation of 0.5% of average investment, AO is directed to exclude the stock in trade of the appellant and strategic investments in subsidiaries and fully owned bank subsidiary and after this AO may recalculate the amount. However, the disallowance shall not be below the amount disallowed by the assessee himself in the computation of total income. This ground is partly allowed.”

Being aggrieved, both parties are in appeal before us.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 and surplus is Rs.57,312.81 crores, while the investment in earning exempt income is Rs.6559.24 crores. Therefore, it is sufficiently evident that during the year under consideration, the assessee’s own funds are more than investments for earning exempt income. We find that the Hon'ble Jurisdictional High Court in CIT vs HDFC Bank Ltd., [2014] 366 ITR 505 (Bom.) held that where assessee’s own funds and other non–interest bearing funds were more than the investment in tax-free securities, no disallowance under section 14A of the Act can be made. We further find that the Hon'ble Supreme Court in South Indian Bank Ltd. vs CIT, [2021] 438 ITR 001 (SC) held that disallowance under section 14A of the Act would not be warranted where interest-free own funds exceed the investment in tax-free securities and in such a case the investment would be presumed to be made out of assessee’s own funds. Therefore, respectfully following the law laid down by the Hon’ble Supreme Court and the Hon’ble jurisdictional High Court in cases cited supra, we find no infirmity in the impugned order in deleting the disallowance made under section 14A r/w Rule 8D(2)(ii).

90. Further, the Hon’ble Supreme Court in Maxopp Investment Ltd. v/s CIT [2018] 402 ITR 640 (SC) held that in cases where the main purpose for investing in shares was to hold the same as stock-in-trade, section 14A of the Act was not attracted and the expenditure could not be disallowed. Thus, we find no infirmity in the directions of the learned CIT(A), vide impugned order, to exclude the investment held as stock in trade.

92. Further, it is the claim of the assessee that only those investments which yielded exempt income during the year should be considered for computation of disallowance under section 14A of the Act. We find that this claim of the assessee is supported by the decision of the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd. (2017) 165 ITD 27 (Delhi-Trib.), wherein it was held that only those investments are to be considered for computing average value of investments, which yield exempt income during the year. Accordingly, we direct the AO to only considered those investments for the purpose of computation of State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 disallowance under section 14A read with Rule 8D(2)(iii) of the Rules, which yield exempt income during the year.

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

“134. The next issue in thisappeal of revenue is as regards to the order of CIT(A) deleting the addition made by AO on account of disallowing the depreciation provided for investments classified under the HTM category. For this revenue has raised the following Ground No. 9: -

9. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in treating loss on account of depreciation of securities in HIM category/amortization of securities in HIM category without appreciating that no depredation is to be provided for investment classified under the HIM category.”

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016 Revenue before the Tribunal emphasised that there is no section under the Act that allows deduction for such amortisation of premium on securities.

99. The issue arising in ground No. 9, raised in Revenue’s appeal, is pertaining to the allowance of depreciation on foreign assets.

“15.2 Appellant's submissions are as under: The Bank had claimed depreciation on assets at foreign offices of Rs. 239,00,82,155 in the return of income. Further, vide letter dated 22 March 2011, the Bank has revised the claim to Rs. 229,01,70,135 on the basis of Annexure 1(a) and 1(b) of the Tax Audit Report in Form No. 3CD. Page | 62

State Bank of India ITA no.3645/Mum./2016 ITA no.4564/Mum./2016

The learned ACIT however did not allow the entire claim of depreciation on assets at foreign offices on the basis that there were certain negative block of assets and hence the depreciation has not been properly computed. Pursuant to the above, the Bank vide its rectification application dated 1 November 2011 (filed on 2 November 2011) submitted to the ACIT that depreciation should be allowed to the Bank as per the provisions of the Income-tax Act. Further the Bank also submitted a revised working for depreciation on assets at foreign offices whereby the claim was Rs. 33,37,94,407. However, the ACIT vide its order dated 18 April 2012 issued under section 154 did not consider the submission filed by the Bank and observed that the issue relating to depreciation claim on assets at foreign office is not considered on the basis that the same have already been raised in appeals before the Commissioner of Income-tax (Appeals) [CIT(A)]. We accordingly request your Honour to kindly direct the ACIT to allow the revised claim of depreciation on assets at foreign offices of Rs 33,37,94,407 filed vide rectification application dated 1 November 2011.”

101. After considering the submissions of the assessee, the learned CIT(A) vide impugned order granted partial relief to the assessee and allowed depreciation of Rs. 33,37,94,407 under section 32(1) of the Act. Being aggrieved, the Revenue is in appeal before us.

103. The issue arising in ground No. 10, raised in Revenue’s appeal, is pertaining to the set off of loss of erstwhile State Bank of Saurashtra.

105. Before the learned CIT(A), the assessee submitted that pursuant to the rectification order passed under section 154, loss of State Bank of Saurashtra amounting to Rs.29,10,42,392 as per the assessment order of the State Bank of Saurashtra was allowed to the assessee. It was further submitted that pursuant to the order giving effect to CIT(A) order of State Bank of Saurashtra, the loss of State Bank of Saurashtra has been determined at Rs. 98,08,30,776. Accordingly, the assessee prayed that the AO be directed to allow the set off of loss of State Bank of Saurashtra to the extent of Rs. 98,08,30,776. In view of the submissions made by the assessee, the learned CIT(A) directed the AO to allow the loss actually determined in the assessment order of the State Bank of Saurashtra. Being aggrieved, the Revenue is in appeal before us.

“140. We noted that the assessee during the year created a provision for Employee Stock Purchase Scheme amounting to Rs. 11 crore in accordance with SEBI Guidelines. The AO disallowed the claim of the assessee on the basis that the same is contingent in nature. The CIT(A) deleted the disallowance made by the AO. The Revenue before the Tribunal emphasised that the same is contingent in nature and that the deduction was claimed by way of a note by the assessee and not by filing a revised return. The facts were submitted before the AO vide letter dated 5.02.2010. It is a well settled principle that deduction may be claimed by the assessee during assessment proceedings, even if the same was not claimed in the revised return. Also, the ground of appeal filed by the department does not challenge the findings of the CIT(A) admitting the additional claim made by the assessee at the time of the assessment. Hence, the said contentions of the learned Department Representative ought to be rejected. 141. It was contended that the discount on Employee Stock Purchase Scheme is an allowable deduction under section 37(1) in view of the Special Bench decision of the Bangalore Tribunal in the case of Biocon Ltd. v/s. DCIT [2013]

25. ITR(T) 602 (Bangalore-Trib.) (SB). As this issue is squarely covered in favour of assessee and against Revenue, we find no infirmity in the order of CIT(A). This issue of Revenue‟s appeal is dismissed.

110. We further find that the aforesaid decision of the Special Bench of the Tribunal has been affirmed by Hon’ble Karnataka High Court in CIT v. Biocon Ltd.: 430 ITR 151. Accordingly, in view of the above, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground No. 11 raised in Revenue’s appeal is dismissed.